<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ADVANCED NUTRACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C>
DELAWARE 2834
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
76-0581202
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
---------------
BARRY C. LODER
PRESIDENT
500 METUCHEN ROAD
SOUTH PLAINFIELD, NEW JERSEY 07080
(908) 668-0088
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
PAUL, HASTINGS, JANOFSKY & WALKER LLP LATHAM & WATKINS
555 SOUTH FLOWER STREET, 23RD FLOOR 633 WEST FIFTH STREET
LOS ANGELES, CALIFORNIA 90071-2371 LOS ANGELES, CALIFORNIA 90071-2007
ATTENTION: DAVID L. GERSH, ESQ. ATTENTION: GARY OLSON, ESQ.
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM AMOUNT OF REGISTRATION
TITLE OF EACHCLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) FEE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par
value..................... $69,000,000 $20,355
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 1998
PROSPECTUS
5,000,000 SHARES
[LOGO]
ADVANCED NUTRACEUTICALS, INC.
COMMON STOCK
-----------
All of the 5,000,000 shares of Common Stock offered hereby are being offered
by Advanced Nutraceuticals, Inc. ("Advanced Nutraceuticals" or "ANI"). Prior to
the Offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price for
the Common Stock will be between $ and $ per share. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The Company intends to apply for listing on the Nasdaq National
Market under the reserved symbol "ANUI," subject to official notice of
issuance.
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 10 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- --------------------------------------------------------------------------------
Total(2).................................. $ $ $
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</TABLE>
(1) Excludes the value of warrants to purchase up to 200,000 shares of Common
Stock (230,000 shares of Common Stock if the Underwriters exercise their
over-allotment option in full) at an exercise price equal to 120% of the
initial public offering price per share to be issued to Sutro & Co.
Incorporated upon the closing of the Offering. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $ . See "Use of Proceeds."
(3) The Company has granted the Underwriters a 45-day option to purchase up to
750,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public as shown above. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $ , $
and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Sutro & Co. Incorporated, San Francisco, California on or about
, 1998.
SUTRO & CO. INCORPORATED
The Date Of This Prospectus Is , 1998.
<PAGE>
(inside front cover)
Advanced Nutraceuticals has entered into agreements to acquire four
companies (the "Founding Companies") simultaneously with the closing of the
Offering. The Founding Companies, which have been in business an average of
approximately eighteen years, had pro forma combined revenues of $50.8 million
for the year ended December 31, 1997 and $33.7 million for the six months
ended June 30, 1998.
[PICTURES AND GRAPHICS--GATEFOLD, SHOWING MAP OF UNITED STATES WITH FOUNDING
COMPANY HEADQUARTERS]
<TABLE>
<C> <S> <C> <C>
Picture: Echinacea purpurea Picture: Ginkgo biloba
Caption: "Maintains Healthy Immune Caption: "Enhances Memory Function"*
Function"*
Picture: St. John's wort Picture: Saw palmetto
Caption: "Positive Mood Caption: "Enhances Prostate Health"*
Enhancement"*
Picture: Ginseng Picture: Goldenseal
Caption: "Enhances Physical Caption: "Enhances Immune Function"*
Endurance"*
Picture: Cranberry Picture: Kava kava
Caption: "Maintains Healthy Urinary Caption: "Enhances Relaxation"*
Tract"*
Picture: Granulation Drying Ovens Picture: Tablet Press
Picture: Powdered Herbs Picture: Bottling
Picture: Blending Picture: Coating
Picture: Encapsulation Picture: In-House Laboratories
Picture: Cryogenic Processing
</TABLE>
* Statements are based on commonly accepted uses. When sold, products
incorporating these ingredients and bearing these statements are normally
accompanied by a disclaimer to the following effect: This statement has not
been evaluated by the FDA and this product is not intended to diagnose,
treat, cure or prevent disease.
Advanced Nutraceuticals was formed to create a full-service, vertically
integrated manufacturing and supplier of quality nutritional supplements,
herbs and extracts. Following consummation of the Mergers, the Company will
continue to provide contract manufacturing of tablets, capsules and powders,
and will source, process and supply powdered herbs and extracts.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent auditors and with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
ANI HAS ENTERED INTO SEPARATE AGREEMENTS PROVIDING FOR TRANSACTIONS (THE
"MERGERS") TO ACQUIRE, SIMULTANEOUSLY WITH, AND AS A CONDITION TO, THE CLOSING
OF THE OFFERING MADE BY THIS PROSPECTUS (THE "OFFERING"), FOUR COMPANIES
ENGAGED IN THE NUTRITIONAL INDUSTRY (EACH A "FOUNDING COMPANY" AND
COLLECTIVELY, THE "FOUNDING COMPANIES") IN EXCHANGE FOR CASH, PURCHASE NOTES
AND ANI'S COMMON STOCK. THE FOUNDING COMPANIES ARE: ACTA PRODUCTS
INTERNATIONAL, INC. (DBA ACTA INTERNATIONAL) AND ACTA PRODUCTS CORPORATION (DBA
ACTA PHARMACAL CO.) FOUNDED IN 1995 AND 1972, RESPECTIVELY, (COLLECTIVELY,
"ACTA"); QUALITY BOTANICAL INGREDIENTS, INC. FOUNDED IN 1983 ("QBI");
NORTHRIDGE LABORATORIES, INC. FOUNDED IN 1967 ("NORTHRIDGE"); AND BACTOLAC
PHARMACEUTICALS, INC. FOUNDED IN 1995 ("BACTOLAC"). UNLESS OTHERWISE INDICATED,
ALL REFERENCES TO THE "COMPANY" HEREIN INCLUDE ANI AND THE FOUNDING COMPANIES,
AND REFERENCES HEREIN TO "ADVANCED NUTRACEUTICALS" MEAN ADVANCED
NUTRACEUTICALS, INC. PRIOR TO THE CONSUMMATION OF THE MERGERS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE PRO FORMA COMBINED FINANCIAL
STATEMENTS, THE INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS OF EACH FOUNDING
COMPANY AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS. UNLESS OTHERWISE
INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION SET FORTH HEREIN
(a) HAVE BEEN ADJUSTED TO GIVE EFFECT TO CONSUMMATION OF ALL OF THE MERGERS;
(b) ASSUME AN INITIAL PUBLIC OFFERING PRICE OF $ PER SHARE; (c) GIVE EFFECT
TO THE MERGER OF A PREDECESSOR COMPANY WITH ANI EFFECTED IN SEPTEMBER, 1998
(THE "ORGANIZATIONAL MERGER") (SEE "DESCRIPTION OF CAPITAL STOCK") AND (d)
ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
Advanced Nutraceuticals, Inc. was formed to create a full-service, vertically
integrated manufacturer and supplier of quality nutritional supplements, herbs
and extracts. Following consummation of the Mergers, the Company will continue
to provide contract manufacturing of tablets, capsules and powders, and will
source, process and supply powdered herbs and extracts. See "Business--Products
and Services."
The principal strength of the Company is its ability to provide a diversified
line of products and services to its customers. With Northridge, ACTA, QBI and
Bactolac having conducted business in the nutritional industry for 31, 26, 15
and 3 years, respectively, the Founding Companies have 75 years of combined
operating history. The Company works closely with customers to create
innovative solutions ranging from research and development through consumer-
level branding initiatives. The Company believes it will benefit from the
collective strengths of ACTA, QBI, Northridge and Bactolac in sourcing and
processing herbs and extracts, and contract manufacturing of custom
formulations. The Company's manufacturing services are tailored to customer
specifications and quality requirements and often include additional value-
added services such as custom packaging and design.
The Founding Companies presently derive revenues from contract manufacturing,
and processing and supplying herbs and extracts. Manufacturing services are
provided by ACTA, Northridge and Bactolac. For the
3
<PAGE>
six months ended June 1998, these services generated $18.2 million or a 16.3%
increase over the same period in 1997 and comprised approximately 54.2% of the
Company's combined net sales. In 1997, contract manufacturing generated $28.2
million or approximately a 46.2% increase in such net sales over 1996. ACTA and
QBI source, process and supply herbs and extracts used in nutritional
supplements and related products. For the six months ended June 30, 1998, these
activities generated $15.4 million or a 40.7% increase over the same period in
1997 and comprised approximately 45.8% of the Company's net sales. In 1997,
herbal powders and extract activities generated $22.6 million or a 45.6%
increase in such net sales over 1996. In 1997, the Company sold over 1.0
million kilograms representing over 500 herbal products and extracts.
Over the past three years, the Company has experienced rapid growth in net
sales and gross profit. From 1995 to 1997, net sales and gross profit have
grown at compound annual growth rates of 44.8% and 33.1%, respectively. Net
sales were $50.8 million and $33.7 million and gross profit was $15.2 million
and $10.9 million in 1997 and for the six months ended June 30, 1998,
respectively.
A 1997 market report, "The U.S. Market for Vitamins, Supplements and
Minerals," prepared by the independent consumer marketing research firm of
Packaged Facts (the "Packaged Facts Report"), reported that the retail market
for vitamins, minerals and other dietary and nutritional supplements (excluding
sports nutrition and diet products) grew at a compound annual rate of 15% from
$3.7 billion in 1992 to $6.5 billion in 1996. A large portion of this growth is
attributable to an increase in sales of such other supplements (primarily
herbal products), which grew from $570 million in 1992 to $2.3 billion in 1996.
This growth has been fueled by the popularity of such herbs as echinacea,
garlic, ginseng, ginkgo biloba and, more recently, saw palmetto, St. John's
wort and kava kava. The Packaged Facts Report forecasts 13.6% compound annual
growth in the retail market for vitamins, minerals and other supplements
(excluding sports nutrition and diet products), including 25% compound annual
growth in the market for other supplements, through 2001. According to the
Packaged Facts Report, compound annual growth rates from 1992 through 1996 for
vitamins, minerals and other supplements were 8.0%, 5.2% and 41.7%,
respectively.
The Nutrition Business Journal reported in July 1997 that there are nearly
5,000 privately held companies with under $25 million in annual sales in the
retail and manufacturing segments of the nutritional industry. These businesses
typically are owner-operated and often have limited access to the capital
necessary to develop and maintain inventory of large volume and wide
selections, expand product offerings, implement advanced management information
systems, incorporate the use of sophisticated technological equipment, conduct
research and development and service national and regional accounts.
THE COMPANY'S COMPETITIVE STRENGTHS
Wide Range of Products and Manufacturing Services--Enables the Company to
offer services ranging from a single step in the production process to a
complete, "turn-key" manufacturing solution.
Experienced Management--Six senior managers of the Company with a combined 67
years of industry experience and relationships.
Technical Expertise--Allows manufacturing of complex and difficult products
and, through the Company's patent pending cryogenic milling, unique processing
of products.
Strong Vendor Relationships--Allows greater access to herbs and extracts
including some that are in scarce supply.
Quality Control Procedures--Designed to promote uniform product quality and
potency to customer specifications.
4
<PAGE>
STRATEGY
The Company was formed to capitalize on opportunities to integrate and
consolidate the highly fragmented nutritional industry. The Company's strategy
is to (i) support and expand the operations of the Founding Companies, (ii)
capitalize on operating synergies and cost savings available through
consolidation and (iii) pursue an acquisition program designed to further
vertical integration and to expand existing operations. The Mergers involving
the Founding Companies are intended to be the first step in this process.
Support and Expand Operations of the Founding Companies. Management intends
to support each Founding Company's efforts to pursue its existing internal
growth plan. The Company also intends to foster growth through the following
initiatives:
. Enhance management strengths through sharing of core competencies and
existing expertise.
. Expand and coordinate marketing opportunities among the Founding
Companies.
. Develop customized solutions that utilize expertise and experience of
each of the Founding Companies.
. Encourage entrepreneurial initiatives.
. Achieve consistently high quality products and services by implementing
a company-wide quality program.
Capitalize on Operating and Cost Synergies Available Through
Consolidation. The Company's strategy includes exploiting opportunities created
by the Merger:
. Implementing a focused company-wide marketing program.
. Cross-selling opportunities to existing customers.
. Capitalizing on its increased national presence.
. Marketing to new and existing customers through an expanded sales force.
. Improving operating efficiencies by promoting core-competencies.
. Providing a company-wide management information system designed to
enhance sales and management.
. Maximizing increased purchasing power to gain volume discounts.
Growth through Acquisitions. The Company intends to pursue an acquisition
program designed both to further its vertical integration and to expand the
existing operations of the Founding Companies. The Company believes that there
are many attractive acquisition candidates in the nutritional industry. This is
due principally to the highly fragmented nature of the industry and the large
number of smaller companies in the industry having under $25 million in annual
sales. In many cases, these companies have needs that are difficult for small
businesses to meet, such as capital for growth and expansion, owners' desires
for liquidity, the ability to attract high caliber management talent and other
factors which motivate these owners to consider strategic alternatives.
5
<PAGE>
THE OFFERING
Common Stock offered by the
Company.................... 5,000,000 shares
Common Stock to be
outstanding after the
Offering................... [ ] shares(1)(2)
Use of Proceeds............. To pay the cash portion of the purchase price for
the Founding Companies, to repay certain
outstanding indebtedness of the Founding
Companies, to pay transaction expenses related to
the Mergers and the Offering and for general
corporate purposes, including potential future
acquisitions. See "Use of Proceeds."
Nasdaq National Market
symbol..................... [ANUI]
- --------
(1) Includes [ ] shares of Common Stock to be issued in connection with the
Mergers, but excludes 558,800 shares of Common Stock subject to options to
be granted upon consummation of the Offering at an exercise price equal to
the initial public offering price. See "Management--1998 Stock Option Plan"
and "--Non-Discretionary Stock Option Plan."
(2) Includes 2,388,000 shares of Common Stock sold in a private offering in
June 1998 and shares issued to founders of and certain consultants to
Advanced Nutraceuticals, Inc. during December 1997.
6
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
Advanced Nutraceuticals has entered into definitive agreements to acquire the
Founding Companies simultaneously with and as a condition to consummation of
the Offering. For financial statement presentation purposes, ACTA has been
identified as the "accounting acquirer." The historical combined net sales,
cost of goods sold and gross profit presented below for the periods indicated
do not represent combined results of operations presented in accordance with
generally accepted accounting principles, but are only a summation of the
actual historical results, including the acquisition (the "BPI Acquisition") by
QBI of Botanical Products International, Inc. ("BPI") in August 1998. The
unaudited pro forma combined financial data for the Company as presented below
has been adjusted to give effect to (i) the Mergers, (ii) certain pro forma
adjustments to the historical financial statements described below, including
the BPI Acquisition and (iii) the consummation of the Offering and the
application of the net proceeds therefrom. See "Selected Financial Data," the
Unaudited Pro Forma Combined Financial Statements and the Notes thereto and the
historical Financial Statements of Advanced Nutraceuticals and certain of the
Founding Companies and the Notes thereto included elsewhere in this prospectus.
HISTORICAL COMBINED DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED(1) JUNE 30,(2)
----------------------------------- -----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------- --- ------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $24,257 100 $34,826 100 $50,825 100 $24,090 100 $33,651 100
Cost of goods sold...... 15,703 65 23,468 67 35,671 70 16,340 68 22,717 68
------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit............ 8,554 35 11,358 33 15,154 30 7,750 32 10,934 32
</TABLE>
- --------
(1) The fiscal years presented are as follows: ACTA, QBI and Bactolac--the
years ended December 31 for all periods presented; Northridge--the years
ended September 30 for all periods presented.
(2) Includes Northridge's results for the second and third quarters of its
fiscal year.
PRO FORMA COMBINED
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
1997 30, 1998
------------- ----------
(IN THOUSANDS EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
INCOME STATEMENT DATA(1)
Net sales........................................... $50,825 $33,651
Gross profit........................................ 15,154 10,934
Selling, general and administrative(2).............. 8,267 4,942
Goodwill amortization(3)............................ 1,826 913
Earnings from operations............................ 5,061 5,079
Interest and other income (expense), net ........... (1,460) (390)
Earnings before income taxes........................ 3,601 4,688
Net earnings(4)..................................... 1,430 2,447
Net earnings per share basic and diluted............ [ ] [ ]
Shares used in computing pro forma net earnings per
share basic and diluted(5)......................... [ ] [ ]
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
PRO FORMA AS
COMBINED ADJUSTED(7)
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA(6)
Working capital (deficit)(8)........................... $(35,293) [ ]
Total assets........................................... 102,097 [ ]
Long-term debt, net of current maturities(9)........... 2,873 2,873
Stockholders' equity(10)............................... 40,855 [ ]
</TABLE>
- --------
(1) The pro forma combined income statement data assume that each of the
Mergers and the BPI Acquisition were consummated on January 1, 1997 and
are not necessarily indicative of the results the Company would have
obtained had these events actually then occurred or of the Company's
future results.
(2) The pro forma combined income statement data reflect an aggregate of $5.9
million for the twelve months ended December 31, 1997 and $1.2 million for
the six months ended June 30, 1998 in pro forma reductions in salaries,
bonuses and benefits to the owners of the Founding Companies to which they
have agreed prospectively (the "Compensation Differential") and includes
the non-recurring, non-cash compensation charge of $3.0 million recorded
in 1997 relative to 1,800,000 shares issued to founders of and consultants
to ANI at $.008 per share in December 1997.
(3) Consists of amortization of goodwill to be recorded as a result of the
Mergers over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.
(5) Includes (i) [ ] shares to be issued to owners of the Founding Companies
and (ii) [ ] of the 5,000,000 shares sold in the Offering necessary to
pay the cash portion of the Merger consideration and expenses of the
Offering.
(6) The pro forma combined balance sheet data assume that the Mergers were
consummated on June 30, 1998.
(7) Adjusted for the sale of the 5,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(8) Pro forma combined includes $37.6 million in notes payable to owners of
the Founding Companies representing the cash portion of the Merger
consideration to be paid from a portion of the net proceeds of the
Offering.
(9) Includes $1.3 of the $2.5 million in notes to be issued to selling
stockholders of Northridge and Bactolac as a portion of the consideration
paid for the acquisitions.
(10) In connection with the Mergers, certain of the Founding Companies will
make distributions to their stockholders totaling $1.8 million.
8
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents summary income statement data for the Founding
Companies for each of their three most recent fiscal years. Earnings from
operations has not been adjusted for the Compensation Differential or to take
into account increased costs associated with the Company's new corporate
management and with being a public company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Introduction."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEARS ENDED(1) JUNE 30,(2)
------------------------ --------------
1995 1996 1997 1997 1998
------ ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACTA:
Net sales............................. $9,531 $14,391 $18,723 $9,305 $11,592
Earnings from operations.............. 986 438 1,534 1,973 2,220
QBI:(3)
Net sales............................. 7,349 11,406 15,568 7,658 10,941
Earnings from operations.............. 962 820 406 141 1,057
Northridge:
Net sales............................. 7,148 7,622 11,532 5,104 7,476
Earnings (loss) from operations....... 443 (74) 1,069 414 602
Bactolac:(4)
Net sales............................. 229 1,406 5,002 2,023 3,642
Earnings (loss) from operations....... (2) 196 954 413 942
</TABLE>
- --------
(1) The fiscal years presented are as follows: ACTA, QBI and Bactolac the years
ended December 31 for all periods presented; Northridge the years ended
September 30 for all periods presented.
(2) Includes Northridge's results for the second and third quarters of its
fiscal year.
(3) Includes QBI's wholly owned subsidiary BPI which began operations in late
1995 and was acquired by QBI in August 1998. The pro forma combined results
presented for QBI and BPI are not necessarily indicative of the combined
results had QBI owned BPI for the periods presented.
(4) Bactolac began operations in October 1995.
9
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to the other information in this
Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Common Stock.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING FOUNDING COMPANIES
ANI was founded in September 1997 (and reincorporated in Delaware in
September 1998) but has conducted no operations and generated no revenues to
date. ANI has entered into definitive agreements to acquire the Founding
Companies simultaneously with, and as a condition to, the closing of the
Offering. The Founding Companies have been operated as separate independent
entities, and there can be no assurance that the Company will be able to
integrate the operations of these businesses successfully or to institute the
necessary systems and procedures, including accounting and financial reporting
systems, to manage the combined enterprise on a profitable basis and to report
the results of the operations of the combined entities on a timely basis. The
Company's management team has been assembled only recently, and there can be
no assurance that the management team will be able to manage the combined
entity or to effectively implement the Company's internal growth and
acquisition strategies. The pro forma combined historical financial results of
the Founding Companies cover periods when the Founding Companies and ANI were
not under common control or management and may not be indicative of the
Company's future financial or operating results. The inability of the Company
to integrate the Founding Companies successfully would have a material adverse
effect on the Company's business, financial condition and results of
operations and would make it unlikely that the Company's acquisition strategy
will be successful. See "Business--Strategy" and "Management."
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY
Key components of the Company's strategy are to increase the profitability
and to continue the internal growth of the Founding Companies and subsequently
acquired businesses. The Company intends to operate on a decentralized basis
and attract and retain quality labor and supervisory personnel. Without proper
overall business controls, the Company's decentralized operating strategy
could result in inconsistent operating and financial practices at the Founding
Companies and subsequently acquired businesses. This could adversely affect
the Company's business, financial condition and results of operations, as
could the Company's failure to attract and retain a sufficient number of
hourly and supervisory personnel to meet its staffing needs. The continued
internal growth of the Founding Companies and subsequently acquired businesses
will be affected by various factors, including the demand for nutritional
supplements and related products as well as the Company's ability to continue
and expand existing relationships and establish new relationships with
manufacturers and sellers of these products, expand the range of products and
services offered to meet its customers' requirements. Customer dissatisfaction
or performance problems at a single acquired company could have an adverse
effect on the reputation of the Company and hinder the Company's sales and
marketing initiatives. Some of these factors are beyond the Company's control,
and there can be no assurance that the Company's operating and internal growth
strategies will be successful or that the Company will be able to generate
sufficient cash flow to support both its operations and its continued internal
growth. See "Business--Strategy."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company intends to seek to acquire additional companies or business
units in the nutritional industry. The Company expects to face competition for
these acquisition candidates, particularly from a few relatively large public
or private companies that have begun or may begin to pursue the acquisition of
such companies. Many potential competitors for acquisition candidates have
greater financial resources and name recognition in the industry than the
Company. This competition may limit the number of acquisitions that the
Company is able to consummate and may lead to higher acquisition prices. There
can be no assurance that the Company will be able to identify, acquire or
manage profitably additional businesses or to integrate successfully any
acquired businesses into the Company without substantial costs, delays or
other operational or financial problems. Furthermore, acquisitions involve a
number of special risks, including failure to integrate effectively acquired
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operations with existing operations, failure of the acquired business to
achieve expected results, diversion of management's attention, failure to
retain key personnel of acquired business and risks associated with
unanticipated events or liabilities, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if the Company were to acquire competitors
of significant customers, such customers could reduce the level of business
such entities do with the Company or cease such business altogether. There can
be no assurance that the Founding Companies or other businesses acquired in
the future will achieve anticipated revenues and earnings. See "Business--
Strategy."
RISKS RELATED TO ACQUISITION FINANCING
The timing, size and success of the Company's acquisition efforts and the
associated capital requirements cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its Common
Stock, which may comprise a significant portion of the acquisition
consideration. If the Common Stock does not maintain a sufficient market
value, if potential acquisition candidates are unwilling to accept Common
Stock as part of the consideration for the sale of their businesses or if the
Company's competitors offer acquisition candidates substantially more cash
than equity or debt securities, the Company may be required to utilize more of
its cash resources, if available, in order to initiate and maintain its
acquisition strategy. Upon completion of the Offering, the Company will have
$[ ] million of net proceeds from the Offering ($[ ] million if the
Underwriters' over-allotment option is exercised in full) remaining for
working capital, including future acquisitions, after payment of expenses
related to the Mergers and the Offering, the cash portion of the purchase
price for the Founding Companies and repayment of Founding Company debt. See
"Use of Proceeds." If the Company's cash resources after the Offering are
insufficient to effect its acquisition strategy, its growth will be limited
unless it is able to obtain additional capital through debt or equity
financings. While as of the date hereof the Company is in discussions with
several financing sources to obtain a credit facility, there can be no
assurance that the Company will be able to obtain the line of credit or
additional financing it will need to finance potential acquisition on terms
that the Company deems acceptable. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Combined Liquidity and
Capital Resources."
NEED FOR EFFECTIVE CONTROLS ON COMPANY'S EXPANSION
In addition to internal growth, the Company intends to expand its business
through the acquisition of other companies. Management expects to expend
significant time and effort in evaluating, completing and integrating
acquisitions. To manage its expansion, promptly after the Offering the Company
must establish accounting, financial reporting, financial control and other
operating systems and procedures. Thereafter, management must continually
evaluate the adequacy of those systems, procedures and controls and its
management structure. There can be no assurance that the Company's systems,
procedures and controls or its management structure will be adequate to
support the Company's operations as they expand. Failure to manage its growth
efficiently and effectively would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Strategy."
RISK OF AVAILABILITY AND COST OF SUPPLY SOURCES; DEPENDENCE ON FOREIGN
SUPPLIERS
The Company believes that its continued success will depend upon the
availability of raw materials that permit the Company to meet its quality
control standards and demand for required ingredients. The supply of herbal
products is subject to the same risks normally associated with agricultural
production, such as climactic conditions, insect infestations and availability
of manual labor or equipment for harvesting. There can be no assurance that
suppliers will provide the raw materials needed by the Company in the
quantities and of the quality requested or at a price the Company is willing
to pay. Any significant delay in or disruption of the supply of raw materials
could substantially increase the cost of such materials, require product
reformulations, require the qualification of new suppliers, require
repackaging and result in a substantial reduction or termination by the
Company of its sales of certain products. Any of these circumstances could
have a material adverse effect upon the Company.
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The Company acquires greater than 50% of its raw materials from supply
sources outside of the United States. Consequently, the Company's business is
subject to the risks generally associated with doing business outside the
United States, such as delays in shipments, embargoes, changes in economic and
political conditions, tariffs, foreign exchange rates and trade disputes. The
Company's business is also subject to the risks associated with the enactment
of United States and foreign legislation and regulations relating to imports
and exports, including quotas, duties, taxes or other charges or restrictions
that could be imposed upon the importation of products into the United States.
These factors could result in a delay in or disruption of the supply of
certain raw materials and could have the consequences described in the
preceding paragraph, any of which could have a material adverse effect on the
Company. See "Business--Materials and Sources of Supply."
TRENDS IN THE NUTRITIONAL INDUSTRY; NEW PRODUCT SUPPORT
The nutritional industry is subject to rapidly changing consumer demands and
preferences. There can be no assurance that customers will continue to favor
the products provided and manufactured by the Company. A significant shift in
customer preferences could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, products
that gain wide acceptance with consumers may result in a greater number of
competitors entering the market which could result in downward price pressure
which could adversely impact the Company's gross profit margins. In addition,
many of the ingredients for the Company's products require long lead times for
growth and production for which the Company must buy or commit to buy long
before ultimate sale to its customers. There can be no assurance that
sufficient consumer demand will still exist at the time the final product is
available for sale or that gross profit margins will be maintained.
The Company believes its growth will be materially dependent upon its
ability to develop new techniques, processes and technical capabilities
necessary to meet the needs of its customers and potential customers. The
inability of the Company to anticipate and respond to these rapidly changing
demands could have an adverse effect on the Company. See "Business--Strategy."
GOVERNMENT REGULATION
The manufacture, packaging, labeling, advertising, promotion, distribution
and sale of the Company's products are subject to regulation by numerous
governmental agencies. The most active of these is the U.S. Food and Drug
Administration (the "FDA"). Through regulations promulgated, the FDA regulates
the Company's products under the Federal Food, Drug and Cosmetic Act (the
"FDCA") and the Dietary Supplement Health and Education Act (the "DSHEA"). The
Company's products are also subject to regulation by, among other regulatory
entities, the Consumer Product Safety Commission (the "CPSC"), and the U.S.
Department of Agriculture (the "USDA"). In addition, the Company's
manufacturing facilities are regulated by the Environmental Protection Agency
(the "EPA") and the Occupational Safety and Health Administration (the
"OSHA"). Advertising and other forms of promotion and methods of marketing of
the Company's products are subject to regulation by the U.S. Federal Trade
Commission (the "FTC"), which regulates these activities under the Federal
Trade Commission Act (the "FTCA"). The manufacturing, labeling and advertising
of the Company's products are also regulated by various states and local
agencies as well as those of each foreign country to which the Company
distributes its products. In particular, California's Safe Drinking Water and
Toxic Enforcement Act of 1986 ("Proposition 65") requires warnings on labels
of dietary supplements that contain chemicals listed by the state which are
known to cause cancer or reproductive toxicity.
The Company's manufactured products are generally regulated as dietary
supplements under the FDCA and DSHEA. Unless a claim is made that a dietary
supplement may be used to treat, mitigate, cure, prevent or diagnose a
specific disease, the Company's manufactured products are not subject to pre-
market approval by the FDA. However, these products are nonetheless subject to
extensive regulation by the FDA relating to adulteration and misbranding. For
instance, the Company is responsible for ensuring that all dietary ingredients
in a supplement are safe, must notify the FDA in advance of putting a product
containing a new dietary ingredient (i.e., an ingredient not marketed for use
as a supplement before October 15, 1994) on the market and furnish
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adequate information to provide reasonable assurance of the ingredient's
safety. Further, if the Company makes statements about the supplement's
effects on the structure or function of the body, the Company must, among
other things, have substantiation that the statements are truthful, accurate
and not misleading. In addition, the Company's product labels must bear proper
ingredient and nutritional labeling and the Company's supplements must be
manufactured in accordance with current Good Manufacturing Practice
regulations ("GMPs") for foods. The FDA has issued an advance notice of
proposed rulemaking to consider whether to develop specific GMP regulations
for dietary supplements and dietary supplement ingredients. Such regulations,
if promulgated, may be significantly more rigorous than current requirements
and may contain quality assurance requirements similar to GMPs for drug
products. A product can be removed from the market if it is shown to pose a
significant or unreasonable risk of illness or injury. Moreover, if the
manufacturer makes claims, or the FDA determines, that the "intended use" of
any of the Company's products is for the diagnosis, cure, mitigation,
treatment or prevention of disease, the product would meet the definition of a
drug and would require pre-market approval of safety and effectiveness prior
to its manufacture and distribution. Failure of the Company to comply with
applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines and
criminal prosecutions.
Advertising of the Company's nutritional products will be subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or
affecting commerce. Section 12 of the FTCA provides that the dissemination or
the causing to be disseminated of any false advertisement pertaining to, among
other things, drugs or foods, which includes nutritional supplements, is an
unfair or deceptive act or practice. Under the FTC's "substantiation
doctrine," an advertiser is required to have a "reasonable basis" for all
product claims at the time the claims are first used in advertising or other
promotions. Failure to adequately substantiate claims may be considered either
as a deceptive or unfair practice. Pursuant to this FTC requirement, the
Company or the customers to which it provides manufactured products will be
required to have adequate substantiation for all advertising claims made about
its products. The type of substantiation will be dependent upon the product
claims made. For example, a health claim normally would require competent and
reliable scientific evidence, while a taste claim would require only survey
evidence.
In recent years the FTC has initiated numerous investigations of nutritional
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for nutritional supplements and has announced that
it will issue a guidance document to assist nutritional supplement marketers
in understanding and complying with the substantiation requirement. Upon
release of this guidance document, the Company or the customers to which it
provides manufactured product will be required to evaluate its compliance with
the guideline and may be required to change its advertising and promotional
practices.
The Company manufactures certain products pursuant to contracts with
customers that distribute the products under their own or other trademarks.
Such private label customers are subject to government regulations in
connection with their purchase, marketing, distribution and sale of such
products, and the Company is subject to government regulations in connection
with its manufacture, packaging and labeling of such products. However, the
Company's private label customers are independent companies, and their
labeling, marketing and distribution of such products is beyond the Company's
control. The failure of these customers to comply with applicable laws or
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
Governmental regulations in foreign countries where the Company sells and
plans to commence or expand sales may prevent or delay entry into the market
or prevent or delay the introduction, or require the reformulation, of certain
of the Company's products. Compliance with such foreign governmental
regulations is generally the responsibility of the Company's distributors in
those countries. These distributors are independent contractors over whom the
Company has limited control.
The Company may be subject to additional laws or regulations by the FDA or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as DSHEA, or more
stringent interpretations of current laws or regulations, from time to time in
the future. The Company is
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unable to predict the nature of such future laws, regulations, interpretations
or applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
its business in the future. Such laws or regulations could, however, require
the Company to reformulate certain products to meet new standards or recall or
discontinuance of certain products that cannot be reformulated, impose
additional recordkeeping requirements, require expanded documentation of the
properties of certain products or expand or change requirements as to labeling
or scientific substantiation. Any or all of these requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Governmental Regulation."
DEPENDENCE ON SIGNIFICANT CUSTOMERS
As of June 30, 1998, no customer constituted more than 10% of the Company's
net sales. Since the Company generally does not produce products pursuant to
long-term contracts, there can be no assurance that the Company's larger
customers will continue as major customers of the Company. The loss of a major
customer, the loss of a significant number of customers, or a significant
reduction in purchase volume by, or financial difficulty of, such companies,
for any reason, could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The nutritional industry is highly competitive. Numerous companies, many of
which are significantly larger than the Company, have greater financial,
personnel, distribution and other resources than the Company and may be better
able to withstand volatile market conditions, compete with the Company in
supplying herbs and extracts and in the development, manufacture and marketing
of nutritional supplements. The Company's principal competition comes from
domestic and foreign suppliers of raw materials, manufacturers and other
companies. With generally low barriers to entry, additional competitors could
enter the market. There can be no assurance that national or international
companies will not seek to enter, or increase their presence in, the industry
or that existing or potential customers will not expand, whether horizontally
or vertically and whether by acquisition or otherwise. In addition, large
nationally known companies (such as Weider Nutritional International, Inc.,
Twinlab Corporation, Solgar Vitamin and Holding Company, Rexall Sundown, Inc.,
Nature's Way Products, Botanicals International, Inc., Pure World, Inc. and
Triarco Industries, Inc.) and, on a limited basis, pharmaceutical and packaged
food and beverage companies, compete with the Company in this industry.
Competition from any of these companies could have a material adverse effect
on the Company. See "Business--Competition."
PRODUCT LIABILITY; POTENTIAL ADVERSE PRODUCT PUBLICITY
The Company, like any other wholesaler, retailer, distributor or
manufacturer of products that are designed to be ingested, faces an inherent
risk of exposure to product liability claims in the event that the use of its
products results in injury. The Company faces the risk that materials used in
the manufacture of final products may be contaminated with substances that may
cause sickness or injury to persons who have used the products, or that
sickness or injury to persons may occur if products manufactured by the
Company are ingested in dosages which exceed the dosage recommended on the
product label. In the event that insurance coverage or contractual
indemnification is not adequate, product liability claims could have a
material adverse effect on the Company. The successful assertion or settlement
of any uninsured claim, a significant number of insured claims, or a claim
exceeding the Company's insurance coverage could have a material adverse
effect on the Company.
The Company is highly dependent upon consumers' perception of the safety and
quality of its products as well as similar products distributed by other
companies. Thus, the mere publication of reports asserting that such products
may be harmful could have a material adverse effect on the Company, regardless
of whether such reports are scientifically supported and regardless of whether
the harmful effects would be present at the dosages recommended for such
products.
Management believes the nutritional industry is affected by national media
attention regarding the consumption of supplements. There can be no assurance
that future scientific research or publicity will be favorable to the
nutritional industry or any particular product. Future reports of research
that are perceived as
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unfavorable could have a material adverse effect on the Company. Because of
the Company's dependence upon consumer perceptions, adverse publicity
associated with illness or other adverse effects of consumption of the
Company's products, or any similar products distributed by other companies
could have a material adverse impact on the Company. Such adverse publicity
could arise even if the adverse effects associated with such products resulted
from consumers' failure to consume such products as directed. The Company may
not be able to counter the effects of negative publicity concerning its
products or raw materials.
LIMITED AVAILABILITY OF CONCLUSIVE CLINICAL STUDIES
Although many of the ingredients in the Company's products are vitamins,
minerals, herbs and other substances for which there is a long history of
human consumption, some of the Company's products contain innovative
ingredients or combinations of ingredients. Although the Company believes all
of its products to be safe when used as directed, there is little long-term
experience with human consumption of certain of these product ingredients or
combinations thereof. Accordingly, no assurance can be given that the
Company's products, even when used as directed, will have the effects
intended. Although the Company tests the formulation and production of its
products, it has not sponsored or conducted clinical studies on the effects of
human consumption. See "--Product Liability; Potential Adverse Product
Publicity."
RISKS ASSOCIATED WITH MANUFACTURING AND PROCESSING
The Company's results of operations are dependent upon the continued
operation of its manufacturing and processing facilities in New Jersey, New
York and California at their current levels. The operation of nutritional
supplement manufacturing plants involves many risks, including the breakdown,
failure or substandard performance of equipment, natural and other disasters,
and the need to comply with the requirements of government agencies, including
the FDA. Two of the Company's manufacturing facilities are located in
California in geographic areas that historically have been prone to
earthquakes, which in some cases have been catastrophic. Certain of the
Company's products and ingredients are processed by outside contractors. The
Company's profit margins on these products and its ability to deliver these
products on a timely basis are dependent on the ability of the outside
contractors to continue to supply products that meet the Company's quality
standards in a timely and cost-efficient manner. The occurrence of significant
operational problems at the facilities of the Company or its outside suppliers
could have a material adverse effect on the Company's business, financial
condition and results of operations during the period of such operational
difficulties. See "Business--Quality Control."
INTELLECTUAL PROPERTY PROTECTION
The Company relies on common law trademark rights to protect its
unregistered trademarks as well as its trade dress rights. Common law
trademark rights generally are limited to the geographic area in which the
trademark is actually used, while a United States federal registration of a
trademark enables the registrant to stop the unauthorized use of the trademark
by any third party anywhere in the United States. The protection available, if
any, in jurisdictions other than the United States may not be as extensive as
the protection available to the Company in the United States.
Although the Company seeks to avoid infringement on the intellectual
property rights of others, there can be no assurance that third parties will
not assert intellectual property infringement claims against the Company. Any
infringement claims by third parties against the Company may have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Intellectual Property Protection."
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be largely dependent on the continuing
efforts of the persons who, following the consummation of the Mergers and the
Offering, will constitute its executive management and the senior management
of the Founding Companies, particularly Joseph Schortz, its President, David
Chang, its
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Executive Vice President, Greg Pusey, its Chairman of the Board, Barry Loder,
its Senior Vice President--Finance and Brett Richman and Pailla Reddy,
Presidents of Northridge and Bactolac, respectively. The Company has entered
into employment and non-competition agreements with each of these individuals.
See "Management--Executive Compensation." Additionally, the Company likely
will depend on the senior management of any significant business it acquires
in the future. The business or prospects of the Company could be adversely
affected if any of these people, current or future, do not continue in their
management role until the Company is able to attract and retain qualified
replacements. The success of the Company will also depend on its ability to
attract and retain other qualified personnel. See "Management."
NO ASSURANCE OF FUTURE INDUSTRY GROWTH
There is limited reliable, comprehensive data available regarding the size
of the nutritional industry and the historic and future expected growth of
such industry. Industry data and projections are inherently uncertain and
subject to change. There can be no assurance that the industry is as large as
some publicly available reports indicate or that projected growth will occur
or continue. In addition, underlying market conditions are subject to change
based on economic conditions, consumer preferences and other factors that are
beyond the Company's control. There can be no assurance that an adverse change
in the size or growth rate of the nutritional product market will not have a
material adverse effect on the Company.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the completion of the Mergers and the Offering, the Company's
executive officers and directors, former stockholders of the Founding
Companies and entities and individuals affiliated with or related to them will
beneficially own approximately [ ]% of the outstanding shares of Common Stock
([ ]% if the Underwriters' over-allotment option is exercised in full). These
persons, if acting in concert, will be able to exercise control over the
Company's affairs, to elect the entire Board of Directors and to control the
outcome of any matter submitted to a vote of stockholders. See "Principal
Stockholders."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO STOCKHOLDERS OF FOUNDING COMPANIES
Of the net proceeds of the Offering, $37.6 million, or [ ]%, will be paid as
the cash portion of the purchase price for the Founding Companies. Some of the
recipients of these funds will become directors of the Company or holders of
more than 5% of the Common Stock. See "Use of Proceeds" and "Certain
Transactions."
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Therefore, the initial public offering price for the Common Stock will be
determined by negotiation between the Company and the Representatives of the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after the Offering. See "Underwriting" for the factors to be
considered in determining the initial public offering price. There can be no
assurance that an active trading market will develop subsequent to the
Offering or, if developed, that it will be sustained. After the Offering, the
market price of the Common Stock may be subject to significant fluctuations in
response to numerous factors, including the timing of any acquisitions by the
Company, variations in the Company's annual or quarterly financial results or
those of its competitors, changes by financial research analysts in their
estimates of the future earnings of the Company, conditions in the economy in
general or in the Company's industry in particular, unfavorable publicity or
changes in applicable laws and regulations (or judicial or administrative
interpretations thereof) affecting the Company or the nutritional supplements
industry generally. From time to time, the stock market experiences
significant price and volume volatility, which may affect the market price of
the Common Stock for reasons unrelated to the Company's performance.
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POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Upon consummation of the Mergers and the Offering, [ ] shares of Common
Stock will be outstanding. The 5,000,000 shares sold in the Offering (other
than shares that may be purchased by affiliates of the Company) will be freely
tradable. The remaining outstanding shares may be resold publicly only
following their registration under the Securities Act of 1933, as amended (the
"Securities Act"), or pursuant to an available exemption from registration
(such as provided by Rule 144 following a one year holding period for
previously unregistered shares). The holders of these remaining shares have
certain rights to have their shares registered in the future under the
Securities Act, but may not exercise such registration rights, and have agreed
with the Company that they will not sell, transfer or otherwise dispose of any
of their shares, for twelve months following the consummation of the Offering,
at which time such holders will have piggyback registration rights with
respect to such shares and will have demand registration rights with respect
to such shares after eighteen months following the consummation of the
Offering. See "Shares Eligible for Future Sale." Upon consummation of the
Offering, the Company also will have outstanding options to purchase up to a
total of 558,800 shares of Common Stock at an exercise price equal to the
initial public offering price. The Company has also adopted the 1998 Stock
Option Plan and the Non-Discretionary Stock Option Plan. See "Management--1998
Stock Option Plan" and "Management--Non-Discretionary Stock Option Plan." The
Company intends to register all the shares subject to these options under the
Securities Act for public resale.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
ANI's Certificate of Incorporation (the "Certificate of Incorporation"),
authorizes the Board of Directors to issue, without stockholder approval, one
or more series of preferred stock having such voting powers, if any,
designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof
(including preferences over the Common Stock respecting dividends,
distributions and voting rights) as the Board of Directors may from time to
time determine. The existence of this "blank-check" preferred stock could
render more difficult or discourage an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise. In
addition, the Certificate of Incorporation provides for a classified Board of
Directors, which may also have the effect of inhibiting or delaying a change
in control of the Company. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."
COMPUTER SYSTEMS AND YEAR 2000 ISSUES
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant and is currently developing a
plan to modify its computer systems to be Year 2000 compliant on a timely
basis. Failure of the Company or its software providers to adequately address
the Year 2000 issue could result in misstatement of reported financial
information or otherwise adversely affect the Company's business operations.
The extent to which the Company's customers and suppliers may be affected by
Year 2000 issues that may cause disruptions in their business is uncertain. If
any significant customers or suppliers of the Company do not timely and
successfully achieve Year 2000 compliance, the Company's business or
operations could be adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may fluctuate significantly. These
fluctuations could result from, among other things, variations in the
Company's results of operations, which could be adversely affected by a number
of factors (some of which are beyond the Company's control), including
economic downturns, variations in demand for nutritional supplements, changes
in the mix of products sold, price changes in response to competition,
increases in the cost of raw materials and possible supply shortages. In
particular, the market price of the Common Stock could be materially adversely
affected by reports by health and medical authorities or the
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general media regarding the potential health benefits or detriments of
products sold by the Company or of similar products distributed by other
companies regardless of whether such reports are scientifically supported and
regardless of whether the Company's operating results are likely to be
affected by such reports, as well as by consumer perceptions regarding the
safety and efficacy of nutritional supplements, changing of government
regulations and consumer preferences generally. In addition, the stock market
in general has experienced wide price and volume fluctuations in recent
periods, and these fluctuations are often unrelated to the operating
performance of the specific issuers whose stock is affected.
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THE COMPANY
Advanced Nutraceuticals, Inc. was founded in September 1997 and
reincorporated in Delaware in September 1998. The Company's principal
executive offices are located at 500 Metuchen Rd, South Plainfield, New
Jersey, 07080 and the telephone number is (908) 668-0088. The Company also has
facilities located in Sunnyvale, California, Chatsworth, California, Westbury,
New York, North Las Vegas, Nevada and Hakalau, Hawaii.
USE OF PROCEEDS
The net proceeds from the sale of the 5,000,000 shares of Common Stock
offered hereby, after deducting underwriting discounts and commissions and
estimated Offering and Merger expenses, are estimated to be $[ ] million ($[ ]
million if the Underwriters' over-allotment option is exercised in full) at an
assumed initial offering price of $[ ] per share.
The proceeds to the Company will be used as follows: (i) $37.6 million to
pay the cash portion of the purchase price for the Founding Companies, some of
which will be paid to persons who will become directors or holders of more
than 5% of the Common Stock, (ii) $1.0 million to pay the balance of a
promissory note issued by QBI in settlement of certain litigation (see
"Certain Transactions"), (iii) to repay outstanding indebtedness to certain
stockholders of the Founding Companies in the aggregate amount of $1.3
million, (iv) to pay approximately $[ ] million in expenses incurred in
connection with the Mergers and the Offering, including approximately $2.9
million in finder's fees and (v) to pay $1.35 million owed by QBI to the
former stockholders of BPI. The remaining net proceeds of approximately $[ ]
million will be used for working capital and other general corporate purposes,
which are expected to include future acquisitions and capital expenditures for
expansion, including the acquisition or construction of an herbal extraction
facility. The Company currently has no binding agreements to effect any future
acquisitions. Pending such uses, the net proceeds will be invested in short-
term, interest-bearing, investment grade securities.
As of the date hereof, the Company is in discussions with several financing
sources regarding the Company obtaining a senior credit facility. There can be
no assurance that the Company will be able to obtain, on terms that the
Company deems acceptable, a line of credit or additional financing it may need
to finance potential acquisitions. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Combined Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company intends to retain all of its future earnings, if any, to finance
the expansion of its business and for general corporate purposes, including
future acquisitions, and does not anticipate paying any cash dividends on its
Common Stock for the foreseeable future. In addition, if the Company is
successful in obtaining a credit facility, it is likely that such facility
will include restrictions on the ability of the Company to pay dividends
without the consent of the lender.
19
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization at June 30, 1998 (i) on a pro forma combined
basis to give effect to the Mergers and the BPI Acquisition and (ii) on a pro
forma combined basis, as adjusted to give further effect to the Offering and
the application of a portion of the estimated net proceeds therefrom as set
forth below. This table should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------
PRO FORMA AS
COMBINED ADJUSTED
--------- --------
(IN THOUSANDS EXCEPT
SHARE DATA)
<S> <C> <C>
Current maturities of long-term debt
obligations(1).................................... $46,222(2) $4,940
======= ======
Long-term obligations, less current maturities(1).. 2,873 2,873
Stockholders' equity
Preferred stock, $0.001 par value, 5,000,000
shares authorized; no shares outstanding........
Common stock, $0.001 par value, 30,000,000 shares
authorized; shares outstanding
[ ] pro forma combined;
[ ] as adjusted(3)............................. [ ] [ ]
Additional paid-in capital......................... [ ] [ ]
Retained earnings.................................. 2,481 2,481
------- ------
Total stockholders' equity................... 40,855 [ ]
------- ------
Total capitalization......................... $43,728 $ [ ]
======= ======
</TABLE>
- --------
(1) For a description of the Company's debt, see the Notes to Unaudited Pro
Forma Combined Financial Statements and Notes to the Founding Companies'
Financial Statements.
(2) Includes a $37.6 million note payable to owners of the Founding Companies,
representing the cash portion of the Merger consideration to be paid from
a portion of the net proceeds of the Offering.
(3) Excludes 558,800 shares of Common Stock subject to options to be granted
upon consummation of the Offering at an exercise price equal to the
initial public offering price. See "Management 1998 Stock Option Plan" and
"--Non-Discretionary Stock Option Plan."
20
<PAGE>
DILUTION
The deficit in pro forma combined net tangible book value of the Company at
June 30, 1998 was $32.2 million or $[ ] per share of Common Stock. The deficit
in pro forma combined net tangible book value per share represents the amount
by which the Company's pro forma combined total liabilities exceeds the
Company's pro forma combined net tangible assets, divided by the number of
shares of Common Stock to be outstanding after giving effect to the Mergers.
After giving effect to the sale of the 5,000,000 shares of Common Stock in the
Offering and after deduction of the underwriting discounts and commissions and
estimated Offering expense and expenses of the Mergers, the pro forma combined
net tangible book value of the Company at June 30, 1998 would have been
approximately $[ ] million or $[ ] per share. This represents an immediate
increase in pro forma combined net tangible book value of $[ ] per share to
existing stockholders and an immediate dilution of $[ ] per share to
purchasers of Common Stock in the Offering. The following table illustrates
this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $[ ]
Pro forma combined deficit in net tangible book value per
share before the Offering.................................. ($[ ])
Increase in pro forma combined net tangible book value per
share attributable to new investors........................ [ ]
----- -----
Pro forma combined net tangible book value per share after the
Offering..................................................... [ ]
----- -----
Dilution per share............................................ $[ ]
===== =====
</TABLE>
The following table sets forth, on a pro forma combined basis giving effect
to the Mergers at June 30, 1998, the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and the new investors purchasing
shares of Common Stock from the Company in the Offering, before deducting
underwriting discounts and commissions and estimated Offering and Merger
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED PRICE
----------------- TOTAL PER
NUMBER PERCENT CONSIDERATION SHARE
--------- ------- ------------- -----
<S> <C> <C> <C> <C>
Existing stockholders.................. [ ] [ ] $[ ](1) $[ ]
New investors.......................... 5,000,000 [ ] [ ] [ ]
--------- ----- ----- -----
Total................................ [ ] 100.0 $[ ] $
========= ===== ===== =====
</TABLE>
- --------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity before the Offering, adjusted to reflect: (i) the
cash portion of the consideration payable to the stockholders of the
Founding Companies in connection with the Mergers, (ii) the S Corporation
and other distributions to stockholders by the Founding Companies and
(iii) assumes no exercise of outstanding options and warrants.
21
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Advanced Nutraceuticals will acquire the Founding Companies simultaneously
with and as a condition to the consummation of the Offering. For financial
statement presentation purposes, ACTA has been identified as the "accounting
acquiror." The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto of
the Founding Companies as well as other financial and statistical information
included elsewhere in the prospectus. The selected financial data for ACTA as
of December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996
and 1997 are derived from audited financial statements contained elsewhere in
this Prospectus. The selected financial data for ACTA as of June 30, 1997 and
December 31, 1993, 1994 and 1995 and for the years ended December 31, 1993 and
1994 are derived from unaudited financial statements not included herein. The
selected financial data for ACTA as of June 30, 1998 and for the six month
periods ended June 30, 1997 and 1998 are derived from unaudited financial
statements included herein. In the opinion of management of ACTA, such
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position of ACTA and the results of operations for the indicated
periods. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for fiscal 1998.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ --------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
ACTA
Income statement data
Net sales................ $4,065 $5,793 $9,531 $14,391 $18,723 $9,305 $11,592
Gross profit............. 1,880 2,270 3,615 5,848 6,461 3,605 4,627
Earnings from operations. 34 94 986 438 1,534 1,973 2,220
Balance sheet data
Total assets............. 1,047 1,488 2,906 4,939 6,273 6,573 8,332
Long-term obligations.... 277 404 813 1,124 1,072 1,076 1,188
Stockholders' equity..... 163 137 768 1,210 1,348 2,296 2,809
</TABLE>
22
<PAGE>
The historical combined net sales, cost of goods sold and gross profit
presented below for the periods indicated do not represent combined results of
operations presented in accordance with generally accepted accounting
principles, but are only a summation of the actual historical results of the
Founding Companies, including those of BPI. The historical combined data for
the years ended December 31, 1996 and 1997 (and the year ended December 31,
1995 for ACTA) are derived from audited financial statements contained
elsewhere in the Prospectus. The historical combined data for the six month
periods ended June 30, 1997 and 1998 are derived from the unaudited financial
statements included herein. The historical combined data for the year ended
December 31, 1995 (except for ACTA) is derived from unaudited financial
statements not included herein. In the opinion of management such unaudited
financial statements have been prepared on the same basis as the audited
financial statements referred to above and include all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the results
of operations for the indicated periods and data. See the Unaudited Pro Forma
Combined Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
HISTORICAL COMBINED DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED(1) JUNE 30,(2)
----------------------------------- -----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------- --- ------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $24,257 100 $34,826 100 $50,825 100 $24,090 100 $33,651 100
Cost of goods sold...... 15,703 65 23,468 67 35,671 70 16,340 68 22,717 68
------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit............ 8,554 35 11,358 33 15,154 30 7,750 32 10,934 32
</TABLE>
- --------
(1) The fiscal years presented are as follows: ACTA, QBI and Bactolac--the
years ended December 31 for all periods presented; Northridge--the years
ended September 30 for all periods presented.
(2) Includes Northridge's results for the second and third quarters of its
fiscal year.
The selected unaudited pro forma combined financial data set forth below
present data for the Company, adjusted for (i) the effects of the Mergers,
(ii) the effects of certain pro forma adjustments to the historical financial
statements described below and (iii) the consummation of the Offering and the
application of the net proceeds therefrom.
PRO FORMA COMBINED
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
1997 30, 1998
------------- ----------
<S> <C> <C>
Income statement data(1)
Net sales........................................... $50,825 $33,651
Gross profit........................................ 15,154 10,934
Selling, general and administrative(2).............. 8,267 4,942
Goodwill amortization(3)............................ 1,826 913
Earnings from operations............................ 5,061 5,079
Interest and other income (expense), net ........... (1,460) (390)
Earnings before income taxes........................ 3,601 4,688
Net earnings(4)..................................... 1,430 2,447
Net earnings per share basic and diluted............ [ ] [ ]
Shares used in computing pro forma net earnings per
share basic and diluted(5)......................... [ ] [ ]
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
PRO FORMA AS
COMBINED ADJUSTED(7)
--------- -----------
<S> <C> <C>
Balance sheet data(6)
Working capital, (deficit)(8).......................... $(35,293) [ ]
Total assets........................................... 102,097 [ ]
Long-term debt, net of current maturities(9)........... 2,873 2,873
Stockholders' equity(10)............................... 40,855 [ ]
</TABLE>
- --------
(1) The pro forma combined income statement data assume that each of the
Mergers and the BPI Acquisition were consummated on January 1, 1997 and
are not necessarily indicative of the results the Company would have
obtained had these events actually then occurred or of the Company's
future results.
(2) The pro forma combined income statement data reflect an aggregate of $5.9
million for the twelve months ended December 31, 1997 and $1.2 million
for the six months ended June 30, 1998 in pro forma reductions in
salaries, bonuses and benefits to the owners of the Founding Companies to
which they have agreed to prospectively (the "Compensation Differential")
and includes the non-recurring, non-cash compensation charge of $3.0
million recorded in 1997 relative to 1,800,000 shares issued to founders
of and consultants to Advanced Nutraceuticals at $.008 per share in
December 1997.
(3) Consists of amortization of goodwill to be recorded as a result of the
Mergers over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.
(5) Includes (i) [ ] shares to be issued to owners of the Founding Companies
and (ii) [ ] of the 5,000,000 shares sold in the Offering necessary to
pay the cash portion of the Merger consideration and expenses of the
Offering.
(6) The pro forma combined balance sheet data assume that the Mergers were
consummated on June 30, 1998.
(7) Adjusted for the sale of the 5,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(8) Pro forma combined includes $37.6 million in notes payable to owners of
the Founding Companies, representing the cash portion of the Merger
consideration to be paid from a portion of the net proceeds of the
Offering.
(9) Includes $1.3 of the $2.5 million in notes to be issued to selling
stockholders of Northridge and Bactolac, as a portion of the
consideration paid for the acquisitions.
(10) In connection with the Mergers, certain of the Founding Companies will
make distributions to their stockholders totaling $1.8 million.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Founding Companies' respective Financial Statements
and related Notes thereto appearing elsewhere in this Prospectus.
INTRODUCTION
The Company operates in the nutritional industry. Revenues are derived from
the contract manufacturing of products and from processing and supplying herbs
and extracts. Approximately 55.6% of the Company's pro forma combined revenues
of $50.8 million for 1997 were derived from contract manufacturing and
approximately 44.4% from processing and supplying herbs and extracts.
The Founding Companies have operated throughout the periods presented as
independent, privately-owned entities, and their results of operations reflect
varying tax structures (S Corporations or C Corporations) which have
influenced the historical level of owners' compensation. Gross profit margins
and selling, general and administrative expenses as a percentage of revenues
may not be comparable among the individual Founding Companies. The owners of
the Founding Companies have agreed to certain reductions in their compensation
and benefits in connection with the organization of the Company. The
Compensation Differential for 1997 of $5.9 million has been reflected as a pro
forma adjustment in the Unaudited Pro Forma Combined Statements of Operations.
The Company anticipates that following the Mergers it will be able to reduce
costs and expenses as a result of (i) lower material costs as a result of
consolidation of purchase orders from suppliers; (ii) consolidation of
insurance programs and general and administrative functions such as a company-
wide computer system and advertising; and (iii) the Company's ability to
obtain working capital and acquisition financing at lower interest rates than
would be available to most of the Founding Companies. These savings will be
offset to some degree by costs related to the Company's corporate-level
management, by increased capital expenditures and by the costs associated with
being a public company. The Company believes that neither these savings nor
the costs associated therewith can be quantified because the Mergers have not
occurred, and there have been no combined operating results upon which to base
any assumptions. As a result, they have not been included in the pro forma
financial information included herein nor have any of the potential benefits
of cross-selling between the Founding Companies following the Mergers.
The Company recorded a non-recurring, non-cash compensation charge of $3.0
million during the fourth quarter of 1997 relating to 1,800,000 shares of
Common Stock sold to founders and certain consultants to Advanced
Nutraceuticals, representing the difference between the amount paid for the
shares and the deemed value of those shares for accounting purposes only. This
non-recurring compensation charge is adjusted out as part of the compensation
differential in the Pro Forma Combined Financial Statements.
In July 1996, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 97 ("SAB 97") relating to business combinations immediately prior
to an initial public offering. SAB 97 requires that such combinations be
accounted for using the purchase method of acquisition accounting. Under the
purchase method, one of the companies must be designated as the accounting
acquirer. For the remaining companies, $69.3 million, representing the excess
of the fair value of the Merger consideration received over the fair value of
the net assets to be acquired, will be recorded as "goodwill" on the Company's
balance sheet. Goodwill will be amortized as a non-cash expense over a 40-year
period. The amount of this amortization expense, which is non-deductible for
tax purposes, is $1.7 million per year on an after-tax basis. Prior to the
issuance of SAB 97, goodwill and related amortization expense were not
required to be recorded for most business combinations similar to the Mergers.
The amount of goodwill to be recorded and the related amortization expense
will depend in part on the actual Offering price. See "Certain Transactions--
Organization of the Company."
25
<PAGE>
COMBINED RESULTS OF OPERATIONS
The combined results of operations of the Founding Companies for the periods
presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the net sales, cost of goods and gross profit, general and
administrative expenses of the individual Founding Companies on a historical
basis. The combined results also exclude the effect of pro forma adjustments
and may not be comparable to, and may not be indicative of, the Company's
post-combination results of operations because (i) the Founding Companies were
not under common control or management during the periods presented; (ii) the
Founding Companies used different tax structures (S Corporations or
C Corporations) during the periods presented; (iii) the Company will incur
incremental costs related to its new corporate management and the costs of
being a public company; (iv) the Company will use the purchase method to
record the Mergers, resulting in the recording of goodwill which will be
amortized over 40 years; (v) the results of QBI are combined to reflect the
BPI Acquisition and the contribution to QBI of certain farming assets by QBI's
stockholders; and (vi) the combined data does not reflect the Compensation
Differential and potential benefits and cost savings the Company expects to
realize when operating as a combined entity.
The following table sets forth the combined results of operations of the
Founding Companies on a historical basis and such results as a percentage of
revenues. See "ACTA's Results of Operations," "QBI's Results of Operations,"
"Northridge's Results of Operations" and "Bactolac's Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED(1) JUNE 30, (2)
----------------------------------- -----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------- --- ------- --- ------- --- ------- --- ------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $24,257 100 $34,826 100 $50,825 100 $24,090 100 $33,651 100
Cost of goods sold...... 15,703 65 23,468 67 35,671 70 16,340 68 22,717 68
------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit............ 8,554 35 11,358 33 15,154 30 7,750 32 10,934 32
</TABLE>
- --------
(1) The fiscal years presented are as follows: ACTA, QBI and Bactolac--the
years ended December 31 for all periods presented; Northridge--the years
ended September 30 for all periods presented.
(2) Includes Northridge's results for the second and third quarters of its
fiscal year.
COMBINED RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997
Net Sales. Combined net sales increased approximately $9.6 million, or
39.6%, from $24.1 million for the six months ended June 30, 1997 to $33.7
million for the six months ended June 30, 1998. The growth in net sales
resulted from a $5.1 million increase in net sales of contract manufacturing
and a $4.5 million increase in processing and supplying herbs and extracts. As
further detailed with each Founding Company's discussion, the increase in net
sales resulted from a combination of, (i) a new customer relationship with a
national mass-retailer which accounted for approximately $1.9 million in net
sales in the 1998 period, (ii) the conversion of certain sales from the 1997
period from sales where the customer had supplied its own materials to produce
the product, to sales where the Company supplied the materials in the 1998
period accounting for approximately $1.0 million in additional net sales,
(iii) a $0.9 million increase in net sales generated by BPI in the 1998 period
and (iv) the addition of several new customers as well as expanded sales
levels to existing customers.
Gross Profit. Combined gross profit increased $3.1 million, or 41.0%, from
$7.8 million for the six months ended June 30, 1997 to $10.9 million for the
six months ended June 30, 1998. Combined gross profit as a percentage of net
sales increased from 32.1% in the 1997 period to 32.4% in the 1998 period. The
change in gross profit resulted from overall higher net sales levels for the
Company, offset by higher overhead costs in 1998 due to facilities expansion,
additional production and quality control personnel and an increase in
production costs and equipment to expand capacity.
26
<PAGE>
COMBINED RESULTS FOR 1997 COMPARED TO 1996
Net Sales. Combined net sales increased approximately $16.0 million, or
45.9%, from $34.8 million in 1996 to $50.8 million in 1997. The increase in
combined net sales occurred from a $8.9 million increase in net sales of
contract manufacturing and a $7.1 million increase in processing and supplying
herbs and extracts.
Gross Profit. Combined gross profit increased $3.8 million, or 33.4%, from
$11.4 million in 1996 to $15.2 million in 1997, due principally to higher net
sales. Combined gross profit as a percentage of net sales decreased from 32.6%
in 1996 to 29.8% in 1997. The decrease in the gross profit percentage resulted
from higher overhead costs in 1997 due to facilities expansion, additional
production and quality control personnel, and an increase in fixed production
costs and equipment to expand capacity.
COMBINED RESULTS FOR 1996 COMPARED TO 1995
Net Sales. Combined net sales increased approximately $10.6 million, or
43.5%, from $24.3 million in 1995 to $34.8 million in 1996, primarily due to a
$7.5 million increase in contract manufacturing net sales and approximately a
$3.1 million increase in processing and supplying herbs and extracts.
Gross Profit. Combined gross profit increased $2.8 million, or 32.7%, from
$8.6 million in 1995 to $11.4 million in 1996. Combined gross profit as a
percentage of net sales decreased from 35.2% in 1995 to 32.6% in 1996. The
change in gross profit resulted from overall higher net sales levels for the
Company, off-set by increases in fixed production costs as the Company
expanded its production capacities to enable it to handle increased volume of
business.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a combined basis, the Founding Companies generated $2.3 million of net
cash from operating activities for the six months ended June 30, 1998. Net
cash used in investing activities was $0.7 million, primarily for equipment
purchases. Net cash generated by financing activities was $1.1 million and
consisted of net decreases in long-term debt of $0.3 million, the sale of
stock at $1.1 million offset by distributions to stockholders of the Founding
Companies of $0.2 million. At June 30, 1998, the Founding Companies had
combined working capital of $7.2 million and total long-term debt of $3.3
million, including $.9 million of debt to stockholders.
On a combined basis, the Founding Companies used $1.4 million of net cash in
operating activities during fiscal 1997. Net cash used in investing activities
was $0.8 million on a combined basis, primarily for equipment purchases. Net
cash provided by financing activities was $1.3 million on a combined basis,
consisting of net additions to long-term debt of $2.5 million and
distributions to stockholders of $1.2 million. At December 31, 1997, the
combined Founding Companies had working capital of $3.5 million and total
long-term debt of $3.2 million, including $1.1 million in debt to
stockholders.
The Company is in discussions with various credit sources regarding
obtaining a senior line of credit to be used for acquisitions, capital
expenditures, refinancing of debt not paid out of the proceeds of the Offering
and for general corporate purposes. The terms of any such facility may require
the Company to comply with various loan covenants including (i) maintenance of
certain financial ratios, (ii) restrictions on additional indebtedness, and
(iii) restrictions on liens, guarantees, advances and dividends. There can be
no assurances the Company will be able to obtain a line of credit on
acceptable terms. If the Company does not obtain an acceptable line of credit
or additional financing, the Company's liquidity and capital resources could
be adversely affected.
The Company intends to pursue acquisition opportunities. The Company expects
to fund future acquisitions through the issuance of additional Common Stock,
borrowings including seller financing, use of amounts available under a credit
facility if obtained and cash flow from operations. If cash generated from
operations is insufficient to meet the Company's needs for working capital and
acquisition financing, the Company will need to obtain additional funding
through new borrowings or the issuance of additional debt or equity
securities. There
27
<PAGE>
can be no assurance that such financing will be available to the Company or,
if available, will be available on commercially reasonable terms. The issuance
of additional equity securities (or debt securities convertible or
exchangeable therefor) may result in the dilution of existing stockholders.
SEASONALITY
Management believes the nutritional industry experiences lower product net
sales during the months of June, July and August. Accordingly, as a supplier
to such industry, the Company expects its operations generally will be lower
in the months of June, July and August resulting in lower revenues and
operating results in the second and third fiscal quarters.
INFLATION
Inflation did not have a significant effect on the results of operations of
the combined Founding Companies for 1995, 1996 or 1997 or the six months ended
June 30, 1998.
COMPUTER SYSTEMS AND YEAR 2000 ISSUES
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company does not anticipate any significant costs, problems or uncertainties
associated with becoming Year 2000 compliant and is currently developing a
plan to ensure that its computer systems are modified to be compliant on a
timely basis. The Company intends to upgrade its information systems and
install new software in connection with the consolidation of the operations of
the Founding Companies. The Company anticipates expenditures of up to $500,000
to effectuate such upgrade which will include, in part, costs of Year 2000
compliance. Failure of the Company or its software providers to adequately
address the Year 2000 issue could result in misstatement of reported financial
information or otherwise adversely affect the Company's business operations.
The extent to which the Company's customers and suppliers may be affected by
Year 2000 issues that may cause disruptions in their business is uncertain. If
any significant customers or suppliers of the Company do not timely and
successfully achieve Year 2000 compliance, the Company's business or
operations could be adversely affected. The costs to the Company to become
Year 2000 compliant or as a result of non-compliance of its customers or
suppliers cannot be quantified as of the date hereof.
ACTA'S RESULTS OF OPERATIONS
ACTA is a manufacturer of nutritional supplements and a supplier of raw
materials. Through its constituent companies, Acta Pharmacal and Acta
International, founded in 1972 and 1995, respectively, ACTA operates from a
37,000 square foot facility in Sunnyvale, California. ACTA provides products
and services including herbal extracts, full-service manufacturing and product
development services.
The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ --- ------- --- ------- --- ------ --- ------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $9,531 100 $14,391 100 $18,723 100 $9,305 100 $11,592 100
Cost of goods sold...... 5,916 62 8,543 59 12,262 66 5,700 61 6,965 60
------ --- ------- --- ------- --- ------ --- ------- ---
Gross profit............ 3,615 38 5,848 41 6,461 34 3,605 39 4,627 40
Selling, general and
administrative
expenses............... 2,629 28 5,410 38 4,927 26 1,632 18 2,407 21
------ --- ------- --- ------- --- ------ --- ------- ---
Earnings from
operations............. 986 10 438 3 1,534 8 1,973 21 2,220 19
</TABLE>
28
<PAGE>
ACTA'S RESULTS FOR SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997
Net Sales. Net sales increased $2.3 million, or 24.5%, from $9.3 million for
the six months ended June 30, 1997 to $11.6 million for the six months ended
June 30, 1998 due to a combination of increased net sales levels to existing
customers and a new customer relationship with a national mass-retailer which
accounted for approximately $1.9 million in net sales in the 1998 period.
Gross Profit. Gross profit increased $1.0 million, or 28.3%, from $3.6
million for the six months ended June 30, 1997 to $4.6 million for the six
months ended June 30, 1998. As a percentage of net sales, gross profit
increased from 38.7% to 39.9%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.8 million, or 47.4%, from $1.6 million
for the six months ended June 30, 1997 to $2.4 million for the six months
ended June 30, 1998. The increase in selling, general and administrative
expenses resulted from an increase in net sales commissions for the six months
ended June 30, 1998 as a result of the higher net sales levels and a higher
percentage commission structure on net sales to a certain national mass-
retailer. As a percentage of net sales, selling, general and administrative
expenses increased from 17.5% to 20.7%. ACTA's historical practice has been
that significant bonus expenses have been recorded in the second half of its
fiscal year as year end results are being finalized. Accordingly, the
historical results for the first six months of ACTA's fiscal year have
generally been more profitable on a relative basis than the last six months of
its fiscal year.
ACTA'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996
Net Sales. Net sales increased $4.3 million, or 30.1%, from $14.4 million
for the year ended December 31, 1996 to $18.7 million for the year ended
December 31, 1997 due to the addition of two new customers which accounted for
approximately $3.0 million in additional net sales during 1997 combined with
general increased level of net sales to existing customers.
Gross Profit. Gross profit increased $0.6 million, or 10.4%, from $5.8
million for the year ended December 31, 1996 to $6.5 million for the year
ended December 31, 1997. As a percentage of net sales, gross profit decreased
from 40.6% to 34.5% due to reduced pricing on several net sales orders to
larger customers as well as increase in fixed overhead production costs to
increase capacity.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.5 million, or 8.9%, from $5.4 million for
the year ended December 31, 1996 to $4.9 million for the year ended December
31, 1997. As a percentage of net sales, these expenses decreased from 37.5% to
26.3% due primarily to a decrease in officer/stockholder compensation of $0.8
million from $3.5 million in 1996 to $2.7 million in 1997, off-set by general
increases in administrative overhead costs and higher net sales commission
expenses due to the higher net sales levels.
ACTA'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995
Net Sales. Net sales increased $4.9 million, or 50.9%, from $9.5 million for
the year ended December 31, 1995 to $14.4 million for the year ended December
31, 1996 due to the addition of several new customers as well as expanded net
sales levels to existing customers.
Gross Profit. Gross profit increased $2.2 million, or 61.7%, from $3.6
million for the year ended December 31, 1995 to $5.8 million for the year
ended December 31, 1996. As a percentage of net sales, gross profit increased
from 37.9% to 40.6%. The improvement in gross profit resulted from
significantly higher net sales levels for ACTA in 1996 over 1995 combined with
higher utilization of the fixed production costs.
29
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.8 million, or 106%, from $2.6 million for
the year ended December 31, 1995 to $5.4 million for the year ended December
31, 1996. As a percentage of net sales, these expenses increased from 27.5% to
37.5% due to higher net sales commissions, additions to administrative staff
to handle the increased level of business and a $2.4 million increase in
officer/stockholder compensation from $1.1 million in 1995 to $3.5 million in
1996.
ACTA'S LIQUIDITY AND CAPITAL RESOURCES
ACTA generated $0.2 million in net cash from operating activities for the
six months ended June 30, 1998. Net cash used in investing activities,
principally for equipment purchases, was insignificant. Net cash used by
financing activities was $0.3 million, representing net payments on long-term
debt.
At December 31, 1997, ACTA had working capital of $1.9 million and $1.0
million of total long-term debt outstanding payable to its stockholders.
ACTA provided $0.5 million in net cash from operating activities for the
year ended December 31, 1997. Net cash used in investing activities was
approximately $0.4 million, principally for equipment purchases. Net cash used
in financing activities was $1.1 million, primarily in distributions to
stockholders.
QBI'S RESULTS OF OPERATIONS
QBI is a processor and supplier of raw materials to manufacturers of
nutritional products. Founded in 1983 and headquartered in its 74,000 square
foot facility in South Plainfield, New Jersey, QBI sells to the vitamin, food,
herbal tea, pharmaceutical, diet and sports supplement, health and beauty
care, and pet and equine products industries. QBI also has a 9,000 square foot
facility in North Las Vegas, Nevada from which it distributes products to its
Western regional customers. The information presented does not reflect the
results of operations of BPI.
The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ --- ------- --- ------- --- ------ --- ------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $7,349 100 $10,894 100 $15,495 100 $7,621 100 $10,009 100
Cost of goods sold...... 4,960 67 7,592 70 11,155 72 5,390 71 7,034 70
------ --- ------- --- ------- --- ------ --- ------- ---
Gross profit............ 2,389 33 3,302 30 4,340 28 2,231 29 2,975 30
Selling, general and
administrative
expenses............... 1,979 27 2,595 24 3,514 23 1,880 24 1,991 20
------ --- ------- --- ------- --- ------ --- ------- ---
Earnings from
operations............. 410 6 707 6 826 5 351 5 984 10
</TABLE>
QBI'S RESULTS FOR SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997
Net Sales. Net sales increased $2.4 million, or 31.3%, from $7.6 million for
the six months ended June 30, 1997 to $10.0 million for the six months ended
June 30, 1998. The growth in the 1998 period resulted from increased net sales
to existing customers as well as net sales generated from new customers. The
growth was facilitated by additional warehouse facilities and equipment
improvements completed in 1997 that increased production capacity.
Gross Profit. Gross profit increased $0.7 million, or 33.3%, from $2.2
million for the six months ended June 30, 1997 to $3.0 million for the six
months ended June 30, 1998. As a percentage of revenues, gross profit
increased slightly from 29.2% to 29.7%. The increase in gross profit resulted
from the higher net sales level and production efficiency in the 1998 period.
30
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were substantially unchanged from the six months ended
June 30, 1997 to the six months ended June 30, 1998. As a percentage of net
sales, selling, general and administrative expenses decreased from 24.6% to
19.8% as QBI was able to increase its net sales volume without a commensurate
increase in overhead expenses.
QBI'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996
Net Sales. Net sales increased $4.6 million, or 42.2%, from $10.9 million
for the year ended December 31, 1996 to $15.5 million for the year ended
December 31, 1997. The growth in 1997 resulted from increased net sales to
existing customers as well as net sales generated from new customers. The
growth was facilitated by a production capacity expansion plan, which was
completed in 1997, and the addition of warehouse facilities and equipment.
Gross Profit. Gross profit increased $1.0 million, or 31.4%, from $3.3
million for the year ended December 31, 1996 to $4.3 million for the year
ended December 31, 1997. As a percentage of net sales, gross profit decreased
from 30.3% to 28.0%. The increase in gross profit resulted from the higher net
sales level in 1997 offset by costs of the implementation of additional
quality control initiatives and capabilities. As a result of the cost of the
additional warehouse facilities, equipment and associated costs, in addition
to additional costs incurred as a result of the implementation of additional
quality control staff and procedures, gross profit as a percentage of net
sales decreased slightly in 1997 from the 1996 level.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.9 million, or 35.4%, from $2.6 million
for the year ended December 31, 1996 to $3.5 million for the year ended
December 31, 1997. As a percentage of net sales, these expenses decreased from
23.8% to 22.6%. The increase in selling, general and administrative costs in
1997 was a result of QBI's efforts to expand and upgrade its marketing
program, management information systems and administrative functions to better
support QBI's growth.
QBI'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995
Net Sales. Net sales increased $3.5 million, or 48.2%, from $7.3 million for
the year ended December 31, 1995 to $10.9 million for the year ended December
31, 1996 due to increased net sales to existing customers as well as net sales
generated from new customers.
Gross Profit. Gross profit increased $0.9 million, or 38.2%, from $2.4
million for the year ended December 31, 1995 to $3.3 million for the year
ended December 31, 1996. As a percentage of net sales, gross profit decreased
from 32.5% to 30.3%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.6 million, or 31.1%, from $2.0 million
for the year ended December 31, 1995 to $2.6 million for the year ended
December 31, 1996. As a percentage of net sales, these expenses decreased from
26.9% to 23.8% as QBI was able to increase its net sales volume without a
commensurate increase in overhead expenses.
QBI'S LIQUIDITY AND CAPITAL RESOURCES
QBI generated $0.3 million in net cash from operating activities for the six
months ended June 30, 1998. Net cash used in investing activities was
approximately $0.2 million, principally for equipment purchases. Net cash used
in financing activities was $0.1 million, representing net repayment of long-
term debt.
QBI has a revolving line of credit and term loan facility providing for
approximately $7.8 million in available borrowings. Borrowings thereunder are
collateralized by all of QBI's assets as well as personal guarantees of QBI's
stockholders and certain affiliates and contain specified financial and
operating covenants. As of June 30, 1998 there was approximately $4.5 million
outstanding under the facility, which matures in May 1999.
At December 31, 1997, QBI had a working capital deficit of $0.3 million and
$2.2 million of total long-term debt outstanding.
31
<PAGE>
QBI used $2.1 million in net cash in operating activities for the year ended
December 31, 1997. Net cash used in investing activities was approximately
$0.3 million, principally for equipment purchases. Net cash provided by
financing activities was $2.4 million, of which $2.7 million net, was borrowed
on long-term debt and $0.3 million was distributed to stockholders.
NORTHRIDGE'S RESULTS OF OPERATIONS
Northridge is a full service manufacturing, formulating, encapsulating,
tableting and product development services company. Northridge, headquartered
in Chatsworth, California, was founded in 1967 and has facilities consisting
of two buildings totaling 25,000 square feet.
The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------------- ----------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ --- ------ --- ------- --- ------ --- ------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $7,148 100 $7,622 100 $11,532 100 $7,656 100 $11,233 100
Cost of goods sold...... 5,223 73 6,088 80 8,393 73 5,540 72 8,315 74
------ --- ------ --- ------- --- ------ --- ------- ---
Gross profit............ 1,925 27 1,534 20 3,139 27 2,116 28 2,918 26
Selling, general and
administrative
expenses............... 1,482 21 1,608 21 2,070 18 1,495 20 1,991 18
------ --- ------ --- ------- --- ------ --- ------- ---
Earnings (loss) from
operations............. 443 6 (74) (1) 1,069 9 621 8 927 8
</TABLE>
NORTHRIDGE'S RESULTS FOR NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE
MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales increased $3.6 million, or 46.7%, from $7.7 million for
the nine months ended June 30, 1997 to $11.2 million for the nine months ended
June 30, 1998 due to approximately $2.5 million in net sales which during the
1997 period the customer supplied the materials to produce the finished
product and Northridge invoiced for processing and finishing the product
("Tolling Service"). This arrangement was replaced in the 1998 period with net
sales where Northridge supplied the materials resulting in additional net
sales of approximately $1.0 million. The additional net sales growth was due
to increased net sales to existing customers as well as net sales generated
from new customers.
Gross Profit. Gross profit increased $0.8 million, or 37.9%, from $2.1
million for the nine months ended June 30, 1997 to $2.9 million for the nine
months ended June 30, 1998. As a percentage of net sales, gross profit
decreased from 27.6% to 25.9%. The increase in gross profit resulted from the
higher net sales level in the 1998 period and gross profit percentage
decreased in the 1998 period as a result of the material purchases discussed
above, additional direct labor costs and a return to normal levels in repairs
and maintenance expenses, following the equipment replacement which occurred
in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.5 million in 1998 period. As a
percentage of net sales, selling, general and administrative expenses
decreased from 19.5% to 17.7% as Northridge was able to increase its net sales
volume without a commensurate increase in overhead expenses.
NORTHRIDGE'S RESULTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE
YEAR ENDED SEPTEMBER 30, 1996
Net Sales. Net sales increased $3.9 million, or 51.2%, from $7.6 million for
the year ended September 30, 1996 to $11.5 million for the year ended
September 30, 1997 due to increased net sales to existing customers as well as
net sales generated from new customers.
32
<PAGE>
Gross Profit. Gross profit increased $1.6 million, or 104.6%, from $1.5
million for the year ended September 30, 1996 to $3.1 million for the year
ended September 30, 1997. As a percentage of net sales, gross profit increased
from 20.1% to 27.2%. During a significant portion of 1996, Northridge was
forced to contract with other manufacturers to produce its products as a
result of a gas explosion that occurred late in fiscal 1995 and damaged
Northridge's production facilities resulting in additional costs in that year.
The increase in gross profit percentage occurred as a result of resuming
normal operations
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.5 million, or 28.7%, from $1.6 million
for the year ended September 30, 1996 to $2.1 million for the year ended
September 30, 1997. As a percentage of net sales, these expenses decreased
from 21.0% to 17.9%. The increase in selling, general and administrative
expenses resulted primarily from an increase in officer/stockholder and
general employee bonuses in 1997.
NORTHRIDGE'S RESULTS FOR THE YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE
YEAR ENDED SEPTEMBER 30, 1995
Net Sales. Net sales increased slightly from $7.1 million for the year ended
September 30, 1995 to $7.6 million for the year ended September 30, 1996.
Gross Profit. Gross profit decreased $0.4 million, or 20.3%, from $1.9
million for the year ended September 30, 1995 to $1.5 million for the year
ended September 30, 1996. As a percentage of net sales, gross profit decreased
from 26.9% to 20.1%. The decrease in gross profit percentage in 1996 was a
result of contract manufacturing costs incurred in 1996 as a result of a gas
explosion that occurred in late fiscal 1995, damaging Northridge's production
facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.1 million, or 8.5%, from $1.5 million for
the year ended September 30, 1995 to $1.6 million for the year ended September
30, 1996. As a percentage of net sales, these expenses increased from 20.7% to
21.0%.
NORTHRIDGE'S LIQUIDITY AND CAPITAL RESOURCES
Northridge generated $1.8 million in net cash from operating activities for
the nine months ended June 30, 1998. Net cash used in investing activities was
approximately $0.4 million, principally for equipment purchases. Net cash
generated by financing activities was insignificant.
At September 30, 1997, Northridge had working capital of $1.9 million with
no long-term debt outstanding.
Northridge generated $0.3 million in net cash from operating activities for
the year ended September 30, 1997. Net cash used in investing and financing
activities was insignificant.
BACTOLAC'S RESULTS OF OPERATIONS
Bactolac manufactures nutritional supplements for private label customers.
Bactolac, headquartered in Westbury, New York, began operations in late 1995
and has facilities consisting of one building of 15,000 square feet. Bactolac
is a full-service manufacturer, providing formulation, encapsulation,
tableting and packaging services.
33
<PAGE>
The following table sets forth selected statement of operations data and
such data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ---------------------
1996 % 1997 % 1997 % 1998 %
------ --- ------ --- ------ --- ------ ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $1,406 100 $5,002 100 $2,023 100 $3,642 100
Cost of goods sold................. 1,135 81 3,802 76 1,528 76 2,566 70
------ --- ------ --- ------ --- ------ ---
271 19 1,200 24 495 24 1,076 30
Selling, general and administrative
expenses.......................... 75 5 246 5 82 4 134 4
------ --- ------ --- ------ --- ------ ---
Earnings from operations........... 196 14 954 19 413 20 942 26
</TABLE>
BACTOLAC'S RESULTS FOR SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Net Sales. Net sales increased $1.6 million, or 80%, from $2.0 million for
the six months ended June 30, 1997 to $3.6 million for the six months ended
June 30, 1998 due primarily to expansion in Bactolac's customer base.
Gross Profit. Gross profit increased $ 0.6 million, or 117%, from $0.5
million for the six months ended June 30, 1997 to $1.1 million for the six
months ended June 30, 1998. As a percentage of net sales, gross profit
increased from 24.4% to 29.5%. The change in gross profit resulted from
significantly higher net sales levels for Bactolac from the 1997 period to
1998 combined with higher utilization of fixed production costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly during the six months ended June
30, 1998. The increase in selling, general and administrative expenses was
primarily attributable to an increase in administrative costs associated with
the higher net sales volume. As a percentage of net sales, selling, general
and administrative expenses decreased from 4.0% to 3.6% as Bactolac was able
to increase its net sales volume without a commensurate increase in overhead
expenses.
BACTOLAC'S RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
Net Sales. Net sales increased $3.6 million, or 256%, from $1.4 million for
the year ended December 31, 1996 to $5.0 million for the year ended December
31, 1997. The increase is primarily attributable to the fact that 1996 was
Bactolac's first full year of operations and Bactolac moving into expanded
facilities and adding new production equipment during the first quarter of
1997.
Gross Profit. Gross profit increased $0.9 million, or 343%, from $0.3
million for the year ended December 31, 1996 to $1.2 million for the year
ended December 31, 1997. As a percentage of net sales, gross profit increased
from 19.2% to 23.9%. The change in gross profit resulted from significantly
higher net sales levels for Bactolac from 1996 to 1997 combined with higher
utilization of the fixed production costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly during the year ended December 31,
1997. As a percentage of net sales, these expenses decreased from 5.3% to 4.9%
as a result of the increase in its net sales volume without a commensurate
increase in overall expense.
BACTOLAC'S LIQUIDITY AND CAPITAL RESOURCES
Bactolac generated $0.3 million in net cash from operating activities for
the six months ended June 30, 1998. Net cash used in investing activities was
insignificant. Net cash used in financing activities was $0.3 million,
representing dividends paid to stockholders.
34
<PAGE>
At December 31, 1997, Bactolac had working capital of $1.1 million with no
long-term debt outstanding.
Bactolac generated $0.1 million in net cash from operating activities for
the year ended December 31, 1997. Net cash used in investing and financing
activities was insignificant.
35
<PAGE>
BUSINESS
Advanced Nutraceuticals was formed to create a full-service, vertically
integrated manufacturer and supplier of quality nutritional supplements, herbs
and extracts. Following consummation of the Mergers, the Company will continue
to provide contract manufacturing of tablets, capsules and powders, and will
source, process and supply powdered herbs and extracts. See "--Products and
Services."
The principal strength of the Company is its ability to provide a
diversified line of products and services to its customers. With Northridge,
ACTA, QBI and Bactolac having conducted business in the nutritional industry
for 31, 26, 15 and 3 years, respectively, the Founding Companies have 75 years
of combined operating history. The Company works closely with customers to
create innovative solutions ranging from research and development through
consumer-level branding initiatives. The Company believes it will benefit from
the collective strengths of ACTA, QBI, Northridge and Bactolac in sourcing and
processing herbs and extracts, and contract manufacturing of custom
formulations. The Company's manufacturing services are tailored to customer
specifications and quality requirements and often include additional value-
added services such as custom product and packaging design. In 1997, the
Company sold over 1.0 million kilograms of powdered herbs and extracts and
over 1.5 billion tablets and capsules.
INDUSTRY OVERVIEW
A 1997 market report, "The U.S. Market For Vitamins, Supplements and
Minerals," prepared by the independent consumer marketing research firm of
Packaged Facts (the "Packaged Facts Report"), reported that the retail market
for vitamins, minerals and other dietary and nutritional supplements
(excluding sports nutrition and diet products) grew at a compound annual rate
of 15% from $3.7 billion in 1992 to $6.5 billion in 1996. A large portion of
this growth is attributable to an increase in sales of such other supplements
(primarily herbal products), which grew from $570 million in 1992 to $2.3
billion in 1996. This growth has been fueled by the popularity of such herbs
as echinacea, garlic, ginseng, ginkgo biloba and, more recently, saw palmetto,
St. John's wort and kava kava. The Packaged Facts Report forecasts 13.6%
compound annual growth in the retail market for vitamins, minerals and other
supplements (excluding sports nutrition and diet products), including 25%
compound annual growth in the market for other supplements, through 2001.
According to the Packaged Facts Report, compound annual growth rates from 1992
through 1996 for vitamins, minerals and other supplements were 8.0%, 5.2% and
41.7%, respectively.
The Company believes that growth in the nutritional supplement industry will
continue for the foreseeable future due to, among other things, the aging of
the American population combined with the tendency of consumers to purchase
more nutritional supplements as they mature, liberalized labeling laws under
the Dietary Supplements and Health Education Act of 1994 (DSHEA), academic
studies supporting the positive correlation between health and nutritional
supplementation, increased focus on preventative healthcare in general and as
a contributing factor in controlling healthcare costs and increasing media
attention and acceptance of alternative medicine, which often includes
nutritional supplementation as part of an overall treatment plan. Growth may
also result from potential new products and increasing awareness of existing
products.
Although there are several large participants in the nutritional supplement
industry such as Weider Nutritional International, Inc., Twinlab Corporation,
Solgar Vitamin and Holding Company, Rexall Sundown, Inc., Nature's Way
Products, Botanicals International, Inc., Pure World, Inc. and Triarco
Industries, Inc., the industry continues to include numerous small companies.
The Nutrition Business Journal reported in July 1997 that there are nearly
5,000 privately held companies with under $25 million in annual sales in the
retail and manufacturing segments of the nutritional industry. These
businesses typically are owner-operated and have similar profiles, including
limited access to the capital necessary to develop and maintain inventory of
large volume and wide selections, expand product offerings, implement advanced
management information systems, incorporate the use of sophisticated
technological equipment, conduct research and development and service national
and regional accounts.
36
<PAGE>
COMPETITIVE STRENGTHS
Wide Range of Products and Manufacturing Services--Enables the Company to
offer services ranging from a single step in the production process to a
complete, "turn-key" manufacturing solution.
Experienced Management--Six senior managers of the Company with a combined
67 years of industry experience and relationships.
Technical Expertise--Allows manufacturing of complex and difficult products
and, through the Company's patent pending cryogenic milling, unique processing
of products.
Strong Vendor Relationships--Allows greater access to herbs and extracts
including some that are in scarce supply.
Quality Control Procedures--Designed to promote uniform product quality and
potency to customer specifications.
STRATEGY
The Company was formed to capitalize on opportunities to integrate and
consolidate the highly fragmented nutritional industry. The Company's strategy
is to (i) support and expand the operations of the Founding Companies, (ii)
capitalize on operating synergies and cost savings available through
consolidation, and (iii) pursue an acquisition program designed to further
vertical integration and to expand existing operations. The Mergers involving
the Founding Companies are intended to be the first step in this process.
The Founding Companies were identified and pursued based on a variety of
factors including profitable operating history, entrepreneurial management, a
pattern of sales growth and industry reputation. In order to preserve the
entrepreneurial culture of the Founding Companies, the Founding Companies will
be operated as separate subsidiaries of the Company following the Mergers,
each continuing to be led by current management. Certain common administrative
and developmental functions will be integrated at the parent company level.
The Company intends to grow the businesses of each operating subsidiary
through cross-selling opportunities, sharing of technical expertise, research
and development and the other initiatives described below.
Support and Expand Operations of the Founding Companies. Management intends
to support each Founding Company's efforts to pursue its existing internal
growth plan. The Company also intends to foster growth through the following
initiatives:
. Enhance management strengths through sharing of core competencies and
existing expertise.
. Expand and coordinate marketing opportunities among the Founding
Companies.
. Develop customized solutions that utilize expertise and experience of each
of the Founding Companies.
. Encourage entrepreneurial initiatives.
. Achieve consistently high quality products and services by implementing
a company-wide quality program.
Capitalize on Operating and Cost Synergies Available Through
Consolidation. The Company's strategy includes exploiting opportunities
created by the Merger:
. Implementing a focused company-wide marketing program.
. Cross-selling opportunities to existing customers.
. Capitalizing on its increased national presence.
. Marketing to new and existing customers through an expanded sales force.
37
<PAGE>
. Improving operating efficiencies by promoting core-competencies.
. Providing a company-wide management information system designed to
enhance sales and management.
. Maximizing increased purchasing power to gain volume discounts
Growth through Acquisitions. The Company intends to pursue an acquisition
program designed both to further its vertical integration and to expand the
existing operations of the Founding Companies. The Company believes that there
are many attractive acquisition candidates in the nutritional industry. This
is due principally to the highly fragmented nature of the industry and the
large number of smaller companies in the industry having under $25 million in
annual sales. In many cases, these companies have needs that are difficult for
small businesses to meet, such as capital for growth and expansion, owners'
desires for liquidity, the ability to attract high caliber management talent
and other factors that motivate these owners to consider alternatives. The
Company intends to pursue additional vertical integration through acquisition
or construction of an herbal extraction facility and the addition of
distribution capabilities. The Company will seek to consolidate and enhance
its position in its current markets through strategic acquisitions.
The Company believes it will be regarded by acquisition candidates as an
attractive acquirer because of (i) the Company's strategy of retaining the
operational integrity of businesses that it acquires and its progressive
philosophy of fostering entrepreneurial initiative, (ii) the potential for
acquisition candidates' increased visibility and access to the Company's
financial resources as a public company, (iii) the potential for the owners of
the businesses acquired to achieve liquidity, an exit strategy and potential
equity appreciation, (iv) the Company's ability to provide centralized
administrative functions, enhanced systems capabilities and access to
increased marketing resources, (v) potential cross-selling opportunities, and
(vi) the Company's experience in and commitment to quality control and
assurance.
PRODUCTS AND SERVICES
The nutritional industry generally consists of (i) growers that cultivate
and harvest herbs, (ii) raw material processors who produce powdered herbs and
extractors that concentrate herbs into extracts, (iii) suppliers of herbs,
extracts and vitamins, (iv) manufacturers that produce tablets and capsules
and (v) distributors, direct marketers and retailers. The Founding Companies
presently derive revenues from contract manufacturing and from processing and
supplying herbs and extracts.
Contract Manufacturing. Manufacturing services are provided by ACTA,
Northridge and Bactolac. For the six months ended June 1998, these services
generated $18.2 million of combined net sales or a 16.3% increase over the
same period in 1997 and comprised approximately 54.2% of the Company's
combined net sales. In 1997, contract manufacturing generated $28.2 million of
combined net sales or approximately a 46.2% increase in such net sales over
1996. The Company's manufacturing processes generally consist of the following
operations: (i) formulating and blending measured ingredients into a mixture
with a homogeneous consistency, (ii) encapsulating or tableting blended
mixtures, (iii) tablet coating and (iv) bottling, labeling and packaging the
encapsulated or tableted product with tamper-evident features. Additionally,
on occasion the Company manufactures products incorporating raw materials
provided by the customer.
The Company formulates products consisting of vitamins, herbs, minerals,
amino acids and other ingredients. In 1997, the Company sold over 1.5 billion
tablets and capsules.
The Company works closely with customers to create innovative product
solutions ranging from research and development through consumer-level
branding initiatives. These services can be marketed as a package or
individually depending on the customer's requirements. The Company's customers
include multi-level marketers, specialty health product retailers and mass-
market retailers, among others.
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Process and Supply Herbs and Extracts. ACTA and QBI offer a broad range of
powdered herbs and extracts used in nutritional supplements and related
products. These activities generally consist of the following: (i) sourcing
herbs and extracts from around the world, (ii) processing herbs into powders
or granules and (iii) supplying herbs and extracts to a diverse customer base
in the nutritional industry and, to a lesser extent, the pharmaceutical, food,
beverage, pet, equine and cosmetics industries. For the six months ended June
30, 1998, these activities generated $15.4 million in combined net sales or a
40.7% increase over the same period in 1997 and comprised approximately 45.8%
of the Company's net sales. In 1997, herbal powders and extract activities
generated $22.6 million in combined net sales or a 45.6% increase in such net
sales over 1996. In 1997, the Company sold over 1.0 million kilograms
representing over 500 herbal products and extracts.
Herbs are raw and processed nutritional ingredients derived from plants that
are cultivated or collected and processed. Examples of herbs sold by the
Company include bilberry, black cohosh, cranberry, dong quai, echinacea,
feverfew, ginkgo biloba, ginseng, goldenseal, green tea, guarana, kava kava,
milk thistle, St. John's wort, saw palmetto, valerian and yohimbe bark. The
Company sells herbs as milled raw powders and as extracts in which the
constituents of the herb have been concentrated. The extraction process
produces a concentrated liquid or paste. Concentrated extracted material may
be further processed in order to make it useable in the manufacture of
tablets, capsules and "soft-gel" capsules.
Mineral ingredients are compounds that seek to increase the effectiveness of
elemental minerals by binding them to other organic materials. Mineral
products sold by the Company include calcium, copper, iron, magnesium,
manganese and zinc. The Company also sources other ingredients which include
among others, chlorella, melatonin and spirulina algae.
The Company ships the majority of its products through commercial carriers.
Shipments are made directly to customers from the individual warehouse
facilities of the Founding Companies.
CUSTOMERS
Presently, the Company markets its products and services to companies
primarily in the nutritional industry and, to a lesser extent, the
pharmaceutical, food, beverage, pet, equine and cosmetic industries. The
Company's customers vary in size, complexity, product sophistication, price
sensitivity and manufacturing requirements. The Company provides contract
manufacturing service to specialty food retailers, mass market drug stores,
multi-level marketers, catalog marketers, retail distributors, direct mail
sellers, infomercial marketers, and international distributors. In addition,
the Company supplies herbs and extracts to other manufacturers, marketers with
manufacturing capabilities and wholesale brokers. No single customer accounted
for more than 10% of the Company's pro forma combined 1997 revenues.
SALES AND MARKETING
The Founding Companies use a variety of methods to market their products and
services, including sales personnel, referrals, trade show participation,
trade journal advertising and press publicity as well as reliance on name
recognition and reputation in the industry. The Company intends to expand its
sales force and activities to capitalize on untapped cross-selling
opportunities.
QUALITY CONTROL
The Company's quality assurance program is designed to promote uniform
product quality and potency to meet customer demand. Management believes the
Company's standards and procedures meet or exceed Good Manufacturing Practices
("GMP") promulgated by the FDA. The Company has implemented additional quality
assurance procedures that surpass current GMP requirements for its herbal
processing and extraction operations, by utilizing sophisticated testing
methods and equipment, including thin layer chromatography ("TLC"), gas
chromatography ("GC") and high performance liquid chromatography ("HPLC"). TLC
is used to produce a specific constituent compound model of the material being
tested which identifies it in terms of genus and species. HPLC procedures are
used to quantify the presence and concentration of specific constituent
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compounds identified by the model. Although no standardization of testing
procedures exists in the nutritional industry, the Company's testing
procedures are designed to give the Company's customers confidence in
receiving an accurate analysis of the products delivered.
The Company currently conducts inspections and detailed record keeping
throughout the manufacturing process, including, when and as applicable,
quantity verification, label validation, hardness, weight, friability and
disintegration measurements and package quality sampling.
MATERIALS AND SOURCES OF SUPPLY
The Company has established numerous sources of supply and attempts to
cultivate strong relationships with its suppliers. The Company will seek to
employ centralized purchasing where cost efficiencies can be obtained without
compromising existing supply relationships; in other cases, each Founding
Company will source materials independently. Each of the Founding Companies
has staff with extensive knowledge and experience related to sourcing of raw
materials and other product ingredients. More than 50% of the Company's raw
materials currently come from outside the U.S.
RESEARCH AND DEVELOPMENT
Management believes it must analyze and anticipate trends in the nutritional
industry and incorporate appropriate developments into its product and service
offerings and technical capabilities. In this regard, the Company has
established its Technical Advisory Council (the "TAC") consisting of several
esteemed nutritional industry and science experts and authors. The Company
contracts with the members of the TAC on a non-exclusive basis to advise the
Company with respect to developments in the field and, in certain cases, to
provide insights and research affecting the future of the nutritional
industry. The members of the TAC are: Dr. Rudolf Bauer, a pharmacist and
University Professor at the Institute of Pharmaceutical Biology, University of
Dusseldorf, with over 80 published papers on herbs and natural products; Mr.
Stephen Foster, who for over 22 years has served as a medicinal and aromatic
plant specialist, commercial consultant, writer, lecturer and photographer and
has published over 500 photo-illustrated articles in popular, trade and
scientific journals and authored nine books on herbs and natural ingredients;
Dr. James Simon, a Professor at Purdue University and a specialist in aromatic
and medicinal plants whose work focuses on seed quality, genetics and
production systems, and phytochemistry, the development of analytical
protocols for the quantification of natural plant products and in the
improvement of raw botanical quality; and Dr. Wolfgang Danspeckgruber, a
lecturer at Princeton University's Woodrow Wilson School of Public and
International Affairs.
The Company believes that product quality and innovation will be important
to its long-term growth and success. It sponsors several limited scientific
research projects at prestigious universities in the U.S. to study the
cultivation of popular wild herbs. Approximately 100 acres are under
cultivation under these programs. The purpose of these studies is to determine
planting, harvesting and drying practices that will optimize quality, biomass
yield and bioactivity levels.
RISK MANAGEMENT
The sales of the Company's products include an inherent risk that product
liability claims may be asserted against the Company. See "Risk Factors--
Product Liability; Potential Adverse Product Publicity." The Company intends
to maintain product liability insurance coverage in the minimum amount of $2.0
million per occurrence and $5.0 million in the aggregate. There can be no
assurance that the Company will be able to maintain product liability
insurance on acceptable terms or that its insurance will provide adequate
coverage against potential claims. While the Company has not experienced any
product liability claims, if such claims should arise in the future, they
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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COMPETITION
The nutritional industry is highly competitive. Numerous companies, many of
which are significantly larger than the Company, have greater financial,
personnel, distribution and other resources than the Company. The Company's
principal competitors are domestic and foreign suppliers of herbs and extracts
and other contract manufacturers. To date the nutritional industry has
included many relatively small participants and, with generally low barriers
to entry, additional competitors could enter the market, at any level, at any
time. There can be no assurance that national or international companies will
not seek to enter, or increase their presence, in the industry or that
existing, or potential customers will not expand, whether horizontally or
vertically and whether by acquisition or otherwise. In addition, large
nationally known companies (such as Weider Nutritional International, Inc.,
Twinlab Corporation, Solgar Vitamin and Holding Company, Rexall Sundown, Inc.,
Nature's Way Products, Botanicals International, Inc., Pure World, Inc. and
Triarco Industries, Inc.) and, on a limited basis, pharmaceutical and packaged
food and beverage companies, compete with the Company in this industry.
Increased competition from any of these companies could have a material
adverse effect on the Company.
The Company competes principally on the basis of: customer service, product
quality, and price. See "--Competitive Strengths."
GOVERNMENTAL REGULATION
The Company's business is subject to comprehensive regulation by numerous
federal governmental agencies, including the FDA, CPSC, and the USDA. In
addition, the Company's manufacturing facilities are regulated by the EPA and
OSHA. Advertising and other forms of promotion and methods of marketing of the
Company's products are subject to regulation by the FTC. The manufacture,
labeling and advertising of the Company's products are also regulated by
various state and local agencies as well as those of each foreign country in
which the Company distributes its products.
The FDA has promulgated regulations under the FDCA and DSHEA with respect to
the manufacture of pharmaceuticals, foods, flavors and dietary supplements and
has established GMPs for, among other things, foods and pharmaceuticals. The
Company's products generally fit within the category of "dietary supplements"
and must be manufactured in compliance with "food" GMPs. Recently, however,
the FDA has announced that it is considering promulgating GMPs specific to
"dietary supplements." If promulgated, these dietary supplement specific GMPs
may be significantly more rigorous than those currently applicable to the
Company's products and may require quality assurance requirements similar to
pharmaceutical GMPs. Therefore, the Company may be required to expend
additional capital and resources in the future to comply with new FDA
regulations. In addition, a product can be removed from the market if it is
shown to pose a significant or unreasonable risk of illness or injury.
Moreover, if the manufacturer makes claims, or the FDA determines, that the
"intended use" of any of the Company's products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, the product would meet the
definition of a drug and would require pre-market approval by the FDA of
safety and effectiveness prior to its manufacture and distribution. The
failure of the Company to comply with applicable FDA regulatory requirements
could result in, among other things, injunctions, product withdrawals,
recalls, product seizures, fines and criminal prosecutions.
The safety of the Company's manufacturing operations to personnel and
visitors is regulated by OSHA. The Company's facilities are currently
classified as low risk by OSHA. In addition, the Company's operations are
subject to laws and regulations governing, among other things, air emissions,
waste water discharge, solid and hazardous waste treatment, and storage,
disposal and remediation of releases of hazardous materials administered by
the EPA and other state and local authorities. In particular, California's
Proposition 65 requires warnings on premises and on labels of products that
contain chemicals listed by the state which are known to cause cancer or
reproductive toxicity (such as certain amounts of lead connected to calcium.)
The Company has made and intends to continue to make the necessary
expenditures for environmental compliance. Health and safety and/or
environmental laws and regulations may become more stringent in the future
which would increase the costs of compliance.
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The Company supplies natural products, ingredients and nutritional
supplement products that are further processed, packaged, labeled, distributed
and sold by third party manufacturers, marketers and/or retailers that, along
with other similar participants in the nutritional industry, are subject to
governmental regulations with respect to their businesses. Though not directly
applicable to the Company, the enactment of DSHEA has had a significant effect
on the nutritional industry, which effect the Company believes to be
favorable. DSHEA revised the provisions of the FDCA concerning the regulation
of dietary supplements. The legislation for the first time defined "dietary
supplement" as a product intended to supplement the diet that contains one or
more of certain dietary ingredients, such as a vitamin, a mineral, an herb or
botanical, an amino acid, a dietary substance for use by humans to supplement
the diet by increasing the total dietary intake, or a concentrate, metabolite,
constituent, extract, or combination of the preceding ingredients. A
substantial portion of the products sold by the Company are ingredients for
dietary supplements.
Under the current provisions of the FDCA, there are four categories of
claims that pertain to the regulation of dietary supplements. Health claims
are claims that describe the relationship between a nutrient or dietary
ingredient and a disease or health related condition and can be made on the
labeling of dietary supplements if supported by significant scientific
consensus and authorized by the FDA in advance through notice and comment
rulemaking. Nutrient content claims describe the nutritional value of the
product and may be made if defined by the FDA through notice and comment
rulemaking and if one serving of the product meets the definition. Health
claims and nutrient content claims may also be made if a scientific body of
the U.S. government with official responsibility for the public health has
made an authoritative statement regarding the claim, the claim accurately
reflects that statement and the manufacturer, among other things, provides the
FDA with notice of and basis for the claim at least 120 days before the
introduction of the supplement with a label containing the claim into
interstate commerce. Statements of nutritional support or product performance,
which are permitted on labeling of dietary supplements without FDA pre-
approval, are defined to include statements that (i) claim a benefit related
to a classical nutrient deficiency disease and discloses the prevalence of
such disease in the United States, (ii) describe the role of a nutrient or
dietary ingredient intended to affect the structure or function in humans,
(iii) characterize the documented mechanism by which a dietary ingredient acts
to maintain such structure or function or (iv) describe general well-being
from consumption of a nutrient or dietary ingredient. In order to make a
nutritional support claim the marketer must possess substantiation to
demonstrate that the claim is not false or misleading and, if the claim is for
a dietary ingredient that does not provide traditional nutritional value,
prominent disclosure of the lack of FDA review of the relevant statement, and
notification to the FDA of using the claim is required. Drug claims are
representations that a product is intended to diagnose, mitigate, treat, cure
or prevent a disease. Drug claims are prohibited from use in the labeling of
dietary supplements without pre-market approval by regulatory agencies of the
safety and effectiveness prior to its manufacture and distribution.
The advertising of nutritional supplements is subject to regulation by the
Federal Trade Commission (the "FTC") under the Federal Trade Commission Act
(the "FTCA"). The FTCA prohibits unfair methods of competition and unfair or
deceptive acts or practices in or affecting commerce. In addition, the FTCA
provides that the dissemination, or the causing to be disseminated, of any
false advertisement pertaining to drugs or foods, which would include
nutritional supplements, is an unfair or deceptive act or practice. Under the
FTC's substantiation doctrine, an advertiser is required to have a "reasonable
basis" for all objective product claims before the claims are made. Failure to
adequately substantiate claims may be considered either deceptive or unfair
practices. Pursuant to this FTC requirement, the Company or its customers are
required to have adequate substantiation for all material advertising claims
made for their products. The type of substantiation will be dependent upon the
product claims made. For example, a health claim normally would require
competent and reliable scientific evidence, while a taste claim would require
only survey evidence.
In recent years, the FTC has initiated numerous investigations of
nutritional supplement and weight loss products and companies. The FTC is
reexamining its regulation of advertising for nutritional supplements and has
announced that it will issue a guidance document to assist nutritional
supplement marketers in understanding and complying with the substantiation
requirement. Upon release of this guidance document, the Company or its
customers will be required to evaluate their compliance with the guideline and
may be required to change their advertising and promotional practices.
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The Company manufactures certain products pursuant to contracts with
customers who distribute the products under their own or other trademarks.
Such private label customers are subject to government regulations in
connection with their purchase, marketing, distribution and sale of such
products, and the Company is subject to government regulations in connection
with its manufacture, packaging and labeling of such products. However, the
Company's private label customers are independent companies, and their
labeling, marketing and distribution of such products is beyond the Company's
control. The failure of these customers to comply with applicable laws or
regulations could have a material adverse effect on the Company's business,
financial condition or results of operations.
Governmental regulations in foreign countries where the Company sells and
plans to commence or expand sales may prevent or delay entry into the market
or prevent or delay the introduction, or require the reformulation, of certain
of the Company's products. Compliance with such foreign governmental
regulations is generally the responsibility of the Company's distributors in
those countries. These distributors are independent contractors over whom the
Company has limited control.
The Company may be subject to additional laws or regulations by the FDA or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, or more stringent
interpretations of current laws or regulations, from time to time in the
future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require, among other things, the reformulation of certain products to meet new
standards, the discontinuance of certain products not able to be reformulated,
the imposition of additional quality assurance procedures, or expanded or
different scientific substantiation.
INTELLECTUAL PROPERTY PROTECTION
The Company relies on common law trademark rights to protect its
unregistered trademarks. Common law trademark rights generally are limited to
the geographic area in which the trademark is actually used, while a United
States federal registration of a trademark enables the registrant to stop the
unauthorized use of the trademark by any third party anywhere in the United
States.
The Company operates in certain lines of business where innovation,
investment in new ideas and protection of proprietary information are
important to success. The Company relies on a variety of intellectual property
protections for its products and services. The Company has applied for a
patent on its method and apparatus for cryogenic ingredient processing which
increases milling capacity. Although the Company has no other patents, pending
or otherwise, relating to any of its products or other proprietary right, the
Company relies on other intellectual property protections (including statutory
and common law protections relating to trade secrets and unfair competition)
to protect its proprietary formulas, processes, techniques and know-how.
Although the Company seeks to ensure that it does not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company. Any infringement claims by third parties against the Company may have
a material adverse effect on the Company's business, financial condition and
results of operations
EMPLOYEES
As of June 30, 1998, the Founding Companies collectively had 196 employees,
including 19 management personnel, 12 laboratory personnel, 6 sales personnel,
131 production personnel and 28 administrative personnel. Management does not
anticipate reductions in staff as a result of the consolidation of the
Founding Companies. Rather, as the Company's internal growth and acquisition
strategies are implemented, Management expects that the number of employees
will increase.
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FACILITIES
It is the current intention of Management that all of the Company's
facilities will be leased. Prior to the Mergers, certain stockholders of QBI
and ACTA owned the buildings used for their respective offices and operations.
As part of the agreements pursuant to which QBI and ACTA are being acquired,
the owners of these buildings have agreed to long-term leases at valuations
not to exceed fair market value. See "Certain Transactions." The following is
a list of all facilities utilized by the Founding Companies:
<TABLE>
<CAPTION>
FOUNDING COMPANY LOCATION SQUARE FOOTAGE
- ---------------- -------- --------------
<S> <C> <C>
ACTA............................ Sunnyvale, California(1) 37,000
QBI............................. South Plainfield, New Jersey(1) 74,000
North Las Vegas, Nevada(2) 9,000
Hakalau, Hawaii(1) 3,200
Northridge...................... Chatsworth, California(2)(3) 25,000
Bactolac........................ Westbury, New York(2)(4) 15,000
</TABLE>
- --------
(1) This facility is leased from an affiliate of the Company. See "Certain
Transactions."
(2) This facility is leased from an independent third party.
(3) Consists of two facilities comprising an aggregate of 25,000 sq. feet.
(4) Management anticipates this location will be expanded from 9,000 sq. feet
to 15,000 sq. feet effective October 1998.
LEGAL PROCEEDINGS
There are no lawsuits currently pending or, to the knowledge of the Company,
threatened, either individually or in the aggregate, the outcome of which, if
adverse, is expected to have a material adverse affect on the financial
condition or results of operations of the Company.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information concerning the Company's
directors, executive officers and key employees upon completion of the
Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gregory Pusey(1)..................... 46 Chairman of the Board, Director
Joseph R. Schortz.................... 48 President, Chief Executive Officer,
Director
David Chang.......................... 46 Executive Vice President, Director
Barry C. Loder(2).................... 40 Senior Vice President-Finance,
Director
</TABLE>
- --------
(1) Prior to the Offering, Mr. Pusey was also a Vice President and the
Secretary of Advanced Nutraceuticals.
(2) Prior to the Offering, Mr. Loder was also the President and Chief
Financial Officer of Advanced Nutraceuticals.
Gregory Pusey has served as an officer and director of Advanced
Nutraceuticals since December 1997. He has served both as President of
Livingston Capital, Ltd. and President of the General Partner of Graystone
Capital, Ltd., venture capital firms, since 1987. From June 1994 to August
1998, he served as a director and consultant to Nutrition For Life
International, Inc., a publicly held company that markets nutritional
supplements and other consumer products. Since 1988, Mr. Pusey has been the
President and a director of Cambridge Holdings, Ltd., a publicly held real
estate development firm. Mr. Pusey graduated summa cum laude from Boston
College with a B.S. degree in Finance in 1974.
Joseph R. Schortz has provided services to QBI since 1988. In addition to
financial statement and tax return preparation, from 1988 through 1995, the
services included consulting in areas including human resources, management
information systems, feasibility, capital formation, financing, litigation
support and strategic business and financial planning. Since 1996 Mr. Schortz
has served as President of QBI. He has been highly involved in implementation
of QBI's business plan, including securing the funding necessary for QBI's
cryogenic processing equipment; farming as an aggressive domestic grower of
specialty crops; acquisition of supplier Botanical Products International,
Inc.; internal growth; extraction processing alternatives, etc. Mr. Schortz
earned a Certified Public Accountants license in 1975, and practiced public
accountancy from 1971 through 1996. Organizations in which he is currently
active include the American Institute of Certified Public Accountants (AICPA),
the New Jersey Society of Certified Public Accountant's (NJSCPA) and the LCM
Foundation International, Inc. Mr. Schortz graduated from Pfeiffer College
with a B.S. degree in Accounting in 1971.
David Chang has served as President of Acta International, Inc. since 1995.
Mr. Chang has served as Vice President for Acta Pharmacal Co. since 1990. From
1989 to 1990, Mr. Chang was the regional director for NMC Homecare, a division
of W.R. Grace. Mr. Chang served as area director for InfusionCare, Inc., a
division of AVON, from 1988 to 1989, general manager of CliniShare, Inc. from
1983 to 1987 and Director of Pharmacy of the San Fernando Community Hospital
from 1979 to 1983. From 1977 to 1979, Mr. Chang was staff pharmacist for the
University of California at Los Angeles. Mr. Chang holds a Doctor of Pharmacy
degree from the University of California, San Francisco, and has practiced as
a California pharmacist.
Barry C. Loder has served as an officer and director of Advanced
Nutraceuticals since September 1997. He serves as President of BCL Partners,
Inc. since January 1998. BCL is an investment banking firm that specializes in
mergers and acquisitions. From March 1995 to January 1998, Mr. Loder served as
Chief Financial Officer and later also as Chief Operating Officer of Nutrition
For Life International, Inc. From October 1993 through March 1995, Mr. Loder
was a financial consultant, performing corporate finance, merger and
acquisition and other financing activities. Mr. Loder was the Manager of
Mergers and Acquisitions for Allwaste, Inc. from 1992 to 1994. Mr. Loder was
co-founder of Republic Waste Industries and served as Senior Vice President of
Finance
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during 1990 and 1991. Mr. Loder has a Masters Degree in Business
Administration from Houston Baptist University, a B.A. in accounting from
Walsh University and is a Certified Public Accountant, and holds a Part II
Chartered Financial Analyst designation.
Within 90 days after the consummation of the Offering, the Company
anticipates it will name up to four additional directors, at least two of whom
will be independent directors. Following the consummation of the Offering, the
Company will establish an Audit Committee consisting of at least two
independent directors and a Compensation Committee consisting of at least two
independent directors.
OTHER KEY PERSONNEL
Brett Richman (46) has served as President of Northridge for 12 years. At
Northridge, Mr. Richman is in charge of all marketing, domestic and
international sales, launching and developing new territories, lecturing
world-wide, formulation and product development. Mr. Richman also lectures and
writes for Multi-Marketing News, a leading direct marketing periodical. Mr.
Richman graduated from the University of California magna cum laude with a
Bachelors degree in Eastern Religion and Philosophy. Mr. Richman is not a
director or officer of the Company.
Pailla Reddy (40) is President and founder of Bactolac Pharmaceuticals,
Inc., located in Westbury, New York since late 1995. At Bactolac, Mr. Reddy
manages and organizes operations, develops formulations and manages the
selection and procurement of all received raw materials. From 1991 to 1995,
Mr. Reddy served as production manager for Maxus Pharmaceutical, Inc. where he
managed daily operations and production. From 1983 to 1991, Mr. Reddy served
as a research chemist, production manager and ultimately the director of
operations to Wellcome Pharmaceuticals, Ltd. located in Lagos, Nigeria. Mr.
Reddy has a Bachelors in chemistry with genetics and botany, a Masters in
organic chemistry and Ph.D. in organic chemistry from Kanpur University,
India. Mr. Reddy is not a director or officer of the Company.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each
director who is not an employee of the Company or one of its subsidiaries will
receive a fee of $2,000 for attendance at each Board of Directors' meeting and
$1,000 for each committee meeting.
EXECUTIVE COMPENSATION
ANI was incorporated in September 1997, has conducted limited operations and
generated no revenue to date and did not pay any of its executive officers
compensation during 1997. The Company anticipates that during 1998 its five
most highly compensated executive officers will be Joseph R. Schortz, David
Chang, Greg Pusey and Barry Loder and on the subsidiary level, Brett Richman.
Employment Agreements and Termination of Employment and Change in Control
Arrangements
Each of Joseph R. Schortz, David Chang, Greg Pusey, Barry Loder, Brett
Richman and Pailla Reddy have agreed to enter into employment agreements upon
consummation of the Offering with the Company providing for annual base
salaries of $250,000, $150,000, $135,000, $135,000, $250,000 and $200,000,
respectively, and bonuses payable at the discretion of the Company's Board of
Directors. Each employment agreement will be for a term of three years, except
Mr. Richman's and Mr. Reddy's which will each be for two years. Each of these
agreements will provide that, in the event of a termination of employment by
the Company without cause, the employee will be entitled to receive severance
from the Company an amount equal to one year's salary, payable in one lump sum
on the effective date of termination or termination in connection with a
"Change in Control" of the Company (as defined in the employment agreements).
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1998 STOCK OPTION PLAN
No stock options were granted to, or exercised by or held by any executive
officer in 1997. The Company's Board of Directors adopted and in September
1998 the Company's stockholders approved the Company's 1998 Stock Option (the
"Plan"). The purpose of the Plan is to provide employees, consultants and
other service providers with additional incentives by increasing their
ownership interests in the Company. Individual awards under the Plan may take
the form of either incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs").
The Compensation Committee will administer the Plan and select the
individuals who will receive awards and establish the terms and conditions of
those awards. The maximum number of shares of Common Stock that may be subject
to outstanding awards is 1,300,000 shares. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Plan will remain in effect until September 2008. The Plan may be amended
by the Board of Directors without the consent of the stockholders of the
Company, except that any amendment, although effective when made, will be
subject to stockholder approval if required by any Federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted. Under the Plan, no
person may be granted options to purchase in excess of 200,000 shares of
Common Stock in any calendar year.
At the closing of the Offering, NQSOs to purchase a total of 558,800 shares
of Common Stock will be granted as follows: options to purchase 200,000 shares
will be granted to Mr. Schortz and options to purchase an aggregate of 358,800
shares will be granted to certain non-stockholder employees and consultants of
the Founding Companies. Each of the foregoing options will have an exercise
price equal to the initial public offering price per share. The Company
expects that these options will vest at the rate of 25% per year, commencing
on the first anniversary of the Offering and will expire at the earlier of
seven years from the date of grant or three months following termination of
employment.
NON-DISCRETIONARY STOCK OPTION PLAN
The Company's Non-Discretionary Stock Option Plan (the "Directors' Plan"),
which was adopted by the Board of Directors in August 1998 and approved by the
Company's stockholders in September 1998, provides for (i) the automatic grant
to each non-employee director serving at the commencement of the Offering of
an option to purchase 10,000 shares, or (ii) the automatic grant to each non-
employee director of an option to purchase 10,000 shares upon such person's
initial election as a director and (iii) an automatic annual grant to each
non-employee director of an option to purchase 5,000 shares at each annual
meeting of stockholders thereafter at which time the director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial election as a director. All options will have an
exercise price per share equal to the fair market value of the Common Stock on
the date of grant, are exercisable six months after the date of grant as to
all shares subject thereto and expire on the earlier of seven years from the
date of grant or 30 days after termination of service as a director.
47
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In connection with the formation of Advanced Nutraceuticals, in December
1997, Advanced Nutraceuticals sold 672,000 shares of Common Stock at $.008 per
share to Mr. Pusey, 817,200 shares of Common Stock at $.008 per share to Mr.
Loder and an additional 310,800 shares at $.008 per share to various
unaffiliated purchasers. In June 1998 Advanced Nutraceuticals sold 588,000
additional shares of Common Stock at $1.67 per share in a private placement,
of which 18,000 shares were purchased by certain family members of Mr. Pusey.
Simultaneously with the consummation of the Offering, Advanced
Nutraceuticals will acquire by merger all of the issued and outstanding stock
of the Founding Companies, at which time each Founding Company will become a
wholly-owned subsidiary of the Company. The aggregate consideration to be paid
by Advanced Nutraceuticals in the Mergers consists of $37.55 million in cash,
$2.5 million in promissory notes issued by the Company ("Purchase Notes") and
[ ] shares of Common Stock. The Company has also agreed to pay $2.9 million
in finders fees for Bactolac and ACTA to nonaffiliated parties.
The consummation of each Merger is subject to customary conditions. These
conditions include, among others, the continuing accuracy on the closing date
of the Mergers of the representations and warranties of the Founding Companies
and the principal stockholders thereof and of Advanced Nutraceuticals, the
performance by each of them of all covenants included in the agreements
providing for and relating to the Mergers and the nonexistence of a material
adverse change in the results of operations, financial condition or business
of each Founding Company.
There can be no assurance that the conditions to closing of the Mergers will
be satisfied or waived or that the acquisition agreements will not be
terminated prior to consummation. If any of the Mergers is terminated for any
reason, the Company does not intend to consummate the Offering on the terms
described herein.
Each merger agreement executed in connection with the Mergers contains
certain representations and warranties regarding the business, assets,
liabilities and financial condition of the respective Founding Companies.
These representations and warranties will survive the closing of the Mergers
for a period of at least 12 months following the consummation of the Offering.
The following table sets forth the pro forma consideration to be paid in
cash, shares of the Company's common stock and purchase notes by Advanced
Nutraceuticals as of June 30, 1998 for each of the Founding Companies:
<TABLE>
<CAPTION>
SHARES OF
COMMON PURCHASE
CASH STOCK * NOTES
------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
QBI............................................... $ 8,050 [ ] $ --
ACTA.............................................. 19,000 [ ] --
Northridge........................................ 7,500 [ ] 2,000
Bactolac.......................................... 3,000 [ ] 500
------- --- ------
Total............................................. $37,550 [ ] $2,500
======= === ======
</TABLE>
- --------
*Assuming an offering price of $[ ] per share.
48
<PAGE>
In connection with the Mergers, and as consideration for their interests in
the Founding Companies, certain officers, directors, key employees and holders
of more than 5% of the outstanding shares of the Company, together with their
spouses and trusts for which they act as trustees, will receive cash and
shares of Common Stock and Purchase Notes of the Company as follows:
<TABLE>
<CAPTION>
SHARES
OF
COMMON PURCHASE % OF STOCK
NAME CASH(1) STOCK NOTES OWNERSHIP(2)
- ---- ------- ------ -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
David Chang................................ $11,750 [ ] $ -0- [ ]%
Botanical Trust............................ 4,428 [ ] -0- [ ]%
Joseph R. Schortz(2)....................... 2,254 [ ] -0- [ ]%
Pailla Sadhana Reddy....................... 3,000 [ ] 500 [ ]%
Lawrence J. Katz........................... 1,368 [ ] -0- [ ]%
Brett Richman.............................. 3,375 [ ] 900 [ ]%
Jane Richman............................... 3,375 [ ] 900 [ ]%
Holmby Ave. LLC............................ 750 [ ] 200 [ ]%
Kuang Yu Chang............................. 3,880 [ ] -0- [ ]%
Robert C. Chiang........................... 150 [ ] -0- [ ]%
------- ---- ------ ----
Total...................................... $34,330 [ ] $2,500
======= ==== ====== ====
</TABLE>
- --------
(1) Excludes $3.22 million of costs, $2.9 million of which are finder's fees.
(2) After giving effect to 558,800 shares subject to options, including
200,000 shares subject to options granted to Mr. Schortz.
Pursuant to the agreements to be entered into in connection with the
Mergers, certain stockholders of the Founding Companies have agreed not to
compete with the Company for three years, commencing on the date of
consummation of the Offering.
Certain of the Founding Companies have incurred indebtedness which has been
personally guaranteed by their stockholders or by entities controlled by their
stockholders. At June 30, 1998, the aggregate amount of indebtedness of these
Founding Companies that was subject to personal guarantees was approximately
$6.2 million. The Company intends to use its best efforts to have the personal
guarantees of this indebtedness released within 60 days after the closing of
the Offering and, in the event that certain of the guarantees cannot be
released, to repay such indebtedness. See "Use of Proceeds."
LEASES OF REAL PROPERTY BY FOUNDING COMPANIES
Following the Mergers, QBI will continue to lease its facilities in South
Plainfield, New Jersey. One of the properties is owned by MRA Associates, LLC,
of which Nathan Belkowitz, Mr. Schortz and Lawrence J. Katz own 66 2/3%, 16
2/3% and 16 2/3%, respectively. The existing lease with MRA Associates will be
replaced upon consummation of the Offering and will provide for a base monthly
rental payment of $17,667 or $212,000 per year, with an adjustment increase of
3% per year during the term of the lease. The new lease will initially expire
ten years from the consummation of the Offering. QBI will have two options to
extend the lease for five years each and a right to purchase the property
covered by the lease at the fair market value anytime during the lease term.
The Company believes that the rent for this property does not exceed fair
market value.
Following the Mergers, Acta Pharmacal will continue to lease its facilities
in Sunnyvale, California. These properties are owned by Chang & Chang
Partnership, a company wholly-owned by Kuang Yu Chang and David T. Chang (the
"Chang Partnership"). David T. Chang is President of Acta International and
will serve as Executive Vice President of the Company after the consummation
of the Offering. Kuang Yu Chang, the father of David T. Chang, is President of
Acta Pharmacal and will serve as a consultant to the Company after the
consummation of the Offering. The lease expires on October 31, 2000 and
provides for a monthly rental payment
49
<PAGE>
of $32,000 or $384,000 per year. The Company believes that the rent for this
property does not exceed fair market value. Following the Mergers, Acta
International will continue to lease its existing facilities in Sunnyvale,
California. These properties are owned by Chang Partnership. The lease expires
on October 31, 2000 and provides for a monthly rental payment of $20,000 or
$240,000 per year. The Company believes that the rent for this property does
not exceed fair market value.
OTHER TRANSACTIONS
Consulting Contract with Belkowitz Botanicals, Inc.
QBI has entered into an agreement with Belkowitz Botanicals, Inc., a New
Jersey corporation of which Mr. Belkowitz is the sole stockholder, pursuant to
which Belkowitz Botanicals, Inc. has agreed to provide the full time
consulting services of Mr. Belkowitz to undertake research and development
services for QBI and to provide services to QBI concerning specific aspects of
manufacturing operations, including specialty equipment use and
implementation. Such agreement has a three year term and will terminate upon
consummation of QBI's merger with the Company. Upon the consummation of the
merger with QBI, Belkowitz Botanicals, Inc. has agreed to enter into a three
year consulting agreement with the Company for a fee of approximately $21,000
per month to continue providing such services to QBI. In addition, Mr.
Belkowitz will enter into an agreement not to compete with the Company for at
least one year after the termination of the new consulting agreement. In 1997
Mr. Belkowitz pleaded guilty to a charge of interstate commercial bribery in
the amount of $2,000. Mr. Belkowitz is not, and will not be, after
consummation of the Offering, an officer, director or employee of the Company.
All of Mr. Belkowitz's interest in QBI, consisting of 55% of the shares of QBI
outstanding prior to the Offering, is held in Trust (the "Botanical Trust") of
which Joseph R. Schortz is the sole trustee and all of the interest of Mr.
Belkowitz as beneficiary of the Botanical Trust has been assigned to an escrow
agent. See "Principal Stockholders." The entire corpus of the Botanical Trust
has been pledged as collateral to secure payment of a $1,200,000 note of QBI
pursuant to a litigation settlement. See "--QBI Promissory Note."
Upon consummation of the Offering, the outstanding principal balance of the
note delivered by QBI in its litigation settlement will be paid in full with a
portion of the proceeds of the Offering (see "Use of Proceeds"). Upon payment
of the QBI note, the Botanical Trust will terminate, and the escrow agent has
agreed to deliver the cash portion of the acquisition consideration by the
Company of QBI to Mr. Belkowitz and the shares of ANI to an irrevocable trust
(the "New Botanical Trust" and such shares, the "New Botanical Trust Shares")
of which Mr. Belkowitz is the beneficiary and Mr. Schortz is the sole trustee.
Until termination of the New Botanical Trust, ten years from the date of
consummation of the Offering, Mr. Schortz, in his capacity as trustee, will
have sole voting power and disposition power over the New Botanical Trust
Shares.
QBI Promissory Note
In December 1997, in connection with the settlement of certain litigation
against QBI and certain of its officers, QBI issued a non-interest bearing
promissory note in the principal amount of $1,200,000 payable in sixty monthly
installments of $20,000. The note is personally guaranteed by Mr. Belkowitz
and is collateralized by, among other things, a pledge of shares of QBI held
by Mr. Belkowitz equal to two-thirds of the outstanding shares of QBI (of
which shares equal to 11 2/3% of the outstanding shares of QBI were
subsequently transferred to Mr. Schortz subject to such pledge), a second
mortgage on certain property leased to QBI and owned by MRA Associates, LLC,
an affiliate of QBI in which Mr. Belkowitz, Mr. Schortz and Mr. Katz are
principals. As of June 30, 1998, there was $1,040,000 principal amount
remaining on the note. A portion of the net proceeds to the Company from the
Offering will be used to pay the balance of the note immediately upon
consummation of the Offering.
Notes Receivable and Advances Due from Stockholders of the Founding Companies
During 1997 ACTA advanced $300,000 to K.Y. Chang, father of David Chang, on
a non-interest bearing basis. The balance of the advance outstanding on June
30, 1998, was $100,000, all of which has subsequently been paid.
50
<PAGE>
As of January 1, 1997, QBI had advanced $127,597 to three farming operations
which are 81% owned by the stockholders of QBI. During 1997 an additional
$489,993 was advanced with respect to such farming operations. As of June 30,
1998, the advances outstanding had increased to $809,427. The advances are
non-interest bearing and are scheduled for repayment as the crops are
harvested. The 81% interest in the three farming operations will be
contributed to QBI upon consummation of the merger with QBI.
Notes Payable to Stockholders of the Founding Companies
As of January 1, 1997, ACTA owed $1,614,534 to the Chang Partnership, with
interest rates ranging from 7% to 8%. The notes have no stated maturity terms
and as of December 31, 1997, the outstanding balance was $1,396,476 and as of
June 30, 1998 the outstanding balance was $1,363,950.
As of January 1, 1997, QBI owed $172,099 to two of its officers at an
interest rate of 8%. During 1997, $22,328 was repaid and the remaining
$149,771 was contributed to additional paid in capital of QBI by the holders.
As of October 1, 1996, Northridge owed $88,000 to Jane Richman and Brett
Richman under 7% demand notes. As of September 30, 1997, $20,000 had been
repaid on the notes, with and additional $12,500 repaid during the six months
ended June 30, 1998.
Transactions with Affiliate of a Founding Company Stockholder
Bactolac sells products to, and purchases products from, an entity in which
the stockholder of Bactolac holds a 20% ownership interest. During 1997,
Bactolac had sales of $1,213,121 and purchases of $459,790 with this entity.
As of December 31, 1997, $452,231 was due from the entity for sales and
$44,509 was payable to the entity for purchases. During the six months ended
June 30, 1998, Bactolac had sales of $561,343 and purchases of $245,947 with
this entity. As of June 30, 1998, $332,882 was due from the entity for sales
and $98,367 was payable to the entity for purchases.
COMPANY CONFLICT OF INTEREST POLICY
Any future transactions with affiliated parties of the Company or its
subsidiaries will be subject to the approval in advance by a majority of
disinterested members of the Board of Directors.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock, after giving effect to the Mergers and the
Offering, by (i) each person known to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each Company director; (iii) the
person expected to be named Chief Executive Officer and those persons expected
to be the next four most highly compensated executive officers of the Company
following consummation of Mergers and the Offering; and (iv) all executive
officers and directors as a group. All persons listed have an address c/o the
Company's principal executive offices and have sole voting and investment
power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AFTER
OFFERING(3)
-----------------
NAME NUMBER PERCENT(3)
---- ------ ----------
<S> <C> <C>
David Chang............................................... [ ] [ ]%
Joseph R. Schortz(1)(2)................................... [ ] [ ]%
Barry C. Loder............................................ [ ] [ ]%
Gregory Pusey............................................. [ ] [ ]%
Brett Richman(4).......................................... [ ] [ ]%
All executive officers and directors as a group (6
persons)................................................. [ ] [ ]
</TABLE>
- --------
(1) Includes [ ] shares that are owned by the New Botanical Trust of which
Mr. Schortz is the sole trustee and holds voting and disposition power.
(2) Does not include 200,000 shares subject to options expected to be issued
that will become exercisable in four equal annual installments commencing
on the first anniversary of the consummation of the Offering.
(3) Does not include 558,800 shares subject to options expected to be issued
that will become exercisable in four equal annual installments commencing
on the first anniversary of the consummation of the Offering.
(4) An officer of a subsidiary of the Company, not an officer or director of
the Company.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 30,000,000 shares of
capital stock and 5,000,000 shares of Preferred Stock. Upon completion of the
Mergers and the Offering, the Company will have outstanding [ ] shares of
Common Stock and no shares of Preferred Stock. In September 1998, the
shareholders of Advanced Nutraceuticals approved the Organizational Merger.
The following discussion is qualified in its entirety by reference to the
Certificate of Incorporation of Advanced Nutraceuticals, Inc. (the "ANI
Certificate"), which is included as an exhibit to the Registration Statement
of which this prospectus is a part.
COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. Upon consummation of the Offering, the Board of Directors will
be classified into three classes as nearly equal in number as possible, with
the term of each class expiring on a staggered basis. The classification of
the Board of Directors may make it more difficult to change the composition of
the Board of Directors and thereby may discourage or make more difficult an
attempt by a person or group to obtain control of the Company. Cumulative
voting for the election of directors is not permitted. Any director, or the
entire Board of Directors, may be removed at any time, with cause, by a
majority of the aggregate number of votes which may be cast by the holders of
all of the outstanding shares of capital stock entitled to vote for the
election of directors. The provisions of the ANI Certificate that provide for
a classified board may not be amended or repealed without the approval of 60%
of the vote entitled to be counted in an election of directors.
52
<PAGE>
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock are entitled to participate pro rata in such dividends
as may be declared in the discretion of the Board of Directors out of funds
legally available therefor. Holders of Common Stock are entitled to share
ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. Holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any
other securities of the Company. All outstanding shares of Common Stock are to
be issued pursuant to the Offering and the Mergers will be, upon payment
therefor, fully paid and non-assessable.
The Company has applied for the inclusion of the Common Stock on the Nasdaq
National Market under the symbol "ANUI," subject to official notice of
issuance.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or, if no shares of the series have been issued, to
change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations
or restrictions thereof, including dividend rights (including whether
dividends are cumulative), dividend rates, terms of redemption (including
sinking fund provisions), redemption prices, conversion rights and liquidation
preferences of the shares constituting any series of the Preferred Stock, in
each case without any further action or vote by the stockholders. The Company
has no current plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period
of three years following the time that such stockholder became an interested
stockholder, unless: (i) prior to such time, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) at or after such
time, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. An "interested stockholder" is defined as any
person that is (a) the owner of 15% or more of the outstanding voting stock of
the corporation or (b) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which
it is sought to be determined whether such person is an interested
stockholder.
53
<PAGE>
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for dividend payments or stock repurchases illegal
under Delaware law or any transaction in which a director has derived an
improper personal benefit.
Additionally, the Bylaws of the Company provide that directors, officers and
non-officer employees and agents shall be, indemnified by the Company to the
fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities actually and
reasonably incurred in connection with service for or on behalf of the
Company, and further provide for the advancing of expenses incurred in defense
of claims following delivery of an undertaking by the director, officer,
employee or agent to repay any amounts advanced if it is ultimately determined
that indemnification is not permitted under Delaware Law or the Bylaws.
The Company's Bylaws provide that a special meeting of stockholders may be
called only by the Company's President or by a majority of the Board of
Directors. The Bylaws provide that notices of special meeting must include a
statement of purpose of the special meeting.
The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or
a committee thereof, of candidates for election as directors (the "Nomination
Procedure"). The Nomination Procedure requires that a stockholder give prior
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company generally not less than 53 nor more
than 90 days prior to the meeting at which directors are to be elected. The
requirements as to the form and timing of that notice are specified in the
Company's Bylaws. If the Chairman of the Board of Directors determines that a
person was not nominated in accordance with the Nomination Procedure, such
person will not be eligible for election as a director.
Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of
directors, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors at a particular meeting if the proper
procedures are not followed or (ii) may discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company, even if the conduct of
such solicitation or such attempt might be beneficial to the Company and its
stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Corporate Stock
Transfer, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Mergers and completion of the Offering, the Company
will have outstanding [ ] shares of Common Stock. The 5,000,000 shares sold
in the Offering (plus any additional shares sold upon exercise of the
Underwriters' over-allotment option) will be freely tradable without
restriction unless acquired by affiliates of the Company. None of the
remaining outstanding shares of Common Stock have been registered under the
Securities Act, which means that they may be resold publicly only upon
registration under the Securities Act or in compliance with an exemption from
the registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired
from the Company or the date on which they were acquired from an affiliate,
the holder of such restricted securities (including an affiliate) is entitled
to sell a number of shares within
54
<PAGE>
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding shares of the Common Stock (approximately [ ] shares
upon completion of the Offering) or (ii) the average weekly reported volume of
trading of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements pertaining
to the manner of such sales, notices of such sales and the availability of
current public information concerning the Company. Affiliates may sell shares
not constituting restricted securities in accordance with the foregoing volume
limitations and other requirements but without regard to the one year holding
period. Under Rule 144(k), if a period of at least two years has elapsed
between the later of the date on which restricted securities were acquired
from the Company and the date on which they were acquired from an affiliate, a
holder of such restricted securities who is not an affiliate at the time of
the sale and has not been an affiliate for a least three months prior to the
sale is entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.
The Company and its officers, directors and certain stockholders, who
beneficially own [ ] shares in the aggregate, have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Sutro & Co.
Incorporated except that the Company may issue Common Stock in connection with
acquisitions. In addition, all of the stockholders of the Founding Companies,
the Company's officers and directors and certain stockholders, holding in the
aggregate [ ] shares of Common Stock, have agreed with the Company that they
will not sell any of their shares for a period of twelve months after the
closing of the Offering. These stockholders, however, have the right, in the
event the Company proposes to register under the Securities Act any Common
Stock for its own account or for the account of others, subject to certain
exceptions, to require the Company to include their shares in the
registration, subject to the right of the Company to exclude some or all of
the shares in the Offering upon the advice of the managing underwriter.
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price
for the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the
public market could adversely affect prevailing market prices and the future
ability of the Company to raise equity capital and complete any additional
acquisitions for Common Stock.
55
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives, Sutro &
Co. Incorporated and [Other Underwriters Representatives] (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement with the Company, to purchase from the Company
the number of shares of Common Stock set forth opposite their respective
names. The Underwriters are committed to purchase and pay for all such shares
if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Sutro & Co. Incorporated..........................................
---------
Total........................................................... 5,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the initial public
offering, the price and concessions and reallowances to dealers may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.
The Underwriters have been granted an option exercisable for 45 days after
the date of the Underwriting Agreement to purchase up to a maximum of 750,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the foregoing table.
The Company has agreed to indemnify the Underwriters and certain related
persons against certain liabilities relating to the offering contemplated by
this Prospectus, including liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in
respect thereof.
The Company's directors, officers and stockholders have agreed not to offer,
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock of the Company for
a period of 180 days after the date of this Prospectus without the prior
written consent of Sutro & Co. Incorporated except for a bona fide gift to a
third party or as a distribution to the partners or stockholders of a Company
stockholder, provided that the recipient(s) thereof agree in writing to be
bound by the terms of the lock-up agreement to which such stockholder is
bound.
The Underwriters may engage in stabilizing bids, cover syndicate short
positions or impose penalty bids. If the Underwriters create a short position
in the Common Stock in connection with the Offering (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this
Prospectus), the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
The Representatives also may impose a penalty bid on certain Underwriters.
This means that if the Representatives purchase shares of Common Stock in the
open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling
concession from the Underwriters who sold those shares as part of the
Offering. In general, purchases of a security for the purpose of stabilization
or to reduce a syndicate short position could cause the price of the security
to be higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid may have an effect of the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude or, or any effect that the
transactions described above may have on, the price of the Common Stock.
56
<PAGE>
In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or,
once commenced, will not discontinue such transactions at any time without
notice.
The Company has agreed to sell to Sutro & Co. Incorporated warrants to
purchase from the Company up to 200,000 shares of Common Stock (230,000 shares
of Common Stock if the over-allotment option is exercised in full) at an
exercise price per share equal to 120% of the initial public offering price
per share (the "Representatives' Warrants"). Sutro & Co. Incorporated shall
pay $.01 per warrant to the Company for its Representatives' Warrants. The
Representatives' Warrants may not be sold, transferred, assigned, pledged or
hypothecated for a period of twelve months from the effective date of the
Registration Statement of which this Prospectus is a part, except to officers
and partners (but not directors) of the Representatives and other members of
the underwriting or selling group and officers or partners (but not directors)
thereof in compliance with the applicable provisions of the Corporate
Financing Rules of the National Association of Securities Dealers, Inc. The
Representatives' Warrants will be exercisable for a four year period beginning
one year from the effective date of the Registration Statement of which this
Prospectus is a part. In addition, the Company has granted certain demand and
piggyback registration rights to the holders of the Representatives' Warrants,
which enable them to register the Common Stock underlying the Representatives'
Warrants under the Securities Act.
Prior to the Offering, there has been no public market for the Common Stock.
Accordingly, the initial public offering price for the Common Stock was
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were prevailing market conditions,
the results of operations of the Founding Companies in recent periods, the
market capitalization and stages of development of other companies which the
Company and the Representatives believed to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant by the Company and the
Representatives. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
A principal of Sutro & Co. Incorporated owns beneficially and of record
shares of Common Stock constituting less than 2% of the outstanding shares of
the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Company by Paul, Hastings, Janofsky & Walker LLP, Los Angeles, California, a
principal of which owns beneficially and of record shares of Common Stock
constituting less than 1% of the outstanding shares of Common Stock of the
Company. Certain legal matters related to the Offering will be passed on for
the Underwriters by Latham & Watkins, Los Angeles, California.
EXPERTS
The audited financial statements of Advanced Nutraceuticals as of December
31, 1997 and for the period then ended, ACTA as of December 31, 1997 and 1996
and each of the three years ended December 31, 1997, QBI as of December 31,
1997 and for the year then ended, Northridge as of September 30, 1997 and 1996
and for the two years ended September 30, 1997 and Bactolac as of December 31,
1997 and 1996 and for the two years ended December 31, 1997, appearing in this
Prospectus and the registration statement of which this Prospectus is a part
have been audited by Grant Thornton LLP, independent certified public
accountants, as stated in their reports appearing herein and elsewhere in the
registration statement of which this Prospectus is a part, and are included in
reliance upon the Reports of said firm and given upon their authority as
experts in accounting and auditing.
57
<PAGE>
The financial statement of QBI as of December 31, 1996 and for the year then
ended appearing in this Prospectus and the registration statement of which
this Prospectus is a part have been audited by Amper, Politziner & Mattia
P.A., independent certified public accountants, as stated in their report
appearing herein and elsewhere in the registration statement of which this
Prospectus is a part and are included in reliance upon the reports of said
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall encompass any and all amendments thereto) on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all the information
set forth in the Registration Statement and the exhibits and schedules
thereto, certain items of which are omitted in accordance with the rules and
regulations of the SEC. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is hereby made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
For further information with respect to the Company, reference is hereby made
to the Registration Statement and such exhibits and schedules filed as a part
thereof, which may be inspected, without charge, at the Public Reference
Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC
maintains a web site that contains reports, proxy and information statements
regarding registrants that file electronically with the SEC. The address of
this web site is (http://www.sec.gov). Copies of all or any portion of the
Registration Statement may be obtained from the Public Reference Section of
the SEC, upon payment of the prescribed fees.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Summary Financial Data," Selected Financial Data," Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," including without limitation those concerning (i) the Company's
strategies, (ii) the Company's plans for expansion and growth and (iii) the
Company's capital expenditures, contain certain forward-looking statements (as
such term is defined in the private Securities Litigation Reform Act of 1995)
and information relating to the Company that are based on the beliefs of the
management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used herein, the
words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. The risk factors set forth herein the Company's constitute
important cautionary statements identifying important factors that could cause
actual results to differ from those in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company does not
undertake any obligation to release publicly any revisions to these forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANCED NUTRACEUTICALS, INC. (UNAUDITED)
PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation................................................... F-3
Unaudited Pro Forma Combined Balance Sheet.............................. F-4
Unaudited Pro Forma Combined Statements of Operations................... F-5
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-7
ADVANCED NUTRACEUTICALS, INC.
Report of Independent Certified Public Accountants...................... F-14
Balance Sheets.......................................................... F-15
Statements of Operations................................................ F-16
Statements of Stockholders' Equity...................................... F-17
Statements of Cash Flows................................................ F-18
Notes to Financial Statements........................................... F-19
FOUNDING COMPANIES
ACTA PRODUCTS INTERNATIONAL, INC. & ACTA PRODUCTS CORPORATION (THE ACTA
GROUP)
Report of Independent Certified Public Accountants...................... F-23
Combined Balance Sheets................................................. F-24
Combined Statements of Earnings......................................... F-25
Combined Statements of Stockholders' Equity............................. F-26
Combined Statements of Cash Flows....................................... F-27
Notes to Combined Financial Statements.................................. F-28
QUALITY BOTANICAL INGREDIENTS, INC.
Report of Independent Certified Public Accountants...................... F-36
Report of Independent Certified Public Accountants...................... F-37
Balance Sheets.......................................................... F-38
Statements of Operations................................................ F-39
Statements of Stockholders' Equity...................................... F-40
Statements of Cash Flows................................................ F-41
Notes to Financial Statements........................................... F-42
NORTHRIDGE LABORATORIES, INC.
Report of Independent Certified Public Accountants...................... F-51
Balance Sheets.......................................................... F-52
Statements of Earnings.................................................. F-53
Statements of Stockholders' Equity...................................... F-54
Statements of Cash Flows................................................ F-55
Notes to Financial Statements........................................... F-56
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BACTOLAC PHARMACEUTICALS, INC.
Report of Independent Certified Public Accountants....................... F-62
Balance Sheets........................................................... F-63
Statements of Earnings................................................... F-64
Statements of Stockholder's Equity....................................... F-65
Statements of Cash Flows................................................. F-66
Notes to Financial Statements............................................ F-67
</TABLE>
F-2
<PAGE>
ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisitions by ADVANCED NUTRACEUTICALS, INC. ("ADVANCED
NUTRACEUTICALS") of the outstanding capital stock of each of Acta Products
International, Inc. and Acta Products Corporation (collectively "ACTA" or
"Acta Group"), Quality Botanical Ingredients, Inc., Northridge Laboratories,
Inc., and Bactolac Pharmaceuticals, Inc. (together, the "Founding Companies").
These acquisitions (the "Mergers") will occur simultaneously with the closing
of ADVANCED NUTRACEUTICALS' initial public offering (the "Offering") and will
be accounted for using the purchase method of accounting. ACTA has been
identified as the accounting acquiror in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 97. The unaudited pro forma
combined financial statements also give effect to the issuance of common stock
in connection with the Offering and as partial consideration for the Mergers
to the stockholders of the Founding Companies. These pro forma combined
financial statements are based on the historical financial statements of the
Founding Companies and ADVANCED NUTRACEUTICALS included elsewhere in this
Prospectus and the estimates and assumptions set forth below and in the notes
to the unaudited pro forma combined financial statements. The unaudited pro
forma combined balance sheet gives effect to the Mergers and the Offering as
if they had occurred on June 30, 1998. The unaudited pro forma combined
statements of operations give effect to these transactions as if they had
occurred on January 1, 1997.
ADVANCED NUTRACEUTICALS has preliminarily analyzed the benefits that it
expects will be realized from reductions in salaries, bonuses and certain
benefits to the owners. To the extent the stockholders of the Founding
Companies have agreed prospectively to reductions in salary, bonuses and
benefits, these reductions have been reflected in the unaudited pro forma
combined statements of operations. Additionally, reductions in interest
expense as the result of the planned repayment of the preponderance of the
Founding Companies' existing debt have been reflected in the unaudited pro
forma combined statements of operations. With respect to other potential
benefits, ADVANCED NUTRACEUTICALS has not and cannot quantify these benefits
until completion of the combination of the Founding Companies. It is
anticipated that these benefits will be offset by costs related to ADVANCED
NUTRACEUTICALS's new corporate management, increased capital expenditures and
by the costs associated with being a public company. However, because these
costs cannot be accurately quantified at this time, they have not been
included in the unaudited pro forma financial information of ADVANCED
NUTRACEUTICALS.
The purchase price of the Founding Companies (except ACTA, which is the
accounting acquiror) and ADVANCED NUTRACEUTICALS has been allocated based on
the estimated fair value of assets acquired and liabilities assumed. The pro
forma adjustments are based on estimates, available information and certain
assumptions and may be revised as additional information becomes available. In
the opinion of management, the final allocation of the purchase price will not
materially differ from these preliminary estimates. The unaudited pro forma
combined financial data presented herein does not purport to represent what
the Company's financial position or results of operations would have actually
been had such events occurred on the assumed dates or to project the Company's
financial position or results of operations for any future period. The
unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus. Also see "Risk Factors" included
elsewhere herein.
F-3
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA OFFERING AS
ACTA QBI(F) NORTHRIDGE BACTOLAC ANI COMBINED ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------ ------- ---------- -------- ------- -------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current assets
Cash and cash
equivalents.......... $ 360 $ 454 $2,036 $ 75 $ 598 $ 3,523 $(3,123) $ 400 $ $
Accounts receivables,
net.................. 4,730 2,851 1,464 1,868 -- 10,913 10,913 10,913
Accounts receivable,
related parties...... 100 -- -- -- -- 100 (100) -- --
Inventory............ 2,518 5,679 1,070 713 -- 9,980 9,980 9,980
Prepaid expenses..... 84 709 222 -- 106 1,121 1,121 1,121
Deferred tax asset... -- 239 74 -- -- 313 313 313
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total current
assets............. 7,792 9,932 4,866 2,656 704 25,950 (3,223) 22,727 22,327
Property and
equipment--net........ 537 2,599 1,525 90 2 4,753 4,753 4,753
Deferred tax asset.... -- 28 -- -- -- 28 28 28
Goodwill, net......... -- 3,725 -- -- -- 3,725 69,319 73,044 73,044
Other assets.......... 3 1,204 41 21 276 1,545 1,545 1,545
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total assets....... $8,332 $17,488 $6,432 $2,767 $ 982 $36,001 $66,096 $102,097 $ $
====== ======= ====== ====== ======= ======= ======= ======== ======== =======
LIABILITIES &
STOCKHOLDERS' EQUITY
--------------------
Current liabilities
Note payable--Bank... $ -- $ 3,335 $ 58 $ -- $ -- $ 3,393 $ -- $ 3,393 $ $ 3,393
Current maturities:
Long-term debt....... 22 2,502 -- -- -- 2,524 (1,152) 1,372 (1,350) 22
Capital lease
obligations.......... -- 265 -- -- -- 265 -- 265 265
Note payable--
litigation
settlement........... -- 176 -- -- -- 176 (176) -- --
Account payable...... 1,824 3,617 1,028 916 -- 7,385 -- 7,385 7,385
Accrued expenses &
other................ 2,056 1,078 1,268 11 -- 4,413 -- 4,413 4,413
Payable to
shareholders/affiliates. 433 9 56 -- 58 556 (489) 67 (58) 9
Payable to Founding
Company stockholders. -- -- -- -- -- -- 39,875 39,875 (39,875) --
Purchase notes
payable.............. -- -- -- -- -- -- 1,250 1,250 1,250
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total current
liabilities........ 4,335 10,982 2,410 927 58 18,712 39,308 58,020 16,737
Long-term debt, net of
current maturities.... 257 595 -- -- -- 852 -- 852 852
Capital leases
obligation net of
current maturities.... -- 768 -- -- -- 768 -- 768 768
Note payable--
litigation settlement
net of current
maturities............ -- 700 -- -- -- 700 (700) -- --
Loan payable
shareholders.......... 931 -- -- 3 -- 934 (931) 3 3
Purchase notes
payable............... -- -- -- -- -- -- 1,250 1,250 1,250
Deferred income taxes. -- -- 349 -- -- 349 -- 349 349
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total liabilities.. 5,523 13,045 2,759 930 58 22,315 38,927 61,242 19,959
Stockholders' Equity
Preferred stock...... 50 -- -- -- -- 50 (50)
Common stock......... 78 38 50 -- 2 168 --
Additional paid-in
capital.............. -- 3,508 -- 5 3,945 7,458 --
Retained earnings
(deficit)............ 2,681 897 3,623 1,832 (3,023) 6,010 (3,528) 2,481 2,481
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total stockholders'
equity............. 2,809 4,443 3,673 1,837 924 13,686 27,169 40,855
------ ------- ------ ------ ------- ------- ------- -------- -------- -------
Total liabilities
and stockholders'
equity............. $8,332 $17,488 $6,432 $2,767 $ 982 $36,001 $66,096 $102,097 $ $
====== ======= ====== ====== ======= ======= ======= ======== ======== =======
</TABLE>
F-4
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(ALL AMOUNTS EXCEPT PER SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACTA QBI(F) NORTHRIDGE BACTOLAC ANI COMBINED ADJUSTMENTS COMBINED
------- ------- ---------- -------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $18,723 $15,568 $11,532 $5,002 $ -- $50,825 $ -- $50,825
Cost of goods sold...... 12,262 11,214 8,393 3,802 -- 35,671 35,671
------- ------- ------- ------ ------- ------- ------- -------
6,461 4,354 3,139 1,200 -- 15,154 -- 15,154
Selling, general and
administrative
expenses............... 4,926 3,949 2,070 246 2,997 14,188 (a) (5,921) 8,267
Goodwill amortization... -- 93 -- -- -- 93 (b) 1,733 1,826
------- ------- ------- ------ ------- ------- ------- -------
Earnings (loss) from
operations............. 1,535 312 1,069 954 (2,997) 873 4,188 5,061
Other income (expense)
Interest income........ 33 5 -- -- 1 39 39
Interest expense....... (110) (601) -- -- -- (711)(c) 58 (653)
Other.................. 18 (894) 25 5 -- (846) (846)
------- ------- ------- ------ ------- ------- ------- -------
(59) (1,490) 25 5 1 (1,518) 58 (1,460)
------- ------- ------- ------ ------- ------- ------- -------
Earnings (loss) before
income taxes........... 1,476 (1,178) 1,094 959 (2,996) (645) 4,246 3,601
Income tax expense
(benefit).............. 462 (325) 441 -- -- 578 (d) 1,593 2,171
------- ------- ------- ------ ------- ------- ------- -------
Net earnings (loss)..... $ 1,014 $ (853) $ 653 $ 959 $(2,996) $(1,223) $ 2,653 $ 1,430
======= ======= ======= ====== ======= ======= ======= =======
Net earnings per share
basic and diluted...... $
Shares used in computing
pro forma net earnings
per share basic and
diluted(1).............
</TABLE>
- --------
(1) Includes (i) 1,800,000 shares issued to founders of and certain
consultants to ADVANCED NUTRACEUTICALS, (ii) 588,000 shares issued in a
private placement by ADVANCED NUTRACEUTICALS, (iii) [ ] shares issued
to owners of the Founding Companies and (iv) [ ] of the 5,000,000
shares sold in the Offering necessary to pay the cash portion of the
Merger consideration and expenses of this Offering. The [ ] shares
excluded reflect the net cash proceeds to ADVANCED NUTRACEUTICALS.
F-5
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998
(ALL AMOUNTS EXCEPT PER SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACTA QBI (F) NORTHRIDGE BACTOLAC ANI COMBINED ADJUSTMENTS COMBINED
------- ------- ---------- -------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $11,592 $10,941 $7,476 $3,642 $ -- $33,651 $ -- $33,651
Cost of goods sold...... 6,965 7,653 5,533 2,566 -- 22,717 22,717
------- ------- ------ ------ ----- ------- ------- -------
4,627 3,288 1,943 1,076 -- 10,934 -- 10,934
Selling, general and
administrative
expenses............... 2,407 2,230 1,340 134 28 6,139 (a) (1,197) 4,942
Goodwill amortization... -- 47 -- -- -- 47 (b) 866 913
------- ------- ------ ------ ----- ------- ------- -------
Earning (loss) from
operations............. 2,220 1,011 603 942 (28) 4,748 331 5,079
Other income (expense)
Interest income........ 86 -- -- -- -- 86 86
Interest expense....... (73) (392) -- -- -- (465)(c) 29 (436)
Other.................. -- (74) 30 3 -- (41) (41)
------- ------- ------ ------ ----- ------- ------- -------
13 (466) 30 3 -- (420) 29 (391)
------- ------- ------ ------ ----- ------- ------- -------
Earnings (loss) before
income taxes........... 2,233 545 633 945 (28) 4,328 360 4,688
Income tax expense
(benefit).............. 772 229 266 -- -- 1,267 (d) 974 2,241
------- ------- ------ ------ ----- ------- ------- -------
Net earnings (loss)..... $ 1,461 $ 316 $ 367 $ 945 $ (28) $ 3,061 $ (614) $ 2,447
======= ======= ====== ====== ===== ======= ======= =======
Net earnings per share
basic and diluted...... $
Shares used in computing
pro forma net earnings
per share basic and
diluted (1)............
</TABLE>
- --------
(1) Includes (i) 1,800,000 shares issued to founders of and certain
consultants to ADVANCED NUTRACEUTICALS, (ii) 588,000 shares issued in a
private placement by ADVANCED NUTRACEUTICALS, (iii) [ ] shares issued
to owners of the Founding Companies and (iv) [ ] of the
5,000,000 shares sold in the Offering necessary to pay the cash portion of
the Merger consideration and expenses of this Offering. The [ ]
shares excluded reflect the net cash proceeds to ADVANCED NUTRACEUTICALS.
F-6
<PAGE>
ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
ADVANCED NUTRACEUTICALS, INC. was formed to create a full service vertically
integrated manufacturer and supplier of quality nutritional supplements and
botanical ingredients. ADVANCED NUTRACEUTICALS has conducted no operations to
date and will acquire the Founding Companies concurrently with and as a
condition to the closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The
periods included in these financial statements for the individual Founding
Companies are as of and for the six months ended June 30, 1998 and for the
year ended December 31, 1997, with the exception of Northridge for which the
period is as of and for the six months ended June 30, 1998 and for the fiscal
year ended September 30, 1997. The audited historical financial statements
included elsewhere herein have been included in accordance with Securities and
Exchange Commission ("SEC") Regulation S-X, Rule 3-05.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the closing of this Offering,
ADVANCED NUTRACEUTICALS will acquire all of the outstanding capital stock of
the Founding Companies. The acquisitions will be accounted for using the
purchase method of accounting with ACTA being treated as the accounting
acquirer.
The following table sets forth the consideration to be paid (a) in cash, (b)
in shares of Common Stock to the common stockholders of each of the Founding
Companies and (c) in purchase notes. For purposes of computing the estimated
purchase price for accounting purposes, the value of the shares is determined
using an estimated fair value of $[ ] per share, which represents a discount
of ten percent from the assumed initial public offering price of $[ ] per
share (the mid point of the range of estimated initial public offering prices
set forth on the cover page of the Prospectus) due to the restrictions on the
sale and transferability of the shares issued as well as the effect of sales
of such large quantities of shares would have on the market value of the
stock. The estimated purchase price for the Mergers is based upon preliminary
estimates and is subject to certain purchase price adjustments at and
following closing. In the opinion of management, the final allocation of the
purchase price will not materially differ from these preliminary estimates.
<TABLE>
<CAPTION>
SHARE PURCHASE
CASH SHARES VALUE NOTES
------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ACTA....................................... $19,000 $23,400 $ --
QBI........................................ 8,050 21,105 --
Northridge................................. 7,500 6,300 2,000
Bactolac................................... 3,000 4,050 500
------- --- ------- ------
Total.................................... $37,550 $54,855 $2,500
======= === ======= ======
</TABLE>
F-7
<PAGE>
ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the purchase of the Founding Companies for a total purchase
price of $94.9 million, including $42.4 million (cash of $19.0 million and
ADVANCED NUTRACEUTICALS Common Stock with an aggregate value of $23.4 million
determined using an estimated fair value of $[ ] per share) attributed to
ACTA as accounting acquiror. The entry includes the liability of $37.6 million
for the cash portion of the consideration to be paid to the stockholders of
the Founding Companies in connection with the Acquisitions, the issuance of
[ ] shares of ADVANCED NUTRACEUTICALS Common Stock to the Founding
Companies and the issuance of $2.5 million of purchase notes payable,
resulting in the creation of $44.5 million of goodwill after allocating the
purchase price to the aggregate assets acquired and liabilities assumed,
excluding ACTA, as shown below. In addition, goodwill of $24.9 million,
determined using an estimated fair value of $[ ] per share, has been
recorded attributable to the shares of ADVANCED NUTRACEUTICALS Common Stock
issued and outstanding. Based on its initial assessment, management believes
that the historical carrying value of the Founding Companies' assets and
liabilities will approximate fair value and that there are no other
identifiable intangible assets to which any material purchase price can be
allocated.
The following reconciles the combined historical net assets of the Founding
Companies and ADVANCED NUTRACEUTICALS to the net assets acquired by ACTA (in
thousands):
<TABLE>
<CAPTION>
TOTAL LESS ACQUIRED
COMBINED ACTA COMPANIES
-------- ------- ---------
<S> <C> <C> <C>
Historical net assets.......................... $13,696 $(2,809) $10,887
Corporate distributions........................ 1,836 (200) 1,636
------- ------- -------
$11,860 $(2,609) $ 9,251
======= ======= =======
</TABLE>
(b) Records the S Corporation and other distributions provided for under the
terms of the acquisition agreements.
(c) Records liquidation of notes payable and related early retirement costs
required to be repaid based upon the terms of the debt agreements or based
upon the terms of the acquisition agreements.
F-8
<PAGE>
ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the unaudited pro forma acquisition
adjustments to the pro forma combined balance sheet (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS TOTAL
------------------------ ACQUISITION
(A) (B) (C) ADJUSTMENT
------- ------ ------- -----------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents.............. $ -- $ -- $(3,123) $(3,123)
Accounts receivable, related party..... -- -- (100) (100)
------- ------ ------- -------
Total current assets................. -- -- (3,223) (3,223)
Goodwill, net.......................... 69,319 -- -- 69,319
------- ------ ------- -------
Total assets......................... $69,319 $ -- $(3,223) $66,096
======= ====== ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities
Current maturities
Long-term debt......................... $ -- $ -- $(1,152) $(1,152)
Note payable-litigation settlement..... -- -- (176) (176)
Stockholders loans..................... -- -- (489) (489)
Payable to founding company
stockholders.......................... 37,550 1,836 489 39,875
Purchase notes payable................. 1,250 -- -- 1,250
------- ------ ------- -------
Total current liabilities............ 38,800 1,836 (1,328) 39,308
Note payable--litigation settlement net
of current maturities................. -- -- (700) (700)
Loan payable shareholders.............. -- -- (931) (931)
Purchase notes payable................. 1,250 -- -- 1,250
------- ------ ------- -------
Total liabilities.................... 40,050 1,836 (2,959) 38,927
Stockholders' Equity
Preferred stock........................ (50) -- -- (50)
Common stock
Additional paid in capital
Retained earnings...................... (1,428) (1,836) (264) (3,528)
------- ------ ------- -------
Total stockholders' equity........... 29,269 (1,836) (264) 27,169
------- ------ ------- -------
Total liabilities and stockholders'
equity.............................. $69,319 $ -- $(3,223) $66,096
======= ====== ======= =======
</TABLE>
(d) Records the cash proceeds of $[ ] million from the issuance of shares
of ADVANCED NUTRACEUTICALS Common Stock net of estimated offering costs of
$[ ] million (based on an assumed initial public offering price of $[ ] per
share and includes the payment of deferred offering costs of $0.3 million
incurred through June 30, 1998). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and
printing expenses.
(e) Records the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the Mergers.
F-9
<PAGE>
ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the unaudited pro forma offering adjustments
to the pro forma combined balance sheet adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS TOTAL
---------------- OFFERING
(D) (E) ADJUSTMENT
------- -------- ----------
<S> <C> <C> <C>
ASSETS
------
Cash and cash equivalents.......................... $ $ $
Total current assets...........................
------- -------- --------
Other assets.......................................
------- -------- --------
Total assets................................... $ $ $
======= ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current maturities
Long-term debt................................... $ $ (1,350) $ (1,350)
Stockholders loans............................... (58) (58)
Payable to Founding Company stockholders......... (39,875) (39,875)
------- -------- --------
Total current liabilities...................... (41,283) (41,283)
Stockholders' Equity
Common stock.....................................
Additional paid in capital.......................
------- -------- --------
Total stockholders' equity.....................
------- -------- --------
Total liabilities and stockholders' equity..... $ $(41,283) $(41,283)
======= ======== ========
</TABLE>
(f) For Pro forma Financial Statement purposes the historical financial
statements of QBI as of June 30, 1998 and for the six months then ended as
well as, the year ended December 31, 1997 have been adjusted. The adjustments
are to reflect the subsequent acquisition by QBI of Botanical Products
International, Inc. ("BPI") and the contribution of certain farming assets
("Farms") to QBI by certain of QBI's stockholders, at closing of the Merger
transaction.
BPI was acquired by QBI subsequent to June 30, 1998 for the total
consideration of $4.5 million, consisting of a note payable of $1.35 million,
an equity right of $3.0 million and the balance in cash. The acquisition
resulted in goodwill of approximately $3.7 million, which is being amortized
over a 40-year life. For Pro Forma Financial Statement purposes, the
acquisition adjustments have been recorded under the purchase method of
accounting and have been pushed down to BPI. Farms, to be acquired at closing
by QBI, consist of three farming operations whose activities to June 30, 1998
have consisted of planting and growing of natural product crops.
F-10
<PAGE>
ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes the pro forma affect of the above transactions on
the historical financial statements of QBI.
<TABLE>
<CAPTION>
QBI QBI AS
HISTORICAL BPI FARMS ADJUSTED
---------- --- ----- --------
<S> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents..................... $ 115 $ 339 $ -- $ 454
Accounts receivables, net..................... 2,580 271 -- 2,851
Inventory..................................... 5,576 103 -- 5,679
Prepaid expenses.............................. 538 171 -- 709
Deferred tax asset............................ 239 -- -- 239
------- ------ ---- -------
Total current assets.................... 9,048 884 -- 9,932
Property and equipment-net.................... 2,471 128 -- 2,599
Deferred tax asset............................ 28 -- -- 28
Due from affiliates........................... 809 -- (809) --
Goodwill, net................................. -- 3,725 -- 3,725
Other assets.................................. 518 (123) 809 1,204
------- ------ ---- -------
Total assets............................ $12,874 $4,614 $ -- $17,488
======= ====== ==== =======
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities:
Note payable--Bank............................ $ 3,335 $ -- $ -- $ 3,335
Current maturities
Long-term debt.............................. 1,152 1,350 -- 2,502
Capital lease obligations................... 265 -- -- 265
Note payable-litigation settlement.......... 176 -- -- 176
Account payable............................... 3,547 70 -- 3,617
Accrued expenses & other...................... 1,043 35 -- 1,078
Payable to shareholders/affiliates............ -- 9 -- 9
------- ------ ---- -------
Total current liabilities............... 9,518 1,464 -- 10,982
Long-term debt, net of current maturities..... 595 -- -- 595
Capital leases obligation net of current
maturities................................... 768 -- -- 768
Note payable--litigation settlement net of
current maturities........................... 700 -- -- 700
------- ------ ---- -------
Total liabilities....................... 11,581 1,464 -- 13,045
Stockholders' Equity
Common stock................................ 38 -- -- 38
Additional paid-in capital.................. 358 3,150 -- 3,508
Retained earnings .......................... 897 -- -- 897
------- ------ ---- -------
Total stockholders' equity.............. 1,293 3,150 -- 4,443
------- ------ ---- -------
Total liabilities and stockholders'
equity................................. $12,874 $4,614 $ -- $17,488
======= ====== ==== =======
</TABLE>
F-11
<PAGE>
ADVANCED NUTRACEUTICALS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
-------------------------- -------------------------
QBI QBI AS QBI QBI AS
HISTORICAL BPI ADJUSTED HISTORICAL BPI ADJUSTED
---------- ----- -------- ---------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales................. $15,495 $ 73 $15,568 $10,009 $932 $10,941
Cost of goods sold........ 11,155 59 11,214 7,034 619 7,653
------- ----- ------- ------- ---- -------
4,340 14 4,354 2,975 313 3,288
Selling, general and
administrative expenses.. 3,514 435 3,949 1,991 239 2,230
Goodwill amortization..... -- 93 93 -- 47 47
------- ----- ------- ------- ---- -------
Earning (loss) from
operations............... 826 (514) 312 984 27 1,011
Other income (expense)
Interest income......... -- 5 5 -- -- --
Interest expense........ (493) (108) (601) (338) (54) (392)
Other................... (1,144) 250 (894) (75) 1 (74)
------- ----- ------- ------- ---- -------
(1,637) 147 (1,490) (413) (53) (466)
------- ----- ------- ------- ---- -------
Earnings (loss) before
income taxes............. (811) (367) (1,178) 571 (26) 545
Income tax expense
(benefit)................ (300) (25) (325) 229 -- 229
------- ----- ------- ------- ---- -------
Net earnings (loss)....... $ (511) $(342) $ (853) $ 342 $(26) $ 316
======= ===== ======= ======= ==== =======
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR THE
YEAR ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998
(a) Reflects the reduction in salaries, bonuses and benefits to the owners
of the Founding Companies following the Merger to which they have agreed
prospectively. These reductions in salaries, bonuses and benefits are in
accordance with the terms of the employment agreements. Such employment
agreements are primarily for 3 years, contain restrictions related to
competition and provide severance for termination of employment in certain
circumstances.
Also reflects the reduction in compensation expense related to the non-
recurring, non-cash compensation charge of $3.0 million recorded by Advanced
Nutraceuticals in the fourth quarter of 1997 related to Common Stock issued to
founders of and certain consultants to the Company. The issuance of Common
Stock were made in contemplation of the Mergers and the Offering, and no
future issuances of this nature are anticipated.
(b) Reflects the amortization of goodwill to be recorded as a result of
these Mergers over a 40-year estimated life.
(c) Reflects the additional interest expense to be incurred on seller notes
issued in the acquisition of certain Founding Companies net of reductions in
interest expense from debts required to be paid off at closing using available
cash.
(d) Reflects the incremental provision for federal and state income taxes
relating to other statement of operations adjustments and for income taxes on
S Corporation income.
F-12
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ADVANCED NUTRACEUTICALS, INC.
F-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Advanced Nutraceuticals, Inc.
Houston, Texas
We have audited the accompanying balance sheet of Advanced Nutraceuticals,
Inc. (formerly Naturally Direct, Inc.) as of December 31, 1997, and the
related statements of operations, stockholders' equity, and cash flows for the
period from inception (September 9, 1997) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Advanced Nutraceuticals,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the period from inception (September 9, 1997) to December 31, 1997,
in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
August 17, 1998 (except for the
second paragraph of Note B,
as to which the date is
September 14, 1998)
F-14
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
ASSETS
------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................... $ 24,862 $ 598,002
Prepaid expenses and other current assets.......... 500 1,100
Subscriptions receivable........................... -- 105,000
----------- -----------
Total current assets............................. 25,362 704,102
PROPERTY AND EQUIPMENT, NET.......................... 2,292 1,875
DEFERRED OFFERING COSTS.............................. 1,847 276,199
----------- -----------
$ 29,501 $ 982,176
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Due to affiliates.................................. $ 25,000 $ 58,003
Accounts payable................................... 500 500
----------- -----------
Total current liabilities........................ 25,500 58,503
COMMITMENTS AND CONTINGENCIES........................ -- --
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 30,000,000 shares
authorized, 1,800,000 and 2,388,000 issued and
outstanding....................................... 1,800 2,388
Additional paid-in capital......................... 2,998,200 3,944,718
Retained deficit................................... (2,995,999) (3,023,433)
----------- -----------
Total stockholders' equity....................... 4,001 923,673
----------- -----------
$ 29,501 $ 982,176
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 9, 1997) SIX MONTHS ENDED
TO JUNE 30,
DECEMBER 31, 1997 1998
--------------------- ----------------
(UNAUDITED)
<S> <C> <C>
Compensation expense relating to
issuance of common stock to
founders and certain consultants....... $ 2,985,000 $ --
Selling, general and administrative
expenses............................... 11,892 27,875
----------- --------
Loss from operations................ (2,996,892) (27,875)
Other income (expense)
Interest income....................... 589 496
Other................................. 304 (55)
----------- --------
893 441
----------- --------
Loss before income taxes................ (2,995,999) (27,434)
Income taxes............................ -- --
----------- --------
NET LOSS............................ $(2,995,999) $(27,434)
=========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
to founders and certain
consultants............ 1,800,000 $1,800 $2,998,200 $ -- $ 3,000,000
Net loss................ -- -- -- (2,995,999) (2,995,999)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1997................... 1,800,000 1,800 2,998,200 (2,995,999) 4,001
Stock issued under
subscription agreements
(unaudited)............ 588,000 588 946,518 -- 947,106
Net loss (unaudited).... -- -- -- (27,434) (27,434)
--------- ------ ---------- ----------- -----------
Balance at June 30, 1998
(unaudited)............ 2,388,000 $2,388 $3,944,718 $(3,023,433) $ 923,673
========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 9, SIX MONTHS
1997) TO ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss........................................... $(2,995,999) $ (27,434)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities
Depreciation and amortization...................... 208 417
Compensation expense related to issuance of common
stock to management and consultants............... 2,985,000 --
Change in assets and liabilities
Increase in prepaid expenses and other current
assets........................................... (500) (600)
Increase in deferred offering costs............... (1,847) (307,246)
Increase in due to affiliates..................... 22,500 33,003
Increase in accounts payable...................... 500 --
----------- ---------
Net cash provided (used) by operating activities. 9,862 (301,860)
Cash flows from financing activities
Issuance of common stock........................... 15,000 875,000
----------- ---------
Net increase in cash................................. 24,862 573,140
Cash and cash equivalents at beginning of period..... -- 24,862
----------- ---------
Cash and cash equivalents at end of period........... $ 24,862 $ 598,002
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein are of Naturally Direct, Inc.
(NDI), a Texas corporation and predecessor of Advanced Nutraceuticals, Inc.
(ANI), a Delaware corporation. In September 1998, NDI reorganized in Delaware
by merging into ANI, a newly formed company (see Note C). References to the
Company herein refer to ANI and its predecessor, NDI.
1. Nature of Operations
NDI was incorporated on September 9, 1997 for the purpose of creating a full
service vertically integrated manufacturer and supplier of quality nutritional
supplements, herbs and extracts. The Company intends to acquire four
businesses, complete an initial public offering of its common stock and,
subsequent to the offering, continue to acquire, through merger or purchase,
similar companies.
The Company has not conducted any operations, and all activities to date
have related to the offering and the mergers. Substantially, all expenditures
to date have been funded by the proceeds received in connection with a private
placement in the second quarter of 1998 (see Note B). As of June 30, 1998,
costs of approximately $276,000 (unaudited) have been incurred by the Company
in connection with the anticipated initial public offering and the private
placement, which have been accounted for as deferred offering costs. The
Company is dependent upon the offering to execute the pending mergers. There
is no assurance that the pending mergers discussed below will be completed or
that the Company will be able to generate future operating revenues.
The Company has an absence of a combined operating history, and the
Company's future success is dependent upon a number of factors which include,
among others, the ability to integrate operations, reliance on the
identification and integration of satisfactory acquisition candidates,
reliance on acquisition financing and the ability to manage growth and attract
and retain qualified management and sales personnel as well as the need for
additional capital.
2. Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
3. Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits. The Company
maintains cash balances at financial institutions which may at times be in
excess of federally insured levels. The Company has not experienced any losses
in such accounts and does not believe it is exposed to any significant credit
risks on cash maintained in bank deposit accounts.
4. Commitments
The Company is currently utilizing office space under a lease agreement
which requires monthly rentals of $1,100 through April 30, 1999.
5. Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis. The useful lives of property and equipment for
F-19
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
purposes of computing depreciation is three years. Property and equipment at
December 31, 1997, with a cost and accumulated depreciation of $2,500 and
$208, respectively, consists of furniture and fixtures and a computer system.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
6. Deferred Offering Costs
The costs related to filing a registration statement on Form S-1 for the
sale of Common Stock are capitalized when incurred and will be offset against
additional paid-in capital. Included in deferred offering cost at June 30,
1998, are legal fees of $250,000 paid as a retainer.
7. Income Taxes
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences are expected to reverse. Deferred tax expense (benefit) is the
result of changes in deferred tax assets and liabilities.
8. Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts payable and notes payable. The Company believes that the carrying
value of these instruments on the accompanying balance sheets approximates
their fair value.
9. Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
10. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
Management is presently evaluating what, if any, additional disclosures may be
required when this statement is implemented.
11. Unaudited Interim Information
The financial information for the six months ended June 30, 1998 has not
been audited by independent certified public accountants. Certain information
and footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted from the unaudited interim financial information. In the
opinion of management of the Company, the unaudited interim financial
information includes all adjustments, consisting only of normal recurring
adjustments, necessary
F-20
<PAGE>
ADVANCED NUTRACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for a fair presentation. Results of operations for the interim period are not
necessarily indicative of the results of operations for the full year.
NOTE B--STOCKHOLDERS' EQUITY
In December 1997, the Company issued a total of 1,800,000 shares of Common
Stock to founders and directors of and certain consultants to the Company at a
price of $.008 per share. As a result of these transactions, the Company
recorded a nonrecurring, noncash compensation charge of $2,985,000
representing the difference between the amount paid for the shares and an
estimated fair market value of the shares on the date of sale.
In September 1998, the incorporation of NDI was changed from Texas to
Delaware by the merger of NDI with and into ANI. At the time of the merger,
each share of NDI common stock outstanding was converted into one and two
tenths shares of ANI's common stock. The effects of this merger on common
stock has been retroactively reflected on the balance sheet, statement of
stockholders' equity and in the accompanying notes. In addition to its
authorized common stock, ANI has authorized 5,000,000 shares of preferred
stock having a par value of $.001.
NOTE C--EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)
The Company has signed definitive agreements to acquire four businesses (the
Founding Companies) to be effective contemporaneously with the initial public
offering. The businesses to be acquired are The Acta Group, Quality Botanical
Ingredients, Inc., Bactolac Pharmaceuticals, Inc. and Northridge Laboratories,
Inc. The Company will acquire the Founding Companies for total consideration
of approximately $98.5 million in cash and shares of Common Stock.
During the second quarter of 1998, the Company issued under subscription
agreements in a private placement a total of 588,000 shares of common stock to
investors at a price of $1.67 per share. As a result, the Company recorded
additional paid-in capital of $946,518, net of costs of $32,894, representing
the difference between the amount paid for the shares and the par value of the
shares on the date of sale. Additionally, the Company recorded subscriptions
receivable of $105,000, which were subsequently received in July 1998.
In September 1998, the Board of Directors and the Company's stockholders
approved the Company's 1998 Stock Option Plan (the Plan), which provides for
the granting of incentive to employees and consultants of the Company of up to
1,300,000 shares of common stock. Additionally approved, was the 1998 Non-
Discretionary Stock Option Plan under which 300,000 shares of its common stock
are reserved for issuance to non-employee directors of the Company. The
Company will account for options issued to employees and nonemployee directors
under the Plan in accordance with APB Opinion No. 25 and, accordingly, no
compensation cost will be recognized to the extent that shares are issued at
the fair market value as of the date of grant. The Company will provide the
pro forma disclosure of net earnings per share in the notes to the financial
statements as if the fair value-based method of accounting has been applied to
awards as required by Statement of Financial Standard No. 123, Accounting for
Stock-Based Compensation.
In September 1998, the Company filed a registration statement on Form S-1
for the sale of 5,000,000 shares of its Common Stock.
F-21
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE ACTA GROUP
F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Boards of Directors
Acta Products International, Inc.
and Acta Products Corporation
Sunnyvale, California
We have audited the accompanying combined balance sheets of The Acta Group
(see note A1) as of December 31, 1997 and 1996, and the related combined
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of The Acta Group as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
August 14, 1998
F-23
<PAGE>
THE ACTA GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................. $1,483,417 $ 483,371 $ 359,816
Accounts receivable, less allowance for
doubtful accounts of $44,268, $37,032 and
$32,432 (unaudited)....................... 1,126,489 2,447,825 4,730,386
Accounts receivable, related parties....... -- 300,000 100,000
Inventory.................................. 1,639,347 2,375,956 2,518,427
Prepaid expenses and other current assets.. 460,676 106,047 83,907
---------- ---------- ----------
Total current assets..................... 4,709,929 5,713,199 7,792,536
PROPERTY AND EQUIPMENT, NET.................. 217,192 551,349 537,211
OTHER ASSETS................................. 12,305 8,226 2,677
---------- ---------- ----------
$4,939,426 $6,272,774 $8,332,424
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Line of credit--bank....................... $ 351,160 $ 400,000 $ --
Current maturities of long-term debt,
other..................................... 37,689 78,082 22,252
Current maturities of long-term debt,
related parties........................... 603,827 379,556 432,911
Accounts payable........................... 667,200 1,300,811 1,824,534
Accrued expenses and other current
liabilities............................... 944,823 1,694,335 2,055,871
---------- ---------- ----------
Total current liabilities................ 2,604,699 3,852,784 4,335,568
LONG-TERM DEBT--OTHER, net of current
maturities.................................. 18,056 55,375 257,114
LONG-TERM DEBT--RELATED PARTIES, net of
current maturities.......................... 1,106,476 1,016,920 931,040
COMMITMENTS AND CONTINGENCIES................ -- -- --
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 50,000
shares authorized and outstanding......... 50,000 50,000 50,000
Common stock, $1.00 par value, 78,000
shares authorized and outstanding......... 78,000 78,000 78,000
Retained earnings.......................... 1,082,195 1,219,695 2,680,702
---------- ---------- ----------
Total stockholders' equity............... 1,210,195 1,347,695 2,808,702
---------- ---------- ----------
$4,939,426 $6,272,774 $8,332,424
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
THE ACTA GROUP
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $9,531,209 $14,391,647 $18,722,758 $9,304,551 $11,592,133
Cost of goods sold...... 5,915,778 8,543,425 12,261,964 5,699,497 6,965,472
---------- ----------- ----------- ---------- -----------
3,615,431 5,848,222 6,460,794 3,605,054 4,626,661
Selling, general and
administrative
expenses............... 2,629,360 5,410,582 4,926,476 1,632,084 2,406,809
---------- ----------- ----------- ---------- -----------
Earnings from
operations......... 986,071 437,640 1,534,318 1,972,970 2,219,852
Other income (expense)
Interest expense...... (54,492) (126,654) (110,251) (61,922) (72,812)
Interest income....... 586 22,293 33,453 10,862 86,172
Other................. 1,446 1,832 18,031 718 --
---------- ----------- ----------- ---------- -----------
(52,460) (102,529) (58,767) (50,342) 13,360
---------- ----------- ----------- ---------- -----------
Earnings before
income taxes....... 933,611 335,111 1,475,551 1,922,628 2,233,212
Income tax (expense)
benefit................ (360,430) 155,630 (462,056) (837,083) (772,205)
---------- ----------- ----------- ---------- -----------
NET EARNINGS.......... $ 573,181 $ 490,741 $ 1,013,495 $1,085,545 $ 1,461,007
========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
THE ACTA GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF TOTAL
PREFERRED COMMON RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
--------- ------- --------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... -- $ -- 28,000 $28,000 $ 108,671 $ 136,671
Net earnings............ -- -- -- -- 573,181 573,181
Preferred stock issued.. 50,000 50,000 -- -- -- 50,000
Common stock issued..... -- -- 50,000 50,000 -- 50,000
Dividends-preferred
stock.................. -- -- -- -- (2,000) (2,000)
Dividends-common stock.. -- -- -- -- (40,000) (40,000)
------ ------- ------ ------- ---------- ----------
Balance at December 31,
1995................... 50,000 50,000 78,000 78,000 639,852 767,852
Net earnings............ -- -- -- -- 490,741 490,741
Dividends-preferred
stock.................. -- -- -- -- (4,000) (4,000)
Dividends-common stock.. -- -- -- -- (44,398) (44,398)
------ ------- ------ ------- ---------- ----------
Balance at December 31,
1996................... 50,000 50,000 78,000 78,000 1,082,195 1,210,195
Net earnings............ -- -- -- -- 1,013,495 1,013,495
Dividends-preferred
stock.................. -- -- -- -- (4,000) (4,000)
Dividends-common stock.. -- -- -- -- (871,995) (871,995)
------ ------- ------ ------- ---------- ----------
Balance at December 31,
1997................... 50,000 50,000 78,000 78,000 1,219,695 1,347,695
Net earnings
(unaudited)............ -- -- -- -- 1,461,007 1,461,007
------ ------- ------ ------- ---------- ----------
Balance at June 30, 1998
(unaudited)............ 50,000 $50,000 78,000 $78,000 $2,680,702 $2,808,702
====== ======= ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
THE ACTA GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net earnings.......... $ 573,181 $ 490,741 $ 1,013,495 $ 1,085,545 $ 1,461,007
Adjustments to
reconcile net
earnings to net cash
provided (used) by
operating activities
Loss on sale of
property and
equipment........... 1,029 -- 14,000 -- --
Bad debt expense..... -- 32,432 4,600 -- 7,236
Depreciation......... 36,567 32,298 74,598 22,219 56,348
Change in assets and
liabilities
(Increase) decrease
in accounts
receivable.......... (712,946) 172,113 (1,625,936) (1,484,945) (2,089,797)
(Increase) decrease
in inventory........ (530,596) (629,817) (736,609) 59,971 (142,471)
(Increase) decrease
prepaid expenses and
other current
assets.............. (161,903) (298,773) 354,629 113,201 22,140
(Increase) decrease
in other assets..... (5,464) 1,160 4,079 (48,924) 5,549
Increase (decrease)
in accounts payable. 405,579 (242,238) 633,611 477,238 523,723
Increase in accrued
expenses and other
current liabilities. 433,728 337,546 745,512 416,102 361,535
--------- ---------- ----------- ----------- -----------
Net cash provided
(used) by operating
activities......... 39,175 (104,538) 481,979 640,407 205,270
Cash flows from
investing activities
Payments for purchase
of property and
equipment............ (83,063) (73,951) (422,755) (163,125) (42,210)
Proceeds from sale of
property and
equipment............ 10,000 849 -- -- --
--------- ---------- ----------- ----------- -----------
Net cash used by
investing
activities......... (73,063) (73,102) (422,755) (163,125) (42,210)
Cash flows from
financing activities
Repayment of long-term
obligations.......... (268,078) (116,022) (651,515) -- --
Proceeds from new
borrowings........... 630,089 1,052,027 415,400 6,283 113,385
Net (repayments)
borrowings under line
of credit............ (150,000) 351,159 48,840 (351,160) (400,000)
Issuance of preferred
stock................ 50,000 -- -- -- --
Issuance of common
stock................ 50,000 -- -- -- --
Dividends paid on
preferred stock...... (2,000) -- -- -- --
Dividends paid on
common stock......... (40,000) (44,398) (871,995) -- --
--------- ---------- ----------- ----------- -----------
Net cash provided
(used) by financing
activities......... 270,011 1,242,766 (1,059,270) (344,877) (286,615)
--------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash............... 236,123 1,065,126 (1,000,046) 132,405 (123,555)
Cash and cash
equivalents at
beginning of period... 182,168 418,291 1,483,417 1,483,417 483,371
--------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 418,291 $1,483,417 $ 483,371 $ 1,615,822 $ 359,816
========= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
THE ACTA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and Nature of Earnings
The financial statements of The Acta Group (the Group) combine the financial
statements of Acta Products International, Inc. (International), a California
corporation incorporated in 1975 and Acta Products Corporation, dba Acta
Pharmacal Company (Pharmacal), a California corporation incorporated in 1995,
which are companies under common control and ownership. All significant
intercompany transactions have been eliminated in combination.
The Group provides products and services including herbal extracts, full
contract manufacturing and product development services to customers
throughout the United States.
2. Cash and Cash Equivalents
The Group considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
3. Concentration of Credit Risk
Financial instruments which potentially subject the Group to a concentration
of credit risk consist principally of cash deposits, accounts receivable, and
long-term debt--other. The Group maintains cash balances at financial
institutions which may at times be in excess of federally insured levels. The
Group has not experienced any losses in such accounts and does not believe it
is exposed to any significant credit risks on cash maintained in bank deposit
accounts.
4. Allowance for Doubtful Accounts
The Group maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable. Bad debt expense was
$32,432 and $4,600 for 1996 and 1997, respectively. Charge-offs were not
material.
5. Inventory
Inventory consists of herbs and vitamin supplements in the raw material and
processed stages and is stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis. Pharmaceutical equipment is stated
at lower of cost or market, with cost determined on a specific identification
basis.
6. Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to earnings
as incurred. Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in other income.
7. Revenue Recognition
The Group recognizes revenue when products are shipped to customers.
F-28
<PAGE>
THE ACTA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. Income Taxes
Pharmacal has elected to be taxed under the Subchapter S provisions of the
Internal Revenue Code. As a result of this election, income of Pharmacal is
taxable to the stockholders individually and no provision for Federal income
taxes in the accompanying financial statements has been made for Pharmacal's
income.
Deferred tax assets and liabilities relate to International and are
determined based on the differences between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences are expected to reverse. Deferred tax
expense (benefit) is the result of changes in deferred tax assets and
liabilities.
9. Financial Instruments
The Group's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit and long-term debt. The
Group believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value, except as disclosed
for long-term debt at Note G.
10. Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
11. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
Management is presently evaluating what, if any, additional disclosures may be
required when this statement is implemented.
12. Unaudited Interim Information
The financial information for the six months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
earnings for the interim periods are not necessarily indicative of the results
of earnings for the respective full years.
NOTE B--STOCKHOLDERS' EQUITY
The equity structure of the Group is as follows at both December 31, 1996
and 1997:
<TABLE>
<CAPTION>
AUTHORIZED PREFERRED SHARES PREFERRED AUTHORIZED COMMON SHARES COMMON
PREFERRED ISSUED AND STOCK PAR COMMON ISSUED AND STOCK
SHARES OUTSTANDING VALUE SHARES OUTSTANDING PAR VALUE
---------- ---------------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
International........... 50,000 50,000 $1.00 50,000 50,000 $1.00
Pharmacal............... -- -- -- 28,000 28,000 $1.00
</TABLE>
F-29
<PAGE>
THE ACTA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--INVENTORY
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Raw materials...................................... $1,202,667 $1,734,205
Work in process.................................... -- --
Finished goods..................................... 194,280 235,136
Pharmaceutical equipment........................... 242,400 406,615
---------- ----------
$1,639,347 $2,375,956
========== ==========
</TABLE>
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Leasehold improvements.................... 5 $ 35,881 $149,874
Machinery and equipment................... 5 268,638 375,980
Furniture and fixtures.................... 7 51,252 72,053
Vehicles.................................. 5 134,839 173,375
-------- --------
490,610 771,282
Accumulated depreciation................ 273,418 219,933
-------- --------
$217,192 $551,349
======== ========
</TABLE>
NOTE E--LINE OF CREDIT--BANK
At December 31, 1997, International had a $1,000,000 line of credit with a
financial institution. Advances were limited to specified percentages of
eligible inventory and accounts receivable. Borrowings under this agreement
accrued interest at prime plus 1%.
In March, 1998, International entered into a new line of credit. Under the
new agreement, the overall borrowing limit is $3,000,000, limited to 80% of
eligible accounts receivable, plus 20% of eligible inventory. Advances against
eligible inventory are limited to $300,000. Borrowings under the new line of
credit agreement bear interest at prime (8.5% at December 31, 1997) plus 1%.
The line of credit agreement expires in March 1999, and is collateralized by
substantially all assets and contract rights of International. Under the line
of credit agreement, International has restrictive covenants relating to
various financial ratios.
F-30
<PAGE>
THE ACTA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--LONG-TERM DEBT--OTHER
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Various notes payable to bank, payable in 24-60 monthly
installments aggregating $2,400 and $2,800 respectively, plus
interest; interest from 8 3/4% to 10 1/2%; secured by vehicles
and equipment................................................. $55,745 $72,790
Note payable to bank, payable in monthly principal installments
of $4,167 plus interest at prime (8.5% at December 31, 1997)
plus 1.5%; remainder due to September 2002; collateralized by
accounts receivable, inventory and equipment.................. -- 60,667
------- -------
55,745 133,457
Less current maturities...................................... 37,689 78,082
------- -------
$18,056 $55,375
======= =======
</TABLE>
The approximate aggregate amount of all long-term debt maturities for the
five years following December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- -------
<S> <C>
1998............................................................. $78,082
1999............................................................. 27,089
2000............................................................. 13,036
2001............................................................. 10,569
2002............................................................. 4,681
</TABLE>
NOTE G--LONG-TERM DEBT--RELATED PARTIES
Long-term debt to related parties consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Notes payable to stockholders............................ $ 68,769 $ --
Notes payable to an affiliated partnership of
stockholders, amount and frequency of repayment to be
mutually agreed upon, interest rates ranging from 7% to
8%...................................................... 1,641,534 1,396,476
---------- ----------
1,710,303 1,396,476
Less current maturities................................ 603,827 379,556
---------- ----------
$1,106,476 $1,016,920
========== ==========
</TABLE>
The approximate aggregate amount of all long-term debt maturities for the
five years following December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1998............................................................ $379,556
1999............................................................ 99,880
2000............................................................ 108,169
2001............................................................ 117,151
2002............................................................ 126,871
</TABLE>
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of total long-term
debt, related parties is $1,550,230 and $1,217,063 at December 31, 1996 and
1997.
F-31
<PAGE>
THE ACTA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--RELATED PARTY TRANSACTIONS
The Group had a $300,000 receivable from an officer at December 31, 1997.
Additionally, the Group had outstanding notes payable to stockholders and a
general partnership of stockholders as detailed at Note G and outstanding
obligations under building and equipment leases with related parties as
detailed at Note I.
NOTE I--INCOME TAXES
The provision for income taxes for the year ended December 31, consists of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Current tax expense......................... $264,268 $ 114,009 $ 66,894
Deferred tax expense (benefit).............. 96,162 (269,639) 395,162
-------- --------- --------
$360,430 $(155,630) $462,056
======== ========= ========
</TABLE>
The reconciliation between the Group's effective income tax rate and the
statutory federal income tax rate at December 31, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ -----
<S> <C> <C> <C>
Statutory federal income
tax rate............... 34.00% 34.00% 34.00%
S Corporation income.... (2.18)% (73.88)% (8.53)%
State taxes, net of fed-
eral effect............ 6.10% (6.10)% 6.10%
Other................... .68% (.46)% (.26)%
----- ------ -----
Effective income tax
rate................... 38.60% (46.44)% 31.31%
===== ====== =====
</TABLE>
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities are as follows as
of December 31:
<TABLE>
<CAPTION>
1996 1997
------- ---------
<S> <C> <C>
Current asset/(liability)
Difference in year end for book and tax purposes.... $13,208 $(374,070)
======= =========
Noncurrent liability
Depreciation........................................ $(7,837) $ (15,721)
======= =========
</TABLE>
NOTE J--DEFINED BENEFIT PENSION PLAN
The group has a defined benefit pension plan which covers substantially all
employees. A benefit is paid to employees based upon length of service and
annual salary. Subsequent to December 31, 1997, the Company made an election
to terminate the pension plan, effective December 31, 1997. The Internal
Revenue Service has not yet approved the termination of the plan.
Pension expense for the year ended December 31, includes the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Service cost--benefits earned during the current
period......................................... $207,297 $ 113,003 $151,009
Interest cost on projected benefit obligation... 51,874 65,670 68,882
Actual return on plan assets.................... (94,352) (139,908) (88,818)
Net amortization and deferral................... 91,919 128,224 56,129
-------- --------- --------
Net pension cost.............................. $256,738 $ 166,989 $187,202
======== ========= ========
</TABLE>
F-32
<PAGE>
THE ACTA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet as of December 31:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits.............................. $ (947,934) $(1,135,800)
Nonvested benefits........................... (16,875) --
----------- -----------
Accumulated benefit obligation............. (964,809) (1,135,800)
Provision for future compensation increases.. (199,208) (20,090)
----------- -----------
Projected benefit obligation............... (1,164,017) (1,155,890)
Plan assets at fair value.................... 749,655 943,250
----------- -----------
Projected benefit obligation in excess of
plan assets............................... (414,362) (212,640)
Unrecognized net gain........................ (257,445) (488,303)
Unrecognized prior service cost.............. 426,213 404,902
----------- -----------
Accrued pension cost included in other
liabilities............................... $ (245,594) $ (296,041)
=========== ===========
</TABLE>
The following assumptions were used to develop net periodic pension expense
and the actuarial present value of projected benefit obligations:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected long-term rate of return on plan assets........ 6.00% 6.00% 6.00%
Weighted average discount rate.......................... 6.00% 6.00% 6.00%
Rate of increase in compensation levels................. 4.00% 4.00% 4.00%
</TABLE>
NOTE K--COMMITMENTS AND CONTINGENCIES
The Group leases office and warehouse space in California from an affiliated
partnership. The lease is for 5 years, expiring October 2000 with monthly
payments of $54,000. The Group is required to pay utilities, insurance,
maintenance costs and property taxes.
The Group leases certain machinery and equipment under varying operating
lease agreements from a related party. The leases require monthly payments of
$2,385.
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining lease
terms in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- ----------
<S> <C>
1998.......................................................... $ 686,724
1999.......................................................... 686,724
2000.......................................................... 578,724
2001.......................................................... 25,936
2002.......................................................... 8,420
----------
$1,986,528
==========
</TABLE>
F-33
<PAGE>
THE ACTA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE L--MAJOR CUSTOMERS
Sales to principal customers, which were in excess of 10% of total net sales,
are shown below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
CUSTOMER 1995 1996 1997
-------- ---- ---- ----
<S> <C> <C> <C>
A.......................................................... (a) 20% (a)
B.......................................................... (a) 15% (a)
</TABLE>
- --------
(a) less than 10%
NOTE M--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The preferred stock is cumulative and pays dividends at the rate of 8%. At
December 31, 1996 and 1997, there were approximately $4,000 and $8,000 of
dividends in arrears.
Cash paid for interest expense and income taxes for the years ended December
31, was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Interest paid................................... $10,371 $ 86,476 $176,605
Income taxes paid............................... 96,162 152,800 110,800
</TABLE>
F-34
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
QUALITY BOTANICAL INGREDIENTS, INC.
F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Quality Botanical Ingredients, Inc.
South Plainfield, New Jersey
We have audited the accompanying balance sheet of Quality Botanical
Ingredients, Inc. (formerly Island Organics, Inc.) (a New Jersey corporation)
as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Quality Botanical
Ingredients, Inc. as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
July 16, 1998
F-36
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Quality Botanical Ingredients, Inc.
South Plainfield, New Jersey
We have audited the accompanying balance sheet of Quality Botanical
Ingredients, Inc. (formerly Island Organics, Inc.) (a New Jersey corporation)
as of December 31, 1996, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Quality Botanical
Ingredients, Inc. as of December 31, 1996, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
AMPER, POLITZINER & MATTIA P.A.
Edison, New Jersey
April 15, 1997
F-37
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents................. $ 90,100 $ 54,386 $ 115,156
Accounts receivable, less allowance for
doubtful accounts of $101,000, $121,000
and $63,000 (unaudited).................. 1,886,345 2,109,898 2,579,869
Inventory................................. 2,850,597 5,421,632 5,575,959
Prepaid expenses and other current assets. 79,721 66,918 538,352
Deferred tax asset........................ -- 272,000 239,000
---------- ----------- -----------
Total current assets.................... 4,906,763 7,924,834 9,048,336
PROPERTY AND EQUIPMENT--NET................. 1,648,312 2,417,953 2,471,058
DEFERRED TAX ASSET.......................... -- 28,000 28,000
OTHER ASSETS................................ 184,684 372,065 517,490
DUE FROM AFFILIATES......................... 127,597 617,590 809,427
---------- ----------- -----------
$6,867,356 $11,360,442 $12,874,311
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable--bank........................ $1,668,423 $ 4,166,282 $ 3,334,894
Current maturities of long-term debt...... 53,356 257,779 1,152,133
Current maturities of capital lease
obligations.............................. 143,639 261,599 265,076
Current maturities of note payable--
litigation settlement.................... -- 169,366 176,255
Accounts payable.......................... 1,796,812 2,934,759 3,547,302
Accrued expenses and other current
liabilities.............................. 689,623 456,206 846,308
Income taxes payable...................... -- -- 196,000
---------- ----------- -----------
Total current liabilities............... 4,351,853 8,245,991 9,517,968
LONG-TERM DEBT, net of current maturities... 190,472 496,805 595,200
CAPITAL LEASE OBLIGATIONS, net of current
maturities................................. 556,822 876,203 768,096
LOANS PAYABLE--officers, subordinated....... 172,099 -- --
NOTE PAYABLE--litigation settlement net of
current maturities......................... -- 790,061 700,182
COMMITMENTS AND CONTINGENCIES............... -- -- --
STOCKHOLDERS' EQUITY
Common stock, no par value, 300 shares
authorized, 150 outstanding.............. 38,400 38,400 38,400
Additional paid-in capital................ 207,967 357,738 357,738
Retained earnings......................... 1,349,743 555,244 896,727
---------- ----------- -----------
Total stockholders' equity.............. 1,596,110 951,382 1,292,865
---------- ----------- -----------
$6,867,356 $11,360,442 $12,874,311
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------------
1996 1997 1997 1998
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................... $10,894,053 $15,494,503 $7,620,770 $10,008,951
Cost of goods sold.......... 7,592,328 11,155,121 5,389,718 7,034,031
----------- ----------- ---------- -----------
3,301,725 4,339,382 2,231,052 2,974,920
Selling, general and
administrative expenses.... 2,594,589 3,513,690 1,880,315 1,991,085
----------- ----------- ---------- -----------
Earnings from
operations............. 707,136 825,692 350,737 983,835
Other income (expense)
Interest expense.......... (230,569) (493,168) (159,288) (338,182)
Litigation settlements.... -- (1,144,370) (68,964) --
Other..................... -- -- -- (75,170)
----------- ----------- ---------- -----------
(230,569) (1,637,538) (228,252) (413,352)
----------- ----------- ---------- -----------
Earnings (loss) before
income taxes........... 476,567 (811,846) 122,485 570,483
Income tax benefit (ex-
pense)..................... -- 300,000 (17,800) (229,000)
----------- ----------- ---------- -----------
NET EARNINGS (LOSS)..... $ 476,567 $ (511,846) $ 104,685 $ 341,483
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 100 $38,000 $157,967 $1,170,061 $1,366,028
Net earnings............ -- -- -- 476,567 476,567
Common stock issued..... 50 400 -- -- 400
Capital contributions... -- -- 50,000 -- 50,000
Distributions........... -- -- -- (296,885) (296,885)
--- ------- -------- ---------- ----------
Balance at December 31,
1996................... 150 38,400 207,967 1,349,743 1,596,110
Net loss................ -- -- -- (511,846) (511,846)
Capital contributions... -- -- 149,771 -- 149,771
Distributions........... -- -- -- (282,653) (282,653)
--- ------- -------- ---------- ----------
Balance at December 31,
1997................... 150 38,400 357,738 555,244 951,382
Net earnings (unau-
dited)................. -- -- -- 341,483 341,483
--- ------- -------- ---------- ----------
Balance at June 30, 1998
(unaudited)............ 150 $38,400 $357,738 $ 896,727 $1,292,865
=== ======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activ-
ities
Net earnings (loss)........... $ 476,567 $ (511,846) $ 104,685 $ 341,483
Adjustments to reconcile net
earnings (loss) to net cash
(used) provided by operating
activities
Litigation settlements...... -- 986,370 -- --
Bad debt expense............ 33,000 60,000 -- --
Deferred tax (benefit)
expense.................... -- (300,000) 17,800 33,000
Depreciation and
amortization............... 171,882 316,167 140,506 205,781
Loss on abandonment of
property and equipment..... -- -- -- --
Stock compensation to
officers................... 400 -- -- --
Change in assets and
liabilities
Increase in accounts
receivable............... (298,751) (283,553) (181,593) (469,971)
Increase in inventory..... (1,567,881) (2,571,035) (524,809) (154,327)
(Increase) decrease
prepaid expenses and
other current assets..... (183,992) 12,803 (89,773) (471,434)
Increase due from
affiliates............... -- (489,993) -- (191,837)
Increase in other assets.. (93,761) (237,772) (195,514) (195,894)
Increase (decrease) in
trade accounts payable... 542,997 1,137,847 (159,128) 612,543
Increase (decrease) in
accrued expenses and
other current
liabilities.............. 252,955 (233,417) (138,630) 390,102
Increase in income taxes
payable.................. -- -- -- 196,000
---------- ---------- ---------- ---------
Net cash (used) provided
by operating
activities............. (666,584) (2,114,429) (1,026,456) 295,446
Cash flows from investing
activities
Payments for purchase of
property and equipment....... (463,566) (305,417) (45,021) (179,698)
Cash flows from financing
activities
Net proceeds (payments) from
note payable--bank........... 1,156,688 2,497,859 827,692 (831,388)
Proceeds from long-term debt.. 310,725 899,300 850,000 1,760,000
Principal payments of long-
term debt.................... -- (388,544) (265,681) (767,251)
Principal payments of
obligations under capitalized
leases....................... (88,309) (292,559) (136,475) (133,349)
Decrease in loans payable--
officers..................... (5,636) (22,328) (5,480) --
Distributions to stockholders. (296,885) (282,653) (213,168) --
Payments on note payable--
litigation settlement........ -- (26,943) -- (82,990)
---------- ---------- ---------- ---------
Net cash provided (used) by
financing activities....... 1,076,583 2,384,132 1,056,888 (54,978)
---------- ---------- ---------- ---------
Net (decrease) increase in cash. (53,567) (35,714) (14,589) 60,770
Cash and cash equivalents at
beginning of period............ 143,667 90,100 90,100 54,386
---------- ---------- ---------- ---------
Cash and cash equivalents at end
of period...................... $ 90,100 $ 54,386 $ 75,511 $ 115,156
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Operations
Quality Botanical Ingredients, Inc. (a New Jersey corporation) (the
Company), originally incorporated in 1983 in New York and reincorporated in
New Jersey in 1993, is primarily in the business of processing domestic and
imported herbs into powdered herbs and extracts useable in vitamin supplements
and other products which are sold to manufacturers. Prior to May 1, 1997, the
Company's name was Island Organics, Inc.
2. Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
3. Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions
which may at times be in excess of federally insured levels. The Company has
not experienced any losses in such accounts and does not believe it is exposed
to any significant credit risks on cash maintained in bank deposit accounts.
4. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
5. Inventory
Inventory consists of bulk herbs in the raw material, blended and processed
stages and extracts and is stated at the lower of cost or market, with cost
being determined on a first-in, first-out basis.
6. Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
7. Revenue Recognition
The Company recognizes revenue when products are shipped to customers.
8. Income Taxes
Prior to 1997, the Company had elected to be taxed under the Subchapter S
provisions of the Internal Revenue Code. As a result of this election, income
of the Company was taxable to the stockholders individually and no provision
was made for Federal income taxes in the accompanying financial statements. As
of January 1, 1997, the Company revoked its S-corporation election for federal
and state tax purposes.
F-42
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences are expected to reverse. Deferred tax expense (benefit) is the
result of changes in deferred tax assets and liabilities.
9. Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
10. Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
11. Reclassifications
Certain reclassifications have been made to conform to the 1997
presentation.
12. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
Management is presently evaluating what, if any, additional disclosures may be
required when this statement is implemented.
13. Unaudited Interim Information
The financial information for the six months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.
NOTE B--INVENTORY
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Raw materials....................................... $ 426,659 $ 991,810
Work in process..................................... -- 122,923
Finished goods...................................... 2,423,938 4,306,899
---------- ----------
$2,850,597 $5,421,632
========== ==========
</TABLE>
F-43
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Leasehold improvements............... 25 $ 497,749 $ 640,533
Machinery and equipment.............. 5-10 1,185,138 2,091,365
Furniture and fixtures............... 10 77,016 144,796
Computer system...................... 5-10 142,480 256,400
Vehicles............................. 5 34,437 34,437
Construction in progress............. -- 194,283 --
---------- ----------
2,131,103 3,167,531
Accumulated depreciation........... (482,791) (749,578)
---------- ----------
$1,648,312 $2,417,953
========== ==========
</TABLE>
NOTE D--OTHER ASSETS
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Security deposits...................................... $ 88,775 $131,574
Loan acquisition costs, net............................ -- 114,570
Employee advances...................................... 85,450 87,985
Other.................................................. 10,459 37,936
-------- --------
$184,684 $372,065
======== ========
</TABLE>
Loan acquisition costs are amortized over the term of the loans.
NOTE E--DUE FROM AFFILIATES
Due from affiliates represents advances to three farming operations in the
United States in which certain Company stockholders have significant ownership
interests. These farms have approximately 100 acres presently in development
of various crops which commenced in 1996 and expect to harvest over the next
three to four years. In addition to the $617,590 already advanced, the Company
anticipates funding an additional $400,000 to $900,000 over the next twelve
months.
NOTE F--NOTE PAYABLE--BANK
The Company had an agreement with a lending institution to finance up to 70%
of eligible accounts receivable to a maximum of $1,000,000 and up to 50% of
eligible inventory to a maximum of an additional $1,000,000. Borrowings under
this agreement accrued interest at prime plus 4.5%.
On May 9, 1997, the Company entered into a financing agreement with a new
lending institution. Under the new agreement, the overall borrowing limit is
$4,250,000, limited to 80% of eligible accounts receivable, 40% of eligible
raw material inventory, and 60% of eligible finished goods inventory. Advances
against eligible inventory are limited to $2,000,000, with a sublimit on raw
material inventory of $750,000. Borrowings under the new line of credit
agreement bear interest at prime (8.5% at December 31, 1997) plus 2%. The line
of credit
F-44
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
agreement expires in May 1999, and is collateralized by accounts receivable
and inventory, and is personally guaranteed by a principal of the Company.
Under the new line of credit agreement, the Company has restrictive covenants
relating to dividends, capital expenditures, tangible capital funds, and debt
service coverage.
NOTE G--LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Note payable to bank, payable in 60 monthly installments of
$7,083 plus interest at prime (8.5% at December 31, 1997)
plus 2%, through May 2002, guaranteed by a principal
stockholder (a)............................................. $ -- $375,419
Note payable to bank, payable in 36 monthly installments of
$11,805 plus interest at prime (8.5%at December 31, 1997)
plus 2.5%, through May 2000, guaranteed by a principal
stockholder (a)............................................. -- 342,365
Note payable to bank, payable in 36 monthly installments of
$2,500 plus interest at prime (8.5% at December 31, 1997)
plus 2%, through March 1999, guaranteed by a principal
stockholder (a)............................................. -- 36,800
Note payable to bank, repaid May 1997........................ 243,828 --
-------- --------
243,828 754,584
Less current maturities.................................... 53,356 257,779
-------- --------
$190,472 $496,805
======== ========
</TABLE>
- --------
(a) These notes have restrictive covenants as described in the second
paragraph of Note F.
The approximate aggregate amount of all long-term debt maturities for the
five years following December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1998........................................................... $258,000
1999........................................................... 233,000
2000........................................................... 144,000
2001........................................................... 85,000
2002........................................................... 35,000
</TABLE>
On May 12, 1998, the Company closed on new financing arrangements with
another financial institution. The financing arrangements replaced all
previous financing and consists of the following:
$6 million revolving line of credit up to: 1) 85% of eligible accounts
receivable (including a limitation on a certain account); 2) 55% of
eligible inventory with inventory sublimit of $3 million; 3) this line
requires certain unused line fees; and 4) interest rate 1 1/2% over prime.
Term loan: 1) $760,000 to be paid in 59 installments of $12,667 to May
2003; and 2) interest rate 1 1/2% over prime.
Bridge term loan: 1) $1 million to be repaid, with interest, by May 11,
1999; 2) if not paid by May 11, 1999, must pay a fee of $50,000 and then 36
installments of $27,778 to May 2002; and 3) interest is 3 1/2% over prime.
Letters of credit: 1) Up to $250,000, reserved against line of credit
limits.
F-45
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The lender has a first security interest in all of the Company's existing
and future assets as well as unlimited personal guarantees of certain
shareholder, principal, trust and related entities who lease office and
warehouse space to the Company. This new agreement provides for prepayment
penalties and certain warrants if the bridge loan is not paid in eighteen
months.
The agreement contains covenants restricting officer loans or related party
loans, and dividends and limiting capital expenditures. There are also
requirements to attain certain net income levels by quarter and to maintain
certain leverage ratios.
NOTE H--CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital leases for equipment expiring
through 2001, with aggregate monthly payments of $38,755.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1998.......................................................... $ 375,000
1999.......................................................... 360,000
2000.......................................................... 326,000
2001.......................................................... 240,000
2002.......................................................... 113,000
----------
1,414,000
Less amount representing interest........................... 276,000
----------
1,138,000
Less current maturities..................................... 262,000
----------
$ 876,000
==========
</TABLE>
The present value of minimum future obligations shown above is calculated
based on interest rates ranging from 8% to 16%, with a weighted average of 10%
determined to be applicable at the inception of the lease.
Property and equipment include $570,000 and $1,300,000 at December 31, 1996
and 1997, respectively, capitalized under such leases. Related accumulated
depreciation was $112,000 and $230,000 at December 31, 1996 and 1997,
respectively.
NOTE I--LITIGATION SETTLEMENTS
On December 11, 1997, the Company and certain individuals settled a lawsuit
regarding misappropriation of customers and trade secrets. The settlement
resulted in the Company issuing a $1,200,000 promissory note, payable in sixty
monthly installments of $20,000 commencing on November 1, 1997. For the year
ended December 31, 1997, the Company recorded the present value ($986,370) of
the entire amount as an expense. The remaining amount of $213,630 will be
recorded as interest expense as the payments are made. The note may be prepaid
at any time without premium or penalty. This note is collateralized by a
mortgage on the property leased to the Company from an affiliate for its
office and warehouse facilities (see Note M), the personal guarantee of a
principal of the Company and a first security interest in 66-2/3% of the
Company's common stock. In addition, the Company incurred $116,000 of
professional fees.
F-46
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The approximate amount of long-term maturities for the five years following
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1998........................................................... $170,000
1999........................................................... 183,000
2000........................................................... 199,000
2001........................................................... 215,000
2002........................................................... 193,000
</TABLE>
In 1997, the Company settled a rent dispute with a former landlord and
incurred additional rent and legal expenses amounting to $42,000.
NOTE J--RELATED PARTY TRANSACTIONS
The Company had loans payable to two officers including accrued interest at
8%, which were subordinated to bank financing. Interest expense incurred on
the above for 1996 and 1997 was $10,005 and $10,445, respectively. Loans
payable--officers, subordinated of $149,771, was capitalized to additional
paid-in capital on the authority of the officer.
NOTE K--INCOME TAXES
Due to the Company's status as a Subchapter S Corporation, no tax expense or
deferred taxes were recorded prior to 1997.
The provision for income taxes for the year ended December 31, 1997 consists
of the following:
<TABLE>
<S> <C>
Current tax expense........................................... $ --
Deferred tax expense (benefit)................................ (323,000)
Effect of change in tax status................................ 23,000
---------
$(300,000)
=========
</TABLE>
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate for the year ended December 31, 1997, is as
follows:
<TABLE>
<S> <C>
Statutory federal income tax rate.................................. 34.00%
State taxes........................................................ 5.94
Meals and entertainment............................................ (1.25)
Key man life insurance............................................. (4.90)
Other.............................................................. 3.16
-----
Effective income tax rate.......................................... 36.95%
=====
</TABLE>
F-47
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities are as follows as
of December 31, 1997:
<TABLE>
<S> <C>
Current assets and liabilities
Bonus accrual................................................ $ 26,000
Allowance for doubtful accounts.............................. 48,000
Inventory overhead capitalization............................ 130,000
Litigation settlement........................................ 68,000
---------
Net deferred tax asset..................................... $ 272,000
=========
Noncurrent assets and liabilities
Litigation settlement........................................ $ 150,000
Depreciation................................................. (122,000)
---------
Net noncurrent deferred tax asset.......................... $ 28,000
=========
</TABLE>
NOTE L--PROFIT SHARING PLAN
The Company maintains a defined contribution profit sharing plan covering
all employees meeting certain age and service requirements. Contributions to
the plan are at the discretion of management. Company contributions for the
years ended December 31, 1996 and 1997 were $120,000 and $33,000,
respectively.
NOTE M--COMMITMENTS AND CONTINGENCIES
Real Estate Rental
The Company leases office and warehouse space in New Jersey from an
affiliated entity, under common ownership. The lease is for 25 years, expiring
April 2022 with monthly payments of $16,250. The Company is required to pay
utilities, insurance, maintenance costs and property taxes.
In January 1997, the Company entered into a ten year lease agreement for
additional office and warehouse space in New Jersey. The lease requires
monthly base rent of $6,125 and the payment of certain operating and building
maintenance costs.
The Company leases warehouse space in Nevada under a seven year agreement
expiring in January 2004. The lease requires monthly base rent of $3,822 and
the payment of certain operating costs with an escalating clause of 4% per
year for five years.
Facility rent expense was $147,000 and $284,000 for the years ended December
31, 1996 and 1997, respectively, including rent paid to related parties of
$165,000 in 1997.
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining lease
terms in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1998......................................................... $ 316,000
1999......................................................... 323,000
2000......................................................... 331,000
2001......................................................... 333,000
2002......................................................... 340,000
Thereafter................................................... 4,211,000
----------
$5,854,000
==========
</TABLE>
F-48
<PAGE>
QUALITY BOTANICAL INGREDIENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employment and Consulting Agreements
The Company has agreements with its executive officers, which expire on
December 31, 1999. Such agreements provide for minimum salary levels as well
as incentive bonuses which are based on company revenue and pre-tax income
levels. Approximately $250,000 and $500,000 was expensed for the years ended
December 31, 1996 and 1997, respectively, under these agreements.
University Grant
The Company provides annual grants to Purdue University for researching
specified herbal crop improvements. Approximately $21,000 and $41,000 was
expensed for 1996 and 1997, respectively.
NOTE N--MAJOR CUSTOMERS
Customer concentrations are as follows at December 31:
<TABLE>
<CAPTION>
CUSTOMER 1996 1997
-------- ---- ----
<S> <C> <C>
A............................................................... 32% 16%
B............................................................... (a) 16%
</TABLE>
- --------
(a) less than 10%.
As of December 31, 1996 and 1997, respectively, the one major customer
totaled 51% of accounts receivable, and the two major customers totaled 66% of
accounts receivable.
NOTE O--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During December 1997, the Company transferred $149,771 of a note payable due
to an officer to additional paid-in capital. During 1996 and 1997, the Company
recorded $331,035 and $730,000, respectively, in addition to property and
equipment as a result of noncash capital lease financing activities.
Cash paid for interest expense and income taxes for the years ended December
31, was as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Interest paid........................................... $226,000 $450,000
Income taxes paid....................................... 6,000 1,200
</TABLE>
NOTE P--SUBSEQUENT EVENTS (UNAUDITED)
In August, 1998, the Company and its shareholders entered into a definitive
agreement providing for the merger of the Company with Advanced
Nutraceuticals, Inc.
In August 1998, the Company acquired all the outstanding common stock of
Botanical Products, Inc. (BPI) in exchange for cash of $150,000, subordinated
term notes of $1,350,000, and equity notes with an approximate value of
$3,000,000.
F-49
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
NORTHRIDGE LABORATORIES, INC.
F-50
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Northridge Laboratories, Inc.
Chatsworth, California
We have audited the accompanying balance sheets of Northridge Laboratories,
Inc. (a California corporation) as of September 30, 1997 and 1996, and the
related statements of earnings, stockholders' equity and cash flows for each
of the two years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northridge Laboratories,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the two years in the period ended September 30,
1997, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
July 9, 1998
F-51
<PAGE>
NORTHRIDGE LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- JUNE 30,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................. $ 452,281 $ 665,781 $2,035,961
Accounts receivable, less allowance for
doubtful accounts of $38,909, $50,813 and
$49,630 (unaudited)....................... 625,636 1,414,683 1,464,325
Inventory.................................. 900,470 1,216,836 1,069,756
Prepaid expenses........................... 6,060 9,220 222,462
Deferred income taxes...................... 150,820 74,416 74,416
---------- ---------- ----------
Total current assets..................... 2,135,267 3,380,936 4,866,920
PROPERTY, PLANT AND EQUIPMENT--NET........... 2,065,752 1,549,647 1,524,762
DEPOSITS..................................... 40,572 40,727 40,557
---------- ---------- ----------
$4,241,591 $4,971,310 $6,432,239
========== ========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable........................... $ 665,049 $ 771,731 $1,027,603
Income taxes payable....................... 171,471 347,132 --
Accrued payroll............................ 280,341 66,896 1,097,586
Note payable--bank......................... -- -- 58,308
Accrued profit sharing contribution........ 175,635 183,061 150,000
Accrued expenses........................... 93,663 73,900 21,062
Notes payable to stockholders.............. 88,000 68,000 55,500
---------- ---------- ----------
Total current liabilities................ 1,474,159 1,510,720 2,410,059
DEFERRED INCOME TAXES........................ 495,769 349,641 349,641
---------- ---------- ----------
1,969,928 1,860,361 2,759,700
COMMITMENTS AND CONTINGENCIES................ -- -- --
STOCKHOLDERS' EQUITY
Capital stock, no par value, 10,000 shares
authorized; 100 shares issued and
outstanding............................... 50,000 50,000 50,000
Retained earnings.......................... 2,221,663 3,060,949 3,622,539
---------- ---------- ----------
2,271,663 3,110,949 3,672,539
---------- ---------- ----------
$4,241,591 $4,971,310 $6,432,239
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
NORTHRIDGE LABORATORIES, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER NINE MONTHS ENDED JUNE
30, 30,
----------------------- ----------------------
1996 1997 1997 1998
---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales....................... $7,621,788 $11,532,389 $7,656,570 $11,233,164
Cost of goods sold.............. 6,087,685 8,393,451 5,540,313 8,314,856
---------- ----------- ---------- -----------
Gross profit................ 1,534,103 3,138,938 2,116,257 2,918,308
Selling, general and
administrative expenses........ 1,608,429 2,069,510 1,495,341 1,991,438
---------- ----------- ---------- -----------
Earnings (loss) from
operations................. (74,326) 1,069,428 620,916 926,870
Other income, net............... 43,032 25,266 14,804 41,389
---------- ----------- ---------- -----------
Earnings (loss) before income
tax expense and extraordinary
gain......................... (31,294) 1,094,694 635,720 968,259
Income tax expense (benefit).... (13,580) 440,710 276,534 406,669
---------- ----------- ---------- -----------
Earnings (loss) before
extraordinary gain......... (17,714) 653,984 359,186 561,590
Extraordinary gain from
involuntary conversion due to
gas explosion (net of
applicable income taxes of
$383,954, $124,698 and $124,698
as of September 30, 1996 and
1997, and June 30, 1997,
respectively).................. 519,468 185,302 185,302 --
---------- ----------- ---------- -----------
NET EARNINGS................ $ 501,754 $ 839,286 $ 544,488 $ 561,590
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
NORTHRIDGE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
NUMBER OF CAPITAL RETAINED STOCKHOLDERS'
SHARES STOCK EARNINGS EQUITY
--------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at October 1, 1995.......... 100 $50,000 $1,719,909 $1,769,909
Net earnings........................ -- -- 501,754 501,754
--- ------- ---------- ----------
Balance at September 30, 1996....... 100 50,000 2,221,663 2,271,663
Net earnings........................ -- -- 839,286 839,286
--- ------- ---------- ----------
Balance at September 30, 1997....... 100 50,000 3,060,949 3,110,949
Net earnings (unaudited)............ -- -- 561,590 561,590
--- ------- ---------- ----------
Balance at June 30, 1998
(unaudited)........................ 100 $50,000 $3,622,539 $3,672,539
=== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
NORTHRIDGE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER NINE MONTHS ENDED JUNE
30, 30,
---------------------- -----------------------
1996 1997 1997 1998
----------- --------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net earnings................. $ 501,754 $ 839,286 $ 544,488 $ 561,590
Adjustments to reconcile net
earnings to net cash
provided (used) by operating
activities
Depreciation and
amortization............... 456,540 562,626 421,970 462,365
Gain from involuntary
conversion of property,
plant and equipment........ (763,887) (30,000) -- --
Provision for doubtful
accounts................... 34,789 34,666 34,666 --
Changes in assets and
liabilities
(Increase) decrease in
accounts receivable....... (85,795) (823,713) (1,498,647) (49,643)
(Increase) decrease in
inventory................. (191,876) (316,366) (859,719) 147,080
Decrease (increase) in
prepaid expenses.......... 6,636 (3,160) (5,124) (213,242)
(Increase) decrease in
deposits.................. (26,478) (155) (130) 170
(Decrease) increase in
accounts payable.......... (73,519) 106,682 820,240 255,872
Increase (decrease) in
accrued payroll........... 15,943 (213,445) 393,031 1,030,690
(Decrease) increase in
accrued profit sharing
contribution.............. (7,450) 7,426 (38,635) (33,061)
Decrease in accrued
expenses.................. (177,295) (19,763) (24,199) (52,838)
Increase (decrease) in
income taxes payable...... 181,530 175,661 13,759 (347,132)
Increase (decrease) in
deferred income taxes..... 82,654 (69,724) -- --
----------- --------- ----------- ----------
Net cash (used) provided
by operating activities.. (46,454) 250,021 (198,300) 1,761,851
Cash flows from investing
activities
Purchase of property, plant
and equipment............... (1,264,680) (46,521) (78,161) (437,479)
Insurance proceeds from
involuntary conversion of
property, plant and
equipment................... 763,887 30,000 -- --
----------- --------- ----------- ----------
Net cash used in investing
activities............... (500,793) (16,521) (78,161) (437,479)
Cash flows from financing
activities
Proceeds from notes payable.. 88,000 -- -- 58,308
Repayments of notes payable.. -- (20,000) (20,000) (12,500)
----------- --------- ----------- ----------
Net cash provided (used)
by financing activities.. 88,000 (20,000) (20,000) 45,808
----------- --------- ----------- ----------
Net (decrease) increase in
cash..................... (459,247) 213,500 (296,461) 1,370,180
Cash at beginning of period... 911,528 452,281 452,281 665,781
----------- --------- ----------- ----------
Cash at end of period......... $ 452,281 $ 655,781 $ 155,820 $2,035,961
----------- --------- ----------- ----------
Supplemental disclosures
Cash paid during the period
for:
Interest.................... $ 3,900 $ 8,181 $ 8,133 $ 6,178
Income taxes................ 106,000 459,474 387,474 967,132
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
NORTHRIDGE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Description of Business
Northridge Laboratories, Inc., (a California corporation) (the "Company")
incorporated in 1967, which provides full service contract manufacturing and
product development services to the nutritional supplement and vitamin
industry.
2. Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
3. Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions
which may at times be in excess of federally insured levels. The Company has
not experienced any losses in such accounts and does not believe it is exposed
to any significant credit risks on cash maintained in bank deposit accounts.
4. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
5. Inventory
Inventory consists of herbs and vitamin supplements in the raw material,
blended and processed stages and is stated at the lower of cost or market,
with cost being determined on a first-in, first-out basis.
6. Property, Plant and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
7. Revenue Recognition
The Company recognizes revenue when products are shipped to customers.
8. Income Taxes
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse. Deferred tax expense (benefit) is the result of changes
in deferred tax assets and liabilities.
F-56
<PAGE>
NORTHRIDGE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The Company believes
that the carrying value of these instruments on the accompanying balance
sheets approximates their fair value.
10. Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
11. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
Management is presently evaluating what, if any, additional disclosures may be
required when this statement is implemented.
12. Unaudited Interim Information
The financial information for the nine months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.
NOTE B--INVENTORY
Inventories consist of the following at September 30:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Raw materials......................................... $603,495 $ 665,001
Work-in-process....................................... 190,629 404,233
Finished goods........................................ 106,346 147,602
-------- ----------
$900,470 $1,216,836
======== ==========
</TABLE>
NOTE C--PROPERTY, PLANT AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ ---------- -----------
<S> <C> <C> <C>
Leasehold improvements.............. 5 $ 497,979 $ 505,328
Furniture and equipment............. 3-7 2,177,469 2,213,774
Automobiles and trucks.............. 5 144,593 144,593
---------- -----------
2,820,041 2,863,695
Accumulated depreciation............ (754,289) (1,314,048)
---------- -----------
$2,065,752 $ 1,549,647
========== ===========
</TABLE>
F-57
<PAGE>
NORTHRIDGE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE D--NOTES PAYABLE
Notes payable consist of 7% demand notes due to a stockholder.
Total interest cost incurred and charged to expense was $6,573 and $5,510
for the years ended September 30, 1996 and 1997, respectively.
NOTE E--COMMITMENTS
The Company leases its facilities under lease agreements classified as
operating leases. The leases contain provisions for adjustment of the minimum
payments based on changes in the Consumer Price Index. The following is a
schedule of the future minimum rental payments for the leases which expire
from September 30, 1999 to August 31, 2001.
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- --------
<S> <C>
1998............................................................ $161,856
1999............................................................ 161,856
2000............................................................ 80,676
2001............................................................ 73,953
--------
$478,341
========
</TABLE>
Rent expense was approximately $135,000 and $159,000 for the years ended
September 30, 1996 and 1997, respectively.
NOTE F--PROFIT SHARING PLAN
The Company has a profit sharing plan covering all employees with a minimum
of one year of continuous service and at least twenty one years of age. Annual
contributions to the plan are at the sole discretion of management and are
limited to fifteen percent of total participants' compensation for the fiscal
year. The Company's contribution for the years ended September 30, 1996 and
1997 was approximately $176,000 and $183,000, respectively.
NOTE G--INCOME TAXES
Income tax expense (benefit) consists of the following at September 30:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Current............................................. $ 287,720 $ 635,132
Deferred............................................ 82,654 (69,724)
Less amount applicable to extraordinary gain........ (383,954) (124,698)
--------- ---------
Income tax expense (benefit)...................... $ (13,580) $ 440,710
========= =========
</TABLE>
F-58
<PAGE>
NORTHRIDGE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and deferred tax liability at September
30 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accumulated depreciation............................. $138,035 $296,096
Insurance reimbursement receivable................... 121,240 --
State tax provision.................................. 9,516 48,144
Allowance for doubtful accounts...................... 16,848 22,002
Other................................................ 3,216 4,270
-------- --------
Total deferred tax assets.......................... 288,855 370,512
Deferred tax liability:
Deferred gain from involuntary conversion of
property, plant and equipment....................... 633,804 645,737
-------- --------
Net deferred tax liability......................... $344,949 $275,225
======== ========
</TABLE>
The net deferred tax liability is comprised of the following at September
30:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Current deferred income tax assets.................. $ 150,820 $ 74,416
Noncurrent deferred income taxes:
Assets............................................ 138,035 296,096
Liabilities....................................... (633,804) (645,737)
--------- ---------
Noncurrent deferred tax liability............... (495,769) (349,641)
--------- ---------
Net deferred tax liability...................... $ 344,949 $ 275,225
========= =========
</TABLE>
As a result of the following items, the total tax expense differs from the
amount computed by applying the statutory U.S. federal income tax rate to
earnings before income taxes for the years ended September 30:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expense at statutory rate.................................... 34.0% 34.0%
Change resulting from state franchise tax, net of federal
benefit..................................................... 5.2 6.2
Other........................................................ 4.2 .1
---- ----
43.4% 40.3%
==== ====
</TABLE>
F-59
<PAGE>
NORTHRIDGE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--MAJOR CUSTOMERS
The Company's major customers are located throughout California and Utah.
Sales to customers accounting for 10% or more of sales were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
CUSTOMER 1996 1997
- -------- ------ ------
<S> <C> <C>
A............................................................. (a) 35%
B............................................................. 40% 18%
C............................................................. (a) 18%
D............................................................. 10% (a)
</TABLE>
- --------
(a) less than 10%.
NOTE I--EXTRAORDINARY GAIN
In June 1995, the Company's manufacturing facility was totally destroyed by
a gas explosion. The extraordinary gain of $519,468 and $185,302 (net of
applicable income taxes of $383,954 and $124,698 as of September 30, 1996 and
1997, respectively) represents the insurance proceeds received in excess of
the net book value of the destroyed assets and other related expenses of the
gas explosion as of September 30, 1996 and 1997, respectively.
NOTE J--SUBSEQUENT EVENT (UNAUDITED)
In August, 1998, the Company and its shareholders entered into a definitive
agreement providing for the merger of the Company with Advanced
Nutraceuticals, Inc.
F-60
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BACTOLAC PHARMACEUTICALS, INC.
F-61
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Bactolac Pharmaceuticals, Inc.
Westbury, New York
We have audited the accompanying balance sheets of Bactolac Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of earnings,
stockholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Bactolac Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Houston, Texas
July 30, 1998
F-62
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS
Cash......................................... $ 464 $ 90,902 $ 74,924
Accounts receivable--trade, less allowance
for doubtful accounts of $75,000 in 1997 and
$100,000 (unaudited) in 1998................ 226,291 1,204,040 1,867,909
Inventory.................................... 188,024 657,450 712,674
-------- ---------- ----------
Total current assets....................... 414,779 1,952,392 2,655,507
PROPERTY AND EQUIPMENT-NET..................... 84,970 73,094 89,911
OTHER ASSETS................................... 587 8,341 21,897
-------- ---------- ----------
$500,336 $2,033,827 $2,767,315
======== ========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable............................. $285,679 $ 858,859 $ 916,337
Accrued expenses............................. 8,204 22,708 11,315
-------- ---------- ----------
Total current liabilities.................. 293,883 881,567 927,652
LOAN PAYABLE TO STOCKHOLDER.................... 2,800 2,800 2,800
-------- ---------- ----------
Total liabilities.......................... 296,683 884,367 930,452
COMMITMENTS AND CONTINGENCIES.................. -- -- --
STOCKHOLDER'S EQUITY
Common stock, par value $1 per share;
authorized, issued and outstanding 100
shares...................................... 100 100 100
Additional paid-in capital................... 4,852 4,852 4,852
Retained earnings............................ 198,701 1,144,508 1,831,911
-------- ---------- ----------
203,653 1,149,460 1,836,863
-------- ---------- ----------
$500,336 $2,033,827 $2,767,315
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 30,
--------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.......................... $1,406,339 $5,002,113 $2,022,793 $3,642,245
Cost of goods sold................. 1,135,492 3,802,153 1,527,490 2,566,100
---------- ---------- ---------- ----------
270,847 1,199,960 495,303 1,076,145
Selling, general and administrative
expenses.......................... 74,621 246,224 82,106 134,214
---------- ---------- ---------- ----------
Earnings from operations......... 196,226 953,736 413,197 941,931
Other income, net.................. 4,902 4,913 360 3,344
---------- ---------- ---------- ----------
NET EARNINGS..................... $ 201,128 $ 958,649 $ 413,557 $ 945,275
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
NUMBER PAID-IN EARNINGS STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1996.................... 100 $100 $4,852 $ (2,427) $ 2,525
Net earnings............. -- -- -- 201,128 201,128
--- ---- ------ ---------- ----------
Balance at December 31,
1996.................... 100 100 4,852 198,701 203,653
Net earnings............. -- -- -- 958,649 958,649
Distributions............ -- -- -- (12,842) (12,842)
--- ---- ------ ---------- ----------
Balance at December 31,
1997.................... 100 100 4,852 1,144,508 1,149,460
Net earnings (unaudited). -- -- -- 945,275 945,275
Distributions
(unaudited)............. -- -- -- (257,872) (257,872)
--- ---- ------ ---------- ----------
Balance at June 30, 1998
(unaudited)............. 100 $100 $4,852 $1,831,911 $1,836,863
=== ==== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- --------------------
1996 1997 1997 1998
--------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net earnings.................... $ 201,128 $ 958,649 $ 413,557 $ 945,275
Adjustments to reconcile net
earnings to net cash provided
by operating activities
Depreciation................... 45,564 44,344 30,715 10,997
Provision for doubtful
accounts...................... -- 75,000 40,000 25,000
Changes in assets and
liabilities
Increase in accounts
receivable................... (219,024) (1,052,749) (720,627) (688,869)
(Increase) decrease in
inventory.................... (188,024) (469,426) 29,598 (55,224)
Decrease (increase) in other
assets....................... 160 (7,754) (3,255) (13,556)
Increase in accounts payable.. 280,382 573,180 317,485 57,478
Increase (decrease) in accrued
expenses..................... 3,747 14,504 (2,474) (11,393)
--------- ----------- --------- ---------
Net cash provided by
operating activities........ 123,933 135,748 104,999 269,708
Cash flows from investing
activities
Acquisition of property and
equipment...................... (130,534) (32,468) (25,503) (27,814)
Cash flows from financing
activities
Dividends paid to stockholders.. -- (12,842) (2,961) (257,872)
--------- ----------- --------- ---------
Net (decrease) increase in
cash........................ (6,601) 90,438 76,535 (15,978)
Cash at beginning of period...... 7,065 464 464 90,902
--------- ----------- --------- ---------
Cash at end of period............ $ 464 $ 90,902 $ 76,999 $ 74,924
========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Description of Business
Bactolac Pharmaceuticals, Inc. (a New York Corporation) (the "Company"),
incorporated 1995, and provides services including full service contract
manufacturing and product development services of nutritional supplements and
vitamins to customers throughout the United States.
2. Revenue Recognition
The Company recognizes revenues when products are shipped to customers.
3. Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist of trade receivables. The Company's business activities
are conducted with customers in the United States.
4. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
5. Inventory
Inventory consists of herbs and vitamin supplements in the raw material,
blended and processed stages and is stated at the lower of cost or market,
with cost being determined on a first-in, first-out basis.
6. Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets,
generally seven years, using primarily accelerated methods.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Management evaluates these costs for impairment whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable.
Impairment would be recognized if the carrying amounts of such costs cannot be
recovered by the net cash flows they will generate.
7. Income Taxes
The Company, with the stockholder's consent, has elected to be taxed as an S
corporation since it began operations. Accordingly, taxable results of the
Company are passed through and taxed to the stockholder. The accompanying
financial statements do not contain any provision for, nor any current or
deferred liability relating to income taxes. The difference between the
financial statement and income tax bases of assets and liabilities consist
primarily of the allowance for doubtful accounts receivable.
F-67
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. Financial Instruments
The Company's financial instruments consist of cash, accounts receivable and
accounts payable. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
9. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
10. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
Management is presently evaluating what, if any, additional disclosures may be
required when this statement is implemented.
11. Unaudited Interim Information
The financial information for the six months ended June 30, 1997 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.
NOTE B--INVENTORY
Inventory consists of the following as at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Finished products....................................... $ 35,933 $125,643
Work-in-process......................................... 38,034 132,991
Raw materials........................................... 114,057 398,816
-------- --------
$188,024 $657,450
======== ========
</TABLE>
F-68
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Machinery and equipment.................. 7 $127,821 $150,161
Furniture and fixtures................... 7 2,713 12,841
-------- --------
130,534 163,002
Accumulated depreciation................. (45,564) (89,908)
-------- --------
$ 84,970 $ 73,094
======== ========
</TABLE>
NOTE D--LEASE COMMITMENTS
The Company leases its manufacturing facility as well as various equipment.
The equipment leases are generally short-term (six month) agreements with
month-to-month provisions at maturity. The facility lease was originally
effective June 1, 1996 for a three year term and covered approximately 42% of
the building occupied by the Company. As of May 8, 1998, the Company signed a
letter agreement to be effective on or about July 15, 1998 to occupy 100% of
the building for a five year term. The new facility agreement requires the
following minimum rental commitments as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1998............................................................ $ 62,750
1999............................................................ 95,100
2000............................................................ 99,400
2001............................................................ 103,800
2002............................................................ 108,500
--------
$469,550
========
</TABLE>
The Company incurred rent expense in the amount of $47,562 and $45,373
during each of the years ended December 31, 1996 and 1997.
NOTE E--MAJOR CUSTOMERS
Sales to principal customers accounting for 10% or more of revenues were as
follows:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER
31,
----------
1996 1997
---- ----
<S> <C> <C>
A............................................................... 20% 24%
B............................................................... (a) 16%
C............................................................... 20% (a)
D............................................................... (a) 17%
E............................................................... 11% (a)
F............................................................... 10% (a)
</TABLE>
- --------
(a) less than 10%.
F-69
<PAGE>
BACTOLAC PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996 and 1997, respectively, the three major customers
totaled 64% of accounts receivable, and the four major customers totaled 32%
of accounts receivable.
NOTE F--RELATED PARTY TRANSACTIONS
The Company sells products to, and purchases products from, an entity in
which the stockholder of the Company holds a 20% ownership interest.
Transactions between the Company and this entity are summarized as follows as
of December 31,:
<TABLE>
<CAPTION>
1996 1997
------- ----------
<S> <C> <C>
Products sales to related party....................... $84,246 $1,213,121
Product purchases from related party.................. -- 459,790
Period ending balance in:
Accounts receivable from related party.............. 54,749 452,231
Account payable to related party.................... -- 44,509
</TABLE>
As of December 31, 1996 and 1997, the Company had a loan payable to its
stockholder in the amount of $2,800.
NOTE G--SUBSEQUENT EVENT (UNAUDITED)
In August, 1998, the Company and its stockholder entered into a definitive
agreement providing for the merger of the Company with Advanced
Nutraceuticals, Inc.
F-70
<PAGE>
(Mission Statement) Advanced Nutraceuticals, Inc. was formed to create a
full-service, vertically integrated manufacturer and supplier of quality
nutritional supplements, herbs and extracts.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Company............................................................... 3
The Offering.............................................................. 6
Summary Pro Forma Combined Financial Data................................. 7
Summary Individual Founding Company Financial Data........................ 9
Risk Factors.............................................................. 10
The Company............................................................... 19
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 36
Management................................................................ 45
Certain Transactions...................................................... 48
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 58
Special Note Regarding Forward-Looking Statements......................... 58
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 SHARES
ADVANCED NUTRACEUTICALS, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
[LOGO]
SUTRO & CO. INCORPORATED
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
The following table sets forth the estimated expenses payable by the Company
in connection with the Offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- --------
<S> <C>
SEC Registration Fee............................................... $ 20,355
NASD Filing Fee.................................................... $ 7,400
Nasdaq Listing Fee................................................. $ 25,000
Accounting Fees and Expenses....................................... $325,000
Legal Fees and Expenses............................................ $250,000
Printing Expenses.................................................. $125,000
Blue Sky Qualification Fees and Expenses........................... $ 5,000
Transfer Agent's Fee............................................... $ 2,000
Miscellaneous...................................................... $ 50,000
--------
Total............................................................ $809,755
========
</TABLE>
- --------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq fees, are
in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL"), Article VIII of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") provides that no director of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases, or
(iv) for any transaction from which the director derived an improper personal
benefit. In addition, the Certificate provides that if the DGCL is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended.
Article VI of the Company's By-laws provides for indemnification by the
Company of its officers and certain non-officer employees under certain
circumstances against expenses (including attorneys fees, judgments, fines and
amounts paid in settlement) reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in
which any such person is involved by reason of the fact that such person is or
was an officer or employee of the Company if such person acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to criminal actions or
proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
The Company has entered into indemnification agreements with each of its
directors reflecting the foregoing provisions of its By-laws and requiring the
advancement of expenses in proceedings involving such directors in most
circumstances.
The Underwriters have agreed to indemnify, under certain conditions, the
Company, its directors, certain officers and persons who control the Company
within the meaning of the Securities Act against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Company since its inception in 1997.
Further included is the consideration, if any, received by the Company for
such shares, and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration was claimed.
In December 1997, Naturally Direct, Inc., ("NDI") predecessor of the Company
by merger (the "Organizational Merger"), issued and sold shares of its common
stock to the following parties in the amounts and for the consideration
indicated These sales were exempt from registration pursuant to Section 4(2)
of the Securities Act, no public offer being involved:
<TABLE>
<CAPTION>
NAME SHARES CONSIDERATION
---- ------- -------------
<S> <C> <C>
Barry C. Loder......................................... 817,200 $6,810
Gregory Pusey.......................................... 672,000 5,600
Thomas R. Weinberger................................... 180,000 1,500
Jeffrey G. McGonegal................................... 36,000 300
Patrick O. Cox......................................... 60,000 500
Robert Bearman......................................... 30,000 250
Martha Nachman......................................... 2,400 20
Alan Talesnick......................................... 2,400 20
</TABLE>
In June 1998, NDI issued and sold shares of its Common Stock to the
following parties in the amounts and for the consideration indicated.
<TABLE>
<CAPTION>
NAME: SHARES CONSIDERATION
----- ------ -------------
<S> <C> <C>
Joseph E. Lo Conti...................................... 60,000 $100,000
Lo Conti Family Trust................................... 60,000 100,000
Katherine Halliday O'Neil............................... 60,000 100,000
Joseph A. Lo Conti...................................... 45,000 75,000
Gary J. McAdam.......................................... 36,000 60,000
Kenneth Lanci........................................... 30,000 50,000
E. Jeffrey Peierls...................................... 27,000 45,000
Dayle K. Maloney........................................ 21,000 35,000
Ernest Mathis........................................... 21,000 35,000
Brian E. Peierls........................................ 18,000 30,000
Sherman B. Kelly........................................ 18,000 30,000
Warren Ehrlich.......................................... 16,500 27,500
James Cruce............................................. 15,000 25,000
Ehrlichco............................................... 15,000 25,000
Theresa S. Ehrlich...................................... 13,500 22,500
Eugene L. Neidiger...................................... 10,800 18,000
Anthony B. Petrelli..................................... 9,600 16,000
Charles C. Bruner....................................... 9,600 16,000
Thomas J. Hughes........................................ 9,000 15,000
Allan K. Lager.......................................... 9,000 15,000
Robert M. Nieder........................................ 9,000 15,000
David L. Gersh.......................................... 9,000 15,000
Richard Rosdal.......................................... 9,000 15,000
John P. Hadfield........................................ 9,000 15,000
Robert M. Bearman....................................... 9,000 15,000
Edward C. Larkin........................................ 6,000 10,000
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
SHARES
NAME: ISSUED CONSIDERATION
----- ------ -------------
<S> <C> <C>
Alan L. Talesnick....................................... 6,000 10,000
David P. White.......................................... 6,000 10,000
Jill J. Pusey........................................... 6,000 10,000
Jacqueline A. Pusey..................................... 4,500 7,500
Christopher S. Pusey.................................... 4,500 7,500
John H. Altshuler....................................... 3,000 5,000
Donald E. Yager......................................... 3,000 5,000
--------
$980,000
========
</TABLE>
These shares were exempt from registration pursuant to Section 4(2) of the
Securities Act, no public offer being involved.
On September , 1998, NDI was merged with and into the Registrant in the
Organizational Merger. As a result of the Organizational Merger, each issued
and outstanding share of common stock of NDI automatically was converted into
the right to receive 1.2 share of Common Stock of the Registrant. The sale of
the shares of the Registrant's Common Stock in the Organizational Merger was
exempt from registration pursuant to Section 4.2 of the Securities Act, no
public offer being involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant
4.1+ Specimen certificate for shares of Common Stock
5.1 Form of Opinion of Paul, Hastings, Janofsky & Walker LLP
10.1 Agreement and Plan of Merger dated as of August 31, 1998, by and among
the Registrant, AC Acquisition Co., Inc., Acta Products Corporation,
Acta Products International, Inc. and the Shareholders named therein.
The Registrant agrees to furnish supplementally any omitted exhibit
or schedule to the Securities and Exchange Commission upon request.
10.2 Form of Agreement and Plan of Merger to be entered by and among the
Registrant, QBI Acquisitions Co., Inc., Quality Botanical
Ingredients, Inc. and the Shareholders named therein. The Registrant
agrees to furnish supplementally any omitted exhibit or schedule to
the Securities and Exchange Commission upon request.
10.3 Agreement and Plan of Merger dated as of August 31, 1998, by and among
the Registrant, BP Acquisition Co., Inc., Bactolac Pharmaceuticals,
Inc. and the Shareholder named therein. The Registrant agrees to
furnish supplementally any omitted exhibit or schedule to the
Securities and Exchange Commission upon request.
10.4 Agreement and Plan of Merger dated as of August 31, 1998, by and among
the Registrant, NL Acquisition Co., Inc., Northridge Laboratories,
Inc. and the Shareholders named therein. The Registrant agrees to
furnish supplementally any omitted exhibit or schedule to the
Securities and Exchange Commission upon request.
10.5 Form of Employment Agreement between the Registrant and Joseph R.
Schortz
10.6 Form of Employment Agreement between the Registrant and David Chang
10.7+ Form of Employment Agreement between the Registrant and Gregory Pusey
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8+ Form of Employment Agreement between the Registrant and Barry Loder
10.9 Form of Employment Agreement between the Registrant and Brett Richman
10.10 Form of Employment Agreement between the Registrant and Pailla Reddy
10.11 Form of Registrant's 1998 Stock Option Plan
10.12 Form of Registrant's Non Discretionary Stock Option Plan
10.13+ Form of Consulting Agreement between the Registrant and Belkowitz
Botanicals, Inc.
10.14+ Lease Agreement dated between QBI and MRA Associates, LLC
10.15+ Lease Agreement dated June 14, 1997 between Island Organics, Inc., the
predecessor in interest of QBI, and Metuchen Road Realty
10.16+ Lease Agreement dated November 1, 1995, as amended January 1, 1995,
between Acta Products Corp. and Kuang Yu Chang & David T. Chang, a
California partnership
10.17+ Lease Agreement dated , between Acta Products Corp. and
Kuang Yu Chang & David T. Chang, a California partnership
10.18 Lease Agreement dated May 8, 1998, between Bactolac Pharmaceuticals,
Inc. and Harlo Associates, a partnership
21.1 List of Subsidiaries of Registrant
23.1 Consent of Grant Thornton LLP
23.2 Consent of Amper, Politzner & Mattia P.A.
23.3 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit
5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
+ to be filed by amendment
(B) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are not required or because the
required information is given in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on September 15, 1998.
ADVANCED NUTRACEUTICALS, INC.
By: /s/ Barry C. Loder
---------------------------------
Name: Barry C. Loder
Title: President (Principal
Executive, Accounting and
Financial Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Gregory Pusey, Barry C. Loder, Joseph Schortz
and David Chang, and each of them, his true and lawful attorney-in-fact and
agent, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
this Registration Statement and any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ Gregory S. Pusey September 11,
_________________________________ 1998
Gregory S. Pusey
/s/ Joseph R. Schortz September 14,
_________________________________ 1998
Joseph R. Schortz
/s/ David T. Chang September 11,
_________________________________ 1998
David T. Chang
/s/ Barry C. Loder September 11,
_________________________________ 1998
Barry C. Loder
</TABLE>
II-6
<PAGE>
EXHIBIT 3.1
-----------
CERTIFICATE OF INCORPORATION
OF
ADVANCED NUTRACEUTICALS, INC.
FIRST. The name of the corporation is Advanced Nutraceuticals, Inc.
SECOND. The address of the corporation's registered office is 1209 Orange
Street, New Castle County, Wilmington, Delaware 19801. The name of its
registered agent in the County of New Castle is The Corporation Trust Company.
THIRD. (a) The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware (the "Delaware Code").
(b) In furtherance of the foregoing purposes, the corporation shall
have and may exercise all of the rights, powers and privileges granted by the
Delaware Code. In addition, it may do everything necessary, suitable and proper
for the accomplishment of any of its corporate purposes.
FOURTH. The total number of shares that the corporation shall have the
authority to issue is 35,000,000, consisting of 30,000,000 shares of common
stock, with each share having a par value of $.001, and 5,000,000 shares of
preferred stock, with each share having a par value of $.001.
The board of directors is hereby expressly authorized, by resolution
or resolutions, to provide, out of the unissued shares of preferred stock, for
the issuance of one or more series of preferred stock, with such voting powers,
if any, and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be expressed in the resolution or resolutions
providing for the issuance thereof adopted by the board of directors, including,
without limiting the generality of the foregoing, the following:
(a) the designation of such series, the number of shares to
constitute such series and the stated value thereof if different from the par
value thereof;
(b) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the terms of such
voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions and
dates upon which such dividends shall be payable, the preferences or relation
which such dividends shall bear to the dividends payable on any shares of stock
of any other class or any other series of this class;
(d) whether the shares of such series shall be subject to redemption
by the corporation, and, if so, the times, prices and other terms and conditions
of such redemption;
(e) the amount or amounts payable upon shares of such series upon,
and the rights of the holders of such series in, the voluntary or involuntary
liquidation, dissolution or winding up, or upon any distribution of the assets,
of the corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and manner
in which any such retirement or sinking fund
<PAGE>
shall be applied to the purchase or redemption of the shares of such series for
retirement or other corporate purposes and the terms and provisions relative to
the operation thereof;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes or of any other
series of this class or any other class or classes of capital stock and, if so,
the price or prices or the rate or rates of conversion or exchange and the
method, if any, of adjusting the same, and any other terms and conditions of
such conversion or exchange;
(h) the limitations and restrictions, if any, to be effective while
any shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the corporation of, the common stock or shares of stock of any
other class or any other series of this class; and
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of this class
or of any other class or classes.
The powers, preferences and relative, participating, optional and other
special rights of each series of preferred stock , and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
preferred stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereon shall be cumulative.
FIFTH. The corporation is to have perpetual existence.
SIXTH. The name and address of the incorporator is:
Robert M. Bearman
Bearman Talesnick & Clowdus
Professional Corporation
1200 Seventeenth Street
Suite 2600
Denver, Colorado 80202
SEVENTH. (a) The number of directors of the corporation shall be fixed by
the bylaws, or if the bylaws fail to fix such a number, then by resolution
adopted from time to time by vote of the majority of the entire board of
directors, provided that the number of directors shall not be more than eleven
nor fewer than three, with the exception that the number of directors
constituting the initial board of directors shall be two. The following persons
are elected to serve as the corporation's initial directors until the first
annual meeting of stockholders or until their successors are duly elected and
qualified:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Barry C. Loder 2715 Bissonnet, Ste. 305
Houston, Texas 77005
Gregory S. Pusey 1722 Buffehr
Vail, Colorado 81657
</TABLE>
(b) At all times from and after the time the number of directors
constituting the board of directors of the corporation shall be three or more,
the board of directors shall be divided into three classes, as nearly equal in
numbers as the then total number of directors constituting the
<PAGE>
entire board permits with the term of office of one class expiring each year. At
the first annual meeting of stockholders, directors of the first class shall be
elected to hold office for a term expiring at the next succeeding annual
meeting, directors of the second class shall be elected to hold office for a
term expiring at the second succeeding annual meeting and directors of the third
class shall be elected to hold office for a term expiring at the third
succeeding annual meeting. Any vacancies in the board of directors for any
reason, and any directorships, resulting from any increase in the number of
directors, may be filled by the board of directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
directors shall have been chosen and until their successors shall be elected and
qualified. At each annual meeting of stockholders the successors to the class of
directors whose term shall then expire shall be elected to hold office for a
term expiring at the third succeeding annual meeting.
(c) Notwithstanding any other provisions of this Certificate of
Incorporation or the bylaws of the corporation, any director or the entire board
of directors of the corporation may be removed at any time, but only for cause
and only by the affirmative vote of the holders of a majority or more of the
outstanding shares of capital stock of the corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose.
Notwithstanding any other provision of this Certificate of
Incorporation or the bylaws of the corporation (and in addition to any other
vote that may be required by law, this Certificate of Incorporation of the
bylaws), the affirmative vote of the holders of least 60% of the outstanding
shares of the capital stock of the corporation entitled to vote generally in the
election of directors (considered for this purpose at one class) shall be
required to amend, alter or repeal any provision of this Article Seventh of this
Certificate of Incorporation.
EIGHTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
NINTH. Each stockholder of record shall have one vote for each share of
stock standing in his or her name on the books of the corporation and entitled
to vote, except that in the election of directors he or she shall have the right
to vote such number of shares for as many persons as there are directors to be
elected. Cumulative voting shall not be allowed in the election of directors or
for any other purpose.
TENTH. No stockholder of the corporation shall have any preemptive or
similar right to acquire any additional unissued or treasury shares of stock or
other securities of any class, or rights, warrants or options to purchase stock
or scrip, or securities of any kind convertible into stock or carrying stock
purchase warrants or privileges.
ELEVENTH. Elections of directors need not be by written ballot unless the
bylaws of the corporation so provide.
<PAGE>
TWELFTH. Except as provided in Section 2 and 3 of Article III of
the Bylaws, the board of directors of the corporation is expressly authorized to
adopt, amend, or repeal the bylaws of the corporation.
THIRTEENTH. The following provisions are inserted for the management
of the business and for the conduct of the affairs of the corporation, and the
same are in furtherance of and not in limitation of the powers conferred by law:
No contract or other transaction of the corporation with any other
persons, firm or corporation in which this corporation is interested, shall
be affected or invalidated by the fact that any one or more of the
directors or officers of this corporation, individually or jointly with
others, may be a party to or may be interested in any such contract or
transaction so long as the contract or other transaction is approved by the
board of directors in accordance with the Delaware Code. Each person who
may become a director or officer of the corporation is hereby relieved from
any liability that might otherwise arise by reason of his contracting with
the corporation for the benefit of himself or any firm or corporation in
which he may be in any way interested.
FOURTEENTH. No director shall be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
provided that this Article Fourteenth shall not eliminate or limit the liability
of a director (i) for any breach of such director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of Delaware Code, or (iv) for any transaction from which such
director derives an improper personal benefit. If the Delaware Code is amended
to authorize corporate action further eliminating or limiting the personal
liability of directors, then the personal liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware Code as so amended.
FIFTEENTH. The corporation reserves the right to amend, alter, change
or repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
Dated this 4th day of August 1998.
/s/
------------------------
Robert M. Bearman
Incorporator
<PAGE>
STATE OF COLORADO )
) ss.
CITY AND COUNTY OF DENVER )
Before me, Betty L. Lewis, a Notary Public of the State of Colorado, on the
4th day of August 1998, personally appeared Robert M. Bearman, to me known and
known to be the person who signed the foregoing certificate of incorporation,
who being duly sworn, acknowledged that he signed, sealed and delivered the same
as his voluntary act and deed, for the uses and purposes therein expressed, and
that the facts stated therein are true.
[Seal]
/s/
---------------------------
Notary Public
My commission expires: 2/7/99
<PAGE>
EXHIBIT 3.2
-----------
BYLAWS
OF
ADVANCED NUTRACEUTICALS, INC.
<PAGE>
BYLAWS
OF
ADVANCED NUTRACEUTICALS, INC.
ARTICLE I.
Offices
-------
The registered office of the corporation shall be in the City of Wilmington,
County of New Castle, State of Delaware or such other city and county as the
board of directors shall determine.
The corporation may also have offices at such other places both within and
without the State of Delaware as the board of directors may from time to time
determine or the business of the corporation may require.
ARTICLE II.
Stockholders
------------
Section 1. Annual Meeting. The annual meeting of the stockholders shall be
--------------
held at a time and date fixed by the board of directors for the purpose of
electing directors and for the transaction of such other business as may come
before the meeting. If the election of directors shall not be held at the
annual meeting of the stockholders, or at any adjournment thereof, the board of
directors shall cause the election to be held at a special meeting of the
stockholders as soon thereafter as conveniently may be.
Section 2. Special Meetings. Special meetings of the stockholders, for any
----------------
purpose, unless otherwise prescribed by statute, may be called by the president
or by the board of directors.
Section 3. Place Of Meeting. The person or persons authorized to call any
----------------
annual or special meeting may designate any place, either within or outside
Delaware, as the place for the meeting. A waiver of notice signed by all
stockholders entitled to vote at a meeting may designate any place, either
within or outside Delaware, as the place for such meeting. If no designation is
made, the place of meeting shall be the principal corporate offices of the
corporation.
Section 4. Fixing Date For Determination Of Stockholders Of Record. For the
-------------------------------------------------------
purpose of determining stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or entitled to express
consent to corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for any other lawful action, the board of directors may fix, in
advance, a date as the record date for any such determination of stockholders,
which date shall not be more than 60 nor less than ten days before the date of
such meeting, nor more than 60 days prior to any other action. If no record
date is fixed then the record date shall be as follows: (a) for determining
stockholders entitled to notice of or to vote at the meeting of stockholders,
the close of business on the day next preceding the day on which the meeting is
held; (b) for determining stockholders entitled to express consent to corporate
action in writing without a meeting, when no prior action by the board of
directors is necessary, the day on which the first written consent is expressed,
and (c) for determining stockholders for any other purpose, the close of
business on the day on which the board of directors adopts the resolution
1
<PAGE>
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
Section 5. Notice Of Meeting. Written notice stating the place, day and hour
-----------------
of the meeting, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten nor more
than 60 days before the date of the meeting, unless otherwise required by
statute, either personally or by mail, to each stockholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, addressed to the stockholder at his
address as it appears on the stock books of the corporation, with postage
thereon prepaid. When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting.
Section 6. Organization. The president or any vice president shall call
------------
meetings of stockholders to order and act as chairman of such meetings. In the
absence of said officers, any stockholder entitled to vote at that meeting, or
any proxy of any such stockholder, may call the meeting to order and a chairman
shall be elected by a majority of the stockholders entitled to vote at that
meeting. In the absence of the secretary or any assistant secretary of the
corporation, any person appointed by the chairman shall act as secretary of such
meetings.
Section 7. Agenda And Procedure. The board of directors shall have the
--------------------
responsibility of establishing an agenda for each meeting of stockholders,
subject to the rights of stockholders to raise matters for consideration which
may otherwise properly be brought before the meeting although not included
within the agenda. The chairman shall be charged with the orderly conduct of
all meetings; provided however, that in the event of any difference in opinion
with respect to the proper cause of action which cannot be resolved by reference
to statute, or to the articles of incorporation or these bylaws, Robert's Rules
Of Order (as last revised) shall govern the disposition of the matter.
Section 8. Voting Lists. The officer who has charge of the stock books of
------------
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of each stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 9. Quorum. One-third of the outstanding shares of the corporation
------
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders for the transaction of business except as otherwise
provided by statute or the certificate of incorporation. If fewer than one-
third of the outstanding shares are represented at a meeting, a majority of the
shares so represented may adjourn the meeting from time to time in accordance
with Section 5 of this Article II until a quorum shall be present or
represented.
Section 10. Manner Of Acting. When a quorum is present at any meeting, the
----------------
affirmative vote of a majority of the shares represented at the meeting and
entitled to vote on the subject matter shall be
2
<PAGE>
the act of the stockholders, unless a different vote is required by law or the
certificate of incorporation, in which case such express provision shall govern.
Section 11. Informal Action By Stockholders. Unless otherwise provided in
-------------------------------
the certificate of incorporation, any action required or permitted to be taken
at any meeting of the stockholders may be taken without a meeting, without prior
notice and without a vote, provided that a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. In the event that the action
which is consented to is such as would require the filing of a certificate with
the Secretary of State of Delaware under the General Corporation Law of the
State of Delaware if such action had been voted on by stockholders at a meeting
thereof, the certificate filed shall state, in lieu of any statement required
under law concerning any vote of stockholders, that written consent has been
given in accordance with the provision of law and that written notice has been
given as provided by law.
Section 12. Proxies. Each stockholder entitled to vote at a meeting of
-------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize any other person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date unless the proxy provides for a longer period.
Section 13. Voting Of Shares. Unless otherwise provided in the certificate
----------------
of incorporation and subject to the provisions of Section 4 of this Article II,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder. In the election of directors, each record holder of
stock entitled to vote at such election shall have the right to vote the number
of shares owned by him for as many persons as there are directors to be elected,
and for whose election he has the right to vote. Cumulative voting shall not be
allowed.
Section 14. Voting Of Shares By Certain Holders. Persons holding stock in a
-----------------------------------
fiduciary capacity shall be entitled to vote the shares so held. Persons whose
stock is pledged shall be entitled to vote, unless in the transfer by the
pledgor on the books of the corporation the pledgor has expressly empowered the
pledgee to vote thereon, in which case only the pledgee or his proxy may
represent such shares and vote thereon. If shares stand of record in the names
of two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or if two or
more persons have the same fiduciary relationship respecting the same shares,
unless the secretary of the corporation is given written notice to the contrary
and if furnished with a copy of the instrument or order appointing them or
creating the relationship wherein it is so provided, their acts with respect to
voting shall be as set forth in the General Corporation Law of the State of
Delaware.
Section 15. Inspectors. The chairman of the meeting may at any time appoint
----------
one or more inspectors to serve at a meeting of the stockholders. Such
inspector(s) shall decide upon the qualifications of voters, including the
validity of proxies, accept and count the votes for and against the questions
presented, report the results of such votes, and subscribe and deliver to the
secretary of the meeting a certificate stating the number of shares of stock
issued and outstanding and entitled to vote thereon and the number of shares
voted for and against the questions presented. The inspector(s) does not need
to be a stockholder of the corporation, and any director or officer of the
corporation may be an inspector on any question other than a vote for or against
his election to any position with the corporation or on any other question in
which he may be directly interested.
3
<PAGE>
ARTICLE III.
Board Of Directors
------------------
Section 1. General Powers. The business and affairs of the corporation shall
--------------
be managed by or under the direction of its board of directors, except as
otherwise provided in the General Corporation Law of the State of Delaware or
the certificate of incorporation.
Section 2. (a) Number, Tenure And Qualification. The number of directors
--------------------------------
of the corporation shall be as determined by the vote of the majority of the
entire board of directors and shall be not fewer than three nor more than 11,
except that the number of directors constituting the initial board of directors
shall be two. Directors need not be residents of Delaware or stockholders of the
corporation.
(b) At all times from and after the time the number of directors
constituting the board of directors of the corporation shall be three or more,
the board of directors shall be divided into three classes, as nearly equal in
numbers as the then total number of directors constituting the entire board
permits with the term of office of one class expiring each year. At the first
annual meeting of stockholders, directors of the first class shall be elected to
hold office for a term expiring at the next succeeding annual meeting, directors
of the second class shall be elected to hold office for a term expiring at the
second succeeding annual meeting and directors of the third class shall be
elected to hold office for a term expiring at the third succeeding annual
meeting. Any vacancies in the board of directors for any reason, and any
directorships resulting from any increase in the number of directors, may be
filled by the board of directors, acting by a majority of the directors then in
office, although less than a quorum, and any directors so chosen shall hold
office until the next election of the class for which such directors shall have
been chosen and until their successors shall be elected and qualified. At each
annual meeting of stockholders the successors to the class of directors whose
term shall then expire shall be elected to hold office for a term expiring at
the third succeeding annual meeting.
(c) Any director or the entire board of directors of the
corporation may be removed at any time, but only for cause and only by the
affirmative vote of the holders of a majority or more of the outstanding shares
of capital stock of the corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for the purpose.
(d) The affirmative vote of the holders of at least 60% of the
outstanding shares of the capital stock of the corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) shall be required to amend, alter or repeal any provisions of Section 2
of this Article III.
Section 3. Notice Of Nominations. (a) Nominations for the election of
---------------------
directors may be made by the board of directors or a committee of the board of
directors or by any stockholder entitled to vote for the election of directors.
Nominations by the board of directors or a committee of the board of directors
may be made by oral or written notice delivered to the secretary of the
corporation by any officer or director on behalf of the board of directors or
committee at any time prior to or at any meeting of the stockholders at which
directors are to be elected. Each notice of nomination of directors by the
board of directors or a committee of the board of directors shall set forth the
names of the nominees. Nominations by stockholders shall be made by notice in
writing, delivered or mailed by first class United States mail, postage prepaid,
to the secretary of the corporation not less than 53 days nor more than 90 days
prior to any
4
<PAGE>
meeting of the stockholders at which directors are to be elected; provided,
however, that if less than 60 days' notice of the meeting is given to
stockholders, written notice of nominations of directors by stockholders shall
be delivered or mailed, as prescribed, to the secretary of the corporation not
later than the close of the seventh day following the day on which notice of the
meeting was mailed to stockholders. Nominations by stockholders for directors to
be elected by written consent of stockholders shall be made by notice in
writing, delivered or mailed by first class United States mail, postage prepaid,
to the secretary of the corporation not less than 60 days nor more than 90 days
prior to the first solicitation of any written consents of stockholders for the
election of those nominees. Each notice of nomination of directors by a
stockholder of the corporation shall set forth (a) the name, age, business
address and, if known, residence address of each nominee proposed in that
notice, (b) the principal occupation or employment of each such nominee for the
five years preceding the date of the notice, (c) the number of shares of stock
of the corporation that are beneficially owned by each nominee, and (d) any
arrangement, affiliation, association, agreement or other relationship of the
nominee with any stockholder of the corporation. The chairman of any meeting of
stockholders of the corporation may, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedure, and if the chairman should so determine, the chairman shall so
declare to the meeting and the defective nomination shall be disregarded.
(b) The affirmative vote of holders of at least 60% of the
outstanding capital stock of the corporation entitled to vote generally in the
election of directors (considered for this purpose as one class) shall be
required to amend, alter or repeal any provisions of Section 3 of this Article
III.
Section 4. Resignations. Any director may resign at any time by giving
------------
written notice to the corporation. Such resignation shall take effect at the
time specified therein; and unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective. If at any time,
by reason of death, resignation or other cause, the corporation should have no
directors in office, then an election of directors may be held in the manner
provided by law.
Section 5. Regular Meetings. Unless otherwise approved by the board of
----------------
directors, a regular meeting of the board of directors shall be held without
other notice than this bylaw immediately after and at the same place as the
annual meeting of stockholders. The board of directors may provide by
resolution the time and place, either within or outside Delaware, for the
holding of additional regular meetings without other notice than such
resolution.
Section 6. Special Meetings. Special meetings of the board of directors may
----------------
be called by or at the request of the president or any two directors. The
person or persons authorized to call special meetings of the board of directors
may fix any place, either within or outside Delaware, as the place for holding
any special meeting of the board of directors called by them.
Section 7. Notice. Notice of any special meeting shall be given at least
------
five days previously thereto by written notice delivered personally or mailed to
each director at his business address, or by notice given at least two business
days previously thereto by telegraph or facsimile. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram such notice shall
be deemed to be delivered when the telegram is actually delivered to the
telegraph company. Notice delivered by facsimile shall be effective when
transmitted with confirmation of transmittal by 5:00 pm local time on a business
day, otherwise, on the next business day. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the board of directors
need be specified in the notice or waiver of notice of such meeting.
5
<PAGE>
Section 8. Quorum. A majority of the number of directors then in office
------
shall constitute a quorum for the transaction of business at any meeting of the
board of directors, but if less than such majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present.
Section 9. Manner Of Acting. The vote of the majority of the directors
----------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, except as may be otherwise specifically provided by law or the
certificate of incorporation.
Section 10. Committees. The board of directors may, by resolution passed by
----------
a majority of the whole board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not they constitute a quorum, may unanimously appoint another member of the
board of directors to act at the meeting in the place of such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors, shall have and may exercise all the powers
and authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amend the certificate of incorporation, to
adopt an agreement of merger or consolidation, to recommend to the stockholders
the sale, lease or exchange of all or substantially all of the corporation's
property and assets, to recommend to the stockholders a dissolution of the
corporation or a revocation of a dissolution, or to amend the bylaws of the
corporation; and, unless the resolution expressly so provides, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors when required.
Section 11. Compensation. Unless otherwise restricted by the certificate of
------------
incorporation or these bylaws, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at such meeting of the board of directors and may be paid
a fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of any committee of the board may be allowed like compensation for
attending committee meetings.
Section 12. Informal Action By Directors. Unless otherwise restricted by the
----------------------------
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the board of directors or any committee thereof
may be taken without a meeting if all members of the board or committee, as the
case may be, consent thereto in writing and the writing or writings are filed
with the minutes of the proceedings of the board or committee.
Section 13. Meetings By Telephone. Unless otherwise restricted by the
---------------------
certificate of incorporation or these bylaws, members of the board of directors,
or any committee designated by the board of directors, may participate in a
meeting of the board of directors, or any committee thereof, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting in such manner shall constitute presence in person at the meeting.
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ARTICLE IV.
Officers And Agents
-------------------
Section 1. General. The officers of the corporation shall be a president, a
-------
secretary and a treasurer. The board of directors may appoint such other
officers, assistant officers, and agents, a chairman or vice-chairmen of the
board, assistant secretaries and assistant treasurers, as they may consider
necessary, who shall be chosen in such manner and hold their offices for such
terms and have such authority and duties as from time to time may be determined
by the board of directors. The salaries of all the officers of the corporation
shall be fixed by the board of directors. Any number of offices may be held by
the same person with the exception of the office of president and secretary
being held simultaneously by the same person, or as otherwise provided in the
certificate of incorporation or these bylaws.
Section 2. Election And Term Of Office. The officers of the corporation
---------------------------
shall be elected by the board of directors annually at the first meeting of the
board held after each annual meeting of the stockholders. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as conveniently may be. Each officer shall hold office until his
successor shall have been duly elected and qualified or until the earliest to
occur of his death, resignation or removal.
Section 3. Removal. Any officer or agent elected or appointed by the board
-------
of directors may be removed at any time by the board whenever in its judgment
the best interests of the corporation will be served thereby.
Section 4. Vacancies. Any officer may resign at any time upon written notice
---------
to the corporation. Such resignation shall take effect at the time stated
therein; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. Any vacancy occurring
in any office by death, resignation, removal or otherwise shall be filled by the
board of directors for the unexpired portion of the term. If any officer shall
be absent or unable for any reason to perform his duties, the board of
directors, to the extent not otherwise consistent with these bylaws or law, may
direct that the duties of such officer during such absence or inability shall be
performed by such other officer or assistant officer as seems advisable to the
board.
Section 5. Authority And Duties Of Officers. The officers of the corporation
--------------------------------
shall have the authority and shall exercise the powers and perform the duties
specified below, and as may be otherwise specified by the board of directors or
by these bylaws, except that in any event each officer shall exercise such
powers and perform such duties as may be required by law, and in cases where the
duties of any officer or agent are not prescribed by these bylaws or by the
board of directors, such officer or agent shall follow the orders and
instructions of (a) the president, and if a chairman of the board is elected,
then (b) the chairman of the board.
(a) President. The president, subject to the direction and
---------
supervision of the board of directors, shall have the following
responsibilities: (i) be the chief executive officer of the corporation and
have general and active control of its affairs, business and property and
general supervision of its officers, agents and employees; (ii) preside at all
meetings of the stockholders; (iii) see that all orders and resolutions of the
board of directors are carried into effect; and (iv) sign or countersign all
certificates, contracts and other instruments of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
board of directors to some other officer or agent of the corporation. In
addition, the
7
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president shall, unless otherwise directed by the board of directors, attend in
person or by substitute appointed by them, or by written instruments appointing
proxy or proxies to represent the corporation, all meetings of the stockholders
of any corporation in which the corporation shall hold any stock and may, on
behalf of the corporation, in person or by substitute or proxy, execute written
waivers of notice and consents with respect to such meetings. At all such
meetings, and otherwise, the president, in person or by substitute or proxy as
aforesaid, may vote the stock so held by the corporation and may execute written
consent and other instruments with respect to such stock and may exercise any
and all rights and powers incident to the ownership of said stock, subject
however to the instructions, if any, of the board of directors. Subject to the
directions of the board of directors, the president shall exercise all other
powers and perform all other duties normally incident to the office of president
of a corporation and shall exercise such other powers and perform such other
duties as from time to time may be assigned to him by the board. If a chairman
of the board has been elected, the chairman of the board shall have, subject to
the direction and modification of the board of directors, all the same
responsibilities, rights and obligations as described in these bylaws for the
president.
(b) Vice Presidents. The vice presidents, if any shall be elected,
---------------
and if they be so directed shall assist the president and shall perform such
duties as may be assigned to them by the president or by the board of directors.
In the absence of the president, the vice president designated by the board of
directors or (if there be no such designation) designated in writing by the
president shall have the powers and perform the duties of the president. If no
such designation shall be made all vice presidents may exercise such powers and
perform such duties.
(c) Secretary. The secretary shall perform the following functions:
---------
(i) record or cause to be recorded the proceedings of the meeting of the
stockholders, the board of directors and any committees of the board of
directors in a book to be kept for that purpose; (ii) see that all notices are
duly given in accordance with the provisions of these bylaws or as required by
law; (iii) be custodian of the corporate records and of the seal of the
corporation; (iv) keep at the corporation's registered office or principal place
of business within or outside Delaware a record containing the names and
addresses of all stockholders and the number and class of shares held by each,
unless such a record shall be kept at the office of the corporation's transfer
agent or registrar; (v) have general charge of the stock books of the
corporation, unless the corporation has a transfer agent; and (vi) in general,
perform all other duties as from time to time may be assigned to him by the
president, or by the board of directors. Assistant secretaries, if any, shall
have the same duties and powers, subject to supervision by the secretary.
(d) Treasurer. The treasurer shall perform the following functions:
---------
(i) be the principal financial officer of the corporation and have the care and
custody of all funds, securities, evidences of indebtedness and other personal
property of the corporation and deposit the same in accordance with the
instructions of the board of directors; (ii) receive and give receipts and
acquittances for monies paid in on account of the corporation, and pay out of
the funds on hand all bills, payrolls and other just debts of the corporation of
whatever nature upon maturity; (iii) be the principal accounting officer of the
corporation and as such prescribe and maintain the methods and systems of
accounting to be followed, keep complete books and records of account, prepare
and file all local, state and federal tax returns, prescribe and maintain an
adequate system of internal audit, and prepare and furnish to the president and
the board of directors statements of account showing the financial position of
the corporation and the results of its operations; and (iv) perform all other
duties incident to the office of treasurer and such other duties as from time to
time may be assigned to him by the president or the board of directors.
Assistant treasurers, if any, shall have the same powers and duties, subject to
the supervision of the treasurer.
Section 6. Surety Bonds. The board of directors may require any
------------
officer or agent of the
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<PAGE>
corporation to execute to the corporation a bond in such sums and with such
sureties as shall be satisfactory to the board, conditioned upon the faithful
performance of his duties and for the restoration to the corporation of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the corporation.
Section 7. Salaries. Officers of the corporation shall be entitled
--------
to such salaries, emoluments, compensation or reimbursement as shall be fixed or
allowed from time to time by the board of directors.
ARTICLE V.
Stock
-----
Section 1. Certificates. Each holder of stock in the corporation
------------
shall be entitled to have a certificate signed in the name of the corporation by
the president or a vice-president, and by the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of the corporation. Any
of or all the signatures on the certificate may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue. Certificates of stock shall be
consecutively numbered and shall be in such form consistent with law as shall be
prescribed by the board of directors.
Section 2. Record. A record shall be kept of the name of each
------
person or other entity holding the stock represented by each certificate for
shares of the corporation issued, the number of shares represented by each such
certificate, the date thereof and, in the case of cancellation, the date of
cancellation. The person or other entity in whose name shares of stock stand on
the books of the corporation shall be deemed the owner thereof, and thus a
holder of record of such shares of stock, for all purposes as regards the
corporation.
Section 3. Consideration For Shares. Shares shall be issued for
------------------------
such consideration (but not less than the par value thereof) as shall be
determined from time to time by the board of directors. Treasury shares shall
be disposed of for such consideration as may be determined from time to time by
the board. Such consideration may consist, in whole or in part, of cash,
personal property, real property, leases of real property, services rendered, or
promissory notes, and shall be paid in such form, in such manner and at such
times as the directors may require.
Section 4. Issuance of Stock. The capital stock issued by the
-----------------
corporation shall be deemed to be fully paid and nonassessable stock, if: (a)
the entire amount of the consideration has been received by the corporation in
the form or forms set forth in Section 3 of this Article V and if any part of
the consideration is in the form of a promissory note or other obligation, such
note or obligation has been satisfied in full; or (b) not less than the amount
of the consideration determined to be capital pursuant to statute has been
received by the corporation in the form or forms set forth in Section 3 of this
Article V and the corporation has received a binding obligation of the
subscriber or purchaser to pay the balance of the subscription or purchase
price; provided, however, nothing contained herein shall prevent the board of
directors from issuing partly paid shares as described herein.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock
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<PAGE>
certificate issued to represent any such partly paid shares the total amount of
the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend upon partly paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
The directors may from time to time demand payment, in respect of each
share of stock not fully paid, of such sum of money as the necessities of the
business may, in the judgment of the board of directors, require, not exceeding
in the whole, the balance remaining unpaid on said stock, and such sum so
demanded shall be paid to the corporation at such times and by such installments
as the directors shall direct. The directors shall give written notice of the
time and place of such payments, which notice shall be mailed to each holder or
subscriber to his last known post office address at least thirty days before the
time for such payment for stock which is not fully paid.
The corporation may, but shall not be required to, issue fractions of
a share. If it does not issue fractions of a share, it shall: (a) arrange for
the disposition of fractional interests by those entitled thereto; (b) pay in
cash the fair value of fractions of a share as of the time when those entitled
to receive such fractions are determined; or (c) issue scrip or warrants in
registered or bearer form which shall entitle the holder to receive a
certificate for a full share upon the surrender of such scrip or warrants
aggregating a full share. A certificate for a fractional share shall, but scrip
or warrants shall not unless provided therein, entitle the holder to exercise
voting rights, to receive dividends thereon, and to participate in any of the
assets of the corporation in the event of liquidation. The board of directors
may cause scrip or warrants to be issued subject to the conditions that they
shall become void if not exchanged for certificates representing full shares
before a specified date, or subject to the conditions that the shares for which
scrip or warrants are exchangeable may be sold by the corporation and the
proceeds thereof distributed to the holders of scrip or warrants, or subject to
any other conditions which the board of directors may impose.
The board of directors may, at any time and from time to time, if all
of the shares of capital stock which the corporation is authorized by its
certificate of incorporation to issue have not been issued, subscribed for, or
otherwise committed to be issued, issue or take subscriptions for additional
shares of its capital stock up to the amount authorized in its certificate of
incorporation.
Section 5. Lost Certificates. In case of the alleged loss,
-----------------
destruction or mutilation of a certificate of stock, the board of directors may
direct the issuance of a new certificate in lieu thereof upon such terms and
conditions in conformity with law as it may prescribe. The board of directors
may in its discretion require a bond in such form and amount and with such
surety as it may determine, before issuing a new certificate.
Section 6. Transfer Of Shares. Upon surrender to the corporation or
------------------
to a transfer agent of the corporation of a certificate of stock duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction in the stock books.
Section 7. Registered Stockholders. The corporation shall be
-----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and the
corporation shall be entitled to hold liable for calls and assessments a person
registered on its books as the owner of shares, and the corporation shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof except as otherwise provided by the laws of Delaware.
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Section 8. Transfer Agents, Registrars And Paying Agents. The board
---------------------------------------------
may at its discretion appoint one or more transfer agents, registrars and agents
for making payment upon any class of stock, bond, debenture or other security of
the corporation. Such agents and registrars may be located either within or
outside Delaware. They shall have such rights and duties and shall be entitled
to such compensation as may be agreed.
ARTICLE VI.
Indemnification Of Officers And Directors
-----------------------------------------
Section 1. Indemnification Of Directors, Officers, And Others. Any
--------------------------------------------------
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was at any time since the inception of the corporation a director, officer or
employee of the corporation, or is or was at any time since the inception of the
corporation serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including serving as trustee, plan administrator or other
fiduciary of any employee benefit plan, shall be indemnified by the corporation
to the full extent permitted by the General Corporation Law of the State of
Delaware (or any similar provision or provisions of applicable law at the time
in effect).
Section 2. Indemnification Of Officers, Directors And Employees
----------------------------------------------------
Pursuant To The Common Law Or Statutory Provisions Other Than The General
- -------------------------------------------------------------------------
Corporation Law Of The State Of Delaware. Any person who was or is a party or
- ----------------------------------------
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was at any time since the inception of the
corporation a director, officer or employee of the corporation, or is or was at
any time since the inception of the corporation serving at the request of the
corporation as a director, officer, or employee of another corporation,
partnership, joint venture, trust or other enterprise, including serving as
trustee, plan administrator or other fiduciary of any employee benefit plan,
shall be indemnified by the corporation to the full extent permitted by the
common law and by any statutory provision other than the General Corporation Law
of the State of Delaware.
Section 3. Mandatory Advance Of Expenses. Reasonable expenses
-----------------------------
incurred in defending any action, suit or proceeding described in Section 1 or 2
of this Article VI shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director, officer or employee to repay such amount to the
corporation if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this Article VI.
Section 4. Payment Of Indemnified Claims. Reasonable amounts
-----------------------------
required to be paid in settlement or as a judgment in any action, suit or
proceeding described in Section 1 or 2 of this Article VI shall be paid by the
corporation within 90 days of the receipt of an undertaking by or on behalf of
such director, officer or employee to repay such amount to the corporation if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized in this Article VI; provided however, that the
corporation shall not be required to pay such amounts if a majority of the
members of the Board of Directors vote to deny the request for indemnification
within the 90 day period set forth in this Section 4 if such amounts previously
have not been paid by the corporation in accordance with this Section 4.
Section 5. Rights Of Appeal. In the event that the corporation
----------------
advances funds for indemnification pursuant to this Article VI, and,
subsequently, indemnification pursuant to this Article VI is
11
<PAGE>
declared unenforceable by a court, or the corporation determines that the
director, officer or employee on whose behalf the funds were advanced is not
entitled to indemnification pursuant to this Article VI, then such director,
officer or employee shall have the right to retain the indemnification payments
until all appeals of the court's or the corporation's decision have been
exhausted.
Section 6. Additional Indemnification. Without limiting the
--------------------------
indemnification otherwise provided by this Article VII, any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the corporation a director, officer or employee of the corporation
or a wholly owned subsidiary of the corporation, or is or was at any time since
the inception of the corporation a trustee, plan administrator or other
fiduciary of any employee benefit plan of the corporation or a wholly owned
subsidiary of the corporation, shall be indemnified by the corporation against
all expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him in connection with such
action, suit or proceeding, including an action or suit by or in the right of
the corporation to procure a judgment in its favor, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 7. Indemnification Not Exclusive. The indemnification
-----------------------------
provided in this Article VI shall not be deemed exclusive of any other rights to
which any person seeking indemnification may be entitled under any agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office.
Section 8. Insurance. By action of the board of directors,
---------
notwithstanding any interest of the directors in such action, the corporation
may purchase and maintain insurance, in such amounts as the board may deem
appropriate, on behalf of any person who is or was a director, officer or
employee of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under applicable provisions of laws.
Section 9. Applicability; Effect. Any indemnification and
---------------------
advancement of expenses provided by or granted pursuant to this Article VI shall
be applicable to acts or omissions that occurred prior to the adoption of this
Article VI, shall continue as to any persons who ceased to be a director,
officer, or employee of the corporation or a wholly owned subsidiary of the
corporation, or was serving as or has since ceased to be a trustee, plan
administrator or other fiduciary of any employee benefit plan of the corporation
or a wholly owned subsidiary of the corporation, and shall inure to the benefit
of the heirs, executors, and administrators of such person. The repeal or
amendment of this Article VI or any Section or provision thereof which would
have the effect of limiting, qualifying or restricting any of the powers or
rights of indemnification provided or permitted in this Article VI shall not,
solely by reason of such repeal or amendment, eliminate, restrict or otherwise
affect the right or power of the corporation to indemnify any person, or affect
any right of indemnification of such person, with respect to any acts or
omissions which occurred prior to such repeal or amendment. All rights under
this Article VI shall be deemed to be provided
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by a contract between the corporation and each person covered hereby.
Section 10. Savings Clause. If this Article VI or any Section or
--------------
provision hereof shall be invalidated by any court on any ground, then the
corporation shall nevertheless indemnify each party otherwise entitled to
indemnification hereunder to the fullest extent permitted by law or any
applicable provision of this Article VI that shall not have been invalidated.
ARTICLE VII.
Execution Of Instruments; Loans; Checks
---------------------------------------
And Endorsements; Deposits; Proxies
-----------------------------------
Section 1. Execution Of Instruments. The president or any vice
------------------------
president shall have the power to execute and deliver on behalf of and in the
name of the corporation any instrument requiring the signature of an officer of
the corporation, except as otherwise provided in these bylaws or where the
execution and delivery thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation. Unless authorized
to do so by these bylaws or by the board of directors, no officer, agent or
employee shall have any power or authority to bind the corporation in any way,
to pledge its credit or to render it liable pecuniarily for any purpose or in
any amount.
Section 2. Loans To Directors, Officers And Employees. The
------------------------------------------
corporation may lend money to, guarantee the obligations of and otherwise assist
directors, officers and employees of the corporation, or directors of another
corporation of which the corporation owns a majority of the voting stock, only
upon compliance with the requirements of the General Corporation Law of the
State of Delaware.
Section 3. Checks And Endorsements. All checks, drafts or other
-----------------------
orders for the payment of money, obligations, notes or other evidences of
indebtedness, bills of lading, warehouse receipts, trade acceptances and other
such instruments shall be signed or endorsed by such officers or agents of the
corporation as shall from time to time be determined by resolution of the board
of directors, which resolution may provide for the use of facsimile signatures.
Section 4. Deposits. All funds of the corporation not otherwise
--------
employed shall be deposited from time to time to the corporation's credit in
such banks or other depositories as shall from time to time be determined by
resolution of the board of directors, which resolution may specify the officers
or agents of the corporation who shall have the power, and the manner in which
such powers shall be exercised, to make such deposits and to endorse, assign and
deliver for collection and deposit checks, drafts and other orders for the
payment of money payable to the corporation or its order.
Section 5. Proxies. Unless otherwise provided by resolution adopted
-------
by the board of directors, the president or any vice president may from time to
time appoint one or more agents or attorneys-in-fact of the corporation, in the
name and on behalf of the corporation, to cast the votes which the corporation
may be entitled to cast as the holder of stock or other securities in any other
corporation, association or other entity any of whose stock or other securities
may be held by the corporation, at meetings of the holders of the stock or other
securities of such other corporation, association or other entity or to consent
in writing, in the name of the corporation as such other entity, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed in the
name and on behalf of the corporation and under its corporate seal, or
otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises.
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ARTICLE VIII.
Miscellaneous
-------------
Section 1. Waivers Of Notice. Whenever notice is required to be
-----------------
given by law, by the certificate of incorporation or by these bylaws, a written
waiver thereof, signed by the person entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent to notice. Attendance
of a person at a meeting or (in the case of a stockholder) by proxy shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need to be specified in any written waiver or notice
unless so required by the certificate of incorporation or these bylaws.
Section 2. Presumption Of Assent. A director or stockholder of the
---------------------
corporation who is present at a meeting of the board of directors or
stockholders at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
secretary of the corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director or stockholder who voted in
favor of such action.
Section 3. Seal. The corporate seal of the corporation shall be
----
circular in form and shall contain the name of the corporation and the words
"Seal, Delaware." The custodian of the seal shall be the secretary, who along
with the president or other officer authorized by the board of directors, may
affix the seal to documents of the corporation.
Section 4. Amendments. Except as provided otherwise in the
----------
certificate of incorporation or in Sections 2 and 3 of Article III of these
bylaws, these bylaws may be altered, amended or repealed or new bylaws may be
adopted by the board of directors at any meeting of the directors or by the
stockholders at any meeting of the stockholders if in the case of a
stockholders' meeting notice of such alteration, amendment, repeal or adoption
is contained in the notice of such stockholders' meeting.
Any amendment or repeal of any provision or all provisions of this
Article VIII, Section 4, or the adoption of any provision inconsistent with any
provision or all provisions of this Article VIII, Section 4, shall, in addition
to any other vote or approval required by law or by these bylaws or by the
certificate of incorporation, require the affirmative vote of the outstanding
shares of capital stock entitled to vote on amendments to the certificate of
incorporation (considered for this purpose as one class).
Section 5. Emergency Bylaws. Subject to repeal or change by action
----------------
of the stockholders, the board of directors may adopt emergency bylaws in
accordance with and pursuant to the provisions of the General Corporation Law of
the State of Delaware.
* * * * *
14
<PAGE>
EXHIBIT 5.1
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA 90071-2371
TELEPHONE (213) 683-6000
FACSIMILE (213) 627-0705
October , 1998
Advanced Nutraceuticals, Inc.
2715 Bissonet, Suite 305
Houston, Texas 77005
Ladies and Gentlemen:
We are furnishing this opinion of counsel to Advanced Nutraceuticals, Inc.,
a Delaware corporation (the "Company"), for filing as Exhibit 5 to the
Registration Statement on Form S-1 (the "Registration Statement") to be filed
by the Company with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, relating to the sale of up to shares
of the Company's Common Stock, par value $.001 per share (the "Shares").
We have examined the Certificate of Incorporation and Bylaws, each as
amended to date, of the Company, and the originals, or copies certified or
otherwise identified, of records of corporate action of the Company as
furnished to us by the Company, certificates of public officials and of
representatives of the Company, and such other instruments and documents as we
deemed necessary, as a basis for the opinions hereinafter expressed. In such
examination we have assumed the genuineness of all signatures, the
authenticity of all corporate records and other documents submitted to us and
the conformity to original documents submitted to us as certified or
photostatic copies.
Based upon our examination as aforesaid, and in reliance upon our
examination of such questions of law as we deem relevant under the
circumstances, we are of the opinion that the Shares, when purchased as
described in the Registration Statement, will be validly issued, fully paid
and nonassessable.
We express no opinion with respect to the applicability or effect of the
laws of any jurisdiction other than the Delaware General Corporation Law as in
effect on the date hereof.
We hereby consent to the filing of this opinion of counsel as Exhibit 5 to
the Registration Statement.
Very truly yours,
DRAFT
<PAGE>
EXHIBIT 10.1
------------
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as
---------
of August 31, 1998 by and among AC Acquisition Co., Inc., a Delaware corporation
("Newco"), Advanced Nutraceuticals, Inc., a Delaware corporation ("ANI,"
----- ---
"Purchaser" or "Buyer"), Acta Products Corporation, dba Acta Pharmacal Co., and
- ---------- -----
Acta Products International, dba Acta International, California corporations
(collectively, the "Company" or individually, "each Company"), and K.Y. Chang,
-------
David Chang and Robert Chiang ("Shareholders").
------------
R E C I T A L S
- - - - - - - -
A. Buyer owns all of the outstanding shares of capital stock of Newco.
B. The respective boards of directors of Newco and the Company have
determined that it is fair to, and in the best interests of, their respective
corporations and stockholders for the Company to be merged with and into Newco
upon the terms and subject to the conditions set forth herein (the "Merger");
------
the board of directors and sole stockholder of Newco have approved and adopted
this Agreement in accordance with the Delaware Law; and the board of directors
and shareholders of the Company have approved and adopted the principal terms of
this Agreement in accordance with the California General Corporation Law (the
"California Law").
- ---------------
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. For all purposes of this Agreement, certain
-----------
capitalized terms not otherwise defined herein shall have the meanings set forth
in Exhibit A attached hereto.
---------
ARTICLE 2
THE MERGER
----------
Section 2.1 Merger. Upon the terms and subject to the conditions of
------
this Agreement, the Company shall be merged with and into Newco in accordance
with the applicable provisions of the Delaware Law. The Company and Newco are
herein sometimes referred to as the "Constituent Corporations." Newco shall be
------------------------
the surviving corporation following the effectiveness of the Merger (sometimes
referred to herein as the "Surviving Corporation").
---------------------
Section 2.2 Effect of Merger. The parties agree to the following
----------------
provisions with respect to the Merger:
(a) Certificate of Incorporation and Bylaws. The
---------------------------------------
certificate of incorporation of Newco, as in effect immediately prior to the
Effective Time, shall be the certificate of incorporation of the Surviving
Corporation, from and after the Effective Time until amended in accordance with
applicable law. The bylaws of Newco, as in effect immediately prior to the
Effective Time, shall be the bylaws of the Surviving Corporation from and after
the Effective Time until amended in accordance with applicable law, the
Surviving Corporation's certificate of incorporation and such bylaws.
-1-
<PAGE>
(b) Directors and Officers. The directors and officers of
----------------------
Newco in office immediately prior to the Effective Time shall be the directors
and officers, respectively, of the Surviving Corporation, and each shall hold
his or her respective office or offices from and after the Effective Time until
his or her successor shall have been elected and shall have qualified or as
otherwise provided in the bylaws of the Surviving Corporation.
(c) Name and Corporate Organization of Surviving Corporation.
---------------------------------------------------------
The name of the Surviving Corporation from and after the Effective Time shall be
"AC Acquisition Co., Inc.," which name shall be changed after the closing to
ACTA International in accordance with applicable law. At the Effective Time, the
identity and separate corporate existence of the Company shall cease and Newco
as the surviving corporation and successor shall succeed to the Company in the
manner of and as more fully set forth in Section 259 of the Delaware Law.
(d) Filing of Certificate of Merger and Further Assurances.
------------------------------------------------------
If this Agreement is not terminated pursuant to Article 9 hereof, as soon as
practicable after all conditions to the Merger set forth in Article 6 hereof
shall have been satisfied or waived, the Constituent Corporations shall cause
the Certificate of Merger attached hereto as Annex B-1 ("Delaware Certificate of
-----------------------
Merger") to be executed and acknowledged and, as required by Delaware Law, filed
- ------
with the Secretary of State of the State of Delaware as provided in the Delaware
Law and, the Certificate of Merger attached hereto as Annex B-2 ("California
----------
Certificate of Merger") to be executed and acknowledged and, as required by
- ---------------------
California Law, filed with the Secretary of State of the State of California as
provided in the California Law and as required by California Law, together with
such other instruments as are required to be filed under Section 1103 thereof.
The Merger shall become effective on the date and at the time the Certificate of
Merger is filed with the Secretary of State of the State of Delaware in
accordance with Section 103 of the Delaware Law (the "Effective Time"). If, at
--------------
any time after the Effective Time, the Surviving Corporation shall consider or
be advised that any deeds, bills of sale, assignments or assurances or any other
acts or things are necessary, desirable or proper (i) to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation, its right, title
or interest in, to or under any of the rights, properties or assets of the
Constituent Corporations acquired or to be acquired as a result of the Merger,
or (ii) otherwise to carry out the purposes of this Agreement, the Surviving
Corporation and its officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of the Constituent
Corporations, all such deeds, bills of sale, assignments and assurances and do,
in the name and on behalf of the Constituent Corporations, all such other acts
and things necessary, desirable or proper to vest, perfect or confirm its right,
title or interest in, to or under any of the rights, properties or assets of the
Constituent Corporations acquired or to be acquired as a result of the Merger
and otherwise to carry out the purposes of this Agreement.
Section 2.3 Conversion of Securities.
------------------------
(a) By virtue of the Merger and without any action on the
part of the holder thereof, at the Effective Time each share of common stock of
the Company ("Company Common Stock") outstanding immediately prior to the
--------------------
Effective Time shall be converted into the right to receive (i) that amount of
the Stock Merger Consideration (hereinafter defined) equal to the total
aggregate Stock Merger Consideration divided by the number of shares of Company
Common Stock outstanding, (ii) that amount of the Cash Merger Consideration (as
hereinafter defined) equal to the total aggregate Cash Merger Consideration
divided by the number of shares of Company Common Stock outstanding, and (iii)
that amount of the Note Merger Consideration (as hereinafter defined) equal to
the total aggregate Note Merger Consideration divided by the number of shares of
Company Common Stock outstanding; deliverable and payable to the holder thereof
upon surrender of the certificate formerly representing Company Common Stock
(the "Share Certificate") in the manner provided in Section 2.4 hereof.
------------------
(b) Subject to Section 8.9 hereof: "Stock Merger Consideration" shall
--------------------------
mean that number of shares of common stock, par value $[.001] of Buyer ("Buyer
-----
Common Stock") equal to $25,000,000 divided by the initial public offering price
- ------------
per share of Buyer Common Stock (the "IPO
---
-2-
<PAGE>
Price"); "Note Merger Consideration" shall mean an aggregate of $100,000 in
- ----- -------------------------
subordinated promissory notes, payable in two equal annual installments, with
interest at 8% payable annually; "Cash Merger Consideration" shall mean an
-------------------------
aggregate of $20,000,000 in cash, without interest. The Stock Merger
Consideration, Note Merger Consideration and Cash Merger Consideration are
herein sometimes collectively referred to as the "Merger Consideration."
---------------------
(c) By virtue of the Merger and without any action on the
part of the holder thereof, at the Effective Time each share of Company Common
Stock held by the Company as a treasury share immediately prior to the Effective
Time shall be canceled and no payment of any consideration shall be made with
respect thereto.
Section 2.4 Payment of Cash for Company Common Stock; Exchange of Shares;
-------------------------------------------------------------
Delivery of Notes.
- -----------------
(a) Each holder of a Share Certificate which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock will be entitled to receive, upon surrender to Buyer of such Share
Certificate for cancellation, (i) a cash payment, (ii) shares of Buyer Common
Stock and (iii) Buyer Notes, in each case in the amount calculated in accordance
with Section 2.3 hereof. Until properly surrendered, each such Share Certificate
shall be deemed for all purposes to evidence only the right to receive the
Merger Consideration. No interest shall accrue or be paid on the cash payable
upon the surrender of the Share Certificates.
(b) No certificates or script representing fractional shares
of Buyer Common Stock shall be issued upon the surrender for exchange of Share
Certificates, and no holders thereof shall be entitled to any voting rights,
rights to receive any dividends or distributions or other rights as a
stockholder of Buyer with respect to any fractional shares of Buyer Common Stock
that would otherwise be issued to such holder. In lieu of any fractional shares
of Buyer Common Stock that would otherwise be issued, each holder that would
have been entitled to receive a fractional share of Buyer Common Stock shall,
upon proper surrender of such holder's Share Certificates, receive a cash
payment equal to such fraction multiplied by the initial public offering price
per share of Buyer Common Stock.
Section 2.5 Closing. The closing of the Merger and the other
-------
transactions contemplated hereby (the "Closing") shall take place at the offices
-------
of Paul, Hastings, Janofsky & Walker LLP, Twenty-Third Floor, 555 South Flower
Street, Los Angeles, California 90071, at 10:00 A.M. local time on the day of
closing of the initial public offering of the Buyer Common Stock, or at such
other time or on such other date as shall be agreed upon amount the parties upon
satisfaction or waiver of all conditions precedent to the Closing (such time and
date being referred to herein as the "Closing Date").
------------
Section 2.6 Actions at the Closing. At the Closing:
----------------------
(a) The Company and the Shareholders shall deliver or cause
to be delivered to Buyer and Newco all of the documents, certificates and
instruments required to be delivered to Buyer or Newco pursuant to Section 6.2.
(b) Buyer and Newco shall deliver or caused to be delivered
to the Company and the Shareholders all of the documents, certificates and
instruments required to be delivered to the Company or the Shareholders pursuant
to Section 6.3.
(c) The Company and Newco shall file the Delaware Certificate
of Merger with the Secretary of State of the State of Delaware and the
California Certificate of Merger with the Secretary of State of the State of
California.
(d) Buyer shall deliver to the Shareholders certificates
representing the shares of Buyer Common Stock acquired by the Shareholders in
the Merger.
-3-
<PAGE>
(e) Buyer shall deliver to the Shareholders, by wire transfer
of immediately available funds, or by certified or cashier's check, the cash
portion of the Merger Consideration.
(f) Buyer shall deliver to the Shareholders by wire transfer
of immediately available funds or by certified or cashier's check, approximately
$1,400,000 to repay in full the notes due to the Chang and Chang Partnership
from the Company.
(g) David Chang shall enter into an employment agreement with
the Company (the "Employment Agreement") in the form of Exhibit B hereto having
-------------------- ---------
a term of three years from the Closing Date and providing for payment of annual
salary to David Chang of $150,000 and, if terminated without cause, severance
equal to the remainder of the term of the Employment Agreement or a maximum of
one year. In addition, David Chang shall be Executive Vice President of Buyer,
be elected to Buyer's Board of Directors and shall become a member of the
Executive Committee of the Board immediately after Closing if an Executive
Committee has been formed.
(h) K.Y. Chang shall enter into a consulting agreement with
the Company (the "Consulting Agreement") in the form of Exhibit C hereto having
-------------------- ---------
a term of three years and providing for payment of annual consulting fees to
K.Y. Chang of $150,000 and, if terminated without cause, severance equal to the
remainder of the term of the Consulting Agreement or a maximum of one year.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
------------------------------
REGARDING THE COMPANY
---------------------
The Company jointly and severally and the Shareholders severally hereby
represent and warrant to, and covenant and agree with, ANI and Newco that:
Section 3.1 Organization and Good Standing; Subsidiaries. Each Company
--------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of California, with full power and authority to own and lease
its properties and to conduct its business as currently conducted. Each Company
has been duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of each jurisdiction in which each
Company owns or leases any property, or conducts any business, so as to require
such qualification, except where the failure to obtain such qualification would
not be reasonably likely to have a Material Adverse Effect. Each Company has no
Subsidiaries and does not own or control or have any other equity investment or
other interest in, directly or indirectly, any corporation, joint venture,
limited liability company, partnership, association or other entity. The copies
or originals of the articles of incorporation, bylaws, minute books and stock
records of each Company previously delivered to, or made available for
inspection by, NDI are true, complete and correct.
Section 3.2 Authorization, Binding Agreement. Each Company has all
--------------------------------
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by each Company's board of
directors and each Company's stockholders in accordance with the California Law
and the articles of incorporation and bylaws of each Company. No other
corporate proceedings on the part of either Company are necessary to authorize
this Agreement and the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by each Company and constitutes the
legal, valid and binding agreement of each Company, enforceable against each
Company in accordance with its terms, except as such enforceability may be
limited by (a) bankruptcy, insolvency, reorganization, moratorium or other laws,
now or hereafter in effect, relating to or limiting creditors' rights generally,
and (b) general principles of equity (whether considered in an action in equity
or at law).
-4-
<PAGE>
Section 3.3 No Conflicts. The execution, delivery and performance of
------------
this Agreement and the consummation of the transactions contemplated hereby will
not (a) conflict with or result in a breach or violation of any term or
provision of, or constitute a default under (with or without notice or passage
of time, or both), or otherwise give any Person a basis for accelerated or
increased rights or termination or nonperformance under, any obligation,
agreement or instrument to which either Company is a party or by which either
Company is bound or affected or to which any of the property or assets of either
Company is bound or affected, (b) result in the violation of the provisions of
the articles of incorporation or bylaws of each Company or any Legal Requirement
applicable to or binding upon it, (c) result in the creation or imposition of
any Lien upon any property or asset of either Company or (d) otherwise adversely
affect the contractual or other legal rights or privileges of either Company.
Schedule 3.3 sets forth a list of all agreements requiring the consent of any
- ------------
party thereto to any of the transactions contemplated hereby.
Except as set forth on Schedule 3.3, all consents, authorizations and
------------
approvals of any Person to or as a result of the consummation of the
transactions contemplated hereby, that are necessary or advisable in connection
with the operations and business of either Company as currently conducted and as
proposed to be conducted, or for which the failure to obtain the same might
have, individually or in the aggregate, a Material Adverse Effect, have been
lawfully and validly obtained by each Company.
Section 3.4 Capitalization. The authorized capital stock of Acta
--------------
Products Corporation consists solely of 500,000 shares of Common Stock, of which
28,000 shares are, and as of the Closing will be, issued and outstanding. The
authorized capital stock of Acta Products International consists solely of
1,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, of
which 50,000 shares of Common Stock and 50,000 shares of preferred stock are,
and as of the Closing will be, issued and outstanding. All of the issued and
outstanding shares of each Company Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable and are held by the
Shareholders in the amounts reflected in Annex A hereto. There are no existing
-------
options, warrants, rights, calls or commitments of any character relating to the
shares of either Company Common Stock or any other capital stock or securities
of either Company, (ii) there are [no outstanding securities or other
instruments convertible into or exchangeable for shares of, or any other capital
stock or securities of either Company Common Stock] and no commitments to issue
such securities or instruments, and no Person has any right of first refusal,
preemptive right, subscription right or similar right with respect to any shares
of either Company Common Stock or any other capital stock or securities of
either Company.
Section 3.5 Financial Statements.
--------------------
(a) The Company has prepared and furnished to ANI, and there are
included in Schedule 3.5 hereto, true and complete copies of (i) the
------------
consolidated unaudited balance sheet (the "Balance Sheet") of the Company at
-------------
June 30, 1998 (the "Balance Sheet Date"), and the related consolidated unaudited
------------------
statements of income, shareholders' equity and cash flows for the six months
then ended, (ii) the consolidated unaudited balance sheets of the Company at
December 31, 1997 and December 31, 1996 and the related consolidated unaudited
statements of income, shareholders' equity and cash flow for the fiscal year
then ended, together with the report thereon of independent certified public
accountants (the financial statements described in clauses (i) and (ii) above
are collectively referred to as the "Financial Statements").
--------------------
(b) The Financial Statements present fairly the financial condition of
the Company as of the dates indicated therein and the results of operations and
cash flows of the Company for the periods specified therein, have been prepared
on a consistent basis during the periods covered thereby and prior periods and
have been derived from the accounting records of the Company.
-5-
<PAGE>
Section 3.6 Property and Products.
---------------------
(a) The Company has, and immediately prior to the Closing will have,
good, valid and marketable title in fee simple to all real property and all
personal property reflected on the Balance Sheet as owned by the Company and all
real property and personal property acquired by the Company since the Balance
Sheet Date, in each case free and clear of all Liens except (i) as set forth on
Schedule 3.6(a-1), and (ii) for sales and other dispositions of inventory in the
- -----------------
ordinary course of business since the Balance Sheet Date which, in the
aggregate, have not been materially different from prior periods. Schedule
--------
3.6(a-2) contains a list of all tangible personal property (including, but not
- --------
limited to computer systems, hardware and software), having a cost or fair
market value in excess of $50,000 owned by the Company (other than personal
property held by the Company as lessee under an operating lease). Schedule
--------
3.6(a-3) contains a list of all real property leases, licenses and personal
- --------
property leases under which the Company is the lessee or licensee. True and
complete copies of all real property leases, licenses and personal property
leases listed on Schedule 3.6(c) have been delivered to Purchaser heretofore, as
---------------
well as copies of any title reports, surveys or environmental reports or audits
relating to any leased real property. For the purposes of this Section 3.6(c),
a "lease" shall include a sublease. All personal property owned by the Company
and all personal property held by the Company pursuant to operating leases is in
good operating condition and repair, subject only to ordinary wear and tear, and
is suitable and appropriate for the use thereof made and proposed to be made by
the Company in its business and operations. The real property and personal
property described in Schedules 3.6(a-1) and 3.6(a-2) and the real property and
personal property held by the Company pursuant to the leases and licenses
described in Schedule 3.6(a-3) comprise all of the real property and personal
property used in the conduct of business of the Company. The Company owns or
leases all of the real and personal property, tangible and intangible, necessary
to conduct its business as heretofore conducted or as contemplated to be
conducted except as specifically disclosed herein.
(b) Except as set forth in Schedule 3.6(b), all of the facilities,
---------------
buildings, plants, structures and improvements (A) are in good operating
condition and repair, and (B) are adequate and suitable for the purposes for
which they are currently and proposed to be used. There are no (i) leases,
subleases, licenses, concessions or other agreements, written or oral, granting
to any other Person the right to acquire, use or occupy any portion of, any real
property, (ii) outstanding options or rights of first refusal to purchase all or
any portion of real property or interest therein, and (iii) Persons (other than
the Company) in possession of any Real Property. Except for inventory that is
excess, damaged or obsolete, for which in the aggregate an adequate reserve has
been established in the Balance Sheet in accordance with generally accepted
accounting principles, consistently applied, the inventory reflected in the
Balance Sheet and thereafter acquired and not disposed of since such date is of
good and merchantable quality, and of a quantity and quality saleable in the
ordinary course of business in accordance with past practices.
(c) Schedule 3.6(c) includes an accurate description of all products
manufactured, marketed, sold or licensed by the Company since January 1, 1997
(the "Company Products"). Except as disclosed on Schedule 3.6(c), there have
been no Company Products which have been recalled, withdrawn or suspended in
and/or outside of the United States (whether voluntarily or otherwise) since
January 1, 1993, nor have there been proceedings in and/or outside of the United
States pending against the Company at any time since January 1, 1993 (whether
such proceedings have since been completed or remain pending) seeking the
recall, withdrawal, suspension or seizure of any Company Product or seeking to
enjoin the Company from engaging in any activities pertaining to such Company
Products or to affirmatively perform activities pertaining to such Company
Products prior to shipping such products. There are no facts which exist which
could reasonably be expected to furnish a basis for the recall or withdrawal or
any Company Product or the suspension of any product registration, product
license, manufacturing license, wholesale dealer's license, export license or
other governmental license, or the approval or consent of any governmental
regulatory agency with respect to any Company Product, nor do there exist any
facts which could reasonably be expected to furnish a basis for the recall,
withdrawal, suspension or seizure by any governmental agency or court of any
Company Product or
-6-
<PAGE>
which could reasonably be expected to form the basis for the issuance of an
injunction pertaining thereto or to cause the Company to cease further
distribution or marketing of any Company Product pending further approval or
authorization by any governmental agency or to change marketing classification
of any Company Product. The Company Products have been manufactured, marketed
and distributed in accordance with the specifications under which such Company
Products have normally been manufactured and in accordance with all applicable
requirements of law. Since January 1, 1993, the Company has not received or been
subject to consent decrees, orders, settlement agreements or similar matters
relating in any fashion to the Company Products or received any warning letters
or other correspondence from the Food and Drug Administration, the Federal Trade
Commission or other governmental officials or agencies concerning the Company
Products or which have in any manner asserted that the operations of the Company
may not be in compliance with applicable laws, regulations, rules or guidelines.
The Company has complied in all respects with current reporting requirements
relating to the Company Products. No officer, director or, to the knowledge of
Shareholders, employee of the Company has been convicted of or formally charged
with any offense or act of a type that would be required to be disclosed in a
registration statement pursuant to Form S-1 under the Securities Act.
Section 3.7 Accounts Receivable. All accounts receivable of the
-------------------
Company reflected in the Balance Sheet and all accounts receivable of the
Company that have arisen since the Balance Sheet Date (except such accounts
receivable as have been collected since such dates) are valid and enforceable
claims. Such accounts receivable of the Company are not subject to any valid
defense, offset or counterclaim and are fully collectible on normal terms and in
the ordinary course of business, except to the extent of the allowance for
doubtful accounts reflected on the Balance Sheet. Schedule 3.7 contains a true
------------
and complete aging of the Company's accounts receivable as of the Balance Sheet
Date.
Section 3.8 Trademarks, Patents, Etc.
------------------------
(a) Schedule 3.8(a) contains a true and complete list of all letters
---------------
patent, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, copyrights, copyright
registrations and applications, grants of a license or right to the Company with
respect to the foregoing, both domestic and foreign, claimed by the Company or
used or proposed to be used by the Company in the conduct of its business,
whether registered or not, and the status of each (collectively herein,
"Registered Rights").
- ------------------
(b) Except as described in Schedule 3.8(b), the Company owns and has the
---------------
unrestricted right to use the Registered Rights and every trade secret, know-
how, process, discovery, development, design, technique, customer and supplier
list, promotional idea, marketing and purchasing strategy, invention, process,
confidential data, product formulation and or other information (collectively
herein, "Proprietary Information") required for, advantageous to or incident to
-----------------------
the design, development, purchase, distribution, sale and use of all products
and services sold or rendered or proposed to be sold or rendered by the Company,
free and clear of any right, equity or claim of others. The Company has taken
reasonable security measures to protect the secrecy, confidentiality and value
of all Proprietary Information.
(c) Except as described in Schedule 3.8(c), (i) the Company has not
---------------
sold, transferred, assigned, licensed or subjected to any Lien, any Registered
Right or Proprietary Information or any interest therein, and (ii) the Company
is not obligated or under any liability whatever to make any payments by way of
royalties, fees or otherwise to any owner or licensor of, or other claimant to,
any Registered Right or Proprietary Information. None of the Registered Rights
or Proprietary Information licensed or granted to the Company is owned by any
Shareholder or any affiliate of any Shareholder and no Registered Right or
Proprietary Information has been licensed or granted to any Shareholder or any
affiliate of any Shareholder.
(d) There is no claim or demand of any Person pertaining to, or any
Action that is pending or, to the Company's or Shareholders' knowledge,
threatened, which challenges the rights of the Company in respect of any
Registered Right or any Proprietary Information.
-7-
<PAGE>
Section 3.9 Banking and Insurance.
---------------------
(a) Schedule 3.9(a) contains a true and complete list of the names and
---------------
locations of all financial institutions at which the Company maintains a
checking account, deposit account, securities account, safety deposit box or
other deposit or safekeeping arrangement, the numbers or other identification of
all such accounts and arrangements and the names of all persons authorized to
draw against any funds therein.
(b) Schedule 3.9(b) contains a true and complete list and brief summary
---------------
of all insurance policies and bonds and self insurance arrangements currently in
force that cover or purport to cover risks or losses to or associated with the
Company's business, operations, premises, properties, assets, employees, agents
and directors. The insurance policies, bonds and arrangements described on
Schedule 3.9(b) (the "Policies") provide such coverage against such risk of loss
- --------------- --------
and in such amounts as are customary for corporations of established reputation
engaged in the same or similar business and similarly situated. True and
complete copies of all such Policies have been delivered to NDI heretofore.
Section 3.10 Litigation. Except as set forth on Schedule 3.10, there is
---------- -------------
no legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding pending or, to the knowledge
of the Company, threatened against or affecting the Company or any of its
property, assets, business, products, franchises or governmental approvals,
before any court or governmental department, commission, board, bureau, agency,
instrumentality or arbitrator (including but not limited to any taxing entity or
authority) which, individually or in the aggregate, could reasonably be expected
to have a material adverse effect upon the Company and its subsidiaries, taken
as a whole, or to materially and adversely affect the ability of the Company to
carry out, or to prevent or make unduly burdensome, the Merger contemplated by
this Agreement. The Company is subject to no outstanding judgments, orders,
decrees, awards, stipulations or injunctions of any governmental entity or
arbitrator against or affecting the Company or its properties, assets or
business.
Neither the Company nor, to the Shareholders' knowledge, any of its
directors, officers, agents, employees or other Person associated with or acting
on behalf of the Company has (a) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (b) made any direct or indirect unlawful payments to
government officials or employees, or foreign government officials or employees,
from corporate funds, (c) established or maintained any unlawful or unrecorded
fund of corporate monies or other assets, (d) made any false or fictitious
entries on the books of account of the Company, or (e) made or received any
bribe, rebate, payoff, influence payment, kickback or other unlawful payment.
Section 3.11 Income and Other Taxes. Except as set forth on Schedule
---------------------- --------
3.11:
- ----
(a) All Tax Returns required to be filed through and including the date
hereof in connection with the operations of the Company are true, complete and
correct in all respects and have been properly and timely filed. The Company
has not requested any extension of time within which to file any Tax Return,
which Tax Return has not since been filed. Buyer has heretofore been furnished
by the Company with true, correct and complete copies of each Tax Return of the
Company with respect to the past three taxable years, and of all reports of, and
communications from, any Governmental Entities relating to such period.
(b) All Taxes required to be paid or withheld and deposited through and
including the date hereof in connection with the operations of the Company have
been duly and timely paid or deposited by the Company. The Company has properly
withheld or collected all amounts required by law for income Taxes and
employment Taxes relating to its employees, creditors, independent contractors
and other third parties, and for sales and use Taxes on sales, and has properly
and timely remitted such withheld or collected amounts to the appropriate
Governmental Entity. The Company
-8-
<PAGE>
has no liabilities for any Taxes for any taxable period ending prior to or
coincident with the Closing Date.
Section 3.12 Employee Benefit Matters. Schedule 3.12 contains a
------------------------ -------------
complete list of all employee benefit plans (within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
-----
which are maintained or contributed to by the Company (the "Company Benefit
---------------
Plans"). The Company has heretofore provided to Buyer (i) true and complete
- -----
copies of all Company Benefit Plans; (ii) the most recent annual actuarial
evaluation, if any, prepared for each Company Benefit Plan; (iii) the two most
recent annual reports (series 5500), if any, required under ERISA with respect
to each Company Benefit Plan, including audited financial statements; (iv) the
most recent determination letter received from the IRS, if any, for each Company
Benefit Plan, and (v) the most recent Summary Plan Description, if any, required
under ERISA with respect to each Company Benefit Plan. Except as disclosed on
Schedule 3.12, (i) with respect to each Company Benefit Plan that is intended to
- -------------
be qualified under Section 401(a) of the Code and is maintained by the Company
for any of its employees, (x) the Company has obtained a favorable determination
letter from the IRS and nothing has happened since such letter that would
adversely affect the tax qualification of such plan and (y) such plan has been
operated in compliance with ERISA and in accordance with the provisions of, and
the rules and regulations covering, such plan except where the failure to so
comply does not individually or in the aggregate, have a Material Adverse Effect
upon the Company, (ii) with respect to each Company Benefit Plan, the Company is
not, and to the Company's knowledge no other person is, engaged in a transaction
prohibited by Section 4975 of the Code or Section 406 of ERISA which could
result in a liability to the Company which would individually or in the
aggregate, have a Material Adverse Effect upon the Company, (iii) each Company
Benefit Plan which is subject to Part III of Subtitle B of Title I of ERISA or
Section 412 of the Code has been maintained in compliance with the minimum
funding standards of ERISA and the Code, and no reportable event, within the
meaning of Section 4043 of ERISA has occurred with respect to any Company
Benefit Plan which is subject to Title IV of ERISA, other than reportable events
with respect to which notice has been waived by the Pension Benefit Guaranty
Corporation or which would not, individually or in the aggregate, have a
Material Adverse Effect upon the Company, and (iv) no benefit is provided
pursuant to a welfare benefit plan (as defined in ERISA Section 3(1)) to a
former employee of the Company other than for continuation health coverage
benefits provided under Code Section 4980B.
Section 3.13 No Undisclosed Liabilities. Except (i) to the extent set
--------------------------
forth or provided for in the Balance Sheet or the notes thereto, (ii) as set
forth on Schedule 3.13 or (iii) for non-material current liabilities incurred
-------------
since the Balance Sheet Date in the ordinary course of business, as of the date
hereof the Company has no liabilities or obligations of any kind or nature
(whether or not of a type that would be required to be disclosed in financial
statements), whether accrued, absolute, contingent or otherwise, whether due or
to become due and whether the amounts thereof are readily ascertainable or not,
or any unrealized or anticipated losses from any commitments of a contractual
nature, including but not limited to liabilities or obligations for Taxes and
Environmental Matters with respect to or based upon the facts existing, or
transactions or events occurring at or prior to the Closing.
Section 3.14 Permits, Licenses, Etc.; Regulatory Filings. The Company
-------------------------------------------
possesses, and is operating in compliance with, all franchises, licenses,
permits, certificates, authorizations, rights and other approvals of
Governmental Entities necessary to (i) occupy, maintain, operate and use the
real property as it is currently used and proposed to be used, (ii) conduct its
business as currently conducted and as proposed to be conducted, and (iii)
maintain and operate its Company Benefit Plans (collectively, the "Permits").
-------
Schedule 3.14 contains a true and complete list of all Permits. Each Permit has
- -------------
been lawfully and validly issued, and no proceeding is pending or, to the
Shareholders' knowledge, threatened looking toward the revocation, suspension or
limitation of any Permit. The consummation of the transactions contemplated by
this Agreement will not result in the revocation, suspension or limitation of
any Permit.
The Company has made all required registrations and filings with and
submissions to all applicable Governmental Entities relating to the operations
of the Company as currently
-9-
<PAGE>
conducted and as proposed to be conducted, including, without limitation, all
such applicable Governmental Entities having jurisdiction over any matters
pertaining to conservation or protection of the environment, the treatment,
discharge, use, handling, storage or production, or disposal of Hazardous
Materials and the safety of foods, drugs and other consumer products. All such
registrations, filings and submissions were in compliance with all Legal
Requirements (including all Environmental Laws) and other requirements when
filed, no material deficiencies have been asserted by any such applicable
Governmental Entities with respect to such registrations, filings or submissions
and, to the Shareholders' knowledge, no facts or circumstances exist which would
indicate that a material deficiency may be asserted by any such authority with
respect to any such registration, filing or submission.
Section 3.15 Material Contracts; No Defaults.
-------------------------------
(a) Schedule 3.15 contains a true and complete list and
-------------
description of all material contracts, agreements, understandings, arrangements
and commitments, written or oral ("Contracts"), of the Company by which it or
its properties, rights or assets are bound. True and complete copies of such
written Contracts and true and complete summaries of such oral Contracts have
been delivered to Purchaser heretofore. For the purposes of this subsection (a),
"material" means any contract, agreement, understanding, arrangement or
commitment that (i) involves performance by any party more than 90 days from the
date hereof, (ii) involves payments or receipts by the Company in excess of
$100,000, (iii) involves capital expenditures in excess of $25,000 or (iv)
otherwise materially affects the Company.
(b) Except as described in Schedule 3.15, each Contract
-------------
described herein or elsewhere in this Agreement, including, without limitation,
Section 3.6, is, and after the Closing on identical terms will be, legal, valid,
- -----------
binding, enforceable and in full force and effect and no event or condition has
occurred or become known to the Company or any Shareholder or is alleged to have
occurred that constitutes or, with notice or the passage of time, or both, would
constitute a default or a basis of force majeure or other claim of excusable
----- -------
delay, termination, nonperformance or accelerated or increased rights by the
Company or any other Person under any Contract described above in this Section
3.15, or described or otherwise disclosed pursuant to this Agreement; and
(c) No customer that represented in excess of 10% of the
Company's sales of goods or services during the twelve months ended on the
Balance Sheet Date, and since that date no such customer has terminated its
relationship with or adversely curtailed its purchases from the Company or
indicated (for any reason) its intention so to terminate its relationship or
curtail its purchases. No supplier from whom the Company purchased in excess of
10% of the Company's purchases of goods or services during the twelve months
ended on the Balance Sheet Date, and since that date no such supplier has
terminated its relationship with or adversely curtailed its accommodations,
sales or services to the Company or indicated (for any reason) its intention to
terminate such relationship or curtail its accommodations, sales or services.
The Company makes no purchases available from only a single source.
(d) No person with whom the Company has such a contract,
agreement, arrangement, commitment or other understanding is in default
thereunder or has failed to perform fully thereunder by reason of force majeure
----- -------
or other claim of excusable delay, termination or nonperformance thereunder, the
delay, termination or nonperformance of which, or a default under which, has had
or may have a material adverse effect.
Section 3.16 Absence of Certain Changes. Since December 31, 1997, except
--------------------------
as disclosed in Schedule 3.16, the Company has not: (i) incurred any debts,
-------------
obligations or liabilities (absolute, accrued, contingent or otherwise), other
than current liabilities incurred in the ordinary course of business which,
individually or in the aggregate, are not material; (ii) subjected to or
permitted a Lien upon or otherwise encumbered any of its assets, tangible or
intangible; (iii) sold, transferred, licensed or leased any of its assets or
properties except in the ordinary course of business; (iv) canceled or
compromised any debt
-10-
<PAGE>
owed to or by or claim of or against it, or waived or released any right, of
material value other than in the ordinary course of business; (v) suffered any
physical damage, destruction or loss (whether or not covered by insurance)
causing or having a material adverse effect; (vi) made or suffered any change
in, or condition affecting, its condition (financial or otherwise), properties,
profitability, prospects or operations other than changes, events or conditions
in the ordinary course of business, none of which (individually or in the
aggregate) has had or may have a material adverse effect; (vii) made any change
in the accounting principles, methods, records or practices followed by it or
depreciation or amortization policies or rates theretofore adopted; (viii) paid,
or made any accrual or arrangement for payment of, any severance or termination
pay to, or entered into any employment or loan or loan guarantee agreement with,
any current or former officer, director or employee or consultant; (ix) paid, or
made any accrual or arrangement for payment of, any increase in compensation,
bonuses or special compensation of any kind to any employee other than in the
ordinary course of business, or paid, or made any accrual or arrangement for
payment of, any increase in compensation, bonuses or special compensation of any
kind to any officer or director of the Company or any consultant to the Company;
or (x) entered into any agreement or otherwise obligated itself to do any of the
foregoing.
Section 3.17 Employees and Labor Matters.
---------------------------
(a) Schedule 3.17(a) contains a true and complete list of
----------------
all contracts, agreements, plans, arrangements, commitments and understandings
(formal and informal) pertaining to terms of employment, compensation, bonuses,
profit sharing, stock purchases, stock repurchases, stock options, stock
appreciation rights, commissions, incentives, loans or loan guarantees,
severance pay or benefits, use of the Company's property and related matters of
the Company with any current or former shareholder, officer, director, employee
or consultant, and true and complete copies of all such contracts, agreements,
plans, arrangements and understandings have been delivered to Purchaser
heretofore.
(b) Except as set forth on Schedule 3.17(a), and except as
----------------
specifically provided herein with respect to K.Y. Chang and David Chang, neither
ANI nor the Surviving Corporation will have any responsibility for continuing
any person in the employ (or retaining any person as a consultant) of the
Company from and after the Closing or have any liability for any severance
payments to or similar arrangements with any such Person who shall cease to be
an employee of the Company at or prior to the Closing.
(c) There is not occurring or, to the Company's or
Shareholders' knowledge, threatened or anticipated, any strikes, slow downs,
pickets, work stoppages, grievance proceedings, union organization efforts or
other concerted action by (i) any current or former employees or other persons
or (ii) any union or other collective bargaining unit, relating to either the
Company or its premises or products.
Section 3.18 Affiliates. Except as disclosed on Schedule 3.18, none of
---------- -------------
the Shareholders, any officer, director or key employee of the Company or any
associate or Affiliate of the Company or any of such Persons has, directly or
indirectly, (i) an interest in any Person that (A) furnishes or sells, or
proposes to furnish or sell, services or products that are furnished or sold by
the Company or (B) purchases from or sells or furnishes to, or proposes to
purchase from or sell or furnish to, the Company any goods or services or (ii) a
beneficial interest in any contract or agreement to which the Company is a party
or by which the Company or any of the assets of the Company are bound or
affected.
Section 3.19 Compliance with Law. The Company (i) has not violated or
-------------------
conducted its business or operations in violation of, and has not used or
occupied its properties or assets in violation of, any Legal Requirement or
Licensing Requirement which would individually or in the aggregate have a
material adverse effect on the Company or its subsidiaries, (ii) has not been
alleged to be in violation of any Legal Requirement or Licensing Requirement,
and (iii) has not received any notice of any
-11-
<PAGE>
alleged violation of, or any citation for noncompliance with, any Legal
Requirement or Licensing Requirement.
Section 3.20 Brokers' Fees. Except as disclosed on Schedule 3.20 hereto,
-------------
no investment banker, broker, finder or similar agent has been employed by or on
behalf of the Company in connection with this Agreement or the transactions
contemplated hereby, and the Company has not entered into any agreement or
understanding of any kind with any person or entity for the payment of any
brokerage commission, finder's fee or any similar compensation in connection
with this Agreement or the transactions contemplated hereby.
Section 3.21 Disclosure. No representation or warranty of the Company
----------
or any Shareholder in this Agreement and no information contained in any
Schedule or other writing delivered pursuant to this Agreement or at the Closing
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact required to make the statements herein or
therein not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer and Newco hereby represent and warrant to, and covenant and agree
with, the Company and the Shareholders that:
Section 4.1 Organization and Good Standing of Buyer. Buyer is a
---------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full power and authority to own and lease its
properties and to conduct its business as currently conducted. Buyer has been
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each jurisdiction in which Buyer owns or
leases any property, or conducts any business, so as to require such
qualification, except where the failure to obtain such qualification would not
be reasonably likely to have a material adverse effect. The copies or originals
of the certificate of incorporation, bylaws, minute books and stock records of
Buyer previously delivered to, or made available for inspection by, the Company
and the Shareholders are true, complete and correct.
Section 4.2 Organization and Good Standing of Newco. Newco is a
---------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full power and authority to own and lease its
properties and to conduct its business as currently conducted. Newco has been
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each jurisdiction in which Newco owns or
leases any property, or conducts any business, so as to require such
qualification, except where the failure to obtain such qualification would not
be reasonably likely to have a material adverse effect. The copies or originals
of the certificate of incorporation, bylaws, minute books and stock records of
Newco previously delivered to, or made available for inspection by, the Company
and the Shareholders are true, complete and correct.
Section 4.3 Authorization, Binding Agreement. Buyer and Newco each have
--------------------------------
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the respective
boards of directors of Buyer and Newco and the sole stockholder of Newco in
accordance with the Delaware Law and the respective certificates of
incorporation and bylaws of Buyer and Newco. No other corporate proceedings on
the part of Buyer or Newco are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Buyer and Newco and constitutes the legal, valid and
binding agreement of Buyer and Newco, enforceable against Buyer and Newco in
accordance with its terms, except as such enforceability may be limited by (a)
bankruptcy, insolvency, reorganization, moratorium or other laws, now or
hereafter
-12-
<PAGE>
in effect, relating to or limiting creditors' rights generally, and (b) general
principles of equity (whether considered in an action in equity or at law).
Section 4.4 No Conflicts. The execution, delivery and performance of
------------
this Agreement and the consummation of the transactions contemplated hereby will
not (a) conflict with or result in a breach or violation of any term or
provision of, or constitute a default under (with or without notice or passage
of time, or both), or otherwise give any Person a basis for accelerated or
increased rights or termination or nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement or instrument to which Buyer or Newco is a party or by which Buyer or
Newco is bound or affected or to which any of the property or assets of Buyer or
Newco are bound or affected, (b) result in the violation of the provisions of
the certificate of incorporation or bylaws of Buyer or Newco or any Legal
Requirement applicable to or binding upon them, (c) result in the creation or
imposition of any Lien upon any property or asset of Buyer or Newco or (d)
otherwise adversely affect the contractual or other legal rights or privileges
of Buyer or Newco. Schedule 4.4 sets forth a list of all agreements requiring
------------
the consent of any party thereto to any of the transactions contemplated hereby.
Except as set forth on Schedule 4.4, all consents, authorizations and approvals
------------
of any Person to or as a result of the consummation of the transactions
contemplated hereby, that are necessary or advisable in connection with the
operations and business of Buyer and Newco as currently conducted and as
proposed to be conducted, or for which the failure to obtain the same might
have, individually or in the aggregate, a material adverse effect, have been
lawfully and validly obtained by Buyer and Newco.
Section 4.5 Capitalization. The authorized capital stock of Buyer
--------------
consists solely of 30,000,000 shares of Buyer Common Stock, of which [______]
shares are issued and outstanding, and 5,000,000 shares of Preferred Stock, of
which none are issued and outstanding. All of the issued and outstanding shares
of Buyer Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable. Except as set forth in Schedule 4.5, there are no
------------
existing options, warrants, right, calls or commitments of any character
relating to the shares of Buyer Common Stock or any other capital stock or
securities of Buyer, (ii) there are no outstanding securities or other
instruments convertible into or exchangeable for shares of Buyer Common Stock or
any other capital stock or securities of Buyer and no commitments to issue such
securities or instruments, and no Person has any right of first refusal,
preemptive right, subscription right or similar right with respect to any shares
of Buyer Common Stock or any other capital stock or securities of Buyer. The
authorized capital stock of Newco consists solely of 10,000 shares of common
stock, par value $.001 per share, of which 1,000 shares are, and on the Closing
Date will be, issued and outstanding. All of the issued and outstanding shares
of capital stock of Newco are, and on the Closing Date will be, owned
beneficially and of record by Buyer.
Section 4.6 Brokers' Fees. Except as set forth on Schedule 4.6, no
------------- ------------
investment banker, broker, finder or similar agent has been employed by or on
behalf of Buyer or Newco in connection with this Agreement or the transactions
contemplated hereby, and neither Buyer nor Newco have entered into any agreement
or understanding of any kind with any person or entity for the payment of any
brokerage commission, finder's fee or any similar compensation in connection
with this Agreement or the transactions contemplated hereby.
Section 4.7 Disclosure. No representation or warranty of Buyer or
----------
Newco in this Agreement and no information contained in any Schedule or other
writing delivered pursuant to this Agreement or at the Closing contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact required to make the statements herein or therein not misleading.
-13-
<PAGE>
Section 4.8 Litigation. There is no legal action, suit, arbitration or
----------
other legal, administrative or other governmental investigation, inquiry or
proceeding pending or, to the knowledge of Buyer, threatened against or
affecting Buyer or Newco or any of their property, assets, business, products,
franchises or governmental approvals, before any court or governmental
department, commission, board, bureau, agency, instrumentality or arbitrator
(including but not limited to any taxing entity or authority) which,
individually or in the aggregate, could reasonably be expected to have a
material adverse effect upon Buyer and its subsidiaries, taken as a whole, or to
materially and adversely affect the ability of Buyer or Newco to carry out, or
to prevent or make unduly burdensome, the Merger contemplated by this Agreement.
Neither Buyer nor Newco is subject to any outstanding judgments, orders,
decrees, awards, stipulations or injunctions of any governmental entity or
arbitrator against or affecting Buyer or Newco or their properties, assets or
business.
Section 4.9 Compliance with Law. Neither Buyer nor Newco (i) has
-------------------
violated or conducted its business or operations in violation of, or has used or
occupied its properties or assets in violation of, any Legal Requirement or
Licensing Requirement which would individually or in the aggregate have a
material adverse effect on Buyer or its subsidiaries, (ii) has been alleged to
be in violation of any Legal Requirement or Licensing Requirement, or (iii) has
received any notice of any alleged violation of, or any citation for
noncompliance with, any Legal Requirement or Licensing Requirement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
------------------------------
OF THE SHAREHOLDERS
-------------------
The K. Y. Chang, David Chang and Robert Chiang, jointly and severally
(where the term "jointly and severally" for this purpose means that the
obligations of K.Y. Chang and David Chang are joint and several with the
obligations of each other and Robert Chiang, but the obligation of Robert Chiang
is several and not joint with the obligation of K. Y. Chang and David Chang),
hereby represent and warrant to, and covenants and agree with, Buyer and Newco
that:
Section 5.1 Ownership of Shares. The Shareholders own of record and
-------------------
beneficially all of the issued and outstanding shares of each Company's Common
Stock and have, and at all times prior to and as of the Closing, will have, good
and marketable title to such shares free and clear of all Liens and adverse
claims.
Section 5.2 Execution and Delivery. The Shareholders have the power
----------------------
and authority to execute and deliver this Agreement, to consummate the
transactions contemplated hereby and to perform their obligations under this
Agreement. This Agreement, upon its execution and delivery by the Shareholders
(assuming the due authorization, execution and delivery hereof by the other
parties hereto), will constitute the legal, valid and binding obligation of the
Shareholders, enforceable against the Shareholders in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency and similar laws relating to creditors' rights generally and by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
Section 5.3 No Conflicts. The execution, delivery and performance of
------------
this Agreement by the Shareholders and the consummation by the Shareholders of
the transactions contemplated hereby will not conflict with or result in a
breach or violation of any term or provision of, or (with or without notice or
passage of time, or both) constitute a default under, any indenture, mortgage,
deed of trust, trust (constructive and other), loan agreement or other agreement
or instrument to which the Shareholders are a party or by which the Shareholders
or the Shareholders' shares are bound, or violate the provisions of any statute,
or any order, rule or regulation of any governmental body or agency or
instrumentality thereof, or any order, writ, injunction or decree of any court
or any arbitrator, having jurisdiction over the Shareholders or the property of
the Shareholders.
-14-
<PAGE>
Section 5.4 Restrictions on Transfer of Buyer Common Stock and Buyer
--------------------------------------------------------
Notes Under Securities Laws.
- ---------------------------
The Shareholders understand and agree that the shares of
Buyer Common Stock that the Shareholders will acquire in the Merger have not
been registered under the Securities Act and that, accordingly, such shares and
notes will not be fully transferable except as permitted under various
exemptions contained in the Securities Act or upon satisfaction of the
registration and prospectus delivery requirements of the Securities Act. The
Shareholders acknowledge that the Shareholders must bear the economic risk of
its investment in such shares of Buyer Common Stock for an indefinite period of
time since such shares and notes have not been registered under the Securities
Act and therefore cannot be sold unless they are subsequently registered or an
exemption from registration is available. The Shareholders hereby represent and
warrant that the Shareholders other than Robert Chiang are Accredited Investors
as defined under Rule 501(a) of the Securities Act and the Shareholders are
acquiring the shares of Buyer Common Stock in the Merger for investment purposes
only, for Shareholders' own account, and not as nominee or agent for any other
Person, and not with the view to, or for resale in connection with, any
distribution thereof within the meaning of the Securities Act.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF MERGER
------------------------------------
Section 6.1 Conditions to Each Party's Obligations. Notwithstanding any
--------------------------------------
other provision of this Agreement, the obligations of each party hereto to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) There shall not be instituted and pending or threatened
any Action before any Governmental Entity (i) challenging the Merger or
otherwise seeking to restrain or prohibit the consummation of the transactions
contemplated hereby, or (ii) seeking to prohibit the direct or indirect
ownership or operation by Buyer or the Surviving Corporation of all or a
material portion of the business or assets of the Company, or to compel Buyer,
the Surviving Corporation or the Company to dispose of or hold separate all or a
material portion of the business or assets of the Company, the Surviving
Corporation or Buyer.
(b) Buyer shall have had declared effective its registration
statement under the Securities Act with respect to its firm commitment
underwritten initial public offering of the Buyer Common Stock, and no stop
order with respect thereto shall have been entered by the Securities and
Exchange Commission.
(c) The Company shall enter into a mutually acceptable lease
with the Shareholders (guaranteed by Buyer) for the existing premises of the
Company, which lease will have a term of five years at a rent equal to the lower
of the current rate or the fair market rate, with an option for the Company to
renew the lease for an additional five years on the same terms.
(d) The Company shall have entered into a contract with the
Company's key salesman on terms mutually agreeable to Buyer and the
Shareholders, effective upon Closing.
Section 6.2 Conditions to Obligations of Buyer and Newco.
--------------------------------------------
Notwithstanding any other provision of this Agreement, the obligations of Buyer
and Newco to consummate the Merger and the other transactions contemplated
hereby shall be subject to the satisfaction, at or prior to the Closing Date, of
the following conditions:
(a) The representations and warranties of the Company and the
Shareholders in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same effect as if made on the
Closing Date and each of the Company and the Shareholders shall
-15-
<PAGE>
have complied with all covenants and agreements and satisfied all conditions on
the Company's or the Shareholders' part, as applicable, to be performed or
satisfied on or prior to the Closing Date.
(b) Buyer shall have received from Ferrari, Olsen, Ottoboni & Bebb,
LLP, counsel for the Company, a written opinion dated the Closing Date and
addressed to Buyer and Newco, in substantially the form attached as Annex C
-------
hereto.
(c) Buyer shall have received a certificate of the President of the
Company in substantially the form attached as Annex D hereto.
-------
(d) Buyer shall have received the following under cover of a
certificate of the Secretary of the Company dated the Closing Date in
substantially the form attached as Annex E hereto:
-------
(i) Copies of resolutions of (A) the board of directors of each
Company authorizing and approving the execution, delivery and performance of
this Agreement and all other documents and instruments to be delivered by the
Company pursuant hereto, and of (B) each Company's shareholders evidencing
approval of this Agreement and the transactions contemplated hereby;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
subparagraph (i) above and further certifying that the articles of incorporation
and bylaws of each Company delivered to Buyer at the time of, or prior to, the
execution of this Agreement have been validly adopted and have not been amended
or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as Buyer or its
counsel may reasonably request.
(e) K.Y. Chang and David Chang shall have entered into a Non-
Competition Agreement with Buyer which shall provide for a broad form of non-
competition with the Company and Buyer for a period of three years after closing
(but in no event less than one year after termination of employment with the
Company), in substantially the form attached hereto as Annex F.
-------
(f) The Shareholders and Buyer shall have entered into a Registration
Rights Agreement in substantially the form attached hereto as Annex G, the terms
-------
of which shall be no less favorable than those of any other stockholder of Buyer
on the Closing Date.
(g) Buyer shall be satisfied, in its sole discretion, with the results
of its due diligence investigation of the Company.
(h) The Shareholders shall have entered into the Employment Agreement
and the Consulting Agreement, respectively.
(i) All authorizations, consents, waivers and approvals by or from
third parties required for the consummation of the transactions contemplated
hereby shall have been obtained and all Liens on the assets and properties of
the Company shall have been released or terminated.
(j) No act, event or condition shall have occurred after the date
hereof which Buyer determines has had or could reasonably be expected to have a
Material Adverse Effect.
(k) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to Buyer and its counsel.
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<PAGE>
(l) The Shareholders shall have repaid the Company for any shareholder
loans pursuant to Section 8.1(e) and for any expenses pursuant to Section 8.4
-----------
hereof.
(m) Buyer shall have theretofore received a true and complete list of
(a) the names and addresses of (i) customers that represented in excess of 10%
of the Company's sales of goods and services during the 12 months ended on
September 30, 1998 and (ii) suppliers from whom the Company purchased in excess
of 10% of the Company's purchase of goods and services during the 12 months
ended on September 30, 1998 and (b) all licenses of or rights to Proprietary
Information granted to the Company by others or by others to the Company with a
description (including the term, payment for and scope thereof).
Section 6.3 Conditions to Obligations of the Company and the
------------------------------------------------
Shareholders. Notwithstanding any other provision of this Agreement, the
- ------------
obligations of the Company and the Shareholders to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions:
(a) The representations and warranties of Buyer and Newco in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date with the same effect as if made on the Closing Date, and Buyer
and Newco shall have complied with all covenants and agreements and satisfied
all conditions on their part to be performed or satisfied on or prior to the
Closing Date.
(b) The Company shall have received from Paul, Hastings,
Janofsky & Walker LLP, counsel for Buyer and Newco, a written opinion dated the
Closing Date and addressed to the Company and the Shareholders, in substantially
the form attached as Annex H hereto.
-------
(c) The Company shall have received the following under cover
of a certificate of the Secretary of Buyer dated the Closing Date in
substantially the form attached as Annex I hereto:
-------
(i) Copies of resolutions of the board of directors of
Buyer authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by Buyer
pursuant hereto and thereto;
(ii) A certificate of incumbency certifying the names,
titles and signatures of the officers authorized to execute the documents
referred to in subparagraph (i) above and further certifying that the
certificate of incorporation and bylaws of Buyer delivered to the Company at the
time of, or prior to, the execution of this Agreement have been validly adopted
and have not been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
or its counsel may reasonably request.
(d) The Company shall have received a certificate of the
President of Buyer in substantially the form attached as Annex J hereto.
-------
(e) The Company shall have received the following under cover
of a certificate of the Secretary of Newco dated the Closing Date in
substantially the form attached as Annex K hereto:
-------
(i) Copies of resolutions of (A) the board of directors
of Newco authorizing and approving the execution, delivery and performance of
this Agreement and all other documents and instruments to be delivered by Newco
pursuant hereto and thereto, and (B) the sole stockholder of Newco approving
this Agreement and the Merger;
(ii) A certificate of incumbency certifying the names,
titles and signatures of the officers authorized to execute the documents
referred to in subparagraph (i) above and
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<PAGE>
further certifying that the certificate of incorporation and bylaws of Newco
delivered to the Company at the time of, or prior to, the execution of this
Agreement have been validly adopted and have not been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
or its counsel may reasonably request.
(f) The Company shall have received a certificate of the
President of Newco in substantially the form attached as Annex L hereto.
-------
(g) Buyer or Newco shall have assumed all existing contracts
with the management, employees, consultants and advisors of the Company.
(h) No act, event or condition shall have occurred after the
date hereof which the Shareholders or the Company determines has had or could
reasonably be expected to have a Material Adverse Effect.
(i) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to the Company and its counsel.
(j) David Chang shall, at the Closing, be elected to the
Board of Directors of Buyer and to the Executive Committee of the Board, if one
is then in existence, and become Executive Vice President of Buyer.
(k) Approximately $1,400,000 shall be paid at Closing to
David Chang in full satisfaction of the note due to the Chang and Chang
Partnership from the Company.
(l) There shall be distributed to the Shareholders at the
Closing the life insurance policy on the life of David Chang.
(m) Shareholders shall have been released from any personal
guarantees on bank indebtedness.
ARTICLE 7
CONDUCT OF BUSINESS PENDING CLOSING
-----------------------------------
During the period commencing on the date hereof and continuing through
the Closing Date, the Company and the Shareholders covenant and agree (except as
expressly contemplated by this Agreement or to the extent that Buyer shall
otherwise expressly consent in writing) that:
Section 7.1 Qualification. The Company shall maintain all qualifications
-------------
to transact business and remain in good standing in the foreign jurisdictions in
which the Company owns or leases any property, or conducts any business, so as
to require such qualification, except where the failure to maintain such
qualification would not be reasonably likely to have a Material Adverse Effect.
Section 7.2 Ordinary Course. The Company shall conduct its business in,
---------------
and only in, the ordinary course and shall preserve intact its current business
organizations, keep available the services of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it to the end that its goodwill and going business value
shall be unimpaired at the Closing Date. The Company shall maintain its
properties and assets in good condition and repair.
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<PAGE>
Section 7.3 Organic Changes. The Company shall not (a) amend its
---------------
articles of incorporation or bylaws, (b) acquire by merging or consolidating
with, or agreeing to merge or consolidate with, or purchase substantially all of
the stock or assets of, or otherwise acquire any business or any corporation,
partnership, association or other business organization or division thereof, (c)
enter into any partnership or joint venture, (d) declare, set aside, make or pay
any dividend or other distribution in respect of its capital stock (other than
distributions necessary to pay the federal and state income taxes of
Shareholders resulting from the Company's election to be taxed under Subchapter
S of the Internal Revenue Code) or purchase or redeem, directly or indirectly,
any shares of its capital stock, (e) issue or sell any shares of its capital
stock of any class or any options, warrants, conversion or other rights to
purchase any such shares or any securities convertible into or exchangeable for
such shares, or (f) liquidate or dissolve or obligate itself to do.
Section 7.4 Indebtedness. The Company shall not incur any Indebtedness,
------------
sell any debt securities or lend money to or guarantee the Indebtedness of any
Person other than Indebtedness incurred in the ordinary course of business to
finance the purchase of machines used therein not exceeding in the aggregate
$100,000. The Company shall not restructure or refinance its existing
Indebtedness or Indebtedness incurred after the date hereof permitted under the
preceding sentence.
Section 7.5 Accounting. The Company shall not make any change in the
----------
accounting principles, methods, records or practices followed by it or
depreciation or amortization policies or rates theretofore adopted by it. The
Company shall maintain its books, records and accounts in accordance with GAAP.
Section 7.6 Compliance with Legal Requirements. The Company shall comply
----------------------------------
promptly with all requirements that applicable law may impose upon it and its
operations and with respect to the transactions contemplated by this Agreement,
and shall cooperate promptly with, and furnish information to, Buyer in
connection with any such requirements imposed upon Buyer, or upon any of its
affiliates, in connection therewith or herewith, including, without limitation,
all information reasonably required by Buyer to prepare its registration
statement with respect to its initial public offering.
Section 7.7 Disposition of Assets. The Company shall not sell, transfer,
---------------------
license, lease or otherwise dispose of, or suffer or cause the encumbrance by
any Lien upon any of, its properties or assets, tangible or intangible, or any
interest therein, except in the ordinary course of business.
Section 7.8 Compensation. The Company shall not (a) adopt or amend in
------------
any material respect any collective bargaining, bonus, profit-sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other plan, agreement, trust, fund or arrangement for the benefit
of employees (whether or not legally binding) other than to comply with any
Legal Requirement or (b) pay, or make any accrual or arrangement for payment of,
any increase in compensation, bonuses or special compensation of any kind, or
any severance or termination pay to, or enter into any employment or loan or
loan guarantee agreement with, any current or former officer, director, employee
or consultant of the Company.
Section 7.9 Modification or Breach of Agreements; New Agreements. The
----------------------------------------------------
Company shall not terminate or modify, or commit or cause or suffer to be
committed any act that will result in breach or violation of any term of, or
(with or without notice or passage of time, or both) constitute a default under
or otherwise give any person a basis for nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement, instrument, arrangement or understanding, written or oral, disclosed
in this Agreement or the Schedules hereto. The Company shall refrain from
becoming a party to any contract or commitment other than in the ordinary course
of business. The Company shall meet all of its contractual obligations in
accordance with their respective terms.
Section 7.10 Capital Expenditures. Except for capital expenditures or
--------------------
commitments necessary to maintain its properties and assets in good condition
and repair (the amount of which shall not exceed
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<PAGE>
$25,000 in the aggregate), the Company shall not purchase or enter into any
contract to purchase any capital assets.
Section 7.11 Maintain Insurance. The Company shall maintain its Policies
------------------
in full force and effect and shall not do, permit or willingly allow to be done
any act by which any of the Policies may be suspended, impaired or canceled.
Section 7.12 Discharge. The Company shall not cancel, compromise, release
---------
or discharge any claim of the Company upon or against any person or waive any
right of the Company of material value, and not discharge any Lien upon any
asset of the Company or compromise any debt or other obligation of the Company
to any person other than Liens, debts or obligations with respect to current
liabilities of the Company.
Section 7.13 Actions. The Company shall not institute, settle or agree
-------
to settle any Action before any governmental entity.
Section 7.14 Permits. The Company shall maintain in full force and
-------
effect, and comply with, all Permits.
Section 7.15 Tax Assessments and Audits. The Company shall furnish
--------------------------
promptly to Buyer a copy of all notices of proposed assessment or similar
notices or reports that are received from any taxing authority and which relate
to the Company's operations for periods ending on or prior to the Closing Date.
The Shareholders shall cause the Company to promptly inform Buyer, and permit
the participation in and control by Buyer, of any investigation, audit or other
proceeding by a Governmental Entity in connection with any Taxes, assessment,
governmental charge or duty and shall not consent to any settlement or final
determination in any proceeding without the prior written consent of Buyer.
ARTICLE 8
ADDITIONAL COVENANTS
--------------------
Section 8.1 Covenants of the Company and the Shareholders. During the
---------------------------------------------
period commencing on the date hereof and continuing through the Closing Date,
each of the Company and the Shareholders agree to:
(a) comply promptly with all requirements that applicable
Legal Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and furnish
information to, Buyer in connection with any such requirements imposed upon
Buyer or upon any of its affiliates in connection therewith or herewith,
including, without limitation, all information reasonably required by Buyer to
prepare its registration statement with respect to its initial public offering;
(b) use its reasonable commercial efforts to obtain (and to
cooperate with Buyer in obtaining) any consent, authorization or approval of, or
exemption by, any Person required to be obtained or made by the Company or the
Shareholders, as applicable, in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to bring about the
satisfaction of each of the conditions precedent to Closing set forth in
Sections 6.1 and 6.2 of this Agreement;
(d) promptly orally advise Buyer and, within three business
days thereafter, in writing of any change in the Company's business or condition
that has had or may have a Material Adverse Effect; and
-20-
<PAGE>
(e) at or prior to the Closing, the Shareholders will repay
to the Company shareholders loans payable, if any.
Section 8.2 Covenants of Buyer. During the period commencing on the
------------------
date hereof and continuing through the Closing Date, Buyer agrees to:
(a) comply promptly with all requirements that applicable
Legal Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and furnish
information to, the Company and the Shareholders in connection with any such
requirements imposed upon the Shareholders or the Company or upon any of the
Affiliates of the Company in connection therewith or herewith;
(b) use its reasonable commercial efforts to obtain any
consent, authorization or approval of, or exemption by, any Person required to
be obtained or made by Buyer in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to have the
Shareholders released from any guarantees set forth on Schedule 8.2 hereto. If
------------
Buyer cannot obtain any such release within 90 days after the Closing Date, it
will indemnify the Shareholders from and after the Closing date with respect to
any liability on the related guarantees; and
(d) use its reasonable commercial efforts to bring about the
satisfaction of each of the conditions precedent to Closing set forth in
Sections 6.1 and 6.3 of this Agreement.
Section 8.3 Access and Information.
----------------------
(a) Between the date hereof and the Closing Date, (i) the
Company will permit, and will cause its officers, directors, key employees and
advisors to permit, Buyer and its representatives and agents reasonable access
to the Company's books and records, facilities, key personnel, customers,
suppliers, independent accountants and attorneys, as requested by Buyer;
provided, however, Buyer and its representatives and agents shall not contact
- -------- -------
any of Company's customers or key salesmen other than with the consent of David
Chang or when David Chang is present; (ii) Buyer will use its reasonable best
efforts to provide the Shareholders and the Company and their respective
representatives and agents reasonable access to the books and records,
facilities, key personnel, customers, suppliers, independent accountants and
attorneys of other companies to be acquired by Buyer in conjunction with the
acquisition of the Company, as reasonably requested by the Company (subject to
the execution of appropriate confidentiality agreements and with the
understanding that there will be no access to product formulations or other
sensitive trade secret information); and (iv) the Company shall provide to
Buyer, promptly upon completion, an unaudited balance sheet and the related
statements of income or operations, cash flows and stockholder's equity for each
month-end and period from and after December 31, 1997.
(b) The Confidentiality Agreement dated April 22, 1998 (the
"Confidentiality Agreement") entered into among the Company, the Shareholders
- --------------------------
and Buyer shall survive the execution and delivery of this Agreement.
Section 8.4 Expenses. Except as otherwise specifically provided herein,
--------
each party to this Agreement shall bear its own direct and indirect expenses
incurred in connection with the negotiation and preparation of this Agreement
and the consummation and performance of the transactions contemplated hereby,
including, without limitation, all legal fees and fees of any brokers, finders
or similar agents; provided, however, that the Company may advance such
-------- -------
expenses on behalf of the Shareholders which such advances the Shareholders
shall repay to the Company at, or prior to, the Closing; provided, further, that
-------- -------
the fees of independent auditors to audit the Company's financial statements
shall be paid by Buyer.
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<PAGE>
Section 8.5 Certain Notifications. At all times from the date hereof
---------------------
to the Closing Date, no party shall permit or undertake any action that would
result in, and each party shall promptly notify the others in writing of, the
occurrence of any event that will or may (i) render any statement,
representation or warranty of such party in this Agreement (including the
Schedules hereto) inaccurate or incomplete in any material respect or (ii)
constitute or result in the breach by such party of, or a failure to comply
with, any agreement or covenant in this Agreement applicable to such party or
(iii) result in the failure by such party to satisfy any of the conditions
specified in Article 6 hereof.
---------
Section 8.6 Publicity; Employee Communications. At all times prior to
----------------------------------
the Closing Date, each party shall obtain the consent of all other parties
hereto prior to issuing, or permitting any of its directors, officers, employees
or agents to issue, any press release or other information to the press,
employees of the Company or any third party with respect to this Agreement or
the transactions contemplated hereby; provided, however, that no party shall be
-------- -------
prohibited from supplying any information to any of is representatives, agents,
attorneys, advisors, financing sources and others to the extent necessary to
complete the transactions contemplated hereby. Nothing contained in this
Agreement shall prevent any party to this Agreement at any time from furnishing
any required information to any Governmental Entity or authority pursuant to a
Legal Requirement or from complying with its legal or contractual obligations.
Section 8.7 Further Assurances. Subject to the terms and conditions
------------------
of this Agreement, each of the parties hereto agrees to use all reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable Legal
Requirements, to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the Closing any further action is necessary
or desirable to carry out the purposes of this Agreement, the Shareholder, the
Company, Buyer or Newco, as the case may be, shall take or cause to be taken all
such necessary or convenient action and execute, and deliver and file, or cause
to be executed, delivered and filed, all necessary or convenient documentation.
Section 8.8 Competing Offers; Merger or Liquidation. The Company and
---------------------------------------
the Shareholders agree that they will not, and the Shareholders will cause the
Company not to, directly or indirectly, through any officer, director, agent or
otherwise, solicit, initiate, encourage or conduct discussions with, or accept
or consider the submissions of bids, offers or proposals by, any Person with
respect to an acquisition of the Company or its assets or capital stock or a
Merger or similar transaction, and the Company and the Shareholders will not,
and the Shareholders will not permit the Company to, engage any broker,
financial adviser or consultant with an incentive to initiate or encourage
proposals or offers from other parties. Furthermore, the Company and the
Shareholders shall not, and the Shareholders shall not permit the Company to,
directly or indirectly, through any officer, director, agent or otherwise,
engage in negotiations concerning any such transaction with, or provide
information to, any Person other than Buyer and its principal shareholder, and
their respective representatives, with a view to engaging, or preparing to
engage, that Person with respect to any matters referenced in this Section. The
Shareholders shall ensure that the Company shall not commence any proceeding to
merge, consolidate or liquidate or dissolve or obligate itself to do so.
Section 8.9 Covenants regarding Shares. The Shareholders hereby
--------------------------
agree with Buyer as follows:
(a) The certificates evidencing the shares of Buyer Common Stock they
will acquire in the Merger, and each instrument or certificate issued in
transfer thereof, will bear substantially the following legend:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and
such securities may not be sold or transferred unless there is an
effective registration statement under such Act covering
-22-
<PAGE>
such securities or the issuer corporation receives an opinion of
counsel reasonably satisfactory to issuer corporation (which may be
counsel for the issuer corporation) stating that such sale or transfer
is exempt from the registration and prospectus delivery requirements
of such Act."
(b) The certificates representing such shares of Buyer Common
Stock and each instrument or certificate issued in transfer thereof will also
bear any legend required under any applicable state securities law.
(c) Absent an effective registration statement under the
Securities Act, covering the disposition of the shares of Buyer Common Stock
which the Shareholders acquire in the Merger, the Shareholders will not sell,
transfer, assign, pledge, hypothecate or otherwise dispose of any or all of such
shares of Buyer Common Stock without first providing Buyer with an opinion of
counsel reasonably acceptable to Buyer (which may be counsel for Buyer) to the
effect that such sale, transfer, assignment, pledge, hypothecation or other
disposition will be exempt from the registration and the prospectus delivery
requirements of the Securities Act and the registration or qualification
requirements of any applicable state securities laws. The Shareholders consent
to Buyer's making a notation on its records or giving instructions to any
transfer agent of the Buyer Common Stock in order to implement the restrictions
on transfer set forth in this subsection (c).
Section 8.10. Advice of Counsel. The Shareholders acknowledge that
-----------------
the Shareholders have obtained advice from independent counsel with respect to
this Agreement to the extent the Shareholders desired to do so. The
Shareholders are not relying on any representations, except those set forth
herein, or advice from Buyer or Newco or any of their respective officers,
directors, attorneys or other representatives regarding this Agreement, its
content or effect.
Section 8.11. Completion of Due Diligence. Buyer agrees that it will
---------------------------
complete its due diligence investigation of the Company on or prior to August
25, 1998.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 9.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Closing:8.5
(a) by mutual consent of all of the parties hereto;
(b) by the Company or the Shareholders, on the one hand, or by
Buyer, on the other hand, by written notice to the other party or parties hereto
if the Merger shall not have been consummated on or before November 30, 1998 (or
such later date as Buyer, the Company and the Shareholders may agree), provided
that in the case of a termination under this clause (b), the party or parties
terminating this Agreement shall not then be in material breach of any of its or
their obligations under this Agreement;
(c) by Buyer if (i) there has been a material misrepresentation,
breach of warranty or breach of covenant by the Company or the Shareholders
under this Agreement or (ii) any of the conditions precedent to Closing set
forth in Sections 6.1 and 6.3 have not been met on the Closing Date, and, in
each case, Buyer is not then in material default of its obligations hereunder;
or
(d) by the Company or the Shareholders if (i) there has been a
material misrepresentation, breach of warranty or breach of covenant by Buyer
under this Agreement or (ii) any of the conditions precedent to Closing set
forth in Sections 6.1 and 6.2 have not been met on the Closing Date, and, in
each case, neither the Company nor the Shareholders are then in material default
of their obligations hereunder.
-23-
<PAGE>
Section 9.2 Effect of Termination. In the case of any termination of
---------------------
this Agreement, the provisions of Sections 8.3(b) and 8.4 shall remain in full
force and effect. Upon termination of this Agreement as provided in Section
9.1(a) or (b), this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of any party hereto or their respective
directors, officers, employees, agents or other representatives. In the event
of termination of this Agreement as provided in Section 9.1(b), (c) or (d)
hereof, such termination shall be without prejudice to any rights that the
terminating party or parties may have against the breaching party or parties or
any other Person under the terms of this Agreement or otherwise.
Section 9.3 Amendment and Waiver. This Agreement may be amended only
--------------------
by a written instrument executed by each of the parties hereto. Any term or
provision of this Agreement may be waived in writing at any time by the party or
parties entitled to the benefits thereof. No failure to exercise and no delay
in exercising any right, power or privilege shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege
preclude the exercise of any other right, power or privilege. No waiver of any
breach of any covenant or agreement hereunder shall be deemed a waiver of any
preceding or subsequent breach of the same or any other covenant or agreement.
The rights and remedies of each party under this Agreement are in addition to
all other rights and remedies, at law or in equity, that such party may have
against the other parties.
ARTICLE 10
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
-----------------------------------------------------------
Section 10.1. Survival of Representations and Warranties. The
------------------------------------------
representations and warranties of the parties hereto contained in this Agreement
or in any writing delivered pursuant hereto or at the Closing shall survive the
execution and delivery of this Agreement and the Closing and the consummation of
the transactions contemplated hereby (and any examination or investigation by or
on behalf of any party hereto) until the date 18 months after the Closing Date
(except for claims in respect thereof pending at such time, which shall survive
until finally resolved or settled); provided, however, that the representations
-------- -------
and warranties contained in Sections 3.1, 3.2, 3.3, 3.11, 3.13 (in so far as it
applies to Environmental Matters), 5.1, 5.2, 5.3 and 5.4 shall survive until the
expiration of the applicable statute of limitations. No Action may be commenced
with respect to any representation, warranty, covenant or agreement in this
Agreement, or in any writing delivered pursuant hereto, unless written notice,
setting forth in reasonable detail the claimed breach thereof, shall be
delivered pursuant to Section 11 to the party or parties against whom liability
for the claimed breach is charged on or before the termination of the survival
period specified in Section 10 for such representation, warranty, covenant or
agreement. In the event that the Shareholders shall be required to indemnify
the Buyer with respect to this Agreement, the Shareholders may elect to pay such
indemnified amounts in cash or in shares of NDI Common Stock (at fair market
value on the date of payment).
Section 10.2 Indemnification.
---------------
(a) The Shareholders severally covenant and agree to defend, indemnify
and hold harmless Purchaser and the Company, each officer, director, employee,
agent and representative of Purchaser or the Company and each Person who
controls Purchaser or the Company within the meaning of the Securities Act from
and against any loss, damage, cost or expense ("Damages") arising out of or
resulting from: (i) any inaccuracy in or breach of any representation or
warranty made by any Shareholder in this Agreement or in any writing delivered
pursuant to this Agreement or at the Closing; or (ii) the failure of any
Shareholder to perform or observe fully any covenant, agreement or condition to
be performed or observed by such Shareholder pursuant to this Agreement.
(b) Purchaser covenants and agrees to defend, indemnify and hold
harmless the Shareholders from and against any Damages arising out of or
resulting from: (i) any inaccuracy in or breach of any representation or
warranty made by Purchaser in this Agreement or in any writing delivered
pursuant to this Agreement or at the Closing; (ii) the failure by Purchaser to
perform or
-24-
<PAGE>
observe any covenant, agreement or condition to be performed or observed by it
pursuant to this Agreement; or (iii) any Actions arising out of or resulting
from the conduct by the Company of its business or operations after the Closing
Date.
(c) Purchaser shall not be liable to the Shareholders, and
the Shareholders shall not be liable to Purchaser, under this Section 10.2 for
any Damages indemnifiable hereunder except when the amount of such Damages with
respect to each event giving rise to a right to indemnification hereunder
exceeds an accumulated total of $25,000 in the aggregate and the amount of such
Damages with respect to all such events hereunder exceeds in the aggregate
$150,000 (but then for all Damages, including the first $25,000 and $150,000, as
the case may be); and, provided further, the Shareholders and the Purchaser
shall not be liable under this Section 10.2 for any amount in excess of the
Merger Consideration.
Section 10.3 Third Party Claims.
------------------
(a) If any party entitled to be indemnified pursuant to
Section 10.2 (an "Indemnified Party") receives notice of the assertion by any
-----------------
third party of any claim or of the commencement by any such third person of any
Action (any such claim or Action being referred to herein as an "Indemnifiable
-------------
Claim") with respect to which another party hereto (an "Indemnifying Party")
- ----- ------------------
is or may be obligated to provide indemnification, the Indemnified Party shall
promptly notify the Indemnifying Party in writing (the "Claim Notice") of the
------------
Indemnifiable Claim; provided, that the failure to provide such notice shall not
--------
relieve or otherwise affect the obligation of the Indemnifying Party to provide
indemnification hereunder, except to the extent that any Damages directly
resulted or were caused by such failure.
(b) The Indemnifying Party shall have fifteen (15) days after
receipt of the Claim Notice to undertake, conduct and control, through counsel
reasonably acceptable to the Indemnified Party, and at Indemnifying Party's
expense, the settlement or defense thereof, and the Indemnified Party shall
cooperate with the Indemnifying Party in connection therewith; provided, that
--------
(i) the Indemnifying Party shall permit the Indemnified Party to participate in
such settlement or defense through counsel chosen by the Indemnified Party,
provided that the fees and expenses of such counsel shall not be borne by the
Indemnifying Party unless the Indemnified Party shall have reasonably concluded
that there are defenses or counter or cross claims available to it that may not
be available to the Indemnifying Party, in which event the Indemnifying Party
shall bear the reasonable fees and expenses (and shall pay the same on a current
basis as incurred) of counsel and experts selected by the Indemnified Party, and
(ii) the Indemnifying Party shall not settle any Indemnifiable Claim without the
Indemnified Party's consent. So long as the Indemnifying Party is vigorously
contesting any such Indemnifiable Claim in good faith, the Indemnified Party
shall not pay or settle such claim without the Indemnifying Party's consent,
which consent shall not be unreasonably withheld or delayed.
(c) If the Indemnifying Party does not notify the Indemnified
Party within fifteen (15) days after receipt of the Claim Notice that it elects
to undertake the defense of the Indemnifiable Claim described therein, the
Indemnified Party shall have the right to contest, settle or compromise the
Indemnifiable Claim in the exercise of its reasonable discretion; provided, that
--------
the Indemnified Party shall notify the Indemnifying Party of any compromise or
settlement of any such Indemnifiable Claim.
(d) Anything contained in this Section 10.3 to the contrary
notwithstanding, the Shareholders shall not be entitled to assume the defense
for any Indemnifiable Claim (and shall be liable for, and shall pay the same on
a current basis as incurred, the reasonable fees and expenses incurred by the
Indemnified Party in defending such claim) if the Indemnifiable Claim seeks an
order, injunction or other equitable relief or relief for other than money
damages against Purchaser or the Company which Purchaser determines, after
conferring with its counsel, cannot be separated from any
-25-
<PAGE>
related claim for money damages and which, if successful, could adversely affect
the business, properties or prospects of Purchaser or the Company.
Section 10.4 Indemnification Non-Exclusive. The foregoing
-----------------------------
indemnification provisions are in addition to, and not in derogation of, any
statutory, equitable or common-law remedy any party may have for breach of
representation, warranty, covenant or agreement.
Section 10.5 Offsets. All amounts payable in respect of each
-------
Indemnifiable Claim by an Indemnifying Party under Section 10.2 shall be reduced
by the amount of (i) any tax benefit accruing to the Indemnified Party and (ii)
amounts recovered under insurance policies, in each case respect of such
Indemnifiable Claim.
ARTICLE 11
GENERAL PROVISIONS
------------------
Section 11.1 Notices. All notices and other communications under or
-------
in connection with this Agreement shall be in writing and shall be deemed given
(a) if delivered personally, upon delivery, (b) if delivered by registered or
certified mail (return receipt requested), upon the earlier of actual delivery
or three days after being mailed, or (c) if given by telecopy, upon confirmation
of transmission by telecopy, in each case to the parties at the following
addresses:
(a) If to Buyer or Newco, addressed to:
Advanced Nutraceuticals, Inc.
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Barry Loder
With copies to:
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street, 23rd Floor
Los Angeles, California 90071
Telecopy: (213) 627-0705
Attention: David L. Gersh, Esq.
(b) If to the Company, addressed to:
ACTA International and ACTA Pharmacal Co.
1131 North Fair Oaks Avenue
Sunnyvale, California 94089-2102
Telecopy: (408) 734-1149
Attention: David Chang
With copies to:
Ferrari, Olsen, Ottoboni & Bebb, LLP
333 West Santa Clara Street, Suite 700
San Jose, California 95113-1716
Telecopy: (408) 280-0151
Attention: Peter D. Feinberg, Esq.
(c) If to the Shareholders,
addressed to:
-26-
<PAGE>
K.Y. Chang
1131 N. Fair Oaks Avenue
Sunnyvale, California 94089
Telecopy: (408) 734-1149
and
David Chang
1131 N. Fair Oaks Avenue
Sunnyvale, California 94089
Telecopy: (408) 734-1149
and
Robert Chiang
1131 N. Fair Oaks Avenue
Sunnyvale, California 94089
Telecopy: (408) 734-1149
With copies to:
Ferrari, Olsen, Ottoboni & Bebb, LLP
333 W. Santa Clara Street, Suite 700
San Jose, California 95113
Telecopy: (408) 280-0151
Attention: Peter D. Feinberg, Esq.
Section 11.2 Severability. If any term or provision of this Agreement
------------
or the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable such term or
provision in any other jurisdiction, the remaining terms and provisions of this
Agreement or the application of such terms and provisions to circumstances other
than those as to which it is held invalid or enforceable.
Section 11.3 Entire Agreement. This Agreement, including the
----------------
exhibits, annexes and schedules attached hereto and other documents referred to
herein, and the Confidentiality Agreement, contain the entire understanding of
the parties hereto in respect of their subject matter and supersede all prior
and contemporaneous agreements and understandings, oral and written, among the
parties with respect to such subject matter.
Section 11.4 Miscellaneous. This Agreement shall be binding upon and
-------------
inure to the benefit of each of the parties hereto and their respective
successors, heirs and assigns; provided, however, that no party may assign
-------- -------
either this Agreement or any of its rights, interests or obligations hereunder
in whole or in part without the prior written consent of the other parties
hereto (other than to the Surviving Corporation as a result of the Merger), and
any such transfer or assignment without said consent shall be void, ab initio.
---------
Subject to the immediately preceding sentence, this Agreement is not intended to
benefit, and shall not run to the benefit of or be enforceable by, any other
person or entity other than the parties hereto and their permitted successors
and assigns. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all such counterparts together shall
constitute one and the same Agreement. The exhibits, schedules and annexes to
this Agreement are incorporated herein and, by this reference, made a part
hereof as if fully set forth at length herein. The article, section and
subsection headings used herein are inserted for reference purposes only and
shall not in any way affect the meaning or interpretation of this Agreement. As
used in this Agreement, the masculine, feminine or neuter gender, and the
singular or plural, shall be deemed to include the others whenever and wherever
the context so requires. For the purposes of
-27-
<PAGE>
this Agreement, unless the context clearly requires, "or" is not exclusive. Each
party hereto hereby knowingly, voluntarily and intentionally waives any right it
may have to a jury trial in any legal proceeding which may be hereafter
instituted by any party hereto to assert a claim arising out of or relating to
this Agreement or any other agreement, instrument or document contemplated
hereby or thereby.
Section 11.5 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws (and not the law of conflicts) of
the State of Delaware.
Section 11.6 Jurisdiction; Venue; Attorney's Fees. Any legal action or
------------------------------------
proceeding with respect to this Agreement may be brought in the courts of the
State of California sitting in the City of San Francisco or of the United States
of America for the Northern District of California and each party hereby accepts
the jurisdiction of such courts. The parties hereto (i) hereby irrevocably
waive, in connection with any such proceeding or action, any objection to the
laying of venue in such courts, including without limitation on the grounds of
forum non conveniens, and (ii) hereby irrevocably consent to the service of
process of any of such courts. If any legal action or other proceeding is
brought by any party hereto, the prevailing party shall be entitled to recover
therein its costs and expenses incurred in connection therewith, including
without limitation reasonable attorneys' fees.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
as of the day and year first above written.
ADVANCED NUTRACEUTICALS, INC.
By: /s/
---------------------------
An Authorized Officer
AC ACQUISITION CO., INC.
By: /s/
---------------------------
An Authorized Officer
ACTA PRODUCTS CORPORATION
By: /s/
---------------------------
An Authorized Officer
ACTA PRODUCTS INTERNATIONAL
By: /s/
---------------------------
An Authorized Officer
By: /s/
---------------------------
K.Y. Chang
By: /s/
---------------------------
David Chang
By: /s/
---------------------------
Robert Chiang
-29-
<PAGE>
EXHIBIT 10.2
------------
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as
---------
of _________, 1998 by and among QBI Acquisitions Co., Inc., a Delaware
corporation ("Newco"), Advanced Nutraceuticals, Inc., a Delaware corporation
-----
("ANI"), Quality Botanical Ingredients, Inc., a New Jersey corporation (the
- -----
"Company") and Joseph Schortz, Lawrence J. Katz and the Botanical Trust, Joseph
- --------
Schortz, trustee (each individually, a "Shareholder" and collectively, the
-----------
"Shareholders").
- -------------
R E C I T A L S
- - - - - - - -
A. ANI owns all of the outstanding shares of capital stock of Newco.
B. The respective boards of directors of Newco and the Company have
determined that it is fair to, and in the best interests of, their respective
corporations and stockholders for the Company to be merged with and into Newco
upon the terms and subject to the conditions set forth herein (the "Merger");
------
the board of directors and sole stockholder of Newco have approved and adopted
this Agreement in accordance with the Delaware General Corporation Law (the
"Delaware Law"); and the board of directors and stockholders of the Company have
- -------------
approved and adopted this Agreement in accordance with the New Jersey Business
Corporation Act (the "New Jersey Law").
--------------
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. For all purposes of this Agreement, certain
-----------
capitalized terms not otherwise defined herein shall have the meanings set forth
in Exhibit A attached hereto.
---------
ARTICLE 2
THE MERGER
----------
Section 2.1 Merger. Upon the terms and subject to the conditions of
------
this Agreement, the Company shall be merged with and into Newco in accordance
with the applicable provisions of the Delaware Law. The Company and Newco are
herein sometimes referred to as the "Constituent Corporations." Newco shall be
------------------------
the surviving corporation following the effectiveness of the Merger (sometimes
referred to herein as the "Surviving Corporation").
---------------------
Section 2.2 Effect of Merger. The parties agree to the following
----------------
provisions with respect to the Merger:
(a) Certificate of Incorporation and Bylaws. The
---------------------------------------
Certificate of Incorporation of Newco, as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation, from and after the Effective Time until amended in accordance with
applicable law. The Bylaws of Newco, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation from and after
the Effective Time until amended in accordance with applicable law, the
Surviving Corporation's Certificate of Incorporation and such Bylaws.
-1-
<PAGE>
(b) Directors and Officers. The directors and officers of Newco in
----------------------
office immediately prior to the Effective Time shall be the directors and
officers, respectively, of the Surviving Corporation, and each shall hold his or
her respective office or offices from and after the Effective Time until his or
her successor shall have been elected and shall have qualified or as otherwise
provided in the Bylaws of the Surviving Corporation.
(c) Name and Corporate Organization of Surviving Corporation. The
--------------------------------------------------------
name of the Surviving Corporation from and after the Effective Time shall be
"QBI Acquisition Co., Inc.," which name shall be changed after the closing to
Quality Botanical Ingredients, Inc. in accordance with applicable law. At the
Effective Time, the identity and separate corporate existence of the Company
shall cease and Newco as the surviving corporation and successor shall succeed
to the Company in the manner of and as more fully set forth in Section 259 of
the Delaware Law.
(d) Filing of Certificate of Merger and Further Assurances. If this
------------------------------------------------------
Agreement is not terminated pursuant to Article 9 hereof, as soon as practicable
after all conditions to the Merger set forth in Article 6 hereof shall have
been satisfied or waived, the Constituent Corporations shall cause the
Certificate of Merger attached hereto as Annex B ("Certificate of Merger") to be
---------------------
executed and acknowledged and, as required by Delaware Law, filed with the
Secretary of State of the State of Delaware as provided in the Delaware Law, and
an executed and acknowledged counterpart of the Certificate of Merger to be
filed with the State of New Jersey as provided in the New Jersey Law. The
Merger shall become effective on the date and at the time the Certificate of
Merger is filed with the Secretary of State of the State of Delaware in
accordance with Section 103 of the Delaware Law (the "Effective Time"). If, at
--------------
any time after the Effective Time, the Surviving Corporation shall consider or
be advised that any deeds, bills of sale, assignments or assurances or any other
acts or things are necessary, desirable or proper (i) to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation, its right, title
or interest in, to or under any of the rights, properties or assets of the
Constituent Corporations acquired or to be acquired as a result of the Merger,
or (ii) otherwise to carry out the purposes of this Agreement, the Surviving
Corporation and its officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of the Constituent
Corporations, all such deeds, bills of sale, assignments and assurances and do,
in the name and on behalf of the Constituent Corporations, all such other acts
and things necessary, desirable or proper to vest, perfect or confirm its right,
title or interest in, to or under any of the rights, properties or assets of the
Constituent Corporations acquired or to be acquired as a result of the Merger
and otherwise to carry out the purposes of this Agreement.
Section 2.3 Conversion of Securities.
------------------------
(a) By virtue of the Merger and without any action on the
part of the holder thereof, at the Effective Time each share of common stock, no
par value, of the Company ("Company Common Stock"), outstanding immediately
--------------------
prior to the Effective Time shall be converted into the right to receive (i)
that amount of the Stock Merger Consideration (hereinafter defined) equal to the
total aggregate Stock Merger Consideration divided by the number of shares of
Company Common Stock outstanding and (ii) that amount of the Cash Merger
Consideration (as hereinafter defined) equal to the total aggregate Cash Merger
Consideration divided by the number of shares of Company Common Stock
outstanding; deliverable and payable to the holder thereof upon surrender of the
certificate formerly representing Company Common Stock (the "Share Certificate")
-----------------
in the manner provided in Section 2.4 hereof.
(b) "Stock Merger Consideration" shall mean that number of shares of
--------------------------
common stock, par value $.001, of ANI ("ANI Common Stock") equal to $23,450,000
----------------
divided by the initial public offering price per share of ANI Common Stock (the
"IPO Price"); provided, however, at the instruction of the Shareholders, that
---------
number of shares of ANI Common Stock only (and not cash) determined by dividing
$3,000,000 by the IPO Price and such additional shares required, if any, in
satisfaction of the convertible debt held by the BPI Holders shall be withheld
and issued directly to the BPI Holders (as hereinafter defined) immediately
after the Closing. "Cash Merger Consideration" shall mean an aggregate of
-------------------------
$8,050,000 in cash, without interest. The Stock Merger Consideration and Cash
Merger Consideration are herein sometimes collectively referred to as the
"Merger Consideration."
- ---------------------
-2-
<PAGE>
(c) By virtue of the Merger and without any action on the part of the
holder thereof, at the Effective Time each share of Company Common Stock held by
the Company as a treasury share immediately prior to the Effective Time shall be
canceled and no payment of any consideration shall be made with respect thereto.
Section 2.4 Payment of Cash for Company Common Stock; Exchange of Shares.
------------------------------------------------------------
(a) Each holder of a Share Certificate which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock will be entitled to receive, upon surrender to ANI of such Share
Certificate for cancellation, (i) a cash payment per share of Company Common
Stock and (ii) subject to the direction of the Shareholders in Section 2.3,
shares of ANI Common Stock, in each case in the amount calculated in accordance
with Section 2.3 hereof. Until properly surrendered, each such Share Certificate
shall be deemed for all purposes to evidence only the right to receive such cash
and shares of ANI Common Stock. No interest shall accrue or be paid on the cash
payable upon the surrender of the Share Certificates.
(b) No certificates or script representing fractional shares
of ANI Common Stock shall be issued upon the surrender for exchange of Share
Certificates, and no holders thereof shall be entitled to any voting rights,
rights to receive any dividends or distributions or other rights as a
stockholder of ANI with respect to any fractional shares of ANI Common Stock
that would otherwise be issued to such holder. In lieu of any fractional shares
of ANI Common Stock that would otherwise be issued, each holder that would have
been entitled to receive a fractional share of ANI Common Stock shall, upon
proper surrender of such holder's Share Certificates, receive a cash payment
equal to such fraction multiplied by the initial public offering price per share
of ANI Common Stock.
Section 2.5 Post-Closing Adjustment for Future Performance.
----------------------------------------------
Pursuant to the earn out due to the BPI Holders, ANI shall
establish an escrow, with a national bank or other independent escrow agent as
escrow agent, for that number of shares of ANI Common Stock equal to $3,000,000
divided by the IPO Price (the "Escrowed Shares"). The former BPI shareholders
---------------
(the "BPI Holders") shall be entitled to receive all or a portion of such
----------
shares in accordance with the provisions of the earn out set forth in Section
1.4 of the Stock Purchase Agreement dated June __, 1998 by and between the
Company and the BPI Holders (the "Earn Out").
--------
Amounts payable to the BPI Holders pursuant to this Section
2.5 shall be paid to each BPI Holder based on such BPI Holder's pro rata share
of BPI capital stock issued and outstanding immediately prior to the acquisition
of BPI by the Company as specified on Exhibit C. The BPI Holders shall
acknowledge as a condition of delivery of the ANI Common Stock that they are
receiving the shares for their own account and not with a view to distribution
and that the shares have not been registered for sale under the Securities Act
but are being issued pursuant to an exemption therefrom and will be so legended,
and there shall exist an available exemption from registration under the
Securities Exchange Act of 1933 (the "Securities Act") for the issuance of such
shares at the date of issuance.
Section 2.6 Closing. The closing of the Merger and the other
-------
transactions contemplated hereby (the "Closing") shall take place at the offices
-------
of Paul, Hastings, Janofsky & Walker LLP, Twenty-Third Floor, 555 South Flower
Street, Los Angeles, California 90071, at 10:00 A.M. local time on the day of
closing of the initial public offering of the ANI Common Stock, or at such other
time or on such other date as shall be agreed upon among the parties upon
satisfaction or waiver of all conditions precedent to the Closing (such time and
date being referred to herein as the "Closing Date").
------------
Section 2.7 Actions at the Closing. At the Closing:
----------------------
(a) The Company and Shareholders shall deliver or cause to be
delivered to ANI and Newco all of the documents, certificates and instruments
required to be delivered to ANI or Newco pursuant to Section 6.2.
-3-
<PAGE>
(b) ANI and Newco shall deliver or cause to be delivered to the
Company and the Shareholders all of the documents, certificates and instruments
required to be delivered to the Company or the Shareholders pursuant to Section
6.3.
(c) The Company and Newco shall file the Certificate of Merger with
the Secretary of State of the State of Delaware and with the Secretary of State
of the State of New Jersey.
(d) ANI shall deliver to the Shareholders, in the number or amounts as
instructed by the Shareholders in writing, signed by all of the Shareholders,
certificates representing the shares of ANI Common Stock acquired by the
Shareholders in the Merger.
(e) ANI shall deliver to the Shareholders, in the number or amounts as
instructed by the Shareholders in writing, signed by all of the Shareholders, by
wire transfer of immediately available funds, or by certified or cashier's
check, the cash portion of the Merger Consideration.
(f) ANI shall pay the Company's $1,350,000 note payable to the BPI
Holders (the "BPI Note") and shall assume (i) the $3,000,000 convertible
--------
promissory note held by the BPI Holders and (ii) the Earn Out.
(g) ANI shall pay the balance of the settlement due to Triarco
pursuant to the agreement dated December 11, 1997 (the "Triarco Settlement"), in
------------------
the approximate amount of $1,000,000.
(h) ANI shall pay the bridge loan due to Mellon Bank pursuant to the
Note dated May 12, 1998 in the approximate amount of $1,000,000.
(i) The Shareholders shall deliver or cause to be delivered to ANI or,
at its direction, an assignment of all of their interests (representing 81% of
the ownership) in each of the limited liability companies owned by Messrs.
Schortz, Katz and Nathan Belkowitz engaged in contract farming in the states of
Missouri, North Carolina and New Jersey (the "Farm LLCs"), free and clear from
---------
any Liens other than amounts due to QBI.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
------------------------------
REGARDING THE COMPANY
---------------------
The Company and the Shareholders hereby jointly and severally represent
and warrant to, and covenant and agree with, ANI and Newco that:
Section 3.1 Organization and Good Standing; Subsidiaries. The Company
--------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of New Jersey, with full power and authority to own and lease
its properties and to conduct its business as currently conducted. The Company
has been duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of each jurisdiction in which the Company
owns or leases any property, or conducts any business, so as to require such
qualification, except for Hawaii (where the Company will be qualified, if
required, prior to Closing) or where the failure to obtain such qualification
would not be reasonably likely to have a material adverse effect. The Company
has no Subsidiaries except BPI and does not own or control or have any other
equity investment or other interest in, directly or indirectly, any corporation,
joint venture, limited liability company, partnership, association or other
entity. The copies or originals of the [articles] of incorporation, bylaws,
minute books and stock records of the Company previously delivered to, or made
available for inspection by, ANI are true, complete and correct.
Section 3.2 Authorization, Binding Agreement. The Company has all
--------------------------------
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated
-4-
<PAGE>
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Company's board of directors and the Company's stockholders in accordance with
the New Jersey Law and the certificate of incorporation and bylaws of the
Company. No other corporate proceedings on the part of the Company are necessary
to authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company and
constitutes the legal, valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as such enforceability
may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or
other laws, now or hereafter in effect, relating to or limiting creditors'
rights generally, and (b) general principles of equity (whether considered in an
action in equity or at law).
Section 3.3 No Conflicts. The execution, delivery and performance of
------------
this Agreement and the consummation of the transactions contemplated hereby will
not (a) except for the required consent of Mellon Bank, conflict with or result
in a breach or violation of any term or provision of, or constitute a default
under (with or without notice or passage of time, or both), or otherwise give
any Person a basis for accelerated or increased rights or termination or
nonperformance under, any obligation, agreement or instrument to which the
Company is a party or by which the Company is bound or affected or to which any
of the property or assets of the Company is bound or affected, (b) result in the
violation of the provisions of the certificate of incorporation or bylaws of the
Company or any Legal Requirement applicable to or binding upon it, (c) result in
the creation or imposition of any Lien upon any property or asset of the Company
or (d) otherwise adversely affect the contractual or other legal rights or
privileges of the Company. Schedule 3.3 sets forth a list of all agreements
------------
requiring the consent of any party thereto to any of the transactions
contemplated hereby (including, without limitation, the agreements with Mellon
Bank and the mortgage holder on the 500 Metuchen Road property).
Except as set forth on Schedule 3.3, all consents,
------------
authorizations and approvals of any Person to or as a result of the consummation
of the transactions contemplated hereby, that are necessary or advisable in
connection with the operations and business of the Company as currently
conducted and as proposed to be conducted, or for which the failure to obtain
the same might have, individually or in the aggregate, a Material Adverse
Effect, have been lawfully and validly obtained by the Company.
Section 3.4 Capitalization. The authorized capital stock of the Company
--------------
consists solely of 300 shares of Company Common Stock, of which 150 shares are,
and as of the Closing will be, issued and outstanding. All of the issued and
outstanding shares of Company Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable and are held by the Shareholders in
the amounts reflected in Annex A hereto. There are no existing options,
-------
warrants, rights, calls or commitments of any character relating to the shares
of Company Common Stock or any other capital stock or securities of the Company,
(ii) there are no outstanding securities or other instruments convertible into
or exchangeable for shares of Company Common Stock or any other capital stock or
securities of the Company and no commitments to issue such securities or
instruments, and no Person has any right of first refusal, subscription right or
similar right with respect to any shares of Company Common Stock or any other
capital stock or securities of the Company.
Section 3.5 Financial Statements.
--------------------
(a) The Company has prepared and furnished to ANI, and there are
included in Schedule 3.5 hereto, true and complete copies of (i) the unaudited
------------
balance sheet (the "Balance Sheet") of the Company, the Farm LLCs and BPI at
-------------
June 30, 1998 (the "Balance Sheet Date"), and the related unaudited statements
------------------
of income, shareholders' equity and cash flows for the six months then ended,
(ii) (a) the audited balance sheets of the Company at December 31, 1997 and
December 31, 1996, (b) the unaudited balance sheets of BPI at December 31, 1997
and December 31, 1996, [and (c) the unaudited balance sheets of the Farm LLCs at
December 31, 1997 and December 31, 1996] and the related audited (and unaudited,
with respect to unaudited balance sheets) statements of income, shareholders'
equity and cash flow for the fiscal year then ended, together with the report
thereon of independent certified public accountants as to the Company (the
financial statements described in clauses (i) and (ii) above are collectively
referred to as the "Financial Statements").
--------------------
-5-
<PAGE>
(b) The Financial Statements present fairly the financial condition of
the Company as of the dates indicated therein and the results of operations and
cash flows of the Company for the periods specified therein, have been prepared
in conformity with GAAP (other than the financial statements of BPI at and for
the period ending December 31, 1996 and the financial statements for the Farm
LLCs, all of which are prepared on a tax basis) applied on a consistent basis
during the periods covered thereby and prior periods, have been derived from the
accounting records of the Company and represent only actual, bona fide
transactions.
Section 3.6 Property and Products.
---------------------
(a) The Company has, and immediately prior to the Closing will have,
good, valid and marketable title in fee simple to all real property and all
personal property reflected on the Balance Sheet as owned by the Company and all
real property and personal property acquired by the Company since the Balance
Sheet Date, in each case free and clear of all Liens except (i) as set forth on
Schedule 3.6(a-1), and (ii) for sales and other dispositions of inventory in the
- -----------------
ordinary course of business since the Balance Sheet Date which, in the
aggregate, have not been materially different from prior periods. Schedule
--------
3.6(a-2) contains a list of all tangible personal property, including, without
- --------
limitation, computer systems, hardware and software, having a cost or fair
market value in excess of $50,000 owned by the Company (other than personal
property held by the Company as lessee under an operating lease). Schedule
--------
3.6(a-3) contains a list of all real property leases, licenses and personal
- --------
property leases under which the Company is the lessee or licensee. True and
complete copies of all real property leases, licenses and personal property
leases listed on Schedule 3.6(a-3) have been delivered to Purchaser heretofore,
-----------------
as well as copies of any title reports, surveys or environmental reports or
audits relating to any leased real property. For the purposes of this Section
3.6(a-3), a "lease" shall include a sublease. All personal property owned by the
Company and all personal property held by the Company pursuant to operating
leases is in good operating condition and repair, subject only to ordinary wear
and tear, and is suitable and appropriate for the use thereof made and proposed
to be made by the Company in its business and operations. The real property and
personal property described in Schedules 3.6(a-1) and 3.6(a-2) and the real
property and personal property held by the Company pursuant to the leases and
licenses described in Schedule 3.6(a-3) comprise all of the real property and
personal property used in the conduct of business of the Company. The Company
owns or leases all of the real and personal property, tangible and intangible,
necessary to conduct its business as heretofore conducted or as contemplated to
be conducted except as specifically disclosed herein.
(b) Except as set forth in Schedule 3.6(b), all of the facilities,
---------------
buildings, plants, structures and improvements (A) are in good operating
condition and repair, and (B) are adequate and suitable for the purposes for
which they are currently and proposed to be used. There are no (i) leases,
subleases, licenses, concessions or other agreements, written or oral, granting
to any other Person the right to acquire, use or occupy any portion of, any real
property, other than the rights of Jay Ram, pursuant to the Lease Agreement
dated December 7, 1995 to buy out the lease and cause BPI to move the building
on the land which is the subject of the prepaid land lease, (ii) outstanding
options or rights of first refusal to purchase all or any portion of real
property or interest therein, other than the option to purchase the real
property at 450 Metuchen Road pursuant to the Lease Agreement dated January 14,
1997, and (iii) Persons (other than the Company) in possession of any Real
Property. Except for inventory that is excess, damaged or obsolete, for which
in the aggregate an adequate reserve has been established in the Balance Sheet
in accordance with generally accepted accounting principles, consistently
applied, the inventory reflected in the Balance Sheet and thereafter acquired
and not disposed of since such date is of good and merchantable quality, and of
a quantity and quality saleable in the ordinary course of business in accordance
with past practices.
(c) Schedule 3.6(c) includes an accurate description of all products
manufactured, marketed, sold or licensed by the Company or its predecessor(s)
since January 1, 1993 (the "Company Products"). Except as disclosed on Schedule
3.6(c), there have been no Company Products which have been recalled, withdrawn
or suspended in and/or outside of the United States (whether voluntarily or
otherwise) since January 1, 1993, nor have there been proceedings in and/or
outside of the United States pending against the Company at any time since
January 1, 1993 (whether such proceedings have since been completed or remain
pending) seeking the recall, withdrawal, suspension or seizure of any
-6-
<PAGE>
Company Product or seeking to enjoin the Company from engaging in any activities
pertaining to such Company Products or to affirmatively perform activities
pertaining to such Company Products prior to shipping such products. There are
no facts which exist which could reasonably be expected to furnish a basis for
the recall or withdrawal or any Company Product or the suspension of any product
registration, product license, manufacturing license, wholesale dealer's
license, export license or other governmental license, or the approval or
consent of any governmental regulatory agency with respect to any Company
Product, nor do there exist any facts which could reasonably be expected to
furnish a basis for the recall, withdrawal, suspension or seizure by any
governmental agency or court of any Company Product or which could reasonably be
expected to form the basis for the issuance of an injunction pertaining thereto
or to cause the Company to cease further distribution or marketing of any
Company Product pending further approval or authorization by any governmental
agency or to change marketing classification of any Company Product. The Company
Products have been manufactured, marketed and distributed in accordance with the
specifications under which such Company Products have normally been manufactured
and in accordance with all applicable requirements of law. Since January 1,
1993, the Company has not received or been subject to consent decrees, orders,
settlement agreements or similar matters relating in any fashion to the Company
Products or received any warning letters or other correspondence from the Food
and Drug Administration, the Federal Trade Commission or other governmental
officials or agencies concerning the Company Products or which have in any
manner asserted that the operations of the Company may not be in compliance with
applicable laws, regulations, rules or guidelines. The Company has complied in
all respects with current reporting requirements relating to the Company
Products. Except for the principal of a corporation with whom the Company has a
consulting agreement, no officer, director or employee of the Company has been
convicted of or formally charged with any offense or act of a type that would be
required to be disclosed in a registration statement pursuant to Form S-1 under
the Securities Act.
Section 3.7 Accounts Receivable. All accounts receivable of the
-------------------
Company reflected in the Balance Sheet and all accounts receivable of the
Company that have arisen since the Balance Sheet Date (except such accounts
receivable as have been collected since such dates) are valid and enforceable
claims. Such accounts receivable of the Company are not subject to any valid
defense, offset or counterclaim and are fully collectible (or, in the case of
Stryka Botanics Co., Inc., fully offsetable against valid accounts payable,
dollar for dollar) on normal terms and in the ordinary course of business,
except to the extent of the allowance for doubtful accounts reflected on the
Balance Sheet. Schedule 3.7 contains a true and complete aging of the Company's
------------
accounts receivable as of the Balance Sheet Date.
Section 3.8 Trademarks, Patents, Etc.
------------------------
(a) Schedule 3.8(a) contains a true and complete list of all letters
---------------
patent, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, copyrights, copyright
registrations and applications, grants of a license or right to the Company with
respect to the foregoing, both domestic and foreign, claimed by the Company or
used or proposed to be used by the Company in the conduct of its business,
whether registered or not, and the status of each (collectively herein,
"Registered Rights").
- ------------------
(b) Except as described in Schedule 3.8(b), the Company owns and has the
---------------
unrestricted right to use the Registered Rights and every trade secret, know-
how, process, discovery, development, design, technique, customer and supplier
list, promotional idea, marketing and purchasing strategy, invention, process,
confidential data, product formulation and or other information (collectively
herein, "Proprietary Information") required for, advantageous to or incident to
-----------------------
the design, development, purchase, distribution, sale and use of all products
and services sold or rendered or proposed to be sold or rendered by the Company,
free and clear of any right, equity or claim of others. The Company has taken
reasonable security measures to protect the secrecy, confidentiality and value
of all Proprietary Information.
(c) Except as described in Schedule 3.8(c), (i) the Company has not
---------------
sold, transferred, assigned, licensed or subjected to any Lien, any Registered
Right or Proprietary Information or any interest therein, and (ii) the Company
is not obligated or under any liability whatever to make any
-7-
<PAGE>
payments by way of royalties, fees or otherwise to any owner or licensor of, or
other claimant to, any Registered Right or Proprietary Information. None of the
Registered Rights or Proprietary Information licensed or granted to the Company
is owned by any Shareholder or any affiliate of any Shareholder and no
Registered Right or Proprietary Information has been licensed or granted to any
Shareholder or any affiliate of any Shareholder.
(d) Except that BPI has been advised that its branded product line
"Farmacopia" conflicts with the trademark "Cornacopia" and that its brand name
"Immu-Neem" conflicts with the brand name "Immunene," there is no claim or
demand of any Person pertaining to, or any Action that is pending or, to the
Company's or Shareholders' knowledge, threatened, which challenges the rights of
the Company in respect of any Registered Right or any Proprietary Information;
provided, however, the exceptions to this subsection (d), if adversely resolved,
would not have a material adverse effect.
Section 3.9 Banking and Insurance.
---------------------
(a) Schedule 3.9(a) contains a true and complete list of the names and
---------------
locations of all financial institutions at which the Company maintains a
checking account, deposit account, securities account, safety deposit box or
other deposit or safekeeping arrangement, the numbers or other identification of
all such accounts and arrangements and the names of all persons authorized to
draw against any funds therein.
(b) Schedule 3.9(b) contains a true and complete list and brief summary
---------------
of all insurance policies and bonds and self insurance arrangements currently in
force that cover or purport to cover risks or losses to or associated with the
Company's business, operations, premises, properties, assets, employees, agents
and directors. The insurance policies, bonds and arrangements described on
Schedule 3.9(b) (the "Policies") provide such coverage against such risk of loss
- --------------- --------
and in such amounts as are customary for corporations of established reputation
engaged in the same or similar business and similarly situated. True and
complete copies of all such Policies have been delivered to ANI heretofore
Section 3.10 Litigation. Except as set forth on Schedule 3.10 (which
---------- -------------
includes a description of the Triarco settlement, a matter wherein the Company
is a plaintiff against a former agent and a $40,000 collection matter at BPI),
there is no legal action, suit, arbitration or other legal, administrative or
other governmental investigation, inquiry or proceeding pending or, to the
knowledge of the Company or its Shareholders, threatened against or affecting
the Company or any of its property, assets, business, products, franchises or
governmental approvals, before any court or governmental department, commission,
board, bureau, agency, instrumentality or arbitrator (including but not limited
to any taxing entity or authority) which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect upon the Company
and its subsidiaries, taken as a whole, or to materially and adversely affect
the ability of the Company to carry out, or to prevent or make unduly
burdensome, the Merger contemplated by this Agreement. Except as set forth in
Schedule 3.10, the Company is subject to no outstanding judgments, orders,
decrees, awards, stipulations or injunctions of any governmental entity or
arbitrator against or affecting the Company or its properties, assets or
business.
Neither the Company nor, to the Shareholders' knowledge, any of its
directors, officers, agents, employees or other Person (except as heretofore
disclosed to ANI concerning a principal of a consultant to the Company)
associated with or acting on behalf of the Company has (a) used any corporate
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity, (b) made any direct or indirect
unlawful payments to government officials or employees, or foreign government
officials or employees, from corporate funds, (c) established or maintained any
unlawful or unrecorded fund of corporate monies or other assets, (d) made any
false or fictitious entries on the books of account of the Company, or (e) made
or received any bribe, rebate, payoff, influence payment, kickback or other
unlawful payment.
Section 3.11 Income and Other Taxes. Except as set forth on Schedule
---------------------- --------
3.11:
- ----
(a) All Tax Returns required to be filed through and including the date
hereof in connection with the operations of the Company are true, complete and
correct in all respects and have
-8-
<PAGE>
been properly and timely filed. The Company has not requested any extension of
time within which to file any Tax Return, which Tax Return has not since been
filed. Purchaser has heretofore been furnished by the Company with true, correct
and complete copies of each Tax Return of the Company with respect to the past
three taxable years, and of all reports of, and communications from, any
Governmental Entities relating to such period.
(b) All Taxes required to be paid or withheld and deposited through and
including the date hereof in connection with the operations of the Company have
been duly and timely paid or deposited by the Company. The Company has properly
withheld or collected all amounts required by law for income Taxes and
employment Taxes relating to its employees, creditors, independent contractors
and other third parties, and for sales and use Taxes on sales, and has properly
and timely remitted such withheld or collected amounts to the appropriate
Governmental Entity. The Company has no liabilities for any Taxes for any
taxable period ending prior to or coincident with the Closing Date.
Section 3.12 Employee Benefit Matters. Schedule 3.12 contains a complete
------------------------ -------------
list of all employee benefit plans (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which
-----
are maintained or contributed to by the Company (the "Company Benefit Plans").
----------------------
The Company has heretofore provided to Purchaser (i) true and complete copies of
all Company Benefit Plans; (ii) the most recent annual actuarial evaluation, if
any, prepared for each Company Benefit Plan; (iii) the two most recent annual
reports (series 5500), if any, required under ERISA with respect to each Company
Benefit Plan, including audited financial statements; (iv) the most recent
determination letter received from the IRS, if any, for each Company Benefit
Plan, and (v) the most recent Summary Plan Description, if any, required under
ERISA with respect to each Company Benefit Plan. Except as disclosed on Schedule
--------
3.12, (i) with respect to each Company Benefit Plan that is intended to
- ----
be qualified under Section 401(a) of the Code and is maintained by the Company
for any of its employees, (x) the Company has obtained a favorable determination
letter from the IRS and nothing has happened since such letter that would
adversely affect the tax qualification of such plan and (y) such plan has been
operated in compliance with ERISA and in accordance with the provisions of, and
the rules and regulations covering, such plan except where the failure to so
comply does not individually or in the aggregate, have a Material Adverse Effect
upon the Company, (ii) with respect to each Company Benefit Plan, the Company is
not, and to the Company's knowledge no other person is, engaged in a transaction
prohibited by Section 4975 of the Code or Section 406 of ERISA which could
result in a liability to the Company which would individually or in the
aggregate, have a Material Adverse Effect upon the Company, (iii) each Company
Benefit Plan which is subject to Part III of Subtitle B of Title I of ERISA or
Section 412 of the Code has been maintained in compliance with the minimum
funding standards of ERISA and the Code, and no reportable event, within the
meaning of Section 4043 of ERISA has occurred with respect to any Company
Benefit Plan which is subject to Title IV of ERISA, other than reportable events
with respect to which notice has been waived by the Pension Benefit Guaranty
Corporation or which would not, individually or in the aggregate, have a
Material Adverse Effect upon the Company, and (iv) no benefit is provided
pursuant to a welfare benefit plan (as defined in ERISA Section 3(1)) to a
former employee of the Company other than for continuation health coverage
benefits provided under Code Section 4980B.
Section 3.13 No Undisclosed Liabilities. Except (i) to the extent set
--------------------------
forth or provided for in the Balance Sheet or the notes thereto, (ii) as set
forth on Schedule 3.13 [which discusses the possible writedown of the Farm LLCs
-------------
to net realizable value] or (iii) for non-material current liabilities incurred
since the Balance Sheet Date in the ordinary course of business, as of the date
hereof the Company has no liabilities or obligations of any kind or nature
(whether or not of a type that would be required to be disclosed in financial
statements), whether accrued, absolute, contingent or otherwise, whether due or
to become due and whether the amounts thereof are readily ascertainable or not,
or any unrealized or anticipated losses from any commitments of a contractual
nature, including but not limited to liabilities or obligations for Taxes and
Environmental Matters with respect to or based upon the facts existing, or
transactions or events occurring at or prior to the Closing.
Section 3.14 Permits, Licenses, Etc.; Regulatory Filings. The Company
-------------------------------------------
possesses, and is operating in compliance with, all franchises, licenses,
permits, certificates, authorizations, rights and
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<PAGE>
other approvals of Governmental Entities necessary to (i) occupy, maintain,
operate and use the real property as it is currently used and proposed (except
for the proposed entry by the Company into the extraction business, for which
applications for licenses and permits have not yet been made) to be used, (ii)
conduct its business as currently conducted and as proposed to be conducted, and
(iii) maintain and operate its Company Benefit Plans (collectively, the
"Permits"). Schedule 3.14 contains a true and complete list of all Permits.
- ------- -------------
Each Permit has been lawfully and validly issued, and no proceeding is pending
or, to the Shareholders' knowledge, threatened looking toward the revocation,
suspension or limitation of any Permit. The consummation of the transactions
contemplated by this Agreement will not result in the revocation, suspension or
limitation of any Permit.
The Company has made all required registrations and filings with and
submissions to all applicable Governmental Entities relating to the operations
of the Company as currently conducted and as proposed to be conducted,
including, without limitation, all such applicable Governmental Entities having
jurisdiction over any matters pertaining to conservation or protection of the
environment, the treatment, discharge, use, handling, storage or production, or
disposal of Hazardous Materials and the safety of foods, drugs and other
consumer products. All such registrations, filings and submissions were in
compliance with all Legal Requirements (including all Environmental Laws) and
other requirements when filed, no material deficiencies have been asserted by
any such applicable Governmental Entities with respect to such registrations,
filings or submissions and, to the Shareholders' knowledge, no facts or
circumstances exist which would indicate that a material deficiency may be
asserted by any such authority with respect to any such registration, filing or
submission.
Section 3.15 Material Contracts; No Defaults.
-------------------------------
(a) Schedule 3.15 contains a true and complete list and description of
-------------
all material contracts, agreements, understandings, arrangements and
commitments, written or oral ("Contracts"), of the Company by which it or its
properties, rights or assets are bound. True and complete copies of such
written Contracts and true and complete summaries of such oral Contracts have
been delivered to Purchaser heretofore. For the purposes of this subsection
(a), "material" means any contract, agreement, understanding, arrangement or
commitment that (i) involves performance by any party more than 90 days from the
date hereof, (ii) involves payments or receipts by the Company in excess of
$100,000, (iii) involves capital expenditures in excess of $25,000 or (iv)
otherwise materially affects the Company.
(b) Except as described in Schedule 3.15 (which includes the loan
-------------
agreement with Mellon Bank), each Contract described herein or elsewhere in this
Agreement, including, without limitation, Section 3.6, is, and after the Closing
-----------
on identical terms will be, legal, valid, binding, enforceable and in full force
and effect and no event or condition has occurred or become known to the Company
or any Shareholder or is alleged to have occurred that constitutes or, with
notice or the passage of time, or both, would constitute a default or a basis of
force majeure or other claim of excusable delay, termination, nonperformance or
- ----- -------
accelerated or increased rights by the Company or any other Person under any
Contract described above in this Section 3.15, or described or otherwise
disclosed pursuant to this Agreement; and
(c) No customer that represented in excess of 10% of the Company's sales
of goods or services during the twelve months ended on the Balance Sheet Date
has terminated its relationship with or adversely curtailed its purchases from
the Company or indicated (for any reason) its intention so to terminate its
relationship or curtail its purchases. No supplier from whom the Company
purchased in excess of 10% of the Company's purchases of goods or services
during the twelve months ended on the Balance Sheet Date has terminated its
relationship with or adversely curtailed its accommodations, sales or services
to the Company or indicated (for any reason) its intention to terminate such
relationship or curtail its accommodations, sales or services. The Company has
no purchases available from only a single source.
(d) No person with whom the Company has such a contract, agreement,
arrangement, commitment or other understanding is in default thereunder or has
failed to perform fully thereunder
-10-
<PAGE>
by reason of force majeure or other claim of excusable delay, termination or
----- -------
nonperformance thereunder, the delay, termination or nonperformance of which, or
a default under which, has had or may have a material adverse effect.
Section 3.16 Absence of Certain Changes. Since December 31, 1997, except
--------------------------
as disclosed in Schedule 3.16 (which will include descriptions of the kava
-------------
purchase contracts acquired with the BPI acquisition and disclose the Mellon
refinancing and the BPI acquisition), the Company has not: (i) incurred any
debts, obligations or liabilities (absolute, accrued, contingent or otherwise),
other than current liabilities incurred in the ordinary course of business
which, individually or in the aggregate, are not material; (ii) subjected to or
permitted a Lien upon or otherwise encumbered any of its assets, tangible or
intangible; (iii) sold, transferred, licensed or leased any of its assets or
properties except in the ordinary course of business; (iv) canceled or
compromised any debt owed to or by or claim of or against it, or waived or
released any right, of material value other than in the ordinary course of
business; (v) suffered any physical damage, destruction or loss (whether or not
covered by insurance) causing or having a material adverse effect; (vi) made or
suffered any change in, or condition affecting, its condition (financial or
otherwise), properties, profitability, prospects or operations other than
changes, events or conditions in the ordinary course of business, none of which
(individually or in the aggregate) has had or may have a material adverse
effect; (vii) made any change in the accounting principles, methods, records or
practices followed by it or depreciation or amortization policies or rates
theretofore adopted; (viii) paid, or made any accrual or arrangement for payment
of, any severance or termination pay to, or entered into any employment or loan
or loan guarantee agreement with, any current or former officer, director or
employee or consultant (other than employment contracts with employees renewed
or entered into with respect to new employees in the ordinary course of business
and with the BPI Shareholders); (ix) paid, or made any accrual or arrangement
for payment of, any increase in compensation, bonuses or special compensation of
any kind to any employee other than in the ordinary course of business, or paid,
or made any accrual or arrangement for payment of, any increase in compensation,
bonuses or special compensation of any kind to any officer or director of the
Company or any consultant to the Company; or (x) entered into any agreement or
otherwise obligated itself to do any of the foregoing.
Section 3.17 Employees and Labor Matters.
---------------------------
(a) Schedule 3.17(a) contains a true and complete list of all contracts,
----------------
agreements, plans, arrangements, commitments and understandings (formal and
informal) pertaining to terms of employment, compensation, bonuses, profit
sharing, stock purchases, stock repurchases, stock options, stock appreciation
rights, commissions, incentives, loans or loan guarantees, severance pay or
benefits, use of the Company's property and related matters of the Company with
any current or former shareholder, officer, director, employee or consultant,
and true and complete copies of all such contracts, agreements, plans,
arrangements and understandings have been delivered to Purchaser heretofore.
(b) Except as set forth on Schedule 3.17(a) and except as specifically
----------------
provided herein with respect to Messrs. Schortz, Katz and a corporation of which
Belkowitz is a principal, neither ANI nor the Surviving Corporation will have
any responsibility for continuing any person in the employ (or retaining any
person as a consultant) of the Company from and after the Closing or have any
liability for any severance payments to or similar arrangements with any such
Person who shall cease to be an employee of the Company at or prior to the
Closing.
(c) There is not occurring or, to the Company's or Shareholders'
knowledge, threatened or anticipated, any strikes, slow downs, pickets, work
stoppages, grievance proceedings, union organization efforts or other concerted
action by (i) any current or former employees or other persons or (ii) any union
or other collective bargaining unit, against either the Company or its premises
or products.
Section 3.18 Affiliates. Except as disclosed on Schedule 3.18 (which
---------- -------------
will describe the supply arrangements with Herzl Markovitch), none of the
Shareholders, any officer, director or key employee of the Company or any
associate or Affiliate of the Company or any of such Persons has, directly or
-11-
<PAGE>
indirectly, (i) an interest in any Person that (A) furnishes or sells, or
proposes to furnish or sell, services or products that are furnished or sold by
the Company or (B) purchases from or sells or furnishes to, or proposes to
purchase from or sell or furnish to, the Company any goods or services or (ii) a
beneficial interest in any contract or agreement to which the Company is a party
or by which the Company or any of the assets of the Company are bound or
affected.
Section 3.19 Compliance with Law. The Company (i) has not violated or
-------------------
conducted its business or operations in violation of, and has not used or
occupied its properties or assets in violation of, any Legal Requirement or
Licensing Requirement which would individually or in the aggregate have a
material adverse effect on the Company or its subsidiaries, (ii) has not been
alleged to be in violation of any Legal Requirement or Licensing Requirement,
and (iii) has not received any notice of any alleged violation of, or any
citation for noncompliance with, any Legal Requirement or Licensing Requirement.
Section 3.20 Brokers' Fees. No investment banker, broker, finder or
-------------
similar agent has been employed by or on behalf of the Company in connection
with this Agreement or the transactions contemplated hereby, and the Company has
not entered into any agreement or understanding of any kind with any person or
entity for the payment of any brokerage commission, finder's fee or any similar
compensation in connection with this Agreement or the transactions contemplated
hereby; provided, however, Lawrence J. Katz provides ongoing corporate
development and financial advisory services to the Company pursuant to an
agreement dated April 17, 1997 and attached hereto as part of Schedule 3.15;
and, provided further, Lawrence J. Katz will not receive any additional
commission, finder's fee or similar compensation as a result of the transaction
contemplated herein.
Section 3.21 Disclosure. No representation or warranty of the Company or
----------
any Shareholder in this Agreement and no information contained in any Schedule
or other writing delivered pursuant to this Agreement or at the Closing contains
or will contain any untrue statement of a material fact or omits or will omit to
state a material fact required to make the statements herein or therein not
misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF ANI
-------------------------------------
ANI hereby represents and warrants to, and covenants and agrees with,
the Company and the Shareholders that:
Section 4.1 Organization and Good Standing of ANI. ANI is a corporation
-------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, with full power and authority to own and lease its properties
and to conduct its business as currently conducted. ANI has been duly qualified
as a foreign corporation for the transaction of business and is in good standing
under the laws of each jurisdiction in which ANI owns or leases any property, or
conducts any business, so as to require such qualification, except where the
failure to obtain such qualification would not be reasonably likely to have a
material adverse effect. The copies or originals of the certificates of
incorporation, bylaws, minute books and stock records of ANI previously
delivered to, or made available for inspection by, the Company and the
Shareholders are true, complete and correct.
Section 4.2 Organization and Good Standing of Newco. Newco is a
---------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full power and authority to own and lease its
properties and to conduct its business as currently conducted. Newco has been
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each jurisdiction in which Newco owns or
leases any property, or conducts any business, so as to require such
qualification, except where the failure to obtain such qualification would not
be reasonably likely to have a material adverse effect. The copies or originals
of the certificate of incorporation, bylaws, minute books and stock records of
Newco previously delivered to, or made available for inspection by, the Company
and the Shareholders are true, complete and correct.
-12-
<PAGE>
Section 4.3 Authorization, Binding Agreement. ANI and Newco each have
--------------------------------
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the respective
boards of directors of ANI and Newco and the sole stockholder of Newco in
accordance with the Delaware Law and the respective certificates of
incorporation and bylaws of ANI and Newco. No other corporate proceedings on
the part of ANI or Newco are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by ANI and Newco and constitutes the legal, valid and
binding agreement of ANI and Newco, enforceable against ANI and Newco in
accordance with its terms, except as such enforceability may be limited by (a)
bankruptcy, insolvency, reorganization, moratorium or other laws, now or
hereafter in effect, relating to or limiting creditors' rights generally, and
(b) general principles of equity (whether considered in an action in equity or
at law).
Section 4.4 No Conflicts. The execution, delivery and performance of
------------
this Agreement and the consummation of the transactions contemplated hereby will
not (a) conflict with or result in a breach or violation of any term or
provision of, or constitute a default under (with or without notice or passage
of time, or both), or otherwise give any Person a basis for accelerated or
increased rights or termination or nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement or instrument to which ANI or Newco is a party or by which ANI or
Newco is bound or affected or to which any of the property or assets of ANI or
Newco are bound or affected, (b) result in the violation of the provisions of
the [articles or] certificate of incorporation or bylaws of ANI or Newco or any
Legal Requirement applicable to or binding upon them, (c) result in the creation
or imposition of any Lien upon any property or asset of ANI or Newco or (d)
otherwise adversely affect the contractual or other legal rights or privileges
of ANI or Newco. Schedule 4.4 sets forth a list of all agreements requiring the
------------
consent of any party thereto to any of the transactions contemplated hereby.
Except as set forth on Schedule 4.4, all consents, authorizations and approvals
------------
of any Person to or as a result of the consummation of the transactions
contemplated hereby, that are necessary or advisable in connection with the
operations and business of ANI and Newco as currently conducted and as proposed
to be conducted, or for which the failure to obtain the same might have,
individually or in the aggregate, a material adverse effect, have been lawfully
and validly obtained by ANI and Newco.
Section 4.5 Capitalization. The authorized capital stock of ANI
--------------
consists solely of 30,000,000 shares of ANI Common Stock, of which [______]
shares are issued and outstanding, and 5,000,000 shares of preferred stock, of
which none are issued and outstanding. All of the issued and outstanding shares
of ANI Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable. Except as set forth in Schedule 4.5, there are no
------------
existing options, warrants, right, calls or commitments of any character
relating to the shares of ANI Common Stock or any other capital stock or
securities of ANI, (ii) there are no outstanding securities or other instruments
convertible into or exchangeable for shares of ANI Common Stock or any other
capital stock or securities of ANI and no commitments to issue such securities
or instruments, and no Person has any right of first refusal, preemptive right,
subscription right or similar right with respect to any shares of ANI Common
Stock or any other capital stock or securities of ANI. The authorized capital
stock of Newco consists solely of 10,000 shares of common stock, par value $.001
per share, of which 1,000 shares are, and on the Closing Date will be, issued
and outstanding. All of the issued and outstanding shares of capital stock of
Newco are, and on the Closing Date will be, owned beneficially and of record by
ANI.
Section 4.6 Brokers' Fees. Except as set forth on Schedule 4.7, no
------------- ------------
investment banker, broker, finder or similar agent has been employed by or on
behalf of ANI or Newco in connection with this Agreement or the transactions
contemplated hereby, and neither ANI nor Newco have entered into any agreement
or understanding of any kind with any person or entity for the payment of any
brokerage commission, finder's fee or any similar compensation in connection
with this Agreement or the transactions contemplated hereby.
Section 4.7 Disclosure. No representation or warranty of ANI or Newco
----------
in this Agreement and no information contained in any Schedule or other writing
delivered pursuant to this Agreement or at
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<PAGE>
the Closing contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to make the statements
herein or therein not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
------------------------------
OF THE SHAREHOLDERS
-------------------
Each Shareholder hereby represents and warrants to, and covenants and
agrees with, ANI and Newco that:
Section 5.1 Ownership of Shares. Such Shareholder owns of record and
-------------------
beneficially the number of shares of Company Common Stock [and the interest in
each of the Farm LLCs] set forth opposite his or its name on Annex A hereto, and
has, and at all times prior to and as of the Closing such Shareholder will have,
good and marketable title to such shares [or interests] free and clear of all
Liens (except those shares pledged (i) pursuant to the Triarco Settlement and
(ii) pursuant to the bridge term loan to Mellon Bank) and adverse claims.
Section 5.2 Execution and Delivery. Such Shareholder has the power and
----------------------
authority to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations under this Agreement. This
Agreement, upon its execution and delivery by such Shareholder (assuming the due
authorization, execution and delivery hereof by the other parties hereto), will
constitute the legal, valid and binding obligation of such Shareholder,
enforceable against such Shareholder in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency and
similar laws relating to creditors' rights generally and by general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
Section 5.3 No Conflicts. The execution, delivery and performance of
------------
this Agreement by such Shareholder and the consummation by such Shareholder of
the transactions contemplated hereby will not conflict with or result in a
breach or violation of any term or provision of, or (with or without notice or
passage of time, or both) constitute a default under, any indenture, mortgage,
deed of trust, trust (constructive and other), loan agreement or other agreement
or instrument to which such Shareholder is a party or by which such Shareholder
or such Shareholder's shares are bound, or violate the provisions of any
statute, or any order, rule or regulation of any governmental body or agency or
instrumentality thereof, or any order, writ, injunction or decree of any court
or any arbitrator, having jurisdiction over such Shareholder or the property of
the such Shareholder, other than the required consent of Mellon Bank, the
satisfaction, at Closing of the Triarco Settlement, the amendment of the
Botanical Trust Agreement and the possible required consent of the mortgage
holder on 500 Metuchen Road.
Section 5.4 Restrictions on Transfer of ANI Common Stock Under
--------------------------------------------------
Securities Laws.
- ---------------
(a) Such Shareholder understands and agrees that the shares
of ANI Common Stock he will acquire in the Merger have not been registered under
the Securities Act and that, accordingly, such shares will not be fully
transferable except as permitted under various exemptions contained in the
Securities Act or upon satisfaction of the registration and prospectus delivery
requirements of the Securities Act. Such Shareholder acknowledges that he must
bear the economic risk of its investment in such shares of ANI Common Stock for
an indefinite period of time since such shares have not been registered under
the Securities Act and therefore cannot be sold unless they are subsequently
registered or an exemption from registration is available. Shareholder hereby
represents and warrants that he is an Accredited Investor as defined under Rule
501(a) of the Securities Act and is acquiring the shares of ANI Common Stock in
the Merger for investment purposes only, for his own account, and not as nominee
or agent for any other Person, and not with the view to, or for resale in
connection with, any distribution thereof within the meaning of the Securities
Act.
(c) Such Shareholder hereby agrees with ANI as follows:
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<PAGE>
(i) The certificates evidencing the shares of ANI Common Stock
it will acquire in the Merger, and each instrument or certificate issued in
transfer thereof, will bear substantially the following legend:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and
such securities may not be sold or transferred unless there is an
effective registration statement under such Act covering such
securities or the issuer corporation receives an opinion of counsel
reasonably satisfactory to issuer corporation (which may be counsel
for the issuer corporation) stating that such sale or transfer is
exempt from the registration and prospectus delivery requirements of
such Act."
(ii) The certificates representing such shares of ANI Common
Stock, and each instrument or certificate issued in transfer thereof, will also
bear any legend required under any applicable state securities law.
(iii) Absent an effective registration statement under the
Securities Act, covering the disposition of the shares of ANI Common Stock which
the such Shareholder acquires in the Merger, such Shareholder will not sell,
transfer, assign, pledge, hypothecate or otherwise dispose of any or all of such
shares of ANI Common Stock without first providing ANI with an opinion of
counsel reasonably acceptable to ANI (which may be counsel for ANI) to the
effect that such sale, transfer, assignment, pledge, hypothecation or other
disposition will be exempt from the registration and the prospectus delivery
requirements of the Securities Act and the registration or qualification
requirements of any applicable state securities laws. Such Shareholder consents
to ANI's making a notation on its records or giving instructions to any transfer
agent of the ANI Common Stock in order to implement the restrictions on transfer
set forth in this subsection (c).
Section 5.5 Advice of Counsel. Each Shareholder acknowledges that
-----------------
Shareholder has obtained advice from independent counsel with respect to this
Agreement to the extent Shareholder desired to do so. Such Shareholder is not
relying on any representations, except those set forth herein, or advice from
ANI or Newco or any of their respective officers, directors, attorneys or other
representatives regarding this Agreement, its content or effect.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF MERGER
------------------------------------
Section 6.1 Conditions to Each Party's Obligations. Notwithstanding any
--------------------------------------
other provision of this Agreement, the obligations of each party hereto to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) There shall not be instituted and pending or threatened
any Action before any Governmental Entity (i) challenging the Merger or
otherwise seeking to restrain or prohibit the consummation of the transactions
contemplated hereby, or (ii) seeking to prohibit the direct or indirect
ownership or operation by ANI or the Surviving Corporation of all or a material
portion of the business or assets of the Company, or to compel ANI, the
Surviving Corporation or the Company to dispose of or hold separate all or a
material portion of the business or assets of the Company, the Surviving
Corporation or ANI.
(b) ANI shall have had declared effective its registration
statement under the Securities Act with respect to its firm commitment
underwritten initial public offering of the ANI Common Stock, and no stop order
with respect thereto shall have been entered by the Securities and Exchange
Commission.
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<PAGE>
Section 6.2 Conditions to Obligations of ANI and Newco.
------------------------------------------
Notwithstanding any other provision of this Agreement, the obligations of ANI
and Newco to consummate the Merger and the other transactions contemplated
hereby shall be subject to the satisfaction, at or prior to the Closing Date, of
the following conditions:
(a) The representations and warranties of the Company and the
Shareholders in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same effect as if made on the
Closing Date and each of the Company and the Shareholders shall have complied
with all covenants and agreements and satisfied all conditions on the Company's
or the Shareholders' part, as applicable, to be performed or satisfied on or
prior to the Closing Date.
(b) ANI shall have received from [McLaughlin, Bennett, Gelson &
Cramer, P.C.], counsel for the Company, a written opinion dated the Closing Date
and addressed to ANI and Newco, in substantially the form attached as Annex C
-------
hereto.
(c) ANI shall have received a certificate of the President of the
Company in substantially the form attached as Annex D hereto.
-------
(d) ANI shall have received the following under cover of a certificate
of the Secretary of the Company dated the Closing Date in substantially the form
attached as Annex E hereto:
-------
(i) Copies of resolutions of (A) the board of directors of the
Company authorizing and approving the execution, delivery and performance of
this Agreement and all other documents and instruments to be delivered by the
Company pursuant hereto, and of (B) the Company's shareholders evidencing
approval of this Agreement and the transactions contemplated hereby;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
subparagraph (i) above and further certifying that the [certificate] of
incorporation and bylaws of the Company delivered to ANI at the time of, or
prior to, the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as ANI or its
counsel may reasonably request.
(e) Joseph Schortz shall have entered into a three-year Employment
Agreement with ANI in substantially the form attached hereto as Annex F,
-------
providing for, among other terms, naming Mr. Schortz President of ANI at a
salary of $250,000 per year and a one-year severance payment in the event of
termination without cause.
(f) A corporation of which Nathan Belkowitz is the sole shareholder
shall have entered into a three-year Consulting Agreement with ANI to provide
Mr. Belkowitz's services in substantially the form attached hereto as Annex G,
-------
providing for, among other terms, annual compensation of $250,000 and a one-year
severance payment in the event of termination of the contract without cause.
(g) Lawrence J. Katz shall have entered into a two-year Consulting
Agreement with ANI in substantially the form attached hereto as Annex H,
-------
providing for, among other terms, annual compensation of $110,000 and a one-year
severance payment in the event of termination without cause.
(h) Joseph Schortz, Nathan Belkowitz and Lawrence J. Katz shall have
each entered into a Non-Competition Agreement with ANI which shall provide for a
broad form of non-competition with the Company and ANI for a period of three
years after closing, but in no event less than one year after the termination of
employment or consulting (whether directly or indirectly) with the Company
and/or ANI, in substantially the form attached hereto as Annex I.
-------
-16-
<PAGE>
(i) The Shareholders and ANI shall have entered into a Registration
Rights Agreement in substantially the form attached hereto as Annex J.
-------
(j) ANI shall be satisfied, in its sole discretion, with the results
of its due diligence investigation of the Company.
(k) ANI shall have received reasonable assurances from those key
employees, if any, of the Company that may be identified by ANI in its
discretion that they will remain in the employ of the Surviving Corporation for
a reasonable period of time after the consummation of the transactions
contemplated hereby.
(l) All authorizations, consents, waivers and approvals by or from
third parties required for the consummation of the transactions contemplated
hereby shall have been obtained and all Liens on the assets and properties of
the Company shall have been released or terminated.
(m) No act, event or condition shall have occurred after the date
hereof which ANI determines has had or could reasonably be expected to have a
material adverse effect on the business, financial condition, properties,
profitability, prospects or operations of the Company.
(n) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to ANI and its counsel.
(o) The Shareholders shall have repaid the Company for any shareholder
loans pursuant to Section 8.1(e), for any expenses pursuant to Section 8.4
-----------
hereof, shall have assigned their interest in the Farm LLCs as provided in
Section 2.7(i).
- --------------
(p) The acquisition of Botanical Products International, Inc. shall
have been consummated on the terms set forth in the Acquisition Agreement dated
June __, 1998.
(q) Triarco and Mellon Bank (as to the bridge note) shall have
acknowledged full payment and shall have released any rights or security
interests that either may have in the Company Common Stock or assets (but in the
case of Mellon Bank, as to the bridge note only, as to the assets of the
Company).
(r) (i) The shareholders agreement dated January 1, 1997 between the
Shareholders shall have been terminated and (ii) the Shareholders shall have
waived their preemptive rights contained in the Certificate of Incorporation.
(s) The convertible promissory note in the amount of $3,000,000 to the
BPI Holders, due on December 31, 1999, shall have been surrendered for
cancellation subject only to the issuance of the ANI Common Stock as set forth
in Section 2.3 hereof.
-----------
(t) ANI shall have theretofore received a true and complete list of
(a) the names and addresses of (i) customers that represented in excess of 10%
of the Company's sales of goods and services during the 12 months ended on
September 30, 1998, and (ii) suppliers from whom the Company purchased in excess
of 10% of the Company's purchase of goods and services during the 12 months
ended on September 30, 1998, and (b) all licenses of or rights to Proprietary
Information granted to the Company by others or by others to the Company with a
description thereof (including the term, payment for and scope).
(u) The Development Agreement dated April 17, 1997 between the Company
and Lawrence J. Katz shall have been terminated without liability or payment.
Section 6.3 Conditions to Obligations of the Company and the
------------------------------------------------
Shareholders. Notwithstanding any other provision of this Agreement, the
- ------------
obligations of the Company and the Shareholders to
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<PAGE>
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) The representations and warranties of ANI and Newco in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date, and ANI and
Newco shall have complied with all covenants and agreements and satisfied all
conditions on their part to be performed or satisfied on or prior to the Closing
Date.
(b) The Company shall have received from Paul, Hastings, Janofsky &
Walker LLP, counsel for ANI and Newco, a written opinion dated the Closing Date
and addressed to the Company and the Shareholders, in substantially the form
attached as Annex K hereto.
-------
(c) The Company shall have received the following under cover of a
certificate of the Secretary of ANI dated the Closing Date in substantially the
form attached as Annex L hereto:
-------
(i) Copies of resolutions of the board of directors of ANI
authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by ANI
pursuant hereto and thereto;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
subparagraph (i) above and further certifying that the certificate of
incorporation and bylaws of ANI delivered to the Company at the time of, or
prior to, the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
or its counsel may reasonably request.
(d) The Company shall have received a certificate of the President of
ANI in substantially the form attached as Annex M hereto.
-------
(e) The Company shall have received the following under cover of a
certificate of the Secretary of Newco dated the Closing Date in substantially
the form attached as Annex N hereto:
-------
(i) Copies of resolutions of (A) the board of directors of Newco
authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by Newco
pursuant hereto and thereto, and (B) the sole stockholder of Newco approving
this Agreement and the Merger;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
subparagraph (i) above and further certifying that the certificate of
incorporation and bylaws of Newco delivered to the Company at the time of, or
prior to, the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
or its counsel may reasonably request.
(f) The Company shall have received a certificate of the President of
Newco in substantially the form attached as Annex O hereto.
-------
(g) ANI shall have approved and implemented a stock option plan under
which the key employees, consultants or advisors of the Company will be eligible
to participate as of the Closing, and Joseph Schortz shall have been granted
thereunder an option for 200,000 shares vesting over five years at an exercise
price equal to the IPO Price.
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<PAGE>
(h) Joseph Schortz and an additional non-affiliated individual
designated by the Shareholders shall have been elected to the board of directors
of ANI.
(i) ANI or Newco shall have assumed all existing contracts with the
management, employees, consultants and advisors of the Company and the BPI Note
shall have been paid at Closing.
(j) QBI shall have entered into a lease with MRA Associates, LLC,
guaranteed by ANI, for a ten-year term and two five-year renewal options which
will also provide an option for QBI or ANI to purchase the properties at fair
market value, in substantially the form attached hereto as Annex P. Initial
-------
annual rent will be $212,000 and the lease will contain a 3% annual cost of
living increase adjustment.
(k) No act, event or condition shall have occurred after the date
hereof which the Shareholders or the Company determines has had or could
reasonably be expected to have a material adverse effect on the business,
financial condition, properties, profitability, prospects or operations of ANI.
(l) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to the Company and its counsel.
(m) ANI shall have included in the use of proceeds section of the
registration statement for the initial public offering of its Common Stock, a
contribution of capital or inter-company loan to the Surviving Corporation of up
to $6,000,000 to the extent required by the 1998/1999 business plan of the
Company as heretofore provided to ANI.
ARTICLE 7
CONDUCT OF BUSINESS PENDING CLOSING
-----------------------------------
During the period commencing on the date hereof and continuing through
the Closing Date, the Company and the Shareholders covenant and agree (except as
expressly contemplated by this Agreement or to the extent that ANI shall
otherwise expressly consent in writing, which consent shall not be unreasonably
withheld) that:
Section 7.1 Qualification. The Company shall maintain all
-------------
qualifications to transact business and remain in good standing in the foreign
jurisdictions in which the Company owns or leases any property, or conducts any
business, so as to require such qualification, except where the failure to
maintain such qualification would not be reasonably likely to have a material
adverse effect.
Section 7.2 Ordinary Course. The Company shall conduct its business in,
---------------
and only in, the ordinary course and shall preserve intact its current business
organizations, keep available the services of its current officers, employees
and consultants and preserve its relationships with customers, suppliers and
others having business dealings with it to the end that its goodwill and going
business value shall be unimpaired at the Closing Date. The Company shall
maintain its properties and assets in good condition and repair.
Section 7.3 Organic Changes. The Company shall not (a) amend its
---------------
certificate of incorporation or bylaws, (b) acquire by merging or consolidating
with, or agreeing to merge or consolidate with, or purchase substantially all of
the stock or assets of, or otherwise acquire any business or any corporation,
partnership, association or other business organization or division thereof
except for the acquisition of BPI, (c) enter into any partnership or joint
venture, (d) declare, set aside, make or pay any dividend or other distribution
in respect of its capital stock or purchase or redeem, directly or indirectly,
any shares of its capital stock, (e) issue or sell any shares of its capital
stock of any class or any options, warrants,
-19-
<PAGE>
conversion or other rights to purchase any such shares or any securities
convertible into or exchangeable for such shares, or (f) liquidate or dissolve
or obligate itself to do.
Section 7.4 Indebtedness. The Company shall not incur any Indebtedness,
------------
sell any debt securities or lend money to or guarantee the Indebtedness of any
Person. The Company shall not restructure or refinance its existing
Indebtedness.
Section 7.5 Accounting. The Company shall not make any change in the
----------
accounting principles, methods, records or practices followed by it or
depreciation or amortization policies or rates theretofore adopted by it. The
Company shall maintain its books, records and accounts in accordance with GAAP.
Section 7.6 Compliance with Legal Requirements. The Company shall comply
----------------------------------
promptly with all requirements that applicable law may impose upon it and its
operations and with respect to the transactions contemplated by this Agreement,
and shall cooperate promptly with, and furnish information to, ANI in connection
with any such requirements imposed upon ANI, or upon any of its affiliates, in
connection therewith or herewith, including, without limitation, all information
reasonably required by ANI to prepare its registration statement with respect to
its initial public offering.
Section 7.7 Disposition of Assets. The Company shall not sell, transfer,
---------------------
license, lease or otherwise dispose of, or suffer or cause the encumbrance by
any Lien upon any of, its properties or assets, tangible or intangible, or any
interest therein, except in the ordinary course of business; provided, however,
the Company shall pay the accrued obligations due to Lawrence J. Katz in an
amount not to exceed $____________ on the following basis: (i) 30% prior to or
at the closing; and (ii) 70% in twenty four (24) equal monthly installments,
without interest, commencing 31 days after the date of closing.
Section 7.8 Compensation. The Company shall not (a) adopt or amend in
------------
any material respect any collective bargaining, bonus, profit-sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other plan, agreement, trust, fund or arrangement for the benefit
of employees (whether or not legally binding) other than to comply with any
Legal Requirement or (b) pay, or make any accrual or arrangement for payment of,
any increase in compensation, bonuses or special compensation of any kind, or
any severance or termination pay to, or enter into any employment or loan or
loan guarantee agreement with, any current or former officer, director, employee
or consultant of the Company.
Section 7.9 Modification or Breach of Agreements; New Agreements. The
----------------------------------------------------
Company shall not terminate or modify, or commit or cause or suffer to be
committed any act that will result in breach or violation of any term of, or
(with or without notice or passage of time, or both) constitute a default under
or otherwise give any person a basis for nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement, instrument, arrangement or understanding, written or oral, disclosed
in this Agreement or the Schedules hereto. The Company shall refrain from
becoming a party to any contract or commitment other than in the ordinary course
of business. The Company shall meet all of its contractual obligations in
accordance with their respective terms.
Section 7.10 Capital Expenditures. Except for capital expenditures or
--------------------
commitments necessary to maintain its properties and assets in good condition
and repair (the amount of which shall not exceed the greater of $7,500 per month
or $25,000 in the aggregate), the Company shall not purchase or enter into any
contract to purchase any capital assets.
Section 7.11 Maintain Insurance. The Company shall maintain its Policies
------------------
in full force and effect and shall not do, permit or willingly allow to be done
any act by which any of the Policies may be suspended, impaired or canceled.
Section 7.12 Discharge. The Company shall not cancel, compromise, release
---------
or discharge any claim of the Company upon or against any person or waive any
right of the Company of material value, and not discharge any Lien upon any
asset of the Company or compromise any debt or other obligation
-20-
<PAGE>
of the Company to any person other than Liens, debts or obligations with respect
to current liabilities of the Company.
Section 7.13 Actions. The Company shall not institute, settle or agree
-------
to settle any Action before any governmental entity.
Section 7.14 Permits. The Company shall maintain in full force and
-------
effect, and comply with, all Permits.
Section 7.15 Tax Assessments and Audits. The Company shall furnish
--------------------------
promptly to ANI a copy of all notices of proposed assessment or similar notices
or reports that are received from any taxing authority and which relate to the
Company's operations for periods ending on or prior to the Closing Date. The
Shareholders shall cause the Company to promptly inform ANI, and permit the
participation in by ANI at its expense, of any investigation, audit or other
proceeding by a Governmental Entity in connection with any Taxes, assessment,
governmental charge or duty and shall not consent to any settlement or final
determination in any proceeding without the prior written consent of ANI, which
shall not be unreasonably withheld.
ARTICLE 8
ADDITIONAL COVENANTS
--------------------
Section 8.1 Covenants of the Company and the Shareholders. During the
---------------------------------------------
period commencing on the date hereof and continuing through the Closing Date,
each of the Company and the Shareholders agrees to:
(a) comply promptly with all requirements that applicable
Legal Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and furnish
information to, ANI in connection with any such requirements imposed upon ANI or
upon any of its affiliates in connection therewith or herewith, including,
without limitation, all information reasonably required by ANI to prepare its
registration statement with respect to its initial public offering;
(b) use its reasonable commercial efforts to obtain (and to
cooperate with ANI in obtaining) any consent, authorization or approval of, or
exemption by, any Person required to be obtained or made by the Company or the
Shareholders, as applicable, in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections 6.1
and 6.2 of this Agreement, including, but not limited to, providing to ANI the
lists required by Section 6.2(t);
(d) promptly orally advise ANI and, within three business
days thereafter, advise ANI in writing of any change in the Company's business
or condition that has had or may have a material adverse effect; and
(e) at or prior to the Closing, the Shareholders will repay
to the Company any shareholders loans payable, other than the loan to Joseph
Schortz in the approximate amount of $80,000, thereafter loaned by Joseph
Schortz to a co-defendant in the Triarco lawsuit, which shall be written off by
the Company prior to Closing.
Section 8.2 Covenants of ANI. During the period commencing on the date
----------------
hereof and continuing through the Closing Date, ANI agrees to:
(a) comply promptly with all requirements that applicable
Legal Requirements may impose upon it with respect to the transactions
contemplated by this Agreement, and shall cooperate promptly with, and furnish
information to, the Company and the Shareholders in connection
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<PAGE>
with any such requirements imposed upon the Shareholders or the Company or upon
any of the Affiliates of the Company in connection therewith or herewith;
(b) use its reasonable commercial efforts to obtain any
consent, authorization or approval of, or exemption by, any Person required to
be obtained or made by ANI in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to have the
Shareholders released from any Guarantees set forth on Schedule 8.2 hereto.
------------
If ANI cannot obtain any such release within 90 days after the Closing Date, it
will indemnify, from and after the Closing Date, the Shareholders from any
liability on the related guarantees;
(d) use its reasonable commercial efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections 6.1,
6.2(q) and (s) and 6.3 of this Agreement; and
(e) assume immediately prior to Closing (i) the convertible
debt held by the BPI Holders and (ii) the Earnout.
Section 8.3 Access and Information.
----------------------
(a) Between the date hereof and the Closing Date, (i) the
Company will, upon reasonable notice of at least 48 hours, permit, and will
cause its officers, directors, key employees and advisors to permit, ANI and its
representatives and agents reasonable access to the Company's books and records,
facilities, key personnel, customers, suppliers, independent accountants and
attorneys, as requested by ANI; (ii) ANI will use its reasonable best efforts to
provide the Shareholders and the Company and their respective representatives
and agents reasonable access to the books and records, facilities, key
personnel, customers, suppliers, independent accountants and attorneys of other
companies to be acquired by ANI in conjunction with the acquisition of the
Company, as reasonably requested by the Company (subject to the execution of
appropriate confidentiality agreements and with the understanding that there
will be no access to product formulations or other sensitive trade secret
information); and (iii) the Company shall provide to ANI, promptly upon
completion, an unaudited balance sheet and the related statements of income or
operations, cash flows and stockholder's equity of each of (a) the Company, [(b)
the Farm LLCs,] and (c) BPI for each month-end and period from and after
December 31, 1997 [except for the Farm LLCs, which may be provided quarterly].
(b) The Confidentiality Agreement dated April 6, 1998 (the
"Confidentiality Agreement") entered into among the Company, the Shareholders
- --------------------------
and ANI shall survive the execution and delivery of this Agreement.
Section 8.4 Expenses. Except as otherwise specifically provided herein,
--------
each party to this Agreement shall bear its own direct and indirect expenses
incurred in connection with the negotiation and preparation of this Agreement
and the consummation and performance of the transactions contemplated hereby,
including, without limitation, all legal fees and fees of any brokers, finders
or similar agents; provided, however, that the Company may advance such
-------- -------
expenses on behalf of the Shareholders which such advances the Shareholders
shall repay to the Company at, or prior to, the Closing; provided, further, that
-------- -------
the fees of independent auditors to audit the Company's financial statements
shall be paid by ANI; and provided, further, that expenses incurred by the
-------- -------
Shareholders in connection with activities specifically requested by ANI in
pursuing and consummating its initial public offering shall be reimbursed by
ANI.
Section 8.5 Certain Notifications. At all times from the date hereof
---------------------
to the Closing Date, each party shall promptly notify the others in writing of
the occurrence of any event that will or may (i) render any statement,
representation or warranty of such party in this Agreement (including the
Schedules hereto) inaccurate or incomplete in any material respect or (ii)
constitute or result in the breach by such party of, or a failure to comply
with, any agreement or covenant in this Agreement applicable to such party or
(iii) result in the failure by such party to satisfy any of the conditions
specified in Article 6 hereof.
---------
-22-
<PAGE>
Section 8.6 Publicity; Employee Communications. At all times prior to
----------------------------------
the Closing Date, each party shall obtain the consent of all other parties
hereto prior to issuing, or permitting any of its directors, officers, employees
or agents to issue, any press release or other information to the press,
employees of the Company or any third party with respect to this Agreement or
the transactions contemplated hereby; provided, however, that no party shall be
-------- -------
prohibited from supplying any information to any of is representatives, agents,
attorneys, advisors, financing sources and others to the extent necessary to
complete the transactions contemplated hereby. Nothing contained in this
Agreement shall prevent any party to this Agreement at any time from furnishing
any required information to any Governmental Entity or authority pursuant to a
Legal Requirement or from complying with its legal or contractual obligations.
Section 8.7 Further Assurances. Subject to the terms and conditions
------------------
of this Agreement, each of the parties hereto agrees to use all reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable Legal
Requirements, to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the Closing any further action is necessary
or desirable to carry out the purposes of this Agreement, the Shareholders, the
Company, ANI or Newco, as the case may be, shall take or cause to be taken all
such necessary or convenient action and execute, and deliver and file, or cause
to be executed, delivered and filed, all necessary or convenient documentation.
Section 8.8 Competing Offers; Merger or Liquidation. The Company and
---------------------------------------
the Shareholders agree that they will not, and the Shareholders will cause the
Company not to, directly or indirectly, through any officer, director, agent or
otherwise, solicit, initiate, encourage or conduct discussions with, or accept
or consider the submissions of bids, offers or proposals by, any Person with
respect to an acquisition of the Company or its assets or capital stock or a
Merger or similar transaction, and the Company and the Shareholders will not,
and the Shareholders will not permit the Company to, engage any broker,
financial adviser or consultant with an incentive to initiate or encourage
proposals or offers from other parties. Furthermore, the Company and the
Shareholders shall not, and the Shareholders shall not permit the Company to,
directly or indirectly, through any officer, director, agent or otherwise,
engage in negotiations concerning any such transaction with, or provide
information to, any Person other than Buyer and its principal shareholder, and
their respective representatives, with a view to engaging, or preparing to
engage, that Person with respect to any matters referenced in this Section. The
Shareholders shall ensure that the Company shall not commence any proceeding to
merge, consolidate or liquidate or dissolve or obligate itself to do so.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 9.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Closing:
(a) by mutual consent of all of the parties hereto;
(b) by the Company or the Shareholders, on the one hand, or by
Buyer, on the other hand, by written notice to the other party or parties hereto
if the Merger shall not have been consummated on or before November 15, 1998 (or
such later date as Buyer, the Company and the controlling Shareholders may
agree), provided that in the case of a termination under this clause (b), the
party or parties terminating this Agreement shall not then be in material breach
of any of its or their obligations under this Agreement;
(c) by Buyer if (i) there has been a material misrepresentation,
breach of warranty or breach of covenant by the Company or the Shareholders
under this Agreement or (ii) any of the conditions precedent to Closing set
forth in Sections 6.1 and 6.3 have not been met on the Closing Date, and, in
each case, Buyer is not then in material default of its obligations hereunder;
or
-23-
<PAGE>
(d) by the Company or the Shareholders if (i) there has been a
material misrepresentation, breach of warranty or breach of covenant by Buyer
under this Agreement or (ii) any of the conditions precedent to Closing set
forth in Sections 6.1 and 6.2 have not been met on the Closing Date, and, in
each case, neither the Company nor the Shareholders are then in material default
of their obligations hereunder.
Section 9.2 Effect of Termination. In the case of any termination of
---------------------
this Agreement, the provisions of Sections 8.3(b) and 8.4 shall remain in full
force and effect. Upon termination of this Agreement as provided in Section
9.1(a) or (b), this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of any party hereto or their respective
directors, officers, employees, agents or other representatives. In the event
of termination of this Agreement as provided in Section 9.1(c) or (d) hereof,
such termination shall be without prejudice to any rights that the terminating
party or parties may have against the breaching party or parties or any other
Person under the terms of this Agreement or otherwise.
Section 9.3 Amendment and Waiver. This Agreement may be amended only
--------------------
by a written instrument executed by each of the parties hereto. Any term or
provision of this Agreement may be waived in writing at any time by the party or
parties entitled to the benefits thereof. No failure to exercise and no delay
in exercising any right, power or privilege shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege
preclude the exercise of any other right, power or privilege. No waiver of any
breach of any covenant or agreement hereunder shall be deemed a waiver of any
preceding or subsequent breach of the same or any other covenant or agreement.
The rights and remedies of each party under this Agreement are in addition to
all other rights and remedies, at law or in equity, that such party may have
against the other parties.
ARTICLE 10
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
------------------------------------------
Section 10.1 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties of the parties hereto contained in this Agreement
or in any writing delivered pursuant hereto or at the Closing shall survive the
execution and delivery of this Agreement and the Closing and the consummation of
the transactions contemplated hereby (and any examination or investigation by or
on behalf of any party hereto) until the date 18 months after the Closing Date
(except for claims in respect thereof pending at such time, which shall survive
until finally resolved or settled); provided, however, that the representations
-------- -------
and warranties contained in Sections 3.1, 3.2, 3.3, 3.11, 3.13 (in so far as it
applies to Environmental Matters), 5.1, 5.2, 5.3 and 5.4 shall survive until the
expiration of the applicable statute of limitations; and, provided further, as
to those representations and warranties made herein as to BPI shall expire on
the date set forth for the expiration of representations and warranties in the
BPI Stock Purchase Agreement. No Action may be commenced with respect to any
representation, warranty, covenant or agreement in this Agreement, or in any
writing delivered pursuant hereto, unless by written notice, setting forth in
reasonable detail the claimed breach thereof, shall be delivered pursuant to
Section 11.1 to the party or parties against whom liability for the claimed
breach is charged on or before the termination of the survival period specified
in Section 10.1 for such representation, warranty, covenant or agreement.
ARTICLE 11
GENERAL PROVISIONS
------------------
Section 11.1 Notices. All notices and other communications under or
-------
in connection with this Agreement shall be in writing and shall be deemed given
(a) if delivered personally, upon delivery, (b) if delivered by registered or
certified mail (return receipt requested), upon the earlier of actual delivery
or three days after being mailed, or (c) if given by telecopy, upon confirmation
of transmission by telecopy, in each case to the parties at the following
addresses:
(a) If to Buyer or Newco, addressed to:
-24-
<PAGE>
Advanced Nutraceuticals, Inc.
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Mr. Barry Loder
With a copy to:
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street, 23rd Floor
Los Angeles, California 90071
Telecopy: (213) 627-0705
Attention: David L. Gersh, Esq.
(b) If to the Company, addressed to:
Quality Botanical Ingredients, Inc.
500 Metuchen Road
South Plainfield, New Jersey 07080
Telecopy: (908) 561-9682
Attention: Mr. Joseph Schortz, President
With a copy to:
McLaughlin Bennett Gelson & Cramer, P.C.
1305 Campus Parkway
Neptune, New Jersey 07753
Telecopy: (732) 919-1240
Attention: John F. Gelson, Esq.
(c) If to the Shareholders,
addressed to:
Joseph Schortz
c/o Quality Botanical Ingredients, Inc.
500 Metuchen Road
South Plainfield, New Jersey 07080
Telecopy: (908) 561-9682
With a copy to:
McLaughlin Bennett Gelson & Cramer, P.C.
1305 Campus Parkway
Neptune, New Jersey 07753
Telecopy: (732) 919-1240
Attention: John F. Gelson, Esq.
Lawrence J. Katz
11 Minute Man Court
Basking Ridge, New Jersey 07921
The Botanical Trust, Joseph Schortz, Trustee
c/o Quality Botanical Ingredients, Inc.
500 Metuchen Road
South Plainfield, New Jersey 07080
Telecopy: (908) 561-9682
-25-
<PAGE>
With a copy to:
McLaughlin Bennett Gelson & Cramer, P.C.
1305 Campus Parkway
Neptune, New Jersey 07753
Telecopy: (732) 919-1240
Attention: John F. Gelson, Esq.
Section 11.2 Severability. If any term or provision of this Agreement
------------
or the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable such term or
provision in any other jurisdiction, the remaining terms and provisions of this
Agreement or the application of such terms and provisions to circumstances other
than those as to which it is held invalid or enforceable.
Section 11.3 Entire Agreement. This Agreement, including the
----------------
exhibits, annexes and schedules attached hereto and other documents referred to
herein, and the Confidentiality Agreement, contain the entire understanding of
the parties hereto in respect of their subject matter and supersede all prior
and contemporaneous agreements and understandings, oral and written, among the
parties with respect to such subject matter.
Section 11.4 Miscellaneous. This Agreement shall be binding upon and
-------------
inure to the benefit of each of the parties hereto and their respective
successors, heirs and assigns; provided, however, that no party may assign
-------- -------
either this Agreement or any of its rights, interests or obligations hereunder
in whole or in part without the prior written consent of the other parties
hereto (other than to the Surviving Corporation as a result of the Merger), and
any such transfer or assignment without said consent shall be void, ab initio.
---------
Subject to the immediately preceding sentence, this Agreement is not intended to
benefit, and shall not run to the benefit of or be enforceable by, any other
person or entity other than the parties hereto and their permitted successors
and assigns. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all such counterparts together shall
constitute one and the same Agreement. The exhibits, schedules and annexes to
this Agreement are incorporated herein and, by this reference, made a part
hereof as if fully set forth at length herein. The article, section and
subsection headings used herein are inserted for reference purposes only and
shall not in any way affect the meaning or interpretation of this Agreement. As
used in this Agreement, the masculine, feminine or neuter gender, and the
singular or plural, shall be deemed to include the others whenever and wherever
the context so requires. For the purposes of this Agreement, unless the context
clearly requires, "or" is not exclusive. Each party hereto hereby knowingly,
voluntarily and intentionally waives any right it may have to a jury trial in
any legal proceeding which may be hereafter instituted by any party hereto to
assert a claim arising out of or relating to this Agreement or any other
agreement, instrument or document contemplated hereby or thereby. If any legal
action or other proceeding is brought by any party pursuant to this Agreement,
the prevailing party shall be entitled to recover its costs and expenses,
including reasonable attorneys' fees.
Section 11.5 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws (and not the law of conflicts) of
the State of Delaware.
-26-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
ADVANCED NUTRACEUTICALS, INC.
By:__________________________________
An Authorized Officer
NEWCO
By:__________________________________
An Authorized Officer
QUALITY BOTANICAL INGREDIENTS, INC.
By:__________________________________
An Authorized Officer
_____________________________________
JOSEPH SCHORTZ
_____________________________________
LAWRENCE J. KATZ
THE BOTANICAL TRUST
By:__________________________________
Joseph Schortz, Trustee
-27-
<PAGE>
EXHIBIT 10.3
------------
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as
---------
of August 31, 1998 by and among BP Acquisition Co., Inc., a Delaware corporation
("Newco"), Advanced Nutraceuticals, Inc., a Delaware corporation ("Buyer"),
----- -----
Bactolac Pharmaceuticals, Inc. a New York corporation (the "Company") and Pailla
-------
Reddy ("Shareholder").
-----------
R E C I T A L S
- - - - - - - -
A. Buyer owns all of the outstanding shares of capital stock of Newco.
B. The respective boards of directors of Newco and the Company have
determined that it is fair to, and in the best interests of, their respective
corporations and sole stockholders for the Company to be merged with and into
Newco upon the terms and subject to the conditions set forth herein (the
"Merger"); the board of directors and sole stockholder of Newco have approved
------
and adopted this Agreement in accordance with the Delaware Law; and the board of
directors and sole shareholder of the Company have approved and adopted the
principal terms of this Agreement in accordance with the New York Business
Corporation Law (the "New York Law").
------------
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. For all purposes of this Agreement, certain
-----------
capitalized terms not otherwise defined herein shall have the meanings set forth
in Exhibit A attached hereto.
---------
ARTICLE 2
THE MERGER
----------
Section 2.1 Merger. Upon the terms and subject to the conditions of
------
this Agreement, the Company shall be merged with and into Newco in accordance
with the applicable provisions of the Delaware Law. The Company and Newco are
herein sometimes referred to as the "Constituent Corporations." Newco shall be
------------------------
the surviving corporation following the effectiveness of the Merger (sometimes
referred to herein as the "Surviving Corporation").
---------------------
Section 2.2 Effect of Merger. The parties agree to the following
----------------
provisions with respect to the Merger:
(a) Certificate of Incorporation and Bylaws. The certificate of
---------------------------------------
incorporation of Newco, as in effect immediately prior to the Effective Time,
shall be the certificate of incorporation of the Surviving Corporation, from and
after the Effective Time until amended in accordance with applicable law. The
bylaws of Newco, as in effect immediately prior to the Effective Time, shall be
the bylaws of the Surviving Corporation from and after the Effective Time until
amended in accordance with applicable law, the Surviving Corporation's
certificate of incorporation and such bylaws.
(b) Directors and Officers. The directors and officers of Newco in
----------------------
office immediately prior to the Effective Time shall be the directors and
officers, respectively, of the Surviving Corporation, and each shall hold his or
her respective office or offices from and after the
-1-
<PAGE>
Effective Time until his or her successor shall have been elected and shall have
qualified or as otherwise provided in the bylaws of the Surviving Corporation.
(c) Name and Corporate Organization of Surviving Corporation. The
--------------------------------------------------------
name of the Surviving Corporation from and after the Effective Time shall be "BP
Acquisition Co., Inc.," which name shall be changed after the closing to
Bactolac Pharmaceuticals, Inc. in accordance with applicable law. At the
Effective Time, the identity and separate corporate existence of the Company
shall cease and Newco as the surviving corporation and successor shall succeed
to the Company in the manner of and as more fully set forth in Section 259 of
the Delaware Law.
(d) Filing of Certificate of Merger and Further Assurances. If this
------------------------------------------------------
Agreement is not terminated pursuant to Article 9 hereof, as soon as practicable
after all conditions to the Merger set forth in Article 6 hereof shall have
been satisfied or waived, the Constituent Corporations shall cause the
Certificate of Merger attached hereto as Annex B-1 ("Delaware Certificate of
-----------------------
Merger") to be executed and acknowledged and, as required by Delaware Law, filed
- ------
with the Secretary of State of the State of Delaware as provided in the Delaware
Law and, the Certificate of Merger attached hereto as Annex B-2 ("New York
--------
Certificate of Merger") to be executed and acknowledged and, as required by New
- ---------------------
York Law, filed with the Secretary of State of the State of New York as provided
in the New York Law and as required by New York Law, together with such other
instruments as are required to be filed under Section 907 thereof. The Merger
shall become effective on the date and at the time the Certificate of Merger is
filed with the Secretary of State of the State of Delaware in accordance with
Section 103 of the Delaware Law (the "Effective Time"). If, at any time after
--------------
the Effective Time, the Surviving Corporation shall consider or be advised that
any deeds, bills of sale, assignments or assurances or any other acts or things
are necessary, desirable or proper (i) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation, its right, title or interest in, to or
under any of the rights, properties or assets of the Constituent Corporations
acquired or to be acquired as a result of the Merger, or (ii) otherwise to carry
out the purposes of this Agreement, the Surviving Corporation and its officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and do, in the name and on behalf of the
Constituent Corporations, all such other acts and things necessary, desirable or
proper to vest, perfect or confirm its right, title or interest in, to or under
any of the rights, properties or assets of the Constituent Corporations acquired
or to be acquired as a result of the Merger and otherwise to carry out the
purposes of this Agreement.
Section 2.3 Conversion of Securities.
------------------------
(a) By virtue of the Merger and without any action on the part of the
holder thereof, at the Effective Time each share of common stock of the Company
("Company Common Stock") outstanding immediately prior to the Effective Time
--------------------
shall be converted into the right to receive (i) that amount of the Stock Merger
Consideration (hereinafter defined) equal to the total aggregate Stock Merger
Consideration divided by the number of shares of Company Common Stock
outstanding, (ii) that amount of the Cash Merger Consideration (as hereinafter
defined) equal to the total aggregate Cash Merger Consideration divided by the
number of shares of Company Common Stock outstanding, and (iii) that amount of
the Note Merger Consideration (as hereinafter defined) equal to the total
aggregate Note Merger Consideration divided by the number of shares of Company
Common Stock outstanding; deliverable and payable to the holder thereof upon
surrender of the certificate formerly representing Company Common Stock (the
"Share Certificate") in the manner provided in Section 2.4 hereof.
- ------------------
(b) Subject to Section 8.9 hereof: "Stock Merger Consideration" shall
--------------------------
mean that number of shares of common stock, par value $.001 of Buyer ("Buyer
-----
Common Stock") equal to $4,500,000 divided by the initial public offering price
- ------------
per share of Buyer Common Stock (the "IPO Price"); "Cash Merger Consideration"
--------- -------------------------
shall mean an aggregate of $3,000,000 in cash, without interest; and "Note
----
Merger Consideration" shall mean the subordinated notes of the Buyer ("Buyer
- -------------------- -----
Notes"), in substantially the form attached hereto as Annex A, having an
- ----- -------
aggregate principal amount of $500,000, an interest rate of 6.5% and payable in
whole on the first anniversary of the Closing Date. The Stock
-2-
<PAGE>
Merger Consideration, Cash Merger Consideration and Note Merger Consideration
are herein sometimes collectively referred to as the "Merger Consideration."
--------------------
(c) By virtue of the Merger and without any action on the part of the
holder thereof, at the Effective Time each share of Company Common Stock held by
the Company as a treasury share immediately prior to the Effective Time shall be
canceled and no payment of any consideration shall be made with respect thereto.
Section 2.4 Payment of Cash for Company Common Stock; Exchange of Shares;
-------------------------------------------------------------
Delivery of Notes.
- -----------------
(a) Each holder of a Share Certificate which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock will be
entitled to receive, upon surrender to Buyer of such Share Certificate for
cancellation, (i) a cash payment, (ii) shares of Buyer Common Stock and (iii)
Buyer Notes, in each case in the amount calculated in accordance with Section
2.3 hereof. Until properly surrendered, each such Share Certificate shall be
deemed for all purposes to evidence only the right to receive the Merger
Consideration. No interest shall accrue or be paid on the cash payable upon the
surrender of the Share Certificates.
(b) No certificates or script representing fractional shares of Buyer
Common Stock shall be issued upon the surrender for exchange of Share
Certificates, and no holders thereof shall be entitled to any voting rights,
rights to receive any dividends or distributions or other rights as a
stockholder of Buyer with respect to any fractional shares of Buyer Common Stock
that would otherwise be issued to such holder. In lieu of any fractional shares
of Buyer Common Stock that would otherwise be issued, each holder that would
have been entitled to receive a fractional share of Buyer Common Stock shall,
upon proper surrender of such holder's Share Certificates, receive a cash
payment equal to such fraction multiplied by the initial public offering price
per share of Buyer Common Stock.
Section 2.5 Closing. The closing of the Merger and the other
-------
transactions contemplated hereby (the "Closing") shall take place at the offices
-------
of [Paul, Hastings, Janofsky & Walker LLP, Twenty-Third Floor, 555 South Flower
Street, Los Angeles, California 90071], at 10:00 A.M. local time on the day of
closing of the initial public offering of the Buyer Common Stock, or at such
other time or on such other date as shall be agreed upon amount the parties upon
satisfaction or waiver of all conditions precedent to the Closing (such time and
date being referred to herein as the "Closing Date").
------------
Section 2.6 Actions at the Closing. At the Closing:
----------------------
(a) The Company and the Shareholder shall deliver or cause to be
delivered to Buyer and Newco all of the documents, certificates and instruments
required to be delivered to Buyer or Newco pursuant to Section 6.2.
(b) Buyer and Newco shall deliver or caused to be delivered to the
Company and the Shareholder all of the documents, certificates and instruments
required to be delivered to the Company or the Shareholder pursuant to Section
6.3.
(c) The Company and Newco shall file the Delaware Certificate of
Merger with the Secretary of State of the State of Delaware and the New York
Certificate of Merger with the Secretary of State of the State of New York.
(d) Buyer shall deliver to the Shareholder certificates representing
the shares of Buyer Common Stock acquired by the Shareholder in the Merger.
(e) Buyer shall deliver to the Shareholder, by wire transfer of
immediately available funds, the cash portion of the Merger Consideration.
(f) Buyer shall deliver to the Shareholder Buyer Notes representing
the note portion of the Merger Consideration.
-3-
<PAGE>
(g) Pailla Reddy shall enter into an employment agreement with the
Company (the "Employment Agreement") in a form reasonably acceptable to Buyer
--------------------
and Pailla Reddy having a term of two years from the Closing Date and providing
for payment of annual salary of $200,000 and, if terminated without cause,
severance equal to the remainder of the term of the Employment Agreement or a
maximum of one year.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
------------------------------
REGARDING THE COMPANY
---------------------
The Company and the Shareholder hereby jointly and severally represent
and warrant to, and covenant and agree with, Buyer and Newco that:
Section 3.1 Organization and Good Standing; Subsidiaries. The Company
--------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of New York, with full power and authority to own and lease
its properties and to conduct its business as currently conducted. The Company
has been duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of each jurisdiction in which the Company
owns or leases any property, or conducts any business, so as to require such
qualification, except where the failure to obtain such qualification would not
be reasonably likely to have a Material Adverse Effect. The Company has no
Subsidiaries and does not own or control or have any other equity investment or
other interest in, directly or indirectly, any corporation, joint venture,
limited liability company, partnership, association or other entity. The copies
or originals of the articles of incorporation, bylaws, minute books and stock
records of the Company previously delivered to, or made available for inspection
by, Buyer are true, complete and correct
Section 3.2 Authorization, Binding Agreement. The Company has all
--------------------------------
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by the Company's board of directors
and the Company's stockholders in accordance with the New York Law and the
articles of incorporation and bylaws of the Company. No other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by the Company and constitutes the legal, valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by (a)
bankruptcy, insolvency, reorganization, moratorium or other laws, now or
hereafter in effect, relating to or limiting creditors' rights generally, and
(b) general principles of equity (whether considered in an action in equity or
at law).
Section 3.3 No Conflicts. The execution, delivery and performance of
------------
this Agreement and the consummation of the transactions contemplated hereby will
not (a) conflict with or result in a breach or violation of any term or
provision of, or constitute a default under (with or without notice or passage
of time, or both), or otherwise give any Person a basis for accelerated or
increased rights or termination or nonperformance under, any obligation,
agreement or instrument to which the Company is a party or by which the Company
is bound or affected or to which any of the property or assets of the Company is
bound or affected, (b) result in the violation of the provisions of the articles
of incorporation or bylaws of the Company or any Legal Requirement applicable to
or binding upon it, (c) result in the creation or imposition of any Lien upon
any property or asset of the Company or (d) otherwise adversely affect the
contractual or other legal rights or privileges of the Company. Schedule 3.3
------------
sets forth a list of all agreements requiring the consent of any party thereto
to any of the transactions contemplated hereby.
Except as set forth on Schedule 3.3, all consents, authorizations and
------------
approvals of any Person to or as a result of the consummation of the
transactions contemplated hereby that are necessary or advisable in connection
with the operations and business of the Company as currently conducted and as
proposed to be conducted, or for which the failure to obtain the same might
have,
-4-
<PAGE>
individually or in the aggregate, a Material Adverse Effect, have been lawfully
and validly obtained by the Company.
Section 3.4 Capitalization. The authorized capital stock of the
--------------
Company consists solely of 100 shares of Company Common Stock, of which 100
shares are issued and outstanding. All of the issued and outstanding shares of
Company Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable and are held by the Shareholder in the amounts reflected
in Annex B hereto. There are no existing options, warrants, rights, calls or
-------
commitments of any character relating to the shares of Company Common Stock or
any other capital stock or securities of the Company, (ii) there are no
outstanding securities or other instruments convertible into or exchangeable for
shares of Company Common Stock or any other capital stock or securities of the
Company and no commitments to issue such securities or instruments, and no
Person has any right of first refusal, preemptive right, subscription right or
similar right with respect to any shares of Company Common Stock or any other
capital stock or securities of the Company.
Section 3.5 Financial Statements.
--------------------
(a) The Company has prepared and furnished to Buyer, and there are
included in Schedule 3.5 hereto, true and complete copies of (i) the unaudited
------------
balance sheet (the "Balance Sheet") of the Company at December 31, 1997 (the
-------------
"Balance Sheet Date"), and the related unaudited statements of income,
- -------------------
shareholders' equity and cash flows for the twelve months then ended, (ii) the
unaudited balance sheets of the Company at June 30, 1998 and the related
unaudited statements of income, shareholders' equity and cash flow for the
fiscal year then ended, together with the report thereon of independent
certified public accountants (the financial statements described in clauses (i)
and (ii) above are collectively referred to as the "Financial Statements").
--------------------
(b) The Financial Statements present fairly the financial condition of
the Company as of the dates indicated therein and the results of operations and
cash flows of the Company for the periods specified therein, have been prepared
in conformity with GAAP applied on a consistent basis during the periods covered
thereby and prior periods, have been derived from the accounting records of the
Company.
Section 3.6 Property and Products.
---------------------
(a) The Company has, and immediately prior to the Closing will have,
good, valid and marketable title in fee simple to all real property and all
personal property reflected on the Balance Sheet as owned by the Company and all
real property and personal property acquired by the Company since the Balance
Sheet Date, in each case free and clear of all Liens except (i) as set forth on
Schedule 3.6(a-1), and (ii) for sales and other dispositions of inventory in the
- -----------------
ordinary course of business since the Balance Sheet Date which, in the
aggregate, have not been materially different from prior periods. Schedule
--------
3.6(a-2) contains a list of all tangible personal property (including, without
- --------
limitation, computer systems, hardware and software) having a cost or fair
market value in excess of $50,000 owned by the Company (other than personal
property held by the Company as lessee under an operating lease). Schedule
--------
3.6(a-3) contains a list of all real property leases, licenses and personal
- --------
property leases under which the Company is the lessee or licensee. True and
complete copies of all real property leases, licenses and personal property
leases listed on Schedule 3.6(a-3) have been delivered to Buyer heretofore, as
well as copies of any title reports, surveys or environmental reports or audits
relating to any leased real property. For the purposes of this Section 3.6(a),
a "lease" shall include a sublease. All personal property owned by the Company
and all personal property held by the Company pursuant to operating leases is in
good operating condition and repair, subject only to ordinary wear and tear, and
is suitable and appropriate for the use thereof made and proposed to be made by
the Company in its business and operations. The real property and personal
property described in Schedules 3.6(a-1) and 3.6(a-2) and the real property and
personal property held by the Company pursuant to the leases and licenses
described in Schedule 3.6(a-3) comprise all of the real property and personal
property used in or necessary for the conduct of business of the Company. The
Company owns all of the real and personal property, tangible and intangible,
including, without limitation, computer systems hardware
-5-
<PAGE>
and software, necessary or desirable to conduct its business as heretofore
conducted or as contemplated to be conducted except as specifically disclosed
herein.
(b) Except as set forth in Schedule 3.6(b), all of the facilities,
---------------
buildings, plants, structures and improvements (A) are in good operating
condition and repair, and (B) are adequate and suitable for the purposes for
which they are currently and proposed to be used. There are no (i) leases,
subleases, licenses, concessions or other agreements, written or oral, granting
to any other Person the right to acquire, use or occupy any portion of, any real
property, (ii) outstanding options or rights of first refusal to purchase all or
any portion of real property or interest therein, and (iii) Persons (other than
the Company) in possession of any real property. Except for inventory that is
excess, damaged or obsolete, for which in the aggregate an adequate reserve has
been established in the Balance Sheet in accordance with generally accepted
accounting principles, consistently applied, the inventory reflected in the
Balance Sheet and thereafter acquired and not disposed of since such date is of
good and merchantable quality, and of a quantity and quality saleable in the
ordinary course of business in accordance with past practices.
(c) Schedule 3.6(c) includes an accurate description of all products
manufactured, marketed, sold or licensed by the Company since January 1, 1993
(the "Company Products"). Except as disclosed on Schedule 3.6(c), there have
----------------
been no Company Products which have been recalled, withdrawn or suspended in
and/or outside of the United States (whether voluntarily or otherwise) since
January 1, 1993, nor have there been proceedings in and/or outside of the United
States pending against the Company at any time since January 1, 1993 (whether
such proceedings have since been completed or remain pending) seeking the
recall, withdrawal, suspension or seizure of any Company Product or seeking to
enjoin the Company from engaging in any activities pertaining to such Company
Products or to affirmatively perform activities pertaining to such Company
Products prior to shipping such products, or requiring the cessation or
curtailment of any business operation or practice. There are no facts which
exist which could reasonably be expected to furnish a basis for the recall or
withdrawal or any Company Product or the suspension of any product registration,
product license, manufacturing license, wholesale dealer's license, export
license or other governmental license, or the approval or consent of any
governmental regulatory agency with respect to any Company Product, nor do there
exist any facts which could reasonably be expected to furnish a basis for the
recall, withdrawal, suspension or seizure by any governmental agency or court of
any Company Product or which could reasonably be expected to form the basis for
the issuance of an injunction pertaining thereto or to cause the Company to
cease further distribution or marketing of any Company Product pending further
approval or authorization by any governmental agency or to change marketing
classification of any Company Product, or which could reasonably be expected to
require the cessation or curtailment of any business operation or practice. The
Company Products have been manufactured, marketed and distributed in accordance
with the specifications under which such Company Products have normally been
manufactured and in accordance with all applicable requirements of law. Since
January 1, 1993, the Company has not received or been subject to consent
decrees, orders, settlement agreements or similar matters relating in any
fashion to the Company Products or received any warning letters or other
correspondence from the Food and Drug Administration, Federal Trade Commission
or other governmental officials or agencies concerning the Company Products or
which have in any manner asserted that the operations of the Company may not be
in compliance with applicable laws, regulations, rules or guidelines. The
Company has complied in all respects with current reporting requirements
relating to the Company Products. No officer, director or employee of the
Company has been convicted of or formally charged with any offense or act of a
type that would be required to be disclosed in a registration statement of the
Company on Form S-1 under the Securities Act.
Section 3.7 Accounts Receivable. All accounts receivable of the
-------------------
Company reflected in the Balance Sheet and all accounts receivable of the
Company that have arisen since the Balance Sheet Date (except such accounts
receivable as have been collected since such dates) are valid and enforceable
claims. Such accounts receivable of the Company are not subject to any valid
defense, offset or counterclaim and are fully collectible on normal terms and in
the ordinary course of business, except to the extent of the allowance for
doubtful accounts reflected on the Balance Sheet. Schedule 3.7 contains a true
------------
and complete aging of the Company's accounts receivable as of the Balance Sheet
Date.
-6-
<PAGE>
Section 3.8 Trademarks, Patents, Etc.
------------------------
(a) Schedule 3.8(a) contains a true and complete list of all letters
---------------
patent, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, copyrights, copyright
registrations and applications, grants of a license or right to the Company with
respect to the foregoing, both domestic and foreign, claimed by the Company or
used or proposed to be used by the Company in the conduct of its business,
whether registered or not, (collectively herein, "Registered Rights").
-----------------
(b) Except as described in Schedule 3.8(b), the Company owns and has the
---------------
unrestricted right to use the Registered Rights and every trade secret, know-
how, process, discovery, development, design, technique, customer and supplier
list, promotional idea, marketing and purchasing strategy, invention, process,
confidential data, product formulation and or other information (collectively
herein, "Proprietary Information") required for, advantageous to or incident to
-----------------------
the design, development, purchase, distribution, sale and use of all products
and services sold or rendered or proposed to be sold or rendered by the Company,
free and clear of any right, equity or claim of others. The Company has taken
reasonable security measures to protect the secrecy, confidentiality and value
of all Proprietary Information.
(c) Schedule 3.8(c) contains a true and complete list and description,
---------------
including the term, payment for and scope thereof, of all licenses of or rights
to Proprietary Information granted to the Company by others or to others by the
Company. Except as described in Schedule 3.8(c), (i) the Company has not sold,
---------------
transferred, assigned, licensed or subjected to any Lien, any Registered Right
or Proprietary Information or any interest therein, and (ii) the Company is not
obligated or under any liability whatever to make any payments by way of
royalties, fees or otherwise to any owner or licensor of, or other claimant to,
any Registered Right or Proprietary Information. None of the Registered Rights
or Proprietary Information licensed or granted to the Company is owned by the
Shareholder or any affiliate of the Shareholder and no Registered Right or
Proprietary Information has been licensed or granted to the Shareholder or any
affiliate of the Shareholder.
(d) There is no claim or demand of any Person pertaining to, or any
Action that is pending or, to the Company's or Shareholder's knowledge,
threatened, which challenges the rights of the Company in respect of any
Registered Right or any Proprietary Information.
Section 3.9 Banking and Insurance.
---------------------
(a) Schedule 3.9(a) contains a true and complete list of the names and
---------------
locations of all financial institutions at which the Company maintains a
checking account, deposit account, securities account, safety deposit box or
other deposit or safekeeping arrangement, the numbers or other identification of
all such accounts and arrangements and the names of all persons authorized to
draw against any funds therein.
(b) Schedule 3.9(b) contains a true and complete list and brief summary
---------------
of all insurance policies and bonds and self insurance arrangements currently in
force that cover or purport to cover risks or losses to or associated with the
Company's business, operations, premises, properties, assets, employees, agents
and directors. The insurance policies, bonds and arrangements described on
Schedule 3.9(b) (the "Policies") provide such coverage against such risk of loss
- --------------- --------
and in such amounts as are customary for corporations of established reputation
engaged in the same or similar business and similarly situated. True and
complete copies of all such Policies have been delivered to Buyer heretofore
-7-
<PAGE>
Section 3.10 Litigation. Except as set forth on Schedule 3.10, there is
---------- -------------
no legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding pending or, to the knowledge
of the Company, threatened against or affecting the Company or any of its
property, assets, business, products, franchises or governmental approvals,
before any court or governmental department, commission, board, bureau, agency,
instrumentality or arbitrator (including but not limited to any taxing entity or
authority) which, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect or to materially and adversely affect the
ability of the Company to carry out, or to prevent or make unduly burdensome,
the Merger contemplated by this Agreement. The Company is subject to no
outstanding judgments, orders, decrees, awards, stipulations or injunctions of
any governmental entity or arbitrator against or affecting the Company or its
properties, assets or business.
Neither the Company nor, to the Shareholder's knowledge, any of its
directors, officers, agents, employees or other Person associated with or acting
on behalf of the Company has (a) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (b) made any direct or indirect unlawful payments to
government officials or employees, or foreign government officials or employees,
from corporate funds, (c) established or maintained any unlawful or unrecorded
fund of corporate monies or other assets, or (d) made or received any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment.
Section 3.11 Income and Other Taxes. Except as set forth on Schedule
---------------------- --------
3.11:
- ----
(a) All Tax Returns required to be filed through and including the date
hereof in connection with the operations of the Company are true, complete and
correct in all respects and have been properly and timely filed. The Company
has not requested any extension of time within which to file any Tax Return,
which Tax Return has not since been filed. Buyer has heretofore been furnished
by the Company with true, correct and complete copies of each Tax Return of the
Company with respect to the past three taxable years, and of all reports of, and
communications from, any Governmental Entities relating to such period.
(b) All Taxes required to be paid or withheld and deposited through and
including the date hereof in connection with the operations of the Company have
been duly and timely paid or deposited by the Company. The Company has properly
withheld or collected all amounts required by law for income Taxes and
employment Taxes relating to its employees, creditors, independent contractors
and other third parties, and for sales and use Taxes on sales, and has properly
and timely remitted such withheld or collected amounts to the appropriate
Governmental Entity. The Company has no liabilities for any Taxes for any
taxable period ending prior to or coincident with the Closing Date.
Section 3.12 Employee Benefit Matters. Schedule 3.12 contains a
------------------------ -------------
complete list of all employee benefit plans (within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
-----
which are maintained or contributed to by the Company (the "Company Benefit
---------------
Plans"). The Company has heretofore provided to Buyer (i) true and complete
- -----
copies of all Company Benefit Plans; (ii) the most recent annual actuarial
evaluation, if any, prepared for each Company Benefit Plan; (iii) the two most
recent annual reports (series 5500), if any, required under ERISA with respect
to each Company Benefit Plan, including audited financial statements; (iv) the
most recent determination letter received from the IRS, if any, for each Company
Benefit Plan, and (v) the most recent Summary Plan Description, if any, required
under ERISA with respect to each Company Benefit Plan. Except as disclosed on
Schedule 3.12, (i) with respect to each Company Benefit Plan that is intended to
- -------------
be qualified under Section 401(a) of the Code and is maintained by the Company
for any of its employees, (x) the Company has obtained a favorable determination
letter from the IRS and nothing has happened since such letter that would
adversely affect the tax qualification of such plan and (y) such plan has been
operated in compliance with ERISA and in accordance with the provisions of, and
the rules and regulations covering, such plan except where the failure to so
comply does not individually or in the aggregate, have a Material Adverse
Effect, (ii) with respect to each Company Benefit Plan, the Company is not, and
to the Company's knowledge no other person is, engaged in a transaction
prohibited by Section 4975 of the Code or Section 406 of ERISA which could
result in a
-8-
<PAGE>
liability to the Company which would individually or in the aggregate, have a
Material Adverse Effect, (iii) each Company Benefit Plan which is subject to
Part III of Subtitle B of Title I of ERISA or Section 412 of the Code has been
maintained in compliance with the minimum funding standards of ERISA and the
Code, and no reportable event, within the meaning of Section 4043 of ERISA has
occurred with respect to any Company Benefit Plan which is subject to Title IV
of ERISA, other than reportable events with respect to which notice has been
waived by the Pension Benefit Guaranty Corporation or which would not,
individually or in the aggregate, have a Material Adverse Effect, and (iv) no
benefit is provided pursuant to a welfare benefit plan (as defined in ERISA
Section 3(1)) to a former employee of the Company other than for continuation
health coverage benefits provided under Code Section 4980B.
Section 3.13 No Undisclosed Liabilities. Except (i) to the extent set
--------------------------
forth or provided for in the Balance Sheet or the notes thereto, (ii) as set
forth on Schedule 3.13 or (iii) for non-material current liabilities incurred
-------------
since the Balance Sheet Date in the ordinary course of business, as of the date
hereof the Company has no liabilities or obligations of any kind or nature
(whether or not of a type that would be required to be disclosed in financial
statements), whether accrued, absolute, contingent or otherwise, whether due or
to become due and whether the amounts thereof are readily ascertainable or not,
or any unrealized or anticipated losses from any commitments of a contractual
nature, including but not limited to liabilities or obligations for Taxes and
Environmental Matters with respect to or based upon the facts existing, or
transactions or events occurring at or prior to the Closing.
Section 3.14 Permits, Licenses, Etc.; Regulatory Filings. The Company
-------------------------------------------
possesses, and is operating in compliance with, all franchises, licenses,
permits, certificates, authorizations, rights and other approvals of
Governmental Entities necessary to (i) occupy, maintain, operate and use the
real property as it is currently used and proposed to be used, (ii) conduct its
business as currently conducted and as proposed to be conducted, and (iii)
maintain and operate its Company Benefit Plans (collectively, the "Permits"),
-------
except to the extent that the failure to have or maintain any such permit would
not result in a Material Adverse Effect. Schedule 3.14 contains a true and
-------------
complete list of all Permits. Each Permit has been lawfully and validly issued,
and no proceeding is pending or, to the Shareholder's knowledge, threatened
looking toward the revocation, suspension or limitation of any Permit. The
consummation of the transactions contemplated by this Agreement will not result
in the revocation, suspension or limitation of any Permit.
The Company has made all required registrations and filings with and
submissions to all applicable Governmental Entities relating to the operations
of the Company as currently conducted and as proposed to be conducted,
including, without limitation, all such applicable Governmental Entities having
jurisdiction over any matters pertaining to conservation or protection of the
environment, the treatment, discharge, use, handling, storage or production, or
disposal of Hazardous Materials and the safety of foods, drugs and other
consumer products. All such registrations, filings and submissions were in
compliance with all Legal Requirements (including all Environmental Laws) and
other requirements when filed, no material deficiencies have been asserted by
any such applicable Governmental Entities with respect to such registrations,
filings or submissions and, to the Shareholder's knowledge, no facts or
circumstances exist which would indicate that a material deficiency may be
asserted by any such authority with respect to any such registration, filing or
submission.
Section 3.15 Material Contracts; No Defaults.
-------------------------------
(a) Schedule 3.15 contains a true and complete list and description of
-------------
all material contracts, agreements, understandings, arrangements and
commitments, written or oral ("Contracts"), of the Company by which it or its
properties, rights or assets are bound. True and complete copies of such
written Contracts and true and complete summaries of such oral Contracts have
been delivered to Buyer heretofore. For the purposes of this subsection (a),
"material" means any contract, agreement, understanding, arrangement or
commitment that (i) involves performance by any party more than 90 days from the
date hereof, (ii) involves payments or receipts by the Company in excess of
$100,000, (iii) involves capital expenditures in excess of $25,000 or (iv)
otherwise materially affects the Company.
-9-
<PAGE>
(b) Except as described in Schedule 3.15, each Contract described herein
-------------
or elsewhere in this Agreement, including, without limitation, Section 3.6, is,
-----------
and after the Closing on identical terms will be, legal, valid, binding,
enforceable and in full force and effect and no event or condition has occurred
or become known to the Company or the Shareholder or is alleged to have occurred
that constitutes or, with notice or the passage of time, or both, would
constitute a default or a basis of force majeure or other claim of excusable
----- -------
delay, termination, nonperformance or accelerated or increased rights by the
Company or any other Person under any Contract described above in this Section
3.15, or described or otherwise disclosed pursuant to this Agreement; and
(c) Schedule 3.15(c-1) contains a true and complete list of the name and
------------------
address of each customer that represented in excess of 10% of the Company's
sales of goods or services during the twelve months ended on the Balance Sheet
Date, and since that date no such customer has terminated its relationship with
or adversely curtailed its purchases from the Company or indicated (for any
reason) its intention so to terminate its relationship or curtail its purchases.
Schedule 3.15(c-2) contains a true and complete list of each supplier from whom
- ------------------
the Company purchased in excess of 10% of the Company's purchases of goods or
services during the twelve months ended on the Balance Sheet Date, and since
that date no such supplier has terminated its relationship with or adversely
curtailed its accommodations, sales or services to the Company or indicated (for
any reason) its intention to terminate such relationship or curtail its
accommodations, sales or services. The Company has no purchases reasonably
available, on competitive terms available from only a single source.
(d) No person with whom the Company has such a contract, agreement,
arrangement, commitment or other understanding is in default thereunder or has
failed to perform fully thereunder by reason of force majeure or other claim of
----- -------
excusable delay, termination or nonperformance thereunder, the delay,
termination or nonperformance of which, or a default under which, has had or may
have a Material Adverse Effect.
Section 3.16 Absence of Certain Changes. Since the Balance Sheet Date,
--------------------------
except as disclosed in Schedule 3.16, the Company has not: (i) incurred any
-------------
debts, obligations or liabilities (absolute, accrued, contingent or otherwise),
other than current liabilities incurred in the ordinary course of business
which, individually or in the aggregate, are not material; (ii) subjected to or
permitted a Lien upon or otherwise encumbered any of its assets, tangible or
intangible; (iii) sold, transferred, licensed or leased any of its assets or
properties except in the ordinary course of business; (iv) canceled or
compromised any debt owed to or by or claim of or against it, or waived or
released any right, of material value other than in the ordinary course of
business; (v) suffered any physical damage, destruction or loss (whether or not
covered by insurance) causing or having a Material Adverse Effect; (vi) made or
suffered any change in, or condition affecting, its condition (financial or
otherwise), properties, profitability, prospects or operations other than
changes, events or conditions in the ordinary course of business, none of which
(individually or in the aggregate) has had or may have a Material Adverse
Effect; (vii) made any change in the accounting principles, methods, records or
practices followed by it or depreciation or amortization policies or rates
theretofore adopted; (viii) paid, or made any accrual or arrangement for payment
of, any severance or termination pay to, or entered into any employment or loan
or loan guarantee agreement with, any current or former officer, director or
employee or consultant; (ix) paid, or made any accrual or arrangement for
payment of, any increase in compensation, bonuses or special compensation of any
kind to any employee other than in the ordinary course of business, or paid, or
made any accrual or arrangement for payment of, any increase in compensation,
bonuses or special compensation of any kind to any officer or director of the
Company or any consultant to the Company; or (x) entered into any agreement or
otherwise obligated itself to do any of the foregoing.
Section 3.17 Employees and Labor Matters.
---------------------------
(a) Schedule 3.17(a) contains a true and complete list of all contracts,
----------------
agreements, plans, arrangements, commitments and understandings (formal and
informal) pertaining to terms of employment, compensation, bonuses, profit
sharing, stock purchases, stock repurchases, stock options, stock appreciation
rights, commissions, incentives, loans or loan guarantees, severance pay or
benefits, use of the Company's property and related matters of the Company with
any current or former
-10-
<PAGE>
shareholder, officer, director, employee or consultant, and true and complete
copies of all such contracts, agreements, plans, arrangements and understandings
have been delivered to Buyer heretofore.
(b) Except as set forth on Schedule 3.17(a), neither Buyer nor the
----------------
Surviving Corporation will have any responsibility for continuing any person in
the employ (or retaining any person as a consultant) of the Company from and
after the Closing or have any liability for any severance payments to or similar
arrangements with any such Person who shall cease to be an employee of the
Company at or prior to the Closing.
(c) There is not any union or other collective bargaining unit, against
either the Company or its premises or products, nor is there occurring or, to
the Company's or Shareholder's knowledge, threatened or anticipated, any
strikes, slow downs, pickets, work stoppages, grievance proceedings, union
organization efforts or other concerted action by any current or former
employees or other persons.
Section 3.18 Affiliates. Except as disclosed on Schedule 3.18, none of
---------- -------------
the Shareholder, any officer, director or key employee of the Company or any
associate or Affiliate of the Company or any of such Persons has, directly or
indirectly, (i) an interest in any Person that (A) furnishes or sells, or
proposes to furnish or sell, services or products that are furnished or sold by
the Company or (B) purchases from or sells or furnishes to, or proposes to
purchase from or sell or furnish to, the Company any goods or services or (ii) a
beneficial interest in any contract or agreement to which the Company is a party
or by which the Company or any of the assets of the Company are bound or
affected.
Section 3.19 Compliance with Law. The Company (i) has not violated or
-------------------
conducted its business or operations in violation of, and has not used or
occupied its properties or assets in violation of, any Legal Requirement or
Licensing Requirement which would individually or in the aggregate have a
Material Adverse Effect, (ii) has not been alleged to be in violation of any
Legal Requirement or Licensing Requirement, and (iii) has not received any
notice of any alleged violation of, or any citation for noncompliance with, any
Legal Requirement or Licensing Requirement.
Section 3.20 Brokers' Fees. No investment banker, broker, finder or
-------------
similar agent has been employed by or on behalf of the Company in connection
with this Agreement or the transactions contemplated hereby, and the Company has
not entered into any agreement or understanding of any kind with any person or
entity for the payment of any brokerage commission, finder's fee or any similar
compensation in connection with this Agreement or the transactions contemplated
hereby.
Section 3.21 Disclosure. No representation or warranty of the Company
----------
or the Shareholder in this Agreement and no information contained in any
Schedule or other writing delivered pursuant to this Agreement or at the Closing
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact required to make the statements herein or
therein not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants to, and covenants and agrees with,
the Company and the Shareholder that:
Section 4.1 Organization and Good Standing of Buyer. Buyer is a
---------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full power and authority to own and lease its
properties and to conduct its business as currently conducted. Buyer has been
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each jurisdiction in which Buyer owns or
leases any property, or conducts any business, so as to require such
qualification, except where the failure to obtain such qualification would not
be reasonably likely to have a material adverse effect. The copies or originals
of the certificate of
-11-
<PAGE>
incorporation, bylaws, minute books and stock records of Buyer previously
delivered to, or made available for inspection by, the Company and the
Shareholder are true, complete and correct.
Section 4.2 Organization and Good Standing of Newco. Newco is a
---------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full power and authority to own and lease its
properties and to conduct its business as currently conducted. Newco has been
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each jurisdiction in which Newco owns or
leases any property, or conducts any business, so as to require such
qualification, except where the failure to obtain such qualification would not
be reasonably likely to have a material adverse effect. The copies or originals
of the certificate of incorporation, bylaws, minute books and stock records of
Newco previously delivered to, or made available for inspection by, the Company
and the Shareholder are true, complete and correct.
Section 4.3 Authorization, Binding Agreement. Buyer and Newco each have
--------------------------------
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the respective
boards of directors of Buyer and Newco and the sole stockholder of Newco in
accordance with the Delaware Law and the respective certificates of
incorporation and bylaws of Buyer and Newco. No other corporate proceedings on
the part of Buyer or Newco are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Buyer and Newco and constitutes the legal, valid and
binding agreement of Buyer and Newco, enforceable against Buyer and Newco in
accordance with its terms, except as such enforceability may be limited by (a)
bankruptcy, insolvency, reorganization, moratorium or other laws, now or
hereafter in effect, relating to or limiting creditors' rights generally, and
(b) general principles of equity (whether considered in an action in equity or
at law).
Section 4.4 No Conflicts. The execution, delivery and performance of
------------
this Agreement and the consummation of the transactions contemplated hereby will
not (a) conflict with or result in a breach or violation of any term or
provision of, or constitute a default under (with or without notice or passage
of time, or both), or otherwise give any Person a basis for accelerated or
increased rights or termination or nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement or instrument to which Buyer or Newco is a party or by which Buyer or
Newco is bound or affected or to which any of the property or assets of Buyer or
Newco are bound or affected, (b) result in the violation of the provisions of
the certificate of incorporation or bylaws of Buyer or Newco or any Legal
Requirement applicable to or binding upon them, (c) result in the creation or
imposition of any Lien upon any property or asset of Buyer or Newco or (d)
otherwise adversely affect the contractual or other legal rights or privileges
of Buyer or Newco. Schedule 4.4 sets forth a list of all agreements requiring
------------
the consent of any party thereto to any of the transactions contemplated hereby.
Except as set forth on Schedule 4.4, all consents, authorizations and approvals
------------
of any Person to or as a result of the consummation of the transactions
contemplated hereby, that are necessary or advisable in connection with the
operations and business of Buyer and Newco as currently conducted and as
proposed to be conducted, or for which the failure to obtain the same might
have, individually or in the aggregate, a material adverse effect, have been
lawfully and validly obtained by Buyer and Newco.
Section 4.5 Capitalization. The authorized capital stock of Buyer
--------------
consists solely of 30,000,000 shares of Buyer Common Stock, of which [______]
shares are issued and outstanding. All of the issued and outstanding shares of
Buyer Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable, and 5,000,000 shares of Preferred Stock, none of which
are issued or outstanding. Except as set forth in Schedule 4.5, there are no
------------
existing options, warrants, right, calls or commitments of any character
relating to the shares of Buyer Common Stock or any other capital stock or
securities of Buyer, (ii) there are no outstanding securities or other
instruments convertible into or exchangeable for shares of Buyer Common Stock or
any other capital stock or securities of Buyer and no commitments to issue such
securities or instruments, and no Person has any right of first refusal,
preemptive right, subscription right or similar right with respect to any shares
of Buyer Common Stock or any other capital stock or securities of Buyer. The
authorized capital stock of Newco consists solely
-12-
<PAGE>
of [10,000] shares of common stock, par value $.001 per share, of which [1,000]
shares are, and on the Closing Date will be, issued and outstanding. All of the
issued and outstanding shares of capital stock of Newco are, and on the Closing
Date will be, owned beneficially and of record by Buyer.
Section 4.6 Brokers' Fees. Except as set forth on Schedule 4.6, no
------------- ------------
investment banker, broker, finder or similar agent has been employed by or on
behalf of Buyer or Newco in connection with this Agreement or the transactions
contemplated hereby, and neither Buyer nor Newco have entered into any agreement
or understanding of any kind with any person or entity for the payment of any
brokerage commission, finder's fee or any similar compensation in connection
with this Agreement or the transactions contemplated hereby.
Section 4.7 Disclosure. No representation or warranty of Buyer or
----------
Newco in this Agreement and no information contained in any Schedule or other
writing delivered pursuant to this Agreement or at the Closing contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact required to make the statements herein or therein not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
------------------------------
OF THE SHAREHOLDER
------------------
The Shareholder hereby represents and warrants to, and covenants and
agrees with, Buyer and Newco that:
Section 5.1 Ownership of Shares. The Shareholder owns of record and
-------------------
beneficially all of the issued and outstanding shares of Company Common Stock
and has, and at all times prior to and as of the Closing, will have, good and
marketable title to such shares free and clear of all Liens and adverse claims.
Section 5.2 Execution and Delivery. The Shareholder has the power and
----------------------
authority to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations under this Agreement. This
Agreement, upon its execution and delivery by the Shareholder (assuming the due
authorization, execution and delivery hereof by the other parties hereto), will
constitute the legal, valid and binding obligation of the Shareholder,
enforceable against the Shareholder in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency and similar
laws relating to creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
Section 5.3 No Conflicts. The execution, delivery and performance of
------------
this Agreement by the Shareholder and the consummation by the Shareholder of the
transactions contemplated hereby will not conflict with or result in a breach or
violation of any term or provision of, or (with or without notice or passage of
time, or both) constitute a default under, any indenture, mortgage, deed of
trust, trust (constructive and other), loan agreement or other agreement or
instrument to which the Shareholder is a party or by which the Shareholder or
the Shareholder's shares are bound, or violate the provisions of any statute, or
any order, rule or regulation of any governmental body or agency or
instrumentality thereof, or any order, writ, injunction or decree of any court
or any arbitrator, having jurisdiction over the Shareholder or the property of
the Shareholder.
Section 5.4 Restrictions on Transfer of Buyer Common Stock and Buyer
--------------------------------------------------------
Notes Under Securities Laws.
- ---------------------------
(a) The Shareholder understands and agrees that the shares of Buyer
Common Stock and the Buyer Notes that the Shareholder will acquire in the Merger
have not been registered under the Securities Act and that, accordingly, such
shares and notes will not be fully transferable except as permitted under
various exemptions contained in the Securities Act or upon satisfaction of the
registration and prospectus delivery requirements of the Securities Act. The
Shareholder acknowledges that the Shareholder must bear the economic risk of its
investment in such shares of
-13-
<PAGE>
Buyer Common Stock and Buyer Notes for an indefinite period of time since such
shares and notes have not been registered under the Securities Act and therefore
cannot be sold unless they are subsequently registered or an exemption from
registration is available. Shareholder hereby represents and warrants that
Shareholder is an Accredited Investor as defined under Rule 501(a) of the
Securities Act and is acquiring the shares of Buyer Common Stock and Buyer Notes
in the Merger for investment purposes only, for Shareholder's own account, and
not as nominee or agent for any other Person, and not with the view to, or for
resale in connection with, any distribution thereof within the meaning of the
Securities Act.
(c) The Shareholder hereby agrees with Buyer as follows:
(i) The certificates evidencing the shares of Buyer Common Stock and
the Buyer Notes it will acquire in the Merger, and each instrument or
certificate issued in transfer thereof, will bear substantially the following
legend:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and
such securities may not be sold or transferred unless there is an
effective registration statement under such Act covering such
securities or the issuer corporation receives an opinion of counsel
reasonably satisfactory to issuer corporation (which may be counsel
for the issuer corporation) stating that such sale or transfer is
exempt from the registration and prospectus delivery requirements of
such Act."
(ii) The certificates representing such shares of Buyer Common Stock
and the Buyer Notes, and each instrument or certificate issued in transfer
thereof, will also bear any legend required under any applicable state
securities law.
(iii) Absent an effective registration statement under the Securities
Act, covering the disposition of the shares of Buyer Common Stock and Buyer
Notes which the Shareholder acquires in the Merger, the Shareholder will not
sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or all
of such shares of Buyer Common Stock or Buyer Notes without first providing
Buyer with an opinion of counsel reasonably acceptable to Buyer (which may be
counsel for Buyer) to the effect that such sale, transfer, assignment, pledge,
hypothecation or other disposition will be exempt from the registration and the
prospectus delivery requirements of the Securities Act and the registration or
qualification requirements of any applicable state securities laws. The
Shareholder consents to Buyer's making a notation on its records or giving
instructions to any transfer agent of the Buyer Common Stock in order to
implement the restrictions on transfer set forth in this subsection (c).
Section 5.5 Advice of Counsel. The Shareholder acknowledges that
-----------------
Shareholder has obtained advice from independent counsel with respect to this
Agreement to the extent Shareholder desired to do so. The Shareholder is not
relying on any representations, except those set forth herein, or advice from
Buyer or Newco or any of their respective officers, directors, attorneys or
other representatives regarding this Agreement, its content or effect.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF MERGER
------------------------------------
Section 6.1 Conditions to Each Party's Obligations. Notwithstanding
--------------------------------------
any other provision of this Agreement, the obligations of each party hereto to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) There shall not be instituted and pending or threatened any Action
before any Governmental Entity (i) challenging the Merger or otherwise seeking
to restrain or prohibit the consummation of the transactions contemplated
hereby, or (ii) seeking to prohibit the direct or indirect ownership or
operation by Buyer or the Surviving Corporation of all or a material portion of
the
-14-
<PAGE>
business or assets of the Company, or to compel Buyer, the Surviving Corporation
or the Company to dispose of or hold separate all or a material portion of the
business or assets of the Company, the Surviving Corporation or Buyer.
(b) Buyer shall have had declared effective its registration statement
under the Securities Act with respect to its firm commitment underwritten
initial public offering of the Buyer Common Stock, and no stop order with
respect thereto shall have been entered by the Securities and Exchange
Commission.
Section 6.2 Conditions to Obligations of Buyer and Newco.
--------------------------------------------
Notwithstanding any other provision of this Agreement, the obligations of Buyer
and Newco to consummate the Merger and the other transactions contemplated
hereby shall be subject to the satisfaction, at or prior to the Closing Date, of
the following conditions:
(a) The representations and warranties of the Company and the
Shareholder in this Agreement shall be true and correct in all material respects
on and as of the Closing Date with the same effect as if made on the Closing
Date and each of the Company and the Shareholder shall have complied with all
covenants and agreements and satisfied all conditions on the Company's or the
Shareholder's part, as applicable, to be performed or satisfied on or prior to
the Closing Date.
(b) Buyer shall have received from Anthony T. Scotto, Esq., counsel
for the Company, a written opinion dated the Closing Date and addressed to Buyer
and Newco, in substantially the form attached as Annex C hereto.
-------
(c) Buyer shall have received a certificate of the president of the
Company in substantially the form attached as Annex D hereto.
-------
(d) Buyer shall have received the following under cover of a
certificate of the Secretary of the Company dated the Closing Date in
substantially the form attached as Annex E hereto:
-------
(i) Copies of resolutions of (A) the board of directors of the
Company authorizing and approving the execution, delivery and performance of
this Agreement and all other documents and instruments to be delivered by the
Company pursuant hereto, and of (B) the Company's shareholder evidencing
approval of this Agreement and the transactions contemplated hereby;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
subparagraph (i) above and further certifying that the articles of incorporation
and bylaws of the Company delivered to Buyer at the time of, or prior to, the
execution of this Agreement have been validly adopted and have not been amended
or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as Buyer or its
counsel may reasonably request.
(e) Pailla Reddy shall have entered into a Non-Competition Agreement
with Buyer which shall provide that Mr. Reddy shall not compete in the
nutritional supplements business with the Company and Buyer for a period of
three years after closing (but in no event less than one year after termination
of employment with the Company), in substantially the form attached hereto as
Annex F.
- -------
(f) The Shareholder and Buyer shall have entered into a Registration
Rights Agreement in substantially the form attached hereto as Annex G.
-------
(g) Buyer shall be satisfied, in its sole discretion, with the results
of its due diligence investigation of the Company.
(h) The Shareholder shall have entered into the Employment
Agreement.
-15-
<PAGE>
(i) All authorizations, consents, waivers and approvals by or from
third parties required for the consummation of the transactions contemplated
hereby shall have been obtained and all Liens on the assets and properties of
the Company shall have been released or terminated.
(j) No act, event or condition shall have occurred after the date
hereof which Buyer determines has had or could reasonably be expected to have a
Material Adverse Effect.
(k) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to Buyer and its counsel.
(l) The Shareholder shall have repaid the Company for any shareholder
loans pursuant to Section 8.1(e) and for any expenses pursuant to Section 8.4
-----------
hereof.
Section 6.3 Conditions to Obligations of the Company and the
------------------------------------------------
Shareholder. Notwithstanding any other provision of this Agreement, the
- -----------
obligations of the Company and the Shareholder to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions:
(a) The representations and warranties of Buyer and Newco in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date, and Buyer and
Newco shall have complied with all covenants and agreements and satisfied all
conditions on their part to be performed or satisfied on or prior to the Closing
Date.
(b) The Company shall have received from Paul, Hastings, Janofsky &
Walker LLP, counsel for Buyer and Newco, a written opinion dated the Closing
Date and addressed to the Company and the Shareholder, in substantially the form
attached as Annex H hereto.
-------
(c) The Company shall have received the following under cover of a
certificate of the Secretary of Buyer dated the Closing Date in substantially
the form attached as Annex I hereto:
-------
(i) Copies of resolutions of the board of directors of Buyer
authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by Buyer
pursuant hereto and thereto;
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
subparagraph (i) above and further certifying that the certificate of
incorporation and bylaws of Buyer delivered to the Company at the time of, or
prior to, the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
or its counsel may reasonably request.
(d) The Company shall have received a certificate of the President of
Buyer in substantially the form attached as Annex J hereto.
-------
(e) The Company shall have received the following under cover of a
certificate of the Secretary of Newco dated the Closing Date in substantially
the form attached as Annex K hereto:
-------
(i) Copies of resolutions of (A) the board of directors of Newco
authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by Newco
pursuant hereto and thereto, and (B) the sole stockholder of Newco approving
this Agreement and the Merger;
-16-
<PAGE>
(ii) A certificate of incumbency certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
subparagraph (i) above and further certifying that the certificate of
incorporation and bylaws of Newco delivered to the Company at the time of, or
prior to, the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
or its counsel may reasonably request.
(f) The Company shall have received a certificate of the President of
Newco in substantially the form attached as Annex L hereto.
-------
(g) Buyer or Newco shall have assumed all existing contracts with the
management, employees, consultants and advisors of the Company.
(h) No act, event or condition shall have occurred after the date
hereof which the Shareholder or the Company determines has had or could
reasonably be expected to have a material adverse effect on the business,
financial condition, properties, profitability, prospects or operations of
Buyer.
(i) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to the Company and its counsel.
ARTICLE 7
CONDUCT OF BUSINESS PENDING CLOSING
-----------------------------------
During the period commencing on the date hereof and continuing through
the Closing Date, the Company and the Shareholder covenant and agree (except as
expressly contemplated by this Agreement or to the extent that Buyer shall
otherwise expressly consent in writing) that:
Section 7.1 Qualification. The Company shall maintain all
-------------
qualifications to transact business and remain in good standing in the foreign
jurisdictions in which the Company owns or leases any property, or conducts any
business, so as to require such qualification, except where the failure to
maintain such qualification would not be reasonably likely to have a Material
Adverse Effect.
Section 7.2 Ordinary Course. The Company shall conduct its business
---------------
in, and only in, the ordinary course and shall preserve intact its current
business organizations, keep available the services of its current officers and
employees and preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and going business
value shall be unimpaired at the Closing Date. The Company shall maintain its
properties and assets in good condition and repair.
Section 7.3 Organic Changes. The Company shall not (a) amend its
---------------
articles of incorporation or bylaws, (b) acquire by merging or consolidating
with, or agreeing to merge or consolidate with, or purchase substantially all of
the stock or assets of, or otherwise acquire any business or any corporation,
partnership, association or other business organization or division thereof, (c)
enter into any partnership or joint venture, (d) declare, set aside, make or pay
any dividend or other distribution in respect of its capital stock or purchase
or redeem, directly or indirectly, any shares of its capital stock, (e) issue or
sell any shares of its capital stock of any class or any options, warrants,
conversion or other rights to purchase any such shares or any securities
convertible into or exchangeable for such shares, or (f) liquidate or dissolve
or obligate itself to do.
-17-
<PAGE>
Section 7.4 Indebtedness. The Company shall not incur any
------------
Indebtedness, sell any debt securities or lend money to or guarantee the
Indebtedness of any Person. The Company shall not restructure or refinance its
existing Indebtedness.
Section 7.5 Accounting. The Company shall not make any change in the
----------
accounting principles, methods, records or practices followed by it or
depreciation or amortization policies or rates theretofore adopted by it. The
Company shall maintain its books, records and accounts in accordance with GAAP.
Section 7.6 Compliance with Legal Requirements. The Company shall
----------------------------------
comply promptly with all requirements that applicable law may impose upon it and
its operations and with respect to the transactions contemplated by this
Agreement, and shall cooperate promptly with, and furnish information to, Buyer
in connection with any such requirements imposed upon Buyer, or upon any of its
affiliates, in connection therewith or herewith, including, without limitation,
all information reasonably required by Buyer to prepare its registration
statement with respect to its initial public offering.
Section 7.7 Disposition of Assets. The Company shall not sell,
---------------------
transfer, license, lease or otherwise dispose of, or suffer or cause the
encumbrance by any Lien upon any of, its properties or assets, tangible or
intangible, or any interest therein, except in the ordinary course of business.
Section 7.8 Compensation. The Company shall not (a) adopt or amend in
------------
any material respect any collective bargaining, bonus, profit-sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other plan, agreement, trust, fund or arrangement for the benefit
of employees (whether or not legally binding) other than to comply with any
Legal Requirement or (b) pay, or make any accrual or arrangement for payment of,
any increase in compensation, bonuses or special compensation of any kind, or
any severance or termination pay to, or enter into any employment or loan or
loan guarantee agreement with, any current or former officer, director, employee
or consultant of the Company.
Section 7.9 Modification or Breach of Agreements; New Agreements. The
----------------------------------------------------
Company shall not terminate or modify, or commit or cause or suffer to be
committed any act that will result in breach or violation of any term of, or
(with or without notice or passage of time, or both) constitute a default under
or otherwise give any person a basis for nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement, instrument, arrangement or understanding, written or oral, disclosed
in this Agreement or the Schedules hereto. The Company shall refrain from
becoming a party to any contract or commitment other than in the ordinary course
of business. The Company shall meet all of its contractual obligations in
accordance with their respective terms.
Section 7.10 Capital Expenditures. Except for capital expenditures or
--------------------
commitments necessary to maintain its properties and assets in good condition
and repair (the amount of which shall not exceed $25,000 in the aggregate), the
Company shall not purchase or enter into any contract to purchase any capital
assets.
Section 7.11 Maintain Insurance. The Company shall maintain its
------------------
Policies in full force and effect and shall not do, permit or willingly allow to
be done any act by which any of the Policies may be suspended, impaired or
canceled.
Section 7.12 Discharge. The Company shall not cancel, compromise,
---------
release or discharge any claim of the Company upon or against any person or
waive any right of the Company of material value, and not discharge any Lien
upon any asset of the Company or compromise any debt or other obligation of the
Company to any person other than Liens, debts or obligations with respect to
current liabilities of the Company.
Section 7.13 Actions. The Company shall not institute, settle or agree
-------
to settle any Action before any governmental entity.
-18-
<PAGE>
Section 7.14 Permits. The Company shall maintain in full force and
-------
effect, and comply with, all Permits.
Section 7.15 Tax Assessments and Audits. The Company shall furnish
--------------------------
promptly to Buyer a copy of all notices of proposed assessment or similar
notices or reports that are received from any taxing authority and which relate
to the Company's operations for periods ending on or prior to the Closing Date.
The Shareholder shall cause the Company to promptly inform Buyer, and permit the
participation in and control by Buyer, of any investigation, audit or other
proceeding by a Governmental Entity in connection with any Taxes, assessment,
governmental charge or duty and shall not consent to any settlement or final
determination in any proceeding without the prior written consent of Buyer.
ARTICLE 8
ADDITIONAL COVENANTS
--------------------
Section 8.1 Covenants of the Company and the Shareholder. During the
--------------------------------------------
period commencing on the date hereof and continuing through the Closing Date,
each of the Company and the Shareholder agrees to:
(a) comply promptly with all requirements that applicable Legal
Requirements may impose upon it with respect to the transactions contemplated by
this Agreement, and shall cooperate promptly with, and furnish information to,
Buyer in connection with any such requirements imposed upon Buyer or upon any of
its affiliates in connection therewith or herewith, including, without
limitation, all information reasonably required by Buyer to prepare its
registration statement with respect to its initial public offering;
(b) use its reasonable commercial efforts to obtain (and to cooperate
with Buyer in obtaining) any consent, authorization or approval of, or exemption
by, any Person required to be obtained or made by the Company or the
Shareholder, as applicable, in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections 6.1
and 6.2 of this Agreement;
(d) promptly orally advise Buyer and, within three business days
thereafter, in writing of any change in the Company's business or condition that
has had or may have a Material Adverse Effect; and
(e) at or prior to the Closing, the Shareholder will repay to the
Company any shareholders loans payable.
Section 8.2 Covenants of Buyer. During the period commencing on the
------------------
date hereof and continuing through the Closing Date, Buyer agrees to:
(a) comply promptly with all requirements that applicable Legal
Requirements may impose upon it with respect to the transactions contemplated by
this Agreement, and shall cooperate promptly with, and furnish information to,
the Company and the Shareholder in connection with any such requirements imposed
upon the Shareholder or the Company or upon any of the Affiliates of the Company
in connection therewith or herewith;
(b) use its reasonable commercial efforts to obtain any consent,
authorization or approval of, or exemption by, any Person required to be
obtained or made by Buyer in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to have the Shareholder
released from any Guarantees set forth on Schedule 8.2 hereto. If Buyer cannot
------------
obtain any such release within 90
-19-
<PAGE>
days after the Closing Date, it will indemnify the Shareholder from any
liability on the related guarantees; and
(d) use its reasonable commercial efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections 6.1
and 6.3 of this Agreement.
Section 8.3 Access and Information.
----------------------
(a) Between the date hereof and the Closing Date, (i) the Company will
permit, and will cause its officers, directors, key employees and advisors to
permit, Buyer and its representatives and agents reasonable access to the
Company's books and records, facilities, key personnel, customers, suppliers,
independent accountants and attorneys, as requested by Buyer; (ii) Buyer will
use its reasonable best efforts to provide the Shareholder and the Company and
their respective representatives and agents reasonable access to the books and
records, facilities, key personnel, customers, suppliers, independent
accountants and attorneys of other companies to be acquired by Buyer in
conjunction with the acquisition of the Company, as reasonably requested by the
Company (subject to the execution of appropriate confidentiality agreements and
with the understanding that there will be no access to product formulations or
other sensitive trade secret information); and (iv) the Company shall provide to
Buyer, promptly upon completion, an unaudited balance sheet and the related
statements of income or operations, cash flows and stockholder's equity for each
month-end and period from and after December 31, 1997.
(b) The Confidentiality Agreement dated June 29, 1998 (the
"Confidentiality Agreement") entered into among the Company, the Shareholder and
- --------------------------
Buyer shall survive the execution and delivery of this Agreement.
Section 8.4 Expenses. Except as otherwise specifically provided
--------
herein, each party to this Agreement shall bear its own direct and indirect
expenses incurred in connection with the negotiation and preparation of this
Agreement and the consummation and performance of the transactions contemplated
hereby, including, without limitation, all legal fees and fees of any brokers,
finders or similar agents; provided, however, that the Company may advance such
-------- -------
expenses on behalf of the Shareholder which such advances the Shareholder shall
repay to the Company at, or prior to, the Closing; provided, further, that the
-------- -------
fees of independent auditors to audit the Company's financial statements shall
be paid by Buyer.
Section 8.5 Certain Notifications. At all times from the date hereof
---------------------
to the Closing Date, no party shall permit or undertake any action that would
result in, and each party shall promptly notify the others in writing of, the
occurrence of any event that will or may (i) render any statement,
representation or warranty of such party in this Agreement (including the
Schedules hereto) inaccurate or incomplete in any material respect or (ii)
constitute or result in the breach by such party of, or a failure to comply
with, any agreement or covenant in this Agreement applicable to such party or
(iii) result in the failure by such party to satisfy any of the conditions
specified in Article 6 hereof.
---------
Section 8.6 Publicity; Employee Communications. At all times prior to
----------------------------------
the Closing Date, each party shall obtain the consent of all other parties
hereto prior to issuing, or permitting any of its directors, officers, employees
or agents to issue, any press release or other information to the press,
employees of the Company or any third party with respect to this Agreement or
the transactions contemplated hereby; provided, however, that no party shall be
-------- -------
prohibited from supplying any information to any of is representatives, agents,
attorneys, advisors, financing sources and others to the extent necessary to
complete the transactions contemplated hereby. Nothing contained in this
Agreement shall prevent any party to this Agreement at any time from furnishing
any required information to any Governmental Entity or authority pursuant to a
Legal Requirement or from complying with its legal or contractual obligations.
Section 8.7 Further Assurances. Subject to the terms and conditions
------------------
of this Agreement, each of the parties hereto agrees to use all reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable Legal
-20-
<PAGE>
Requirements, to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the Closing any further action is necessary
or desirable to carry out the purposes of this Agreement, the Shareholder, the
Company, Buyer or Newco, as the case may be, shall take or cause to be taken all
such necessary or convenient action and execute, and deliver and file, or cause
to be executed, delivered and filed, all necessary or convenient documentation.
Section 8.8 Competing Offers; Merger or Liquidation. The Company and
---------------------------------------
the Shareholder agree that they will not, and the Shareholder will cause the
Company not to, directly or indirectly, through any officer, director, agent or
otherwise, solicit, initiate, encourage or conduct discussions with, or accept
or consider the submissions of bids, offers or proposals by, any Person with
respect to an acquisition of the Company or its assets or capital stock or a
Merger or similar transaction, and the Company and the Shareholder will not, and
the Shareholder will not permit the Company to, engage any broker, financial
adviser or consultant with an incentive to initiate or encourage proposals or
offers from other parties. Furthermore, the Company and the Shareholder shall
not, and the Shareholder shall not permit the Company to, directly or
indirectly, through any officer, director, agent or otherwise, engage in
negotiations concerning any such transaction with, or provide information to,
any Person other than Buyer and its principal shareholder, and their respective
representatives, with a view to engaging, or preparing to engage, that Person
with respect to any matters referenced in this Section. The Shareholder shall
ensure that the Company shall not commence any proceeding to merge, consolidate
or liquidate or dissolve or obligate itself to do so.
Section 8.9. Adjustment to Merger Consideration. (a) Notwithstanding
----------------------------------
anything herein to the contrary, the Merger Consideration shall be reduced as
follows:
(i) if the projected pro forma earnings of the Company before
income taxes as reasonably determined by Buyer at Closing for the
period January 1, 1998 through December 31, 1998 ("1998 EBIT") is less
---------
than $1,500,000, then the total amount Merger Consideration shall be
reduced by an amount equal to the product of $8,000,000 and the
quotient obtained by dividing 1998 EBIT by $1,500,000; and
(ii) in addition to any reduction of the Merger Consideration
pursuant to the preceding clause (i), if the projected pro forma net
equity of the Company as of December 31, 1998 ("1998 Net Equity"), as
---------------
reasonably determined by Buyer at Closing, is less than $1,500,000,
the total amount of the Merger Consideration shall be reduced or
further reduced, as the case may be, by the dollar amount by which
1998 Equity is less than $1,500,000.
The aggregate amount by which the Merger Consideration is reduced (if at all)
pursuant to this Section is referred to as the "Consideration Reduction."
-----------------------
(b) If the Merger Consideration shall be reduced pursuant to this
Section, the Stock Merger Consideration, the Cash Merger Consideration and the
Note Merger Consideration shall each be reduced by the product of the percentage
of the Merger Consideration represented thereby multiplied by the Consideration
Reduction.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 9.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Closing:
(a) by mutual consent of all of the parties hereto;
(b) by the Company or the Shareholder, on the one hand, or by Buyer,
on the other hand, by written notice to the other party or parties hereto if the
Merger shall not have been consummated on or before November 15, 1998 (or such
later date as Buyer, the Company and the
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<PAGE>
controlling Shareholder may agree), provided that in the case of a termination
under this clause (b), the party or parties terminating this Agreement shall not
then be in material breach of any of its or their obligations under this
Agreement;
(c) by Buyer if (i) there has been a material misrepresentation,
breach of warranty or breach of covenant by the Company or the Shareholder under
this Agreement or (ii) any of the conditions precedent to Closing set forth in
Sections 6.1 and 6.3 have not been met on the Closing Date, and, in each case,
Buyer is not then in material default of its obligations hereunder; or
(d) by the Company or the Shareholder if (i) there has been a material
misrepresentation, breach of warranty or breach of covenant by Buyer under this
Agreement or (ii) any of the conditions precedent to Closing set forth in
Sections 6.1 and 6.2 have not been met on the Closing Date, and, in each case,
neither the Company nor the Shareholder are then in material default of their
obligations hereunder.
Section 9.2 Effect of Termination. In the case of any termination of
---------------------
this Agreement, the provisions of Sections 8.3(b) and 8.4 shall remain in full
force and effect. Upon termination of this Agreement as provided in Section
9.1(a) or (b), this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of any party hereto or their respective
directors, officers, employees, agents or other representatives. In the event
of termination of this Agreement as provided in Section 9.1(c) or (d) hereof,
such termination shall be without prejudice to any rights that the terminating
party or parties may have against the breaching party or parties or any other
Person under the terms of this Agreement or otherwise.
Section 9.3 Amendment and Waiver. This Agreement may be amended only
--------------------
by a written instrument executed by each of the parties hereto. Any term or
provision of this Agreement may be waived in writing at any time by the party or
parties entitled to the benefits thereof. No failure to exercise and no delay
in exercising any right, power or privilege shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege
preclude the exercise of any other right, power or privilege. No waiver of any
breach of any covenant or agreement hereunder shall be deemed a waiver of any
preceding or subsequent breach of the same or any other covenant or agreement.
The rights and remedies of each party under this Agreement are in addition to
all other rights and remedies, at law or in equity, that such party may have
against the other parties.
ARTICLE 10
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
------------------------------------------
Section 10 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties of the parties hereto contained in this Agreement
or in any writing delivered pursuant hereto or at the Closing shall survive the
execution and delivery of this Agreement and the Closing and the consummation of
the transactions contemplated hereby (and any examination or investigation by or
on behalf of any party hereto) until the date 18 months after the Closing Date
(except for claims in respect thereof pending at such time, which shall survive
until finally resolved or settled); provided, however, that the representations
-------- -------
and warranties contained in Sections 3.1, 3.2, 3.3, 3.5, 3.11, 3.13 (in so far
as it applies to Environmental Matters), 5.1, 5.2, 5.3 and 5.4 shall survive
until the expiration of the applicable statute of limitations. No Action may be
commenced with respect to any representation, warranty, covenant or agreement in
this Agreement, or in any writing delivered pursuant hereto, unless written
notice, setting forth in reasonable detail the claimed breach thereof, shall be
delivered pursuant to Section 11 to the party or parties against whom liability
for the claimed breach is charged on or before the termination of the survival
period specified in Section 10 for such representation, warranty, covenant or
agreement.
-22-
<PAGE>
ARTICLE 11
GENERAL PROVISIONS
------------------
Section 11.1 Notices. All notices and other communications under or
-------
in connection with this Agreement shall be in writing and shall be deemed given
(a) if delivered personally, upon delivery, (b) if delivered by registered or
certified mail (return receipt requested), upon the earlier of actual delivery
or three days after being mailed, or (c) if given by telecopy, upon confirmation
of transmission by telecopy, in each case to the parties at the following
addresses:
(a) If to Buyer or Newco, addressed to:
Advanced Nutraceuticals, Inc.
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Barry Loder
With copies to:
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street, 23rd Floor
Los Angeles, California 90071
Telecopy: (213) 627-0705
Attention: David L. Gersh, Esq.
(b) If to the Company, addressed to:
Bactolac Pharmaceuticals, Inc.
51 Brooklyn
Westbury, New York 11590
Telecopy: (516) 333-4714
Attention: Pailla Reddy
With copies to:
___________________________
___________________________
___________________________
(c) If to the Shareholder,
addressed to:
Pailla Reddy
51 Brooklyn Avenue
Westbury, New York 11590
____________________________
With copies to:
Anthony T. Scotto, Esq.
401 Franklin Avenue
Garden City, New York 11530
Telecopy: (516) 739-5451
Section 11.2 Severability. If any term or provision of this Agreement
------------
or the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable,
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<PAGE>
such term or provision shall be ineffective as to such jurisdiction to the
extent of such invalidity or unenforceability without invalidating or rendering
unenforceable such term or provision in any other jurisdiction, the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
enforceable.
Section 11.3 Entire Agreement. This Agreement, including the
----------------
exhibits, annexes and schedules attached hereto and other documents referred to
herein, and the Confidentiality Agreement, contain the entire understanding of
the parties hereto in respect of their subject matter and supersede all prior
and contemporaneous agreements and understandings, oral and written, among the
parties with respect to such subject matter.
Section 11.4 Miscellaneous. This Agreement shall be binding upon and
-------------
inure to the benefit of each of the parties hereto and their respective
successors, heirs and assigns; provided, however, that no party may assign
-------- -------
either this Agreement or any of its rights, interests or obligations hereunder
in whole or in part without the prior written consent of the other parties
hereto (other than to the Surviving Corporation as a result of the Merger), and
any such transfer or assignment without said consent shall be void, ab initio.
---------
Subject to the immediately preceding sentence, this Agreement is not intended to
benefit, and shall not run to the benefit of or be enforceable by, any other
person or entity other than the parties hereto and their permitted successors
and assigns. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all such counterparts together shall
constitute one and the same Agreement. The exhibits, schedules and annexes to
this Agreement are incorporated herein and, by this reference, made a part
hereof as if fully set forth at length herein. The article, section and
subsection headings used herein are inserted for reference purposes only and
shall not in any way affect the meaning or interpretation of this Agreement. As
used in this Agreement, the masculine, feminine or neuter gender, and the
singular or plural, shall be deemed to include the others whenever and wherever
the context so requires. For the purposes of this Agreement, unless the context
clearly requires, "or" is not exclusive. Each party hereto hereby knowingly,
voluntarily and intentionally waives any right it may have to a jury trial in
any legal proceeding which may be hereafter instituted by any party hereto to
assert a claim arising out of or relating to this Agreement or any other
agreement, instrument or document contemplated hereby or thereby. If any legal
action or other proceeding is brought by any party pursuant to this Agreement,
the prevailing party shall be entitled to recover its costs and expenses,
including reasonable attorneys' fees.
Section 11.5 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws (and not the law of conflicts) of
the State of Delaware.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
ADVANCED NUTRACEUTICALS, INC.
By: /s/
---------------------------------------
An Authorized Officer
BP ACQUISITION CO., INC.
By: /s/
---------------------------------------
An Authorized Officer
BACTOLAC PHARMACEUTICALS, INC.
By: /s/
---------------------------------------
An Authorized Officer
/s/
---------------------------------------
Pailla Reddy
-25-
<PAGE>
EXHIBIT 10.4
------------
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as
---------
of August 31, 1998 by and among NL Acquisition Co., Inc., a Delaware corporation
("Newco"), Advanced Nutraceuticals, Inc., a Delaware corporation ("ANI," "Buyer"
----- --- -----
or "Purchaser"), Northridge Laboratories Inc., a California corporation (the
---------
"Company") and Jane Richman, Trustee of the Exemption Trust Created Under The
- --------
Alan Richman and Jane Richman Trust Under Trust Dated 5/5/92, Jane Richman,
Trustee of the Survivor's Trust Created Under The Alan Richman and Jane Richman
Trust Under Trust Dated May 5, 1992, Brett Richman and Holmby Avenue, LLC, a
California limited liability company (each individually, a "Shareholder" and
-----------
collectively, the "Shareholders"). The two trusts for which Jane Richman is the
------------
Trustee shall be referred to collectively herein as the "Trusts."
R E C I T A L S
- - - - - - - -
A. Buyer owns all of the outstanding shares of capital stock of Newco.
B. The respective boards of directors of Newco and the Company have
determined that it is fair to, and in the best interests of, their respective
corporations and sole stockholder and shareholders, as applicable, for the
Company to be merged with and into Newco upon the terms and subject to the
conditions set forth herein (the "Merger"); the board of directors and sole
------
stockholder of Newco have approved and adopted this Agreement in accordance with
the Delaware Law; and the board of directors and shareholders of the Company
have approved and adopted the principal terms of this Agreement in accordance
with the California Corporations Code (the "California Law").
--------------
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. For all purposes of this Agreement, certain
-----------
capitalized terms not otherwise defined herein shall have the meanings set forth
in Exhibit A attached hereto.
---------
ARTICLE 2
THE MERGER
----------
Section 2.1 Merger. Upon the terms and subject to the conditions of this
------
Agreement, the Company shall be merged with and into Newco in accordance with
the applicable provisions of the Delaware Law. The Company and Newco are herein
sometimes referred to as the "Constituent Corporations." Newco shall be the
------------------------
surviving corporation following the effectiveness of the Merger (sometimes
referred to herein as the "Surviving Corporation").
---------------------
Section 2.2 Effect of Merger. The parties agree to the following
----------------
provisions with respect to the Merger:
(a) Certificate of Incorporation and Bylaws. The certificate of
---------------------------------------
incorporation of Newco, as in effect immediately prior to the Effective Time,
shall be the certificate of incorporation of the Surviving Corporation, from and
after the Effective Time until amended in accordance with applicable law. The
bylaws of Newco, as in effect immediately prior to the Effective Time, shall be
<PAGE>
the bylaws of the Surviving Corporation from and after the Effective Time until
amended in accordance with applicable law, the Surviving Corporation's
certificate of incorporation and such bylaws.
(b) Directors and Officers. The directors and officers of Newco
----------------------
in office immediately prior to the Effective Time shall be the directors and
officers, respectively, of the Surviving Corporation, and each shall hold his or
her respective office or offices from and after the Effective Time until his or
her successor shall have been elected and shall have qualified or as otherwise
provided in the bylaws of the Surviving Corporation.
(c) Name and Corporate Organization of Surviving Corporation.
--------------------------------------------------------
The name of the Surviving Corporation from and after the Effective Time shall be
"NL Acquisition Co., Inc.," which name shall be changed after the closing to
Northridge Laboratories, Inc. in accordance with applicable law. At the
Effective Time, the identity and separate corporate existence of the Company
shall cease and Newco as the surviving corporation and successor shall succeed
to the Company in the manner of and as more fully set forth in Section 259 of
the Delaware Law.
(d) Filing of Certificate of Merger and Further Assurances. If
------------------------------------------------------
this Agreement is not terminated pursuant to Article 9 hereof, as soon as
practicable after all conditions to the Merger set forth in Article 6 hereof
shall have been satisfied or waived, the Constituent Corporations shall cause
the Certificate of Merger attached hereto as Annex B ("Certificate of Merger")
---------------------
to be executed and acknowledged and, as required by Delaware Law, filed with the
Secretary of State of the State of Delaware as provided in the Delaware Law and,
as required by California Law, an executed and acknowledged counterpart of the
Certificate of Merger to be filed with the Secretary of State of the State of
California as provided in the California Law. The Merger shall become effective
on the date and at the time the Certificate of Merger is filed with the
Secretary of State of the State of Delaware in accordance with Section 103 of
the Delaware Law (the "Effective Time"). If, at any time after the Effective
--------------
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments or assurances or any other acts or things are
necessary, desirable or proper (i) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation, its right, title or interest in, to or
under any of the rights, properties or assets of the Constituent Corporations
acquired or to be acquired as a result of the Merger, or (ii) otherwise to carry
out the purposes of this Agreement, the Surviving Corporation and its officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and do, in the name and on behalf of the
Constituent Corporations, all such other acts and things necessary, desirable or
proper to vest, perfect or confirm its right, title or interest in, to or under
any of the rights, properties or assets of the Constituent Corporations acquired
or to be acquired as a result of the Merger and otherwise to carry out the
purposes of this Agreement.
Section 2.3 Conversion of Securities.
------------------------
(a) By virtue of the Merger and without any action on the part
of the holder thereof, at the Effective Time each share of common stock of the
Company ("Company Common Stock"), outstanding immediately prior to the Effective
--------------------
Time shall be converted into the right to receive (i) that amount of the Stock
Merger Consideration (hereinafter defined) equal to the total aggregate Stock
Merger Consideration divided by the number of shares of Company Common Stock
outstanding, (ii) that amount of the Cash Merger Consideration (as hereinafter
defined) equal to the total aggregate Cash Merger Consideration divided by the
number of shares of Company Common Stock outstanding, and (iii) that amount of
the Note Merger Consideration (as hereinafter defined) equal to the total
aggregate Note Merger Consideration divided by the number of shares of Company
Common Stock outstanding; deliverable and payable to the holder thereof upon
surrender of the certificate formerly representing Company Common Stock (the
"Share Certificate") in the manner provided in Section 2.4 hereof.
-----------------
(b) "Stock Merger Consideration" shall mean that number of
--------------------------
shares of common stock, par value $[.0001] of Buyer ("Buyer Common Stock") equal
----- ------------------
to $7,000,000 divided by the initial
-2-
<PAGE>
public offering price per share of Buyer Common Stock. "Cash Merger
-----------
Consideration" shall mean an aggregate of $7,500,005 in cash, without interest.
- -------------
"Note Merger Consideration" shall mean subordinated notes of the Buyer ("Buyer
------------------------- -----
Notes"), in substantially the form attached hereto as Annex A, having an
- ----- -------
aggregate principal amount of $2,000,000, an interest rate of 8.5% and payable
in two equal installments on the first and second anniversary of the Closing
Date. The Stock Merger Consideration, Cash Merger Consideration and Note Merger
Consideration are herein sometimes collectively referred to as the "Merger
------
Consideration."
- -------------
(c) By virtue of the Merger and without any action on the part
of the holder thereof, at the Effective Time each share of Company Common Stock
held by the Company as a treasury share immediately prior to the Effective Time
shall be canceled and no payment of any consideration shall be made with respect
thereto.
Section 2.4 Payment of Cash for Company Common Stock; Exchange of Shares;
-------------------------------------------------------------
Delivery of Notes.
- -----------------
(a) Each holder of a Share Certificate which immediately prior
to the Effective Time represented outstanding shares of Company Common Stock
will be entitled to receive, upon surrender to Buyer of such Share Certificate
for cancellation, (i) a cash payment per share of Company Common Stock, (ii)
shares of Buyer Common Stock and (iii) Buyer Notes, in each case in the amount
calculated in accordance with Section 2.3 hereof and, with respect to the cash
payment. Until properly surrendered, each such Share Certificate shall be deemed
for all purposes to evidence only the right to receive such cash, shares of
Buyer Common Stock and Buyer Notes. No interest shall accrue or be paid on the
cash payable upon the surrender of the Share Certificates.
(b) No certificates or script representing fractional shares of
Buyer Common Stock shall be issued upon the surrender for exchange of Share
Certificates, and no holders thereof shall be entitled to any voting rights,
rights to receive any dividends or distributions or other rights as a
stockholder of Buyer with respect to any fractional shares of Buyer Common Stock
that would otherwise be issued to such holder. In lieu of any fractional shares
of Buyer Common Stock that would otherwise be issued, each holder that would
have been entitled to receive a fractional share of Buyer Common Stock shall,
upon proper surrender of such holder's Share Certificates, receive a cash
payment equal to such fraction multiplied by the initial public offering price
per share of Buyer Common Stock.
Section 2.5 Closing. The closing of the Merger and the other transactions
-------
contemplated hereby (the "Closing") shall take place at the offices of Paul,
-------
Hastings, Janofsky & Walker LLP, Twenty-Third Floor, 555 South Flower Street,
Los Angeles, California 90071, at 10:00 A.M. local time on the day of closing of
the initial public offering of the Buyer Common Stock, or at such other time or
on such other date as shall be agreed upon amount the parties upon satisfaction
or waiver of all conditions precedent to the Closing (such time and date being
referred to herein as the "Closing Date").
------------
Section 2.6 Actions at the Closing. At the Closing:
----------------------
(a) The Company and Shareholders shall deliver or cause to be
delivered to Buyer and Newco all of the documents, certificates and instruments
required to be delivered to Buyer or Newco pursuant to Section 6.2.
(b) Buyer and Newco shall deliver or caused to be delivered to
the Company and the Shareholders all of the documents, certificates and
instruments required to be delivered to the Company or the Shareholders pursuant
to Section 6.3.
(c) The Company and Newco shall file the Certificate of Merger
with the Secretary of State of the State of Delaware and the Secretary of State
of the State of California.
-3-
<PAGE>
(d) Buyer shall deliver to the Shareholders certificates
representing the shares of Buyer Common Stock acquired by the Shareholders in
the Merger.
(e) Buyer shall deliver to the Shareholders, by wire transfer of
immediately available funds, or by certified or cashier's check, the cash
portion of the Merger Consideration.
(f) Buyer shall deliver to the Shareholders Buyer Notes
representing the note portion of the Merger Consideration.
(g) The Company shall pay Jane Richman a loan in the amount of
approximately $53,000 and disclaim any interest in personal art owned by Brett
Richman, three computers and one desk top computer in the names of the
Shareholders and a Lexus automobile owned by Jane Richman (or if such Lexus is
owned by the Company, it shall be distributed to Mrs. Richman).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
------------------------------
REGARDING THE COMPANY
---------------------
The Company, jointly with Jane Richman as trustee of the Trusts and
Brett Richman (the "Richmans") who hereby severally represent and warrant to,
--------
and covenant and agree with, Buyer and Newco that:
Section 3.1 Organization and Good Standing; Subsidiaries. The Company
--------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of California, with full power and authority to own and lease
its properties and to conduct its business as currently conducted. The Company
has been duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of each jurisdiction in which the Company
owns or leases any property, or conducts any business, so as to require such
qualification, except where the failure to obtain such qualification would not
be reasonably likely to have a Material Adverse Effect. The Company has no
Subsidiaries and does not own or control or have any other equity investment or
other interest in, directly or indirectly, any corporation, joint venture,
limited liability company, partnership, association or other entity. The copies
or originals of the articles of incorporation, bylaws, minute books and stock
records of the Company previously delivered to, or made available for inspection
by, Buyer are true, complete and correct
Section 3.2 Authorization, Binding Agreement. The Company has all requisite
--------------------------------
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Company's board of directors and the
Company's stockholders in accordance with the California Law and the articles of
incorporation and bylaws of the Company. No other corporate proceedings on the
part of the Company are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and constitutes the legal, valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other laws, now or hereafter in
effect, relating to or limiting creditors' rights generally, and (b) general
principles of equity (whether considered in an action in equity or at law).
Section 3.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the consummation of the transactions contemplated hereby will not
(a) conflict with or result in a breach or violation of any term or provision
of, or constitute a default under (with or without notice or passage of time, or
both), or otherwise give any Person a basis for accelerated or increased rights
or termination or nonperformance under, any obligation, agreement or instrument
to which the Company is a party or by which the Company is bound or affected or
to which any of the property or assets of the Company
-4-
<PAGE>
is bound or affected, (b) result in the violation of the provisions of the
articles of incorporation or bylaws of the Company or any Legal Requirement
applicable to or binding upon it, (c) result in the creation or imposition of
any Lien upon any property or asset of the Company or (d) otherwise adversely
affect the contractual or other legal rights or privileges of the Company.
Schedule 3.3 sets forth a list of all agreements requiring the consent of any
- ------------
party thereto to any of the transactions contemplated hereby.
Except as set forth on Schedule 3.3, all consents, authorizations and
------------
approvals of any Person to or as a result of the consummation of the
transactions contemplated hereby, that are necessary or advisable in connection
with the operations and business of the Company as currently conducted and as
proposed to be conducted, or for which the failure to obtain the same might
have, individually or in the aggregate, a Material Adverse Effect, have been
lawfully and validly obtained by the Company.
Section 3.4 Capitalization. The authorized capital stock of the Company
--------------
consists solely of 10,000 shares of Company Common Stock, of which 100 shares
are, and as of the Closing will be, issued and outstanding. All of the issued
and outstanding shares of Company Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable and are held by the
Shareholders in the amounts reflected in Annex B hereto. There are no existing
-------
options, warrants, rights, calls or commitments of any character relating to the
shares of Company Common Stock or any other capital stock or securities of the
Company, (ii) there are no outstanding securities or other instruments
convertible into or exchangeable for shares of Company Common Stock or any other
capital stock or securities of the Company and no commitments to issue such
securities or instruments, and no Person has any right of first refusal,
preemptive right, subscription right or similar right with respect to any shares
of Company Common Stock or any other capital stock or securities of the Company.
Section 3.5 Financial Statements.
--------------------
(a) The Company has prepared and furnished to Buyer, and there
are included in Schedule 3.5 hereto, true and complete copies of (i) the
------------
unaudited balance sheet (the "Balance Sheet") of the Company at June 30, 1998
-------------
(the "Balance Sheet Date"), and the related unaudited statements of income,
-------------------
shareholders' equity and cash flows for the nine months then ended, (ii) the
unaudited but reviewed balance sheets of the Company at September 30, 1997 and
September 30, 1996 and the related unaudited but reviewed statements of income,
shareholders' equity and cash flow for the fiscal year then ended, together with
the report thereon of independent certified public accountants (the financial
statements described in clauses (i) and (ii) above are collectively referred to
as the "Financial Statements").
--------------------
(b) The Financial Statements present fairly the financial
condition of the Company as of the dates indicated therein and the results of
operations and cash flows of the Company for the periods specified therein, have
been derived from the accounting records of the Company and prepared
consistently with all prior periods.
Section 3.6 Property and Products.
---------------------
(a) The Company has, and immediately prior to the Closing will
have, good, valid and marketable title in fee simple to all real property and
all personal property reflected on the Balance Sheet as owned by the Company and
all real property and personal property acquired by the Company since the
Balance Sheet Date, in each case free and clear of all Liens except (i) as set
forth on Schedule 3.6(a-1), and (ii) for sales and other dispositions of
-----------------
inventory in the ordinary course of business since the Balance Sheet Date which,
in the aggregate, have not been materially different from prior periods.
Schedule 3.6(a-2) contains a list of all tangible personal property (including,
- -----------------
without limitation, computer systems, hardware and software) having a cost or
fair market value in excess of $50,000 owned by the Company (other than personal
property held by the Company as lessee under an operating
-5-
<PAGE>
lease). Schedule 3.6(a-3) contains a list of all real property leases, licenses
-----------------
and personal property leases under which the Company is the lessee or licensee.
True and complete copies of all real property leases, licenses and personal
property leases listed on Schedule 3.6(a-3) have been delivered to Purchaser
heretofore, as well as copies of any title reports, surveys or environmental
reports or audits relating to any leased real property. For the purposes of this
Section 3.6(a), a "lease" shall include a sublease. All personal property owned
by the Company and all personal property held by the Company pursuant to
operating leases is in good operating condition and repair, subject only to
ordinary wear and tear, and is suitable and appropriate for the use thereof made
and proposed to be made by the Company in its business and operations. The real
property and personal property described in Schedules 3.6(a-1) and 3.6(a-2) and
the real property and personal property held by the Company pursuant to the
leases and licenses described in Schedule 3.6(a-3) comprise all of the real
property and personal property used in or necessary for the conduct of business
of the Company. The Company owns all of the real and personal property, tangible
and intangible, including, without limitation, computer systems hardware and
software, to conduct its business as heretofore conducted or as contemplated to
be conducted except as specifically disclosed herein.
(b) Except as set forth in Schedule 3.6(b), all of the
---------------
facilities, buildings, plants, structures and improvements (A) are in good
operating condition and repair, and (B) are adequate and suitable for the
purposes for which they are currently and proposed to be used. There are no (i)
leases, subleases, licenses, concessions or other agreements, written or oral,
granting to any other Person the right to acquire, use or occupy any portion of,
any real property, (ii) outstanding options or rights of first refusal to
purchase all or any portion of real property or interest therein, and (iii)
Persons (other than the Company) in possession of any real property. Except for
inventory that is excess, damaged or obsolete, for which in the aggregate an
adequate reserve has been established in the Balance Sheet in accordance with
generally accepted accounting principles, consistently applied, the inventory
reflected in the Balance Sheet and thereafter acquired and not disposed of since
such date is of good and merchantable quality, and of a quantity and quality
saleable in the ordinary course of business in accordance with past practices.
(c) Schedule 3.6(c) includes an accurate description of all
products manufactured, marketed, sold or licensed by the Company since January
1, 1993 (the "Company Products"). Except as disclosed on Schedule 3.6(c), there
----------------
have been no Company Products (except those with sales aggregating less than
$15,000 and not resold to the public) which have been recalled, withdrawn or
suspended in and/or outside of the United States (whether voluntarily or
otherwise) since January 1, 1993, nor have there been proceedings in and/or
outside of the United States pending against the Company at any time since
January 1, 1993 (whether such proceedings have since been completed or remain
pending) seeking the recall, withdrawal, suspension or seizure of any Company
Product or seeking to enjoin the Company from engaging in any activities
pertaining to such Company Products or to affirmatively perform activities
pertaining to such Company Products prior to shipping such products, or
requiring the cessation or curtailment of any business operation or practice. To
the best of knowledge, there are no facts which exist which could reasonably be
expected to furnish a basis for the recall or withdrawal of any Company Product
or the suspension of any product registration, product license, manufacturing
license, wholesale dealer's license, export license or other governmental
license, or the approval or consent of any governmental regulatory agency with
respect to any Company Product, nor do there exist any facts which could
reasonably be expected to furnish a basis for the recall, withdrawal, suspension
or seizure by any governmental agency or court of any Company Product or which
could reasonably be expected to form the basis for the issuance of an injunction
pertaining thereto or to cause the Company to cease further distribution or
marketing of any Company Product pending further approval or authorization by
any governmental agency or to change marketing classification of any Company
Product, or which could reasonably be expected to require the cessation or
curtailment of any business operation or practice. To the best of knowledge, the
Company Products have been manufactured, marketed and distributed in accordance
with the specifications under which such Company Products have normally been
manufactured and in accordance with all applicable requirements of law. Since
January 1, 1993, the Company has not received or been subject to consent
decrees, orders, settlement agreements or similar matters relating in any
fashion to the Company
-6-
<PAGE>
Products or received any warning letters or other correspondence from the Food
and Drug Administration, Federal Trade Commission or other governmental
officials or agencies concerning the Company Products or which have in any
manner asserted that the operations of the Company may not be in compliance with
applicable laws, regulations, rules or guidelines. To the best of knowledge, the
Company has complied in all respects with current reporting requirements
relating to the Company Products. No officer, director or, to the best of
knowledge, employee of the Company has been convicted of or formally charged
with any offense or act of a type that would be required to be disclosed in a
registration statement pursuant to Form S-1 under the Securities Act.
Section 3.7 Accounts Receivable. All accounts receivable of the Company
-------------------
reflected in the Balance Sheet and all accounts receivable of the Company that
have arisen since the Balance Sheet Date (except such accounts receivable as
have been collected since such dates) are valid and enforceable claims. Such
accounts receivable of the Company are not subject to any valid defense, offset
or counterclaim and are, to the Shareholders' knowledge, fully collectible on
normal terms and in the ordinary course of business, except to the extent of the
allowance for doubtful accounts reflected on the Balance Sheet. Schedule 3.7
------------
contains a true and complete aging of the Company's accounts receivable as of
the Balance Sheet Date. As to uncollected accounts receivable, if any, as to
which indemnification is made to Buyer by the Richmans, Buyer shall assign any
uncollected accounts receivable in the amount indemnified to the indemnifying
Shareholder or Shareholders.
Section 3.8 Trademarks, Patents, Etc.
------------------------
(a) Schedule 3.8(a) contains a true and complete list of all
---------------
letters patent, patent applications, trade names, trademarks, service marks,
trademark and service mark registrations and applications, copyrights, copyright
registrations and applications, grants of a license or right to the Company with
respect to the foregoing, both domestic and foreign, claimed by the Company or
used by the Company in the conduct of its business, whether registered or not,
(collectively herein, "Registered Rights").
-----------------
(b) Except as described in Schedule 3.8(b), the Company has the
---------------
unrestricted right to use the Registered Rights and every trade secret, know-
how, process, discovery, development, design, technique, customer and supplier
list, promotional idea, marketing and purchasing strategy, invention,
confidential data, product formulation and or other information (collectively
herein, "Proprietary Information") required for, advantageous to or incident to
-----------------------
the design, development, purchase, distribution, sale and use of all products
and services sold or rendered or proposed to be sold or rendered by the Company,
free and clear of any right, equity or claim of others. The Company has taken
reasonable security measures to protect the secrecy, confidentiality and value
of all Proprietary Information.
(c) Except as described in Schedule 3.8(c), (i) the Company has
---------------
not sold, transferred, assigned, licensed or subjected to any Lien, any
Registered Right or Proprietary Information or any interest therein, and (ii)
the Company is not obligated or under any liability whatever to make any
payments by way of royalties, fees or otherwise to any owner or licensor of, or
other claimant to, any Registered Right or Proprietary Information. None of the
Registered Rights or Proprietary Information licensed or granted to the Company
is owned by any Shareholder or any affiliate of any Shareholder and no
Registered Right or Proprietary Information has been licensed or granted to any
Shareholder or any affiliate of any Shareholder.
(d) There is no claim or demand of any Person pertaining to, or
any Action that is pending or, to the Company's or Shareholders' knowledge,
threatened, which challenges the rights of the Company in respect of any
Registered Right or any Proprietary Information.
-7-
<PAGE>
Section 3.9 Banking and Insurance.
---------------------
(a) Schedule 3.9(a) contains a true and complete list of the
---------------
names and locations of all financial institutions at which the Company maintains
a checking account, deposit account, securities account, safety deposit box or
other deposit or safekeeping arrangement, the numbers or other identification of
all such accounts and arrangements and the names of all persons authorized to
draw against any funds therein.
(b) Schedule 3.9(b) contains a true and complete list and brief
---------------
summary of all insurance policies and bonds and self insurance arrangements
currently in force that cover or purport to cover risks or losses to or
associated with the Company's business, operations, premises, properties,
assets, employees, agents and directors. The insurance policies, bonds and
arrangements described on Schedule 3.9(b) (the "Policies") provide such coverage
--------------- --------
against such risk of loss and in such amounts as are customary for corporations
of established reputation engaged in the same or similar business and similarly
situated. True and complete copies of all such Policies have been delivered to
Purchaser heretofore
Section 3.10 Litigation. Except as to certain emissions at the Company's
----------
plant more fully described in, and otherwise set forth on, Schedule 3.10, there
-------------
is no legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding pending or, to the best
knowledge of the Shareholders, threatened against or affecting the Company or
any of its property, assets, business, products, franchises or governmental
approvals, before any court or governmental department, commission, board,
bureau, agency, instrumentality or arbitrator (including but not limited to any
taxing entity or authority) which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect upon the Company and
its subsidiaries, taken as a whole, or to materially and adversely affect the
ability of the Company to carry out, or to prevent or make unduly burdensome,
the Merger contemplated by this Agreement. The Company is subject to no
outstanding judgments, orders, decrees, awards, stipulations or injunctions of
any governmental entity or arbitrator against or affecting the Company or its
properties, assets or business.
Neither the Company nor, to the Shareholders' best knowledge, any of its
directors, officers, agents, employees or other Person associated with or acting
on behalf of the Company has (a) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (b) made any direct or indirect unlawful payments to
government officials or employees, or foreign government officials or employees,
from corporate funds, (c) established or maintained any unlawful or unrecorded
fund of corporate monies or other assets, or (d) made or received any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment.
Section 3.11 Income and Other Taxes. Except as set forth on Schedule 3.11:
---------------------- -------------
(a) All Tax Returns required to be filed through and including
the date hereof in connection with the operations of the Company are true,
complete and correct in all respects and have been properly and timely filed.
The Company has not requested any extension of time within which to file any Tax
Return, which Tax Return has not since been filed. Purchaser has heretofore been
furnished by the Company with true, correct and complete copies of each Tax
Return of the Company with respect to the past three taxable years, and of all
reports of, and communications from, any Governmental Entities relating to such
period.
(b) All Taxes required to be paid or withheld and deposited
through and including the date hereof in connection with the operations of the
Company have been duly and timely paid or deposited by the Company. The Company
has properly withheld or collected all amounts required by law for income Taxes
and employment Taxes relating to its employees, creditors, independent
contractors and other third parties, and for sales and use Taxes on sales, and
has properly and timely remitted such withheld or collected amounts to the
appropriate Governmental Entity. The Company
-8-
<PAGE>
has no liabilities for any Taxes for any taxable period ending prior to or
coincident with the Closing Date.
Section 3.12 Employee Benefit Matters. Schedule 3.12 contains a complete
------------------------ -------------
list of all employee benefit plans (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which are
-----
maintained or contributed to by the Company (the "Company Benefit Plans"). The
---------------------
Company has heretofore provided to Purchaser (i) true and complete copies of all
Company Benefit Plans; (ii) the most recent annual actuarial evaluation, if any,
prepared for each Company Benefit Plan; (iii) the two most recent annual reports
(series 5500), if any, required under ERISA with respect to each Company Benefit
Plan, including audited financial statements; (iv) the most recent determination
letter received from the IRS, if any, for each Company Benefit Plan, and (v) the
most recent Summary Plan Description, if any, required under ERISA with respect
to each Company Benefit Plan. Except as disclosed on Schedule 3.12, (i) with
-------------
respect to each Company Benefit Plan that is intended to be qualified under
Section 401(a) of the Code and is maintained by the Company for any of its
employees, (x) the Company has obtained a favorable determination letter from
the IRS and nothing has happened since such letter that would adversely affect
the tax qualification of such plan and (y) such plan has been operated in
compliance with ERISA and in accordance with the provisions of, and the rules
and regulations covering, such plan except where the failure to so comply does
not individually or in the aggregate, have a Material Adverse Effect upon the
Company, (ii) with respect to each Company Benefit Plan, the Company is not, and
to the Company's knowledge no other person is, engaged in a transaction
prohibited by Section 4975 of the Code or Section 406 of ERISA which could
result in a liability to the Company which would individually or in the
aggregate, have a Material Adverse Effect upon the Company, (iii) each Company
Benefit Plan which is subject to Part III of Subtitle B of Title I of ERISA or
Section 412 of the Code has been maintained in compliance with the minimum
funding standards of ERISA and the Code, and no reportable event, within the
meaning of Section 4043 of ERISA has occurred with respect to any Company
Benefit Plan which is subject to Title IV of ERISA, other than reportable events
with respect to which notice has been waived by the Pension Benefit Guaranty
Corporation or which would not, individually or in the aggregate, have a
Material Adverse Effect upon the Company, and (iv) no benefit is provided
pursuant to a welfare benefit plan (as defined in ERISA Section 3(1)) to a
former employee of the Company other than for continuation health coverage
benefits provided under Code Section 4980B.
Section 3.13 No Undisclosed Liabilities. Except (i) to the extent set forth
--------------------------
or provided for in the Balance Sheet or the notes thereto, (ii) as set forth on
Schedule 3.13 or (iii) for non-material current liabilities incurred since the
- -------------
Balance Sheet Date in the ordinary course of business, as of the date hereof,
the Company has no liabilities or obligations of any kind or nature (whether or
not of a type that would be required to be disclosed in financial statements),
whether accrued, absolute, contingent or otherwise, whether due or to become due
and whether the amounts thereof are readily ascertainable or not, or any
unrealized or anticipated losses from any commitments of a contractual nature,
including but not limited to liabilities or obligations for Taxes and
Environmental Matters with respect to or based upon the facts existing, or
transactions or events occurring at or prior to the Closing.
Section 3.14 Permits, Licenses, Etc.; Regulatory Filings. To the best of
-------------------------------------------
Shareholders' knowledge, the Company possesses, and is operating in compliance
with, all franchises, licenses, permits, certificates, authorizations, rights
and other approvals of Governmental Entities necessary to (i) occupy, maintain,
operate and use the real property as it is currently used and proposed to be
used, (ii) conduct its business as currently conducted and as proposed to be
conducted, and (iii) maintain and operate its Company Benefit Plans
(collectively, the "Permits"), except to the extent that the failure to have or
-------
maintain any such permit would not result in a Material Adverse Effect. Schedule
--------
3.14 contains a true and complete list of all Permits. Each Permit has been
- ----
lawfully and validly issued, and no proceeding is pending or, to the
Shareholders' knowledge, threatened looking toward the revocation, suspension or
limitation of any Permit. The consummation of the transactions contemplated by
this Agreement will not result in the revocation, suspension or limitation of
any Permit.
-9-
<PAGE>
The Company has made all required registrations and filings with and
submissions to all applicable Governmental Entities relating to the operations
of the Company as currently conducted and as proposed to be conducted,
including, without limitation, all such applicable Governmental Entities having
jurisdiction over any matters pertaining to conservation or protection of the
environment, the treatment, discharge, use, handling, storage or production, or
disposal of Hazardous Materials and the safety of foods, drugs and other
consumer products. All such registrations, filings and submissions were in
compliance with all Legal Requirements (including all Environmental Laws) and
other requirements when filed, no material deficiencies have been asserted by
any such applicable Governmental Entities with respect to such registrations,
filings or submissions and, to the Shareholders' knowledge, no facts or
circumstances exist which would indicate that a material deficiency may be
asserted by any such authority with respect to any such registration, filing or
submission.
Section 3.15 Material Contracts; No Defaults.
-------------------------------
(a) Schedule 3.15 contains a true and complete list and
-------------
description of all material contracts, agreements, understandings, arrangements
and commitments, written or oral ("Contracts"), of the Company by which it or
its properties, rights or assets are bound. True and complete copies of such
written Contracts and true and complete summaries of such oral Contracts have
been delivered to Purchaser heretofore. For the purposes of this subsection (a),
"material" means any contract, agreement, understanding, arrangement or
commitment that (i) requires performance by any party more than 90 days from the
date hereof, (ii) involves payments or receipts by the Company in excess of
$100,000, (iii) involves capital expenditures in excess of $25,000 or (iv)
otherwise materially affects the Company.
(b) Except as described in Schedule 3.15, each Contract
-------------
described herein or elsewhere in this Agreement, including, without limitation,
Section 3.6, is, and after the Closing on identical terms will be, legal, valid,
- -----------
binding, enforceable and in full force and effect and no event or condition has
occurred or become known to the Company or any Shareholder or is alleged to have
occurred that constitutes or, with notice or the passage of time, or both, would
constitute a default or a basis of force majeure or other claim of excusable
----- -------
delay, termination, nonperformance or accelerated or increased rights by the
Company or any other Person under any Contract described above in this Section
3.15, or described or otherwise disclosed pursuant to this Agreement; and
(c) No customer that represented in excess of 10% of the
Company's sales of goods or services during the twelve months ended on the
Balance Sheet Date has terminated its relationship with or adversely curtailed
its purchases from the Company or indicated (for any reason) its intention so to
terminate its relationship or curtail its purchases. No supplier from whom the
Company purchased in excess of 10% of the Company's purchases of goods or
services during the twelve months ended on the Balance Sheet Date has terminated
its relationship with or adversely curtailed its accommodations, sales or
services to the Company or indicated (for any reason) its intention to terminate
such relationship or curtail its accommodations, sales or services. The Company
has no purchases available from only a single source.
(d) No person with whom the Company has such a contract,
agreement, arrangement, commitment or other understanding is in default
thereunder or has failed to perform fully thereunder by reason of force majeure
----- -------
or other claim of excusable delay, termination or nonperformance thereunder, the
delay, termination or nonperformance of which, or a default under which, has had
or may have a Material Adverse Effect.
Section 3.16 Absence of Certain Changes. Since September 30, 1997, except as
--------------------------
disclosed in Schedule 3.16, the Company has not: (i) incurred any debts,
-------------
obligations or liabilities (absolute, accrued, contingent or otherwise), other
than current liabilities incurred in the ordinary course of business which,
individually or in the aggregate, are not material; (ii) subjected to or
permitted a Lien upon or otherwise encumbered any of its assets, tangible or
intangible; (iii) sold, transferred, licensed or leased any of its
-10-
<PAGE>
assets or properties except in the ordinary course of business; (iv) canceled or
compromised any debt owed to or by or claim of or against it, or waived or
released any right, of material value other than in the ordinary course of
business; (v) suffered any physical damage, destruction or loss (whether or not
covered by insurance) causing or having a Material Adverse Effect; (vi) made or
suffered any change in, or condition affecting, its condition (financial or
otherwise), properties, profitability, prospects or operations other than
changes, events or conditions in the ordinary course of business, none of which
(individually or in the aggregate) has had or may have a Material Adverse
Effect; (vii) made any change in the accounting principles, methods, records or
practices followed by it or depreciation or amortization policies or rates
theretofore adopted; (viii) paid, or made any accrual or arrangement for payment
of, any severance or termination pay to, or entered into any employment or loan
or loan guarantee agreement with, any current or former officer, director or
employee or consultant; (ix) paid, or made any accrual or arrangement for
payment of, any increase in compensation, bonuses or special compensation of any
kind to any employee other than in the ordinary course of business, or paid, or
made any accrual or arrangement for payment of, any increase in compensation,
bonuses or special compensation of any kind to any officer or director of the
Company or any consultant to the Company; or (x) entered into any agreement or
otherwise obligated itself to do any of the foregoing.
Section 3.17 Employees and Labor Matters.
---------------------------
(a) Schedule 3.17(a) contains a true and complete list of all
----------------
contracts, agreements, plans, arrangements, commitments and understandings
(formal and informal) pertaining to terms of employment, compensation, bonuses,
profit sharing, stock purchases, stock repurchases, stock options, stock
appreciation rights, commissions, incentives, loans or loan guarantees,
severance pay or benefits, use of the Company's property and related matters of
the Company with any current or former shareholder, officer, director, employee
or consultant, and true and complete copies of all such contracts, agreements,
plans, arrangements and understandings have been delivered to Purchaser
heretofore.
(b) Except as provided to Buyer prior to Closing, neither Buyer
nor the Surviving Corporation will have any responsibility for continuing any
person in the employ (or retaining any person as a consultant) of the Company
from and after the Closing or have any liability for any severance payments to
or similar arrangements with any such Person who shall cease to be an employee
of the Company at or prior to the Closing.
(c) There is not occurring or, to the Company's or Shareholders'
knowledge, threatened or anticipated, any strikes, slow downs, pickets, work
stoppages, grievance proceedings, union organization efforts or other concerted
action by (i) any current or former employees or other persons or (ii) any union
or other collective bargaining unit, against either the Company or its premises
or products.
Section 3.18 Affiliates. Except as disclosed on Schedule 3.18, none of
---------- -------------
the Shareholders, any officer, director or key employee of the Company or any
associate or Affiliate of the Company or any of such Persons has, directly or
indirectly, (i) an interest in any Person that (A) furnishes or sells, or
proposes to furnish or sell, services or products that are furnished or sold by
the Company or (B) purchases from or sells or furnishes to, or proposes to
purchase from or sell or furnish to, the Company any goods or services or (ii) a
beneficial interest in any contract or agreement to which the Company is a party
or by which the Company or any of the assets of the Company are bound or
affected.
Section 3.19 Compliance with Law. Except as disclosed on Schedule 3.19, the
------------------- -------------
Company (i) has not violated or conducted its business or operations in
violation of, and has not used or occupied its properties or assets in violation
of, any Legal Requirement or Licensing Requirement which would individually or
in the aggregate have a Material Adverse Effect on the Company or its
subsidiaries, (ii) has not been alleged to be in violation of any Legal
Requirement or Licensing Requirement, and (iii)
-11-
<PAGE>
has not received any notice of any alleged violation of, or any citation for
noncompliance with, any Legal Requirement or Licensing Requirement.
Section 3.20 Brokers' Fees. No investment banker, broker, finder or similar
-------------
agent has been employed by or on behalf of the Company in connection with this
Agreement or the transactions contemplated hereby, and the Company has not
entered into any agreement or understanding of any kind with any person or
entity for the payment of any brokerage commission, finder's fee or any similar
compensation in connection with this Agreement or the transactions contemplated
hereby.
Section 3.21 Disclosure. No representation or warranty of the Company or any
----------
Shareholder in this Agreement and no information contained in any Schedule or
other writing delivered pursuant to this Agreement or at the Closing contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact required to make the statements herein or therein not
misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants to, and covenants and agrees with,
the Company and the Shareholders that:
Section 4.1 Organization and Good Standing of Buyer. Buyer is a corporation
---------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, with full power and authority to own and lease its properties
and to conduct its business as currently conducted. Buyer has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each jurisdiction in which Buyer owns or leases
any property, or conducts any business, so as to require such qualification,
except where the failure to obtain such qualification would not be reasonably
likely to have a material adverse effect. The copies or originals of the
certificate of incorporation, bylaws, minute books and stock records of Buyer
previously delivered to, or made available for inspection by, the Company and
the Shareholders are true, complete and correct.
Section 4.2 Organization and Good Standing of Newco. Newco is a corporation
---------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, with full power and authority to own and lease its properties
and to conduct its business as currently conducted. Newco has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each jurisdiction in which Newco owns or leases
any property, or conducts any business, so as to require such qualification,
except where the failure to obtain such qualification would not be reasonably
likely to have a material adverse effect. The copies or originals of the
certificate of incorporation, bylaws, minute books and stock records of Newco
previously delivered to, or made available for inspection by, the Company and
the Shareholders are true, complete and correct.
Section 4.3 Authorization, Binding Agreement. Buyer and Newco each have all
--------------------------------
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by the respective boards of
directors of Buyer and Newco and the sole stockholder of Newco in accordance
with the Delaware Law and the respective certificates of incorporation and
bylaws of Buyer and Newco. No other corporate proceedings on the part of Buyer
or Newco are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Buyer and Newco and constitutes the legal, valid and binding
agreement of Buyer and Newco, enforceable against Buyer and Newco in accordance
with its terms, except as such enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other laws, now or hereafter in
effect, relating to or limiting creditors' rights generally, and (b) general
principles of equity (whether considered in an action in equity or at law).
-12-
<PAGE>
Section 4.4 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the consummation of the transactions contemplated hereby will not
(a) conflict with or result in a breach or violation of any term or provision
of, or constitute a default under (with or without notice or passage of time, or
both), or otherwise give any Person a basis for accelerated or increased rights
or termination or nonperformance under, any indenture, mortgage, deed of trust,
loan or credit agreement, lease, license or other agreement or instrument to
which Buyer or Newco is a party or by which Buyer or Newco is bound or affected
or to which any of the property or assets of Buyer or Newco are bound or
affected, (b) result in the violation of the provisions of the certificate of
incorporation or bylaws of Buyer or Newco or any Legal Requirement applicable to
or binding upon them, (c) result in the creation or imposition of any Lien upon
any property or asset of Buyer or Newco or (d) otherwise adversely affect the
contractual or other legal rights or privileges of Buyer or Newco. Schedule 4.4
------------
sets forth a list of all agreements requiring the consent of any party thereto
to any of the transactions contemplated hereby. Except as set forth on Schedule
--------
4.4, all consents, authorizations and approvals of any Person to or as a result
- ---
of the consummation of the transactions contemplated hereby, that are necessary
or advisable in connection with the operations and business of Buyer and Newco
as currently conducted and as proposed to be conducted, or for which the failure
to obtain the same might have, individually or in the aggregate, a material
adverse effect, have been lawfully and validly obtained by Buyer and Newco.
Section 4.5 Capitalization. The authorized capital stock of Buyer consists
--------------
solely of 30,000,000 shares of Buyer Common Stock, of which [______] shares are
issued and outstanding, and 5,000,000 shares of preferred stock, none of which
is outstanding. All of the issued and outstanding shares of Buyer Common Stock
have been duly authorized and validly issued and are fully paid and
nonassessable. Except as set forth in Schedule 4.5, there are no existing
------------
options, warrants, right, calls or commitments of any character relating to the
shares of Buyer Common Stock or any other capital stock or securities of Buyer,
(ii) there are no outstanding securities or other instruments convertible into
or exchangeable for shares of Buyer Common Stock or any other capital stock or
securities of Buyer and no commitments to issue such securities or instruments,
and no Person has any right of first refusal, preemptive right, subscription
right or similar right with respect to any shares of Buyer Common Stock or any
other capital stock or securities of Buyer. The authorized capital stock of
Newco consists solely of 10,000 shares of common stock, par value $.001 per
share, of which 1,000 shares are, and on the Closing Date will be, issued and
outstanding. All of the issued and outstanding shares of capital stock of Newco
are, and on the Closing Date will be, owned beneficially and of record by Buyer.
Section 4.6 Brokers' Fees. Except as set forth on Schedule 4.6, no
------------- ------------
investment banker, broker, finder or similar agent has been employed by or on
behalf of Buyer or Newco in connection with this Agreement or the transactions
contemplated hereby, and neither Buyer nor Newco have entered into any agreement
or understanding of any kind with any person or entity for the payment of any
brokerage commission, finder's fee or any similar compensation in connection
with this Agreement or the transactions contemplated hereby.
Section 4.7 Disclosure. No representation or warranty of Buyer or
----------
Newco in this Agreement and no information contained in any Schedule or other
writing delivered pursuant to this Agreement or at the Closing contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact required to make the statements herein or therein not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
------------------------------
OF THE SHAREHOLDERS
-------------------
Each Shareholder hereby represents and warrants to, and covenants and
agrees with, Buyer and Newco that:
-13-
<PAGE>
Section 5.1 Ownership of Shares. Such Shareholder owns of record and
-------------------
beneficially the number of shares of Company Common Stock set forth opposite its
name on Annex A hereto, and has, and at all times prior to and as of the Closing
such Shareholder will have, good and marketable title to such shares free and
clear of all Liens and adverse claims.
Section 5.2 Execution and Delivery. Such Shareholder has the power and
----------------------
authority to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations under this Agreement. This
Agreement, upon its execution and delivery by such Shareholder (assuming the due
authorization, execution and delivery hereof by the other parties hereto), will
constitute the legal, valid and binding obligation of such Shareholder,
enforceable against such Shareholder in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency and
similar laws relating to creditors' rights generally and by general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
Section 5.3 No Conflicts. The execution, delivery and performance of
------------
this Agreement by such Shareholder and the consummation by such Shareholder of
the transactions contemplated hereby will not conflict with or result in a
breach or violation of any term or provision of, or (with or without notice or
passage of time, or both) constitute a default under, any indenture, mortgage,
deed of trust, trust (constructive and other), loan agreement or other agreement
or instrument to which such Shareholder is a party or by which such Shareholder
or such Shareholder's shares are bound, or violate the provisions of any
statute, or any order, rule or regulation of any governmental body or agency or
instrumentality thereof, or any order, writ, injunction or decree of any court
or any arbitrator, having jurisdiction over such Shareholder or the property of
the such Shareholder.
Section 5.4 Restrictions on Transfer of Buyer Common Stock and Buyer
--------------------------------------------------------
Notes Under Securities Laws.
- ---------------------------
(a) Such Shareholder understands and agrees that the shares of
Buyer Common Stock and the Buyer Notes that such Shareholder will acquire in the
Merger have not been registered under the Securities Act and that, accordingly,
such shares and notes will not be fully transferable except as permitted under
various exemptions contained in the Securities Act or upon satisfaction of the
registration and prospectus delivery requirements of the Securities Act. Such
Shareholder acknowledges that such Shareholder must bear the economic risk of
its investment in such shares of Buyer Common Stock and Buyer Notes for an
indefinite period of time since such shares and notes have not been registered
under the Securities Act and therefore cannot be sold unless they are
subsequently registered or an exemption from registration is available.
Shareholder hereby represents and warrants that Shareholder is an Accredited
Investor as defined under Rule 501(a) of the Securities Act (provided, however,
such representation and warranty is based upon the assumption that the Merger
Consideration to the Shareholder is valued at one million dollars ($1,000,000)
or more on the Closing Date) and is acquiring the shares of Buyer Common Stock
and Buyer Notes in the Merger for investment purposes only, for Shareholder's
own account, and not as nominee or agent for any other Person, and not with the
view to, or for resale in connection with, any distribution thereof within the
meaning of the Securities Act.
(b) Such Shareholder hereby agrees with Buyer as follows:
(i) The certificates evidencing the shares of Buyer Common
Stock and the Buyer Notes it will acquire in the Merger, and each instrument or
certificate issued in transfer thereof, will bear substantially the following
legend:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and
such securities may not be sold or transferred unless there is an
effective registration statement under such Act covering such
securities or the issuer corporation receives an opinion of counsel
reasonably
-14-
<PAGE>
satisfactory to issuer corporation (which may be counsel for the
issuer corporation) stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of such Act."
(ii) The certificates representing such shares of Buyer
Common Stock and the Buyer Notes, and each instrument or certificate issued in
transfer thereof, will also bear any legend required under any applicable state
securities law.
(iii) Absent an effective registration statement under the
Securities Act, covering the disposition of the shares of Buyer Common Stock and
Buyer Notes which the such Shareholder acquires in the Merger, such Shareholder
will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any
or all of such shares of Buyer Common Stock or Buyer Notes without first
providing Buyer with an opinion of counsel reasonably acceptable to Buyer (which
may be counsel for Buyer) to the effect that such sale, transfer, assignment,
pledge, hypothecation or other disposition will be exempt from the registration
and the prospectus delivery requirements of the Securities Act and the
registration or qualification requirements of any applicable state securities
laws. Such Shareholder consents to Buyer's making a notation on its records or
giving instructions to any transfer agent of the Buyer Common Stock in order to
implement the restrictions on transfer set forth in this subsection (c).
Section 5.5 Advice of Counsel. Each Shareholder acknowledges that
-----------------
Shareholder has obtained advice from independent counsel with respect to this
Agreement to the extent Shareholder desired to do so. Such Shareholder is not
relying on any representations, except those set forth herein, or advice from
Buyer or Newco or any of their respective officers, directors, attorneys or
other representatives regarding this Agreement, its content or effect.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF MERGER
------------------------------------
Section 6.1 Conditions to Each Party's Obligations. Notwithstanding any
--------------------------------------
other provision of this Agreement, the obligations of each party hereto to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) There shall not be instituted and pending or threatened any
Action before any Governmental Entity (i) challenging the Merger or otherwise
seeking to restrain or prohibit the consummation of the transactions
contemplated hereby, or (ii) seeking to prohibit the direct or indirect
ownership or operation by Buyer or the Surviving Corporation of all or a
material portion of the business or assets of the Company, or to compel Buyer,
the Surviving Corporation or the Company to dispose of or hold separate all or a
material portion of the business or assets of the Company, the Surviving
Corporation or Buyer.
(b) Buyer shall have had declared effective its registration
statement under the Securities Act with respect to its firm commitment
underwritten initial public offering of the Buyer Common Stock, and no stop
order with respect thereto shall have been entered by the Securities and
Exchange Commission.
Section 6.2 Conditions to Obligations of Buyer and Newco. Notwithstanding
--------------------------------------------
any other provision of this Agreement, the obligations of Buyer and Newco to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions:
(a) The representations and warranties of the Company and the
Shareholders in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same effect as if made on the
Closing Date and each of the Company and the Shareholders shall
-15-
<PAGE>
have complied with all covenants and agreements and satisfied all conditions on
the Company's or the Shareholders' part, as applicable, to be performed or
satisfied on or prior to the Closing Date.
(b) Buyer shall have received from Bryan Cave LLP, counsel for
the Company, a written opinion dated the Closing Date and addressed to Buyer and
Newco, in substantially the form attached as Annex C hereto.
-------
(c) Buyer shall have received a certificate of the president of
the Company in substantially the form attached as Annex D hereto and
-------
certificates from each Shareholder substantially in the form attached as Annex
-----
D-1 hereto.
- ---
(d) Buyer shall have received the following under cover of a
certificate of the Secretary of the Company dated the Closing Date in
substantially the form attached as Annex E hereto:
-------
(i) Copies of resolutions of (A) the board of directors of
the Company authorizing and approving the execution, delivery and performance of
this Agreement and all other documents and instruments to be delivered by the
Company pursuant hereto, and of (B) the Company's shareholders evidencing
approval of this Agreement and the transactions contemplated hereby;
(ii) A certificate of incumbency certifying the names,
titles and signatures of the officers authorized to execute the documents
referred to in subparagraph (i) above and further certifying that the articles
of incorporation and bylaws of the Company delivered to Buyer at the time of, or
prior to, the execution of this Agreement have been validly adopted and have not
been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as Buyer or its
counsel may reasonably request.
(e) Jane Richman and Brett Richman shall have each entered into
a Non-Competition Agreement with Buyer which shall provide for a broad form of
non-competition with the Company and Buyer for a period of three years after
closing, in substantially the form attached hereto as Annex F. In addition,
-------
Brett Richman shall enter into a modification of his Non-Competition Agreement
providing that, in addition, he shall not compete in the business of
manufacturing nutritional supplements for a period of one year after the
termination of his employment with Buyer if his employment extends beyond three
years.
(f) The Shareholders and Buyer shall have entered into a
Registration Rights Agreement in substantially the form attached hereto as Annex
-----
G.
- -
(g) Buyer shall be satisfied, in its sole discretion, with the
results of its due diligence investigation of the Company.
(h) Buyer shall have received reasonable assurances from those
key employees, if any, of the Company that may be identified by Buyer in its
discretion that they will remain in the employ of the Surviving Corporation for
a reasonable period of time after the consummation of the transactions
contemplated hereby.
(i) All authorizations, consents, waivers and approvals by or
from third parties required for the consummation of the transactions
contemplated hereby shall have been obtained and all Liens on the assets and
properties of the Company shall have been released or terminated.
(j) No act, event or condition shall have occurred after the
date hereof which Buyer determines has had or could reasonably be expected to
have a Material Adverse Effect on the Company.
-16-
<PAGE>
(k) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to Buyer and its counsel.
(l) The Shareholders shall have repaid the Company for any
shareholder loans pursuant to Section 8.1(e) and for any expenses pursuant to
Section 8.4 hereof.
- -----------
(m) ANI shall have theretofore received a true and complete list
of (i) all licenses of or rights to Proprietary Information (including term,
payment for and scope thereof) granted to the Company by others or to others by
the Company and (ii) customers that represented in excess of 10% of the
Company's sales of goods and services during the 12 months ended September 30,
1998, and (iii) suppliers from whom the Company purchased in excess of 10% of
the Company's purchase of goods and services during the 12 months ended
September 30, 1998.
(n) ANI shall have received a true and complete list containing
exceptions to Section 3.17.
------------
Section 6.3 Conditions to Obligations of the Company and the
------------------------------------------------
Shareholders. Notwithstanding any other provision of this Agreement, the
- ------------
obligations of the Company and the Shareholders to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions:
(a) The representations and warranties of Buyer and Newco in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date, and Buyer and
Newco shall have complied with all covenants and agreements and satisfied all
conditions on their part to be performed or satisfied on or prior to the Closing
Date.
(b) The Company shall have received from Paul, Hastings, Janofsky
& Walker LLP, counsel for Buyer and Newco, a written opinion dated the Closing
Date and addressed to the Company and the Shareholders, in substantially the
form attached as Annex H hereto.
-------
(c) The Company shall have received the following under cover of
a certificate of the Secretary of Buyer dated the Closing Date in substantially
the form attached as Annex I hereto:
-------
(i) Copies of resolutions of the board of directors of
Buyer authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by Buyer
pursuant hereto and thereto;
(ii) A certificate of incumbency certifying the names,
titles and signatures of the officers authorized to execute the documents
referred to in subparagraph (i) above and further certifying that the
certificate of incorporation and bylaws of Buyer delivered to the Company at the
time of, or prior to, the execution of this Agreement have been validly adopted
and have not been amended or modified; and
(iii) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
or its counsel may reasonably request.
(d) The Company shall have received a certificate of the
President of Buyer in substantially the form attached as Annex J hereto.
-------
(e) The Company shall have received the following under cover of
a certificate of the Secretary of Newco dated the Closing Date in substantially
the form attached as Annex K hereto:
-------
-17-
<PAGE>
(i) Copies of resolutions of (A) the board of directors of
Newco authorizing and approving the execution, delivery and performance of this
Agreement and all other documents and instruments to be delivered by Newco
pursuant hereto and thereto, and (B) the sole stockholder of Newco approving
this Agreement and the Merger;
(ii) A certificate of incumbency certifying the names,
titles and signatures of the officers authorized to execute the documents
referred to in subparagraph (i) above and further certifying that the
certificate of incorporation and bylaws of Newco delivered to the Company at the
time of, or prior to, the execution of this Agreement have been validly adopted
and have not been amended or modified; and
(iii) Such additional supporting documentation and other information
with respect to the transactions contemplated hereby as the Company or its
counsel may reasonably request.
(f) The Company shall have received a certificate of the President of
Newco in substantially the form attached as Annex L hereto.
-------
(g) Buyer or Newco shall have assumed all existing contracts with the
management, employees, consultants and advisors of the Company.
(h) No act, event or condition shall have occurred after the date
hereof which the Shareholders or the Company determines has had or could
reasonably be expected to have a material adverse effect on the business,
financial condition, properties, profitability, prospects or operations of
Buyer.
(i) All corporate and other proceedings and actions taken in
connection with the transactions contemplated hereby and all certificates,
opinions, agreements, instruments, releases and documents referenced herein or
incident to the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to the Company and its counsel.
(j) The Company's Board of Directors shall have determined in their
sole determination whether any amounts theretofore contributed to the profit
sharing plan for employees shall become fully vested in each employee's account
and/or distributed to such employees in accordance with applicable law.
ARTICLE 7
CONDUCT OF BUSINESS PENDING CLOSING
-----------------------------------
During the period commencing on the date hereof and continuing through
the Closing Date, the Company and the Shareholders covenant and agree (except as
expressly contemplated by this Agreement or to the extent that Buyer shall
otherwise expressly consent in writing) that:
Section 7.1 Qualification. The Company shall maintain all qualifications to
-------------
transact business and remain in good standing in the foreign jurisdictions in
which the Company owns or leases any property, or conducts any business, so as
to require such qualification, except where the failure to maintain such
qualification would not be reasonably likely to have a Material Adverse Effect.
Section 7.2 Ordinary Course. The Company shall conduct its business in, and
---------------
only in, the ordinary course and shall preserve intact its current business
organizations, keep available the services of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it to the end that its goodwill and going business value
shall be unimpaired at the Closing Date. The Company shall maintain its
properties and assets in good condition and repair.
-18-
<PAGE>
Section 7.3 Organic Changes. The Company shall not (a) amend its articles
---------------
of incorporation or bylaws, (b) acquire by merging or consolidating with, or
agreeing to merge or consolidate with, or purchase substantially all of the
stock or assets of, or otherwise acquire any business or any corporation,
partnership, association or other business organization or division thereof, (c)
enter into any partnership or joint venture, (d) declare, set aside, make or pay
any dividend or other distribution in respect of its capital stock or purchase
or redeem, directly or indirectly, any shares of its capital stock, (e) issue or
sell any shares of its capital stock of any class or any options, warrants,
conversion or other rights to purchase any such shares or any securities
convertible into or exchangeable for such shares, or (f) liquidate or dissolve
or obligate itself to do.
Section 7.4 Indebtedness. The Company shall not incur any Indebtedness,
------------
sell any debt securities or lend money to or guarantee the Indebtedness of any
Person. The Company shall not restructure or refinance its existing
Indebtedness.
Section 7.5 Accounting. The Company shall not make any change in the
----------
accounting principles, methods, records or practices followed by it or
depreciation or amortization policies or rates theretofore adopted by it. The
Company shall maintain its books, records and accounts in accordance with prior
practices.
Section 7.6 Compliance with Legal Requirements. The Company shall comply
----------------------------------
promptly with all requirements that applicable law may impose upon it and its
operations and with respect to the transactions contemplated by this Agreement,
and shall cooperate promptly with, and furnish information to, Buyer in
connection with any such requirements imposed upon Buyer, or upon any of its
affiliates, in connection therewith or herewith, including, without limitation,
all information reasonably required by Buyer to prepare its registration
statement with respect to its initial public offering.
Section 7.7 Disposition of Assets. The Company shall not sell, transfer,
---------------------
license, lease or otherwise dispose of, or suffer or cause the encumbrance by
any Lien upon any of, its properties or assets, tangible or intangible, or any
interest therein, except in the ordinary course of business.
Section 7.8 Compensation. The Company shall not (a) adopt or amend in any
------------
material respect any collective bargaining, bonus, profit-sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or other
plan, agreement, trust, fund or arrangement for the benefit of employees
(whether or not legally binding) other than to comply with any Legal Requirement
or (b) pay, or make any accrual or arrangement for payment of, any increase in
compensation, bonuses or special compensation of any kind, or any severance or
termination pay to, or enter into any employment or loan or loan guarantee
agreement with, any current or former officer, director, employee or consultant
of the Company; provided, however, that employees who received bonuses in 1997
-------- -------
pursuant to the Company's bonus policy then in effect and who are otherwise
entitled to receive bonuses in 1998 under the Company's bonus policy currently
in effect shall be entitled to receive such bonuses for the year ended September
30, 1998 in an aggregate amount not to exceed $2,000,000 and which will leave
the Company with not less than $400,000 of cash at Closing.
Section 7.9 Modification or Breach of Agreements; New Agreements. The
----------------------------------------------------
Company shall not terminate or modify, or commit or cause or suffer to be
committed any act that will result in breach or violation of any term of, or
(with or without notice or passage of time, or both) constitute a default under
or otherwise give any person a basis for nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement, instrument, arrangement or understanding, written or oral, disclosed
in this Agreement or the Schedules hereto. The Company shall refrain from
becoming a party to any contract or commitment other than in the ordinary course
of business. The Company shall meet all of its contractual obligations in
accordance with their respective terms.
-19-
<PAGE>
Section 7.10 Capital Expenditures. Except for capital expenditures or
--------------------
commitments necessary to maintain its properties and assets in good condition
and repair (the amount of which shall not exceed $25,000 in the aggregate), the
Company shall not purchase or enter into any contract to purchase any capital
assets; provided, however, the Forum Senate seats for the year 1999-2000 shall
be paid prior to Closing.
Section 7.11 Maintain Insurance. The Company shall maintain its Policies in
------------------
full force and effect and shall not do, permit or willingly allow to be done any
act by which any of the Policies may be suspended, impaired or canceled.
Section 7.12 Discharge. The Company shall not cancel, compromise, release or
---------
discharge any claim of the Company upon or against any person or waive any right
of the Company of material value, and not discharge any Lien upon any asset of
the Company or compromise any debt or other obligation of the Company to any
person other than Liens, debts or obligations with respect to current
liabilities of the Company.
Section 7.13 Actions. The Company shall not institute, settle or agree to
-------
settle any Action before any governmental entity.
Section 7.14 Permits. The Company shall maintain in full force and effect,
-------
and comply with, all Permits.
Section 7.15 Tax Assessments and Audits. The Company shall furnish promptly
--------------------------
to Buyer a copy of all notices of proposed assessment or similar notices or
reports that are received from any taxing authority and which relate to the
Company's operations for periods ending on or prior to the Closing Date. The
Shareholders shall cause the Company to promptly inform Buyer, and permit the
participation in and control by Buyer, of any investigation, audit or other
proceeding by a Governmental Entity in connection with any Taxes, assessment,
governmental charge or duty and shall not consent to any settlement or final
determination in any proceeding without the prior written consent of Buyer.
ARTICLE 8
ADDITIONAL COVENANTS
--------------------
Section 8.1 Covenants of the Company and the Shareholders. During the
---------------------------------------------
period commencing on the date hereof and continuing through the Closing Date,
each of the Company and the Shareholders agrees to:
(a) comply promptly with all requirements that applicable Legal
Requirements may impose upon it with respect to the transactions contemplated by
this Agreement, and shall cooperate promptly with, and furnish information to,
Buyer in connection with any such requirements imposed upon Buyer or upon any of
its affiliates in connection therewith or herewith, including, without
limitation, all information reasonably required by Buyer to prepare its
registration statement with respect to its initial public offering;
(b) use its reasonable commercial efforts to obtain (and to
cooperate with Buyer in obtaining) any consent, authorization or approval of, or
exemption by, any Person required to be obtained or made by the Company or the
Shareholders, as applicable, in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections 6.1
and 6.2 of this Agreement;
-20-
<PAGE>
(d) promptly orally advise Buyer and, within three business days
thereafter, in writing of any change in the Company's business or condition that
has had or may have a Material Adverse Effect; and
(e) at or prior to the Closing, the Shareholders will repay to
the Company any shareholders loans payable.
Section 8.2 Covenants of Buyer. During the period commencing on the
------------------
date hereof and continuing through the Closing Date, Buyer agrees to:
(a) comply promptly with all requirements that applicable Legal
Requirements may impose upon it with respect to the transactions contemplated by
this Agreement, and shall cooperate promptly with, and furnish information to,
the Company and the Shareholders in connection with any such requirements
imposed upon the Shareholders or the Company or upon any of the Affiliates of
the Company in connection therewith or herewith;
(b) use its reasonable commercial efforts to obtain any consent,
authorization or approval of, or exemption by, any Person required to be
obtained or made by Buyer in connection with the transactions contemplated by
this Agreement;
(c) use its reasonable commercial efforts to have the
Shareholders released from any Guarantees set forth on Schedule 8.2 hereto. If
------------
Buyer cannot obtain any such release within 90 days after the Closing Date, it
will indemnify the Shareholders from and after the Closing Date with respect to
any liability on the related guarantees; and
(d) use its reasonable commercial efforts to bring about the
satisfaction of the conditions precedent to Closing set forth in Sections 6.1
and 6.3 of this Agreement.
Section 8.3 Access and Information.
----------------------
(a) Between the date hereof and the Closing Date, (i) the
Company will permit, and will cause its officers, directors, key employees and
advisors to permit, Buyer and its representatives and agents reasonable access
to the Company's books and records, facilities, key personnel, customers,
suppliers, independent accountants and attorneys, as requested by Buyer; (ii)
Buyer will use its reasonable best efforts to provide the Shareholders and the
Company and their respective representatives and agents reasonable access to the
books and records, facilities, key personnel, customers, suppliers, independent
accountants and attorneys of other companies to be acquired by Buyer in
conjunction with the acquisition of the Company, as reasonably requested by the
Company (subject to the execution of appropriate confidentiality agreements and
with the understanding that there will be no access to product formulations or
other sensitive trade secret information); and (iv) the Company shall provide to
Buyer, promptly upon completion, an unaudited balance sheet and the related
statements of income or operations, cash flows and stockholder's equity for each
month-end and period from and after December 31, 1997.
(b) The Confidentiality Agreement, if any (the "Confidentiality
---------------
Agreement"), entered into among the Company, the Shareholders and Buyer shall
- ---------
survive the execution and delivery of this Agreement.
Section 8.4 Expenses. Except as otherwise specifically provided herein,
--------
each party to this Agreement shall bear its own direct and indirect expenses
incurred in connection with the negotiation and preparation of this Agreement
and the consummation and performance of the transactions contemplated hereby,
including, without limitation, all legal fees and fees of any brokers, finders
or similar agents; provided, however, that the Company may advance such expenses
-------- -------
on behalf of the Shareholders which such advances the Shareholders shall repay
to the Company at, or prior to, the Closing; provided, further, that the fees of
-------- -------
independent auditors to audit the Company's financial
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<PAGE>
statements shall be paid by Buyer; and provided, further, that expenses incurred
-------- -------
by the Shareholders in connection with activities specifically requested by
Buyer in pursuing and consummating its initial public offering shall be
reimbursed by Buyer.
Section 8.5 Certain Notifications. At all times from the date hereof
---------------------
to the Closing Date, no party shall permit or undertake any action that would
result in, and each party shall promptly notify the others in writing of, the
occurrence of any event that will or may (i) render any statement,
representation or warranty of such party in this Agreement (including the
Schedules hereto) inaccurate or incomplete in any material respect or (ii)
constitute or result in the breach by such party of, or a failure to comply
with, any agreement or covenant in this Agreement applicable to such party or
(iii) result in the failure by such party to satisfy any of the conditions
specified in Article 6 hereof.
---------
Section 8.6 Publicity; Employee Communications. At all times prior to
----------------------------------
the Closing Date, each party shall obtain the consent of all other parties
hereto prior to issuing, or permitting any of its directors, officers, employees
or agents to issue, any press release or other information to the press,
employees of the Company or any third party with respect to this Agreement or
the transactions contemplated hereby; provided, however, that no party shall be
-------- -------
prohibited from supplying any information to any of is representatives, agents,
attorneys, advisors, financing sources and others to the extent necessary to
complete the transactions contemplated hereby. Nothing contained in this
Agreement shall prevent any party to this Agreement at any time from furnishing
any required information to any Governmental Entity or authority pursuant to a
Legal Requirement or from complying with its legal or contractual obligations.
Section 8.7 Further Assurances. Subject to the terms and conditions
------------------
of this Agreement, each of the parties hereto agrees to use all reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable Legal
Requirements, to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the Closing any further action is necessary
or desirable to carry out the purposes of this Agreement, the Shareholders, the
Company, Buyer or Newco, as the case may be, shall take or cause to be taken all
such necessary or convenient action and execute, and deliver and file, or cause
to be executed, delivered and filed, all necessary or convenient documentation.
Section 8.8 Competing Offers; Merger or Liquidation. The Company and
---------------------------------------
the Shareholders agree that they will not, and the Shareholders will cause the
Company not to, directly or indirectly, through any officer, director, agent or
otherwise, solicit, initiate, encourage or conduct discussions with, or accept
or consider the submissions of bids, offers or proposals by, any Person with
respect to an acquisition of the Company or its assets or capital stock or a
Merger or similar transaction, and the Company and the Shareholders will not,
and the Shareholders will not permit the Company to, engage any broker,
financial adviser or consultant with an incentive to initiate or encourage
proposals or offers from other parties. Furthermore, the Company and the
Shareholders shall not, and the Shareholders shall not permit the Company to,
directly or indirectly, through any officer, director, agent or otherwise,
engage in negotiations concerning any such transaction with, or provide
information to, any Person other than Buyer and its principal shareholder, and
their respective representatives, with a view to engaging, or preparing to
engage, that Person with respect to any matters referenced in this Section. The
Shareholders shall ensure that the Company shall not commence any proceeding to
merge, consolidate or liquidate or dissolve or obligate itself to do so.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 9.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Closing:
(a) by mutual consent of all of the parties hereto;
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<PAGE>
(b) by the Company or the Shareholders, on the one hand,
or by Buyer, on the other hand, by written notice to the other party or parties
hereto if the Merger shall not have been consummated on or before November 15,
1998 (or such later date as Buyer, the Company and the controlling Shareholders
may agree), provided that in the case of a termination under this clause (b),
the party or parties terminating this Agreement shall not then be in material
breach of any of its or their obligations under this Agreement;
(c) by Buyer if (i) there has been a material
misrepresentation, breach of warranty or breach of covenant by the Company or
the Shareholders under this Agreement or (ii) any of the conditions precedent to
Closing set forth in Sections 6.1 and 6.3 have not been met on the Closing Date,
and, in each case, Buyer is not then in material default of its obligations
hereunder; or
(d) by the Company or the Shareholders if (i) there has
been a material misrepresentation, breach of warranty or breach of covenant by
Buyer under this Agreement or (ii) any of the conditions precedent to Closing
set forth in Sections 6.1 and 6.2 have not been met on the Closing Date, and, in
each case, neither the Company nor the Shareholders are then in material default
of their obligations hereunder.
Section 9.2 Effect of Termination. In the case of any termination of
---------------------
this Agreement, the provisions of Sections 8.3(b) and 8.4 shall remain in full
force and effect. Upon termination of this Agreement as provided in Section
9.1(a) or (b), this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of any party hereto or their respective
directors, officers, employees, agents or other representatives. In the event
of termination of this Agreement as provided in Section 9.1(c) or (d) hereof,
such termination shall be without prejudice to any rights that the terminating
party or parties may have against the breaching party or parties or any other
Person under the terms of this Agreement or otherwise.
Section 9.3 Amendment and Waiver. This Agreement may be amended only
--------------------
by a written instrument executed by each of the parties hereto. Any term or
provision of this Agreement may be waived in writing at any time by the party or
parties entitled to the benefits thereof. No failure to exercise and no delay
in exercising any right, power or privilege shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege
preclude the exercise of any other right, power or privilege. No waiver of any
breach of any covenant or agreement hereunder shall be deemed a waiver of any
preceding or subsequent breach of the same or any other covenant or agreement.
The rights and remedies of each party under this Agreement are in addition to
all other rights and remedies, at law or in equity, that such party may have
against the other parties.
ARTICLE 10
SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION
--------------------------------------------------------------
Section 10.1 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties of the parties hereto contained in this Agreement
or in any writing delivered pursuant hereto or at the Closing shall survive the
execution and delivery of this Agreement and the Closing and the consummation of
the transactions contemplated hereby (and any examination or investigation by or
on behalf of any party hereto) until the date 12 months after the Closing Date
(except for claims in respect thereof pending at such time, which shall survive
until finally resolved or settled); provided, however, that the representations
-------- -------
and warranties contained in Sections 3.1, 3.2, 3.11, 3.13 (in so far as it
applies to Environmental Matters), 5.1, 5.2, 5.3 and 5.4 shall survive until the
expiration of the applicable statute of limitations. No Action may be commenced
with respect to any representation, warranty, covenant or agreement in this
Agreement, or in any writing delivered pursuant hereto, unless written notice,
setting forth in reasonable detail the claimed breach thereof, shall be
delivered pursuant to Section 11 to the party or parties against whom liability
for the claimed breach is charged on or before the termination of the survival
period specified in Section 10 for such representation, warranty, covenant or
agreement.
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<PAGE>
Section 10.2 Indemnification.
---------------
(a) The Richmans severally covenant and agree to defend,
indemnify and hold harmless Purchaser and the Company, each officer, director,
employee, agent and representative of Purchaser or the Company and each Person
who controls Purchaser or the Company within the meaning of the Securities Act
from and against any loss, damage, cost or expense ("Damages") arising out of or
resulting from: (i) any inaccuracy in or breach of any representation or
warranty made by any Shareholder in this Agreement or in any writing delivered
pursuant to this Agreement or at the Closing; or (ii) the failure of any
Shareholder to perform or observe fully any covenant, agreement or condition to
be performed or observed by such Shareholder pursuant to this Agreement.
(b) Purchaser covenants and agrees to defend, indemnify
and hold harmless the Shareholders from and against any Damages arising out of
or resulting from: (i) any inaccuracy in or breach of any representation or
warranty made by Purchaser in this Agreement or in any writing delivered
pursuant to this Agreement or at the Closing; (ii) the failure by Purchaser to
perform or observe any covenant, agreement or condition to be performed or
observed by it pursuant to this Agreement; or (iii) any Actions arising out of
or resulting from the conduct by the Company or its business or operations after
the Closing Date.
(c) The Richmans' liability for breaches (other than for
fraud) of representations and warranties under Section 3 hereof under this
Section 10.2 shall not exceed the "Indemnity Limit" (as defined below), which
shall be paid, if required, out of the ANI Common Stock (at its fair market
value on the date of payment) or the proceeds thereof as provided in Section
10.2(d). Purchaser shall not be liable to the Shareholders, and the Shareholders
shall not be liable to Purchaser, under this Section 10.2 for any Damages
indemnifiable hereunder except and to the extent that the amount of such Damages
exceeds an accumulated total of $250,000 in the aggregate (but then for all
Damages, including the first $250,000).
(d) The Indemnity Limit for any Breach (as defined in
Section 2.3(b)) shall be the lesser of the two limitations computed in
subsections (i) and (ii), below.
(i) The first limitation is the difference between
Four Million Dollars less the amount of Payments previously made by the Richmans
to Buyer with respect to all prior Breaches for which indemnification has been
claimed. For this purpose, Payments shall mean the sum of (x) the Market Value
(as defined below) of all Stock delivered by the Richmans pursuant to subsection
(iii) below, determined at the time of each such delivery and (y) all cash
payments made by the Richmans to Buyer.
(ii) The second limitation is the sum of the following
amounts:
a. The Market Value of all shares of Buyer Common
Stock owned by the Shareholders at the time payment with respect to a Breach is
due. For this purpose, Market Value shall be determined by reference to the
average Closing Price of Buyer Common Stock for the ten (10) trading days next
preceding the date on which the obligation to make a payment in respect of the
Breach becomes due (the "Applicable Date").
b. The amounts received by the Shareholders from
the public sale (whether in a secondary offering, open market sale or private
placement transaction) of shares of Buyer Common Stock prior to the Applicable
Date in respect of the Breach Payment, to persons who are not affiliates of the
Shareholders.
c. The Market Value of the shares of Common Stock
which the Shareholders have transferred to third parties other than in
transactions described in clause b. above, determined as though such shares were
owned by the Shareholders on the Applicable Date.
-24-
<PAGE>
(iii) The Richmans shall satisfy any liability for a
Breach Payment first by delivering shares of Common Stock then owned by them,
valued as set forth above, and thereafter with cash, the total not to exceed the
Indemnity Limit at the Applicable Date.
Section 10.3 Third Party Claims.
------------------
(d) If any party entitled to be indemnified pursuant to Section
10.2 (an "Indemnified Party") receives notice of the assertion by any third
-----------------
party of any claim or of the commencement by any such third person of any Action
(any such claim or Action being referred to herein as an "Indemnifiable Claim")
-------------------
with respect to which another party hereto (an "Indemnifying Party") is or may
------------------
be obligated to provide indemnification, the Indemnified Party shall promptly
notify the Indemnifying Party in writing (the "Claim Notice") of the
------------
Indemnifiable Claim; provided, that the failure to provide such notice shall not
--------
relieve or otherwise affect the obligation of the Indemnifying Party to provide
indemnification hereunder, except to the extent that any Damages directly
resulted or were caused by such failure.
(e) The Indemnifying Party shall have fifteen (15) days after
receipt of the Claim Notice to undertake, conduct and control, through counsel
reasonably acceptable to the Indemnified Party, and at Indemnifying Party's
expense, the settlement or defense thereof, and the Indemnified Party shall
cooperate with the Indemnifying Party in connection therewith; provided, that
--------
(i) the Indemnifying Party shall permit the Indemnified Party to participate in
such settlement or defense through counsel chosen by the Indemnified Party,
provided that the fees and expenses of such counsel shall not be borne by the
Indemnifying Party unless the Indemnified Party shall have reasonably concluded
that there are defenses or counter or cross claims available to it that may not
be available to the Indemnifying Party, in which event the Indemnifying Party
shall bear the reasonable fees and expenses (and shall pay the same on a current
basis as incurred) of counsel and experts selected by the Indemnified Party, and
(ii) the Indemnifying Party shall not settle any Indemnifiable Claim without the
Indemnified Party's consent. So long as the Indemnifying Party is vigorously
contesting any such Indemnifiable Claim in good faith, the Indemnified Party
shall not pay or settle such claim without the Indemnifying Party's consent,
which consent shall not be unreasonably withheld or delayed.
(f) If the Indemnifying Party does not notify the Indemnified
Party within fifteen (15) days after receipt of the Claim Notice that it elects
to undertake the defense of the Indemnifiable Claim described therein, the
Indemnified Party shall have the right to contest, settle or compromise the
Indemnifiable Claim in the exercise of its reasonable discretion; provided, that
--------
the Indemnified Party shall notify the Indemnifying Party of any compromise or
settlement of any such Indemnifiable Claim.
(g) Anything contained in this Section 10.3 to the contrary
notwithstanding, the Richmans shall not be entitled to assume the defense for
any Indemnifiable Claim (and shall be liable for, and shall pay the same on a
current basis as incurred, the reasonable fees and expenses incurred by the
Indemnified Party in defending such claim) if the Indemnifiable Claim seeks an
order, injunction or other equitable relief or relief for other than money
damages against Purchaser or the Company which Purchaser determines, after
conferring with its counsel, cannot be separated from any related claim for
money damages and which, if successful, could adversely affect the business,
properties or prospects of Purchaser or the Company.
Section 10.4 Indemnification Non-Exclusive. The foregoing indemnification
-----------------------------
provisions are in addition to, and not in derogation of, any statutory,
equitable or common-law remedy any party may have for breach of representation,
warranty, covenant or agreement.
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<PAGE>
ARTICLE 11
GENERAL PROVISIONS
------------------
Section 11.1 Notices. All notices and other communications under or in
-------
connection with this Agreement shall be in writing and shall be deemed given (a)
if delivered personally, upon delivery, (b) if delivered by registered or
certified mail (return receipt requested), upon the earlier of actual delivery
or three days after being mailed, or (c) if given by telecopy, upon confirmation
of transmission by telecopy, in each case to the parties at the following
addresses:
(a) If to Buyer or Newco, addressed to:
Advanced Nutraceuticals, Inc.
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Mr. Barry Loder
With copies to:
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street, 23rd Floor
Los Angeles, California 90071
Telecopy: (213) 627-0705
Attention: David L. Gersh, Esq.
(b) If to the Company, addressed to:
Northridge Laboratories Inc.
20832 Dearborn Street
Chatsworth, California 91311
Telecopy: (818) 998-2815
Attention: Ms. Jane Richman
With copies to:
Bryan Cave LLP
120 Broadway Street, Suite 500
Santa Monica, California 90401-2305
Telecopy: (310) 576-2200
Attention: Thomas S. Loo, Esq.
(c) If to the Shareholders,
addressed to:
Jane Richman, Trustee of the Trusts
1903 Holmby Avenue
Los Angeles, California 90025
Telecopy: (310) 474-1922
Brett Richman
20878 Kelvin Place
Woodland Hills, California 91311
No home telecopy number
-26-
<PAGE>
Holmby Avenue, LLC
1903 Holmby Avenue
Los Angeles, California 90025
Telecopy: (310) 474-1922
With copies to:
Bryan Cave LLP
120 Broadway Street, Suite 500
Santa Monica, California 90401-2305
Telecopy: (310) 576-2200
Attention: Thomas S. Loo, Esq.
Section 11.2 Severability. If any term or provision of this Agreement
------------
or the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable such term or
provision in any other jurisdiction, the remaining terms and provisions of this
Agreement or the application of such terms and provisions to circumstances other
than those as to which it is held invalid or enforceable.
Section 11.3 Arbitration. Except as provided herein, any controversy or
-----------
claim arising out of or relating to this Agreement or the breach thereof shall
be settled as provided below:
11.3.1 Notice of Claim. The prosecution of a claim shall
---------------
commence upon effective date of written notice of claim by the party asserting
the claim to the other party which shall set forth the basis and amount of the
claim.
11.3.2 Pre-Arbitration Negotiations. The parties shall, before
----------------------------
the commencement of arbitration proceedings, attempt in good faith to settle
their dispute by negotiations, including a consideration of mediation.
11.3.3 Selection of Arbitrator. Within thirty (30) days after
-----------------------
notice of the claim, the parties shall select a retired judge as an arbitrator.
If the parties cannot agree upon an arbitrator, they shall exchange lists of at
least five (5) retired judges. If there is one common name, such person shall
be deemed selected. If there is more than one common name, the first common
arbitrator who is available shall be deemed selected. If there is no common
name, the matter will be submitted to J.A.M.S./Endispute for arbitration before
a retired judge pursuant to its policies and procedures. The arbitration will
be conducted by the rules and procedures established by the arbitrator according
to the provisions of this Agreement.
11.3.4 Provisional and Equitable Remedies. Until such time as the
----------------------------------
arbitrator is appointed, either party may seek or request ancillary, provisional
or preliminary rights and/or remedies, including injunctive relief or a
temporary restraining order or any other applicable provisional remedy before
the Los Angeles County Superior Court. Upon appointment of the arbitrator, the
parties agree that jurisdiction over any such provisional remedy and proceeding
shall immediately be transferred to the arbitrator, and the State Court
proceeding shall be dismissed or abated, as the case may be, provided that any
such provisional remedy remain in effect until otherwise ordered by the
arbitrator. The parties agree that the arbitrator shall be empowered to issue
an order for a temporary injunction, preliminary injunction, writ of attachment,
writ of possession, temporary protective order and/or appointment of a receiver
on the grounds that the arbitration award to which the applicant may be entitled
may be rendered ineffectual in the absence of such relief. Following the
appointment of the arbitrator, the parties agree that any application for relief
shall be made exclusively to the arbitrator. In the event of a claimed breach
of the Agreement by Seller, in addition to all of the remedies provided by law
and this Agreement, Buyer shall be entitled to seek specific performance of
Seller's obligations under the Agreement.
-27-
<PAGE>
11.3.5 Enforcement of Judgment. Judgment upon the award rendered by
-----------------------
the arbitrator may be entered in any court having jurisdiction thereof.
11.3.6 Discovery. The parties may obtain discovery in aid of the
---------
arbitration to the fullest extent permitted under law, including California Code
of Civil Procedure Section 1283.05. All discovery disputes shall be resolved by
the arbitrator.
11.3.7 Power and Authority of Arbitrator. The arbitrator shall not
---------------------------------
have any power to alter, amend, modify or change any of the terms of this
Agreement not to grant any remedy which is either prohibited by the terms of
this Agreement or not available in a court of law.
11.3.8 Costs. The costs of arbitration, including the arbitrator's
-----
fee and costs for the use of facilities during the hearings, shall be borne
equally by Buyer and Seller. Reasonable attorneys' fees and costs, including the
arbitrator's fee, may be awarded to the prevailing or most prevailing party by
the arbitrator.
Section 11.4 Entire Agreement. This Agreement, including the exhibits,
----------------
annexes and schedules attached hereto and other documents referred to herein,
and the Confidentiality Agreement, contain the entire understanding of the
parties hereto in respect of their subject matter and supersede all prior and
contemporaneous agreements and understandings, oral and written, among the
parties with respect to such subject matter. All representations and warranties
are expressly provided in this Agreement and except as expressly provided
herein, no other representations, express or implied, oral or written, has been
made by any party to this Agreement.
Section 11.5 Miscellaneous. This Agreement shall be binding upon and inure
-------------
to the benefit of each of the parties hereto and their respective successors,
heirs and assigns; provided, however, that no party may assign either this
-------- -------
Agreement or any of its rights, interests or obligations hereunder in whole or
in part without the prior written consent of the other parties hereto (other
than to the Surviving Corporation as a result of the Merger), and any such
transfer or assignment without said consent shall be void, ab initio. Subject to
---------
the immediately preceding sentence, this Agreement is not intended to benefit,
and shall not run to the benefit of or be enforceable by, any other person or
entity other than the parties hereto and their permitted successors and assigns.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, but all such counterparts together shall constitute one
and the same Agreement. The exhibits, schedules and annexes to this Agreement
are incorporated herein and, by this reference, made a part hereof as if fully
set forth at length herein. The article, section and subsection headings used
herein are inserted for reference purposes only and shall not in any way affect
the meaning or interpretation of this Agreement. As used in this Agreement, the
masculine, feminine or neuter gender, and the singular or plural, shall be
deemed to include the others whenever and wherever the context so requires. For
the purposes of this Agreement, unless the context clearly requires, "or" is not
exclusive. Each party hereto hereby knowingly, voluntarily and intentionally
waives any right it may have to a jury trial in any legal proceeding which may
be hereafter instituted by any party hereto to assert a claim arising out of or
relating to this Agreement or any other agreement, instrument or document
contemplated hereby or thereby. If any action, including without limitation any
arbitration, is brought by any party hereto pursuant to this Agreement, the
prevailing party shall be entitled to its costs and expenses, including
reasonable attorneys' fees. Any judicial proceeding or arbitration brought
against any of the parties to this Agreement on any dispute arising out of this
Agreement or any matter related hereto may be brought in the courts of the
County of Los Angeles, State of California and, by execution and delivery of
this Agreement, each of the parties hereto accepts the exclusive jurisdiction of
such courts and irrevocably agrees to be bound by any judgment rendered thereby
in connection with this Agreement.
Section 11.6 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws (and not the law of conflicts) of
the State of California.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
ADVANCED NUTRACEUTICALS, INC.
By: /s/
--------------------------------
An Authorized Officer
NEWCO
By: /s/
--------------------------------
An Authorized Officer
NORTHRIDGE LABORATORIES INC.
By: /s/
--------------------------------
An Authorized Officer
JANE RICHMAN, TRUSTEE OF THE EXEMPTION TRUST CREATED
UNDER THE ALAN RICHMAN AND JANE RICHMAN TRUST UNDER
TRUST DATED 5/5/92
By: /s/
--------------------------------
Jane Richman, Trustee
JANE RICHMAN, TRUSTEE OF THE SURVIVOR'S TRUST CREATED
UNDER THE ALAN RICHMAN AND JANE RICHMAN TRUST UNDER
TRUST DATED MAY 5, 1992
By: /s/
--------------------------------
Jane Richman, Trustee
By: /s/
--------------------------------
BRETT RICHMAN
HOLMBY AVENUE, LLC
By: /s/
--------------------------------
Jane Richman, Manager
-29-
<PAGE>
EXHIBIT 10.5
------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
---------
_______, 1998 between Advanced Nutraceuticals, Inc., a Delaware corporation (the
"Company") and JOSEPH SCHORTZ (the "Executive").
------- ---------
R E C I T A L S
- - - - - - - -
A. This Agreement is entered into in connection with the acquisition
by the Company of Quality Botanical Ingredients, Inc., a New Jersey Corporation
("QBI") pursuant to that certain Agreement and Plan of Merger dated ______, 1998
---
(the "Merger Agreement") by and among the Company, its wholly-owned subsidiary
----------------
QBI Acquisition Co., Inc., a Delaware corporation, QBI, and the shareholders of
QBI.
B. The Company desires to employ the Executive, and the Executive
desires to be so employed by the Company, on the terms and subject to the
conditions set forth in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth in this Agreement, the Company and the Executive hereby agree
as follows:
1. Employment.
----------
(a) Subject to the terms and conditions contained herein, the
Company employs the Executive, and the Executive accepts such employment, from
the date hereof until the earlier of (i) ________, 2001 or (ii) the date such
employment is terminated pursuant to Section 4 of this Agreement. During the
Executive's employment under this Agreement, the Executive shall perform such
duties for the Company as may from time to time be assigned to the Executive by
the Board of Directors of the Company (the "Board"). The Executive shall have
the title of President and Chief Executive Officer and such other titles as from
time to time may be assigned to the Executive by the Board.
(b) The Executive will devote his entire business time, energy,
attention and skill to the services of the Company and its affiliates and to the
promotion of their interests. So long as the Executive is employed by the
Company, the Executive shall not, without the written consent of the Company,
except for certain accounting and consulting services and services as a trustee
of a trust, none of which, in the aggregate, shall materially affect the
Executive's time or services devoted to the Company:
(i) engage in any other activity for compensation, profit
or other pecuniary advantage, whether received during or after the term of this
Agreement;
<PAGE>
(ii) render or perform services of a business,
professional, or commercial nature other than to or for the Company, either
alone or as an employee, consultant, director, officer, or partner of another
business entity, whether or not for compensation, and whether or not such
activity, occupation or endeavor is similar to, competitive with, or adverse to
the business or welfare of the Company; or
(iii) invest in or become a shareholder of another
corporation or other entity; provided, that the Executive's investment solely as
--------
a shareholder in another corporation shall not be prohibited hereby so long as
such investment is not in excess of two percent (2%) of any class of shares that
are traded on a national securities exchange or quoted on the NASDAQ National
Market.
(c) Concurrently with the execution of this Agreement, the
Executive has executed a Stock Option Agreement with respect to 200,000 shares
of the Company's Common Stock, vesting over five (5) years, with an exercise
price equal to the price of the Company's Common Stock in its initial public
offering.
2. Location of Employment. The Executive's principal place of
----------------------
employment shall be at the executive offices of the Company located at 500
Metuchen Road, South Plainfield, New Jersey 07080 or in the same general area;
provided, that at the direction of the Board, the Executive may from time to
- --------
time be required to travel to various domestic and foreign locations.
3. Compensation.
------------
(a) In exchange for full performance of the Executive's
obligations and duties under this Agreement, the Company shall pay the Executive
a base salary at a monthly rate of $20,833.33, payable in accordance with the
Company's standard payroll practices. In any month in which the Executive shall
be employed for less than the entire number of days in such month, the
compensation payable under this Section 3(a) shall be prorated on the basis of
the number of days during which the Executive was actually employed divided by
the number of days in such month. The base salary described in subsection (a)
hereof is a gross amount, and the Company shall be required to withhold from
such amount deductions with respect to Federal, state and local taxes, FICA,
unemployment compensation taxes and similar taxes, assessments or withholding
requirements.
(b) In addition to the base salary, the Executive shall be
entitled to a performance bonus (the "Bonus") at the discretion of the Board,
-----
based upon annual EBIT targets to be agreed upon by and between the Executive
and the Board on an annual basis.
(c) During the Executive's employment under this Agreement, the
Executive shall also be reimbursed by the Company for reasonable business
expenses actually incurred or paid by the Executive, consistent with the
policies established by the Board, in rendering to the Company the services
provided for in this Agreement, upon presentation of expense statements or such
other supporting information as is consistent with the policies of the Company.
(d) The Executive shall be entitled to 20 business days'
vacation for each full year of employment under this Agreement, which vacation
time will accrue in accordance with the vacation policy of the Company.
-2-
<PAGE>
(e) The Executive shall be entitled to a car allowance of seven
hundred fifty dollars ($750.00) per month. The Company shall provide auto
insurance
(f) The Executive shall be entitled to participate in all
benefit plans (including deferred compensation plans and any medical, dental or
life insurance plans) which shall be available from time to time to the domestic
management employees of the Company generally, except to the extent such
participation in any plan would, in the opinion of the Chairman of the
Compensation Committee or, in his absence, the Chairman of the Board, alter the
intended tax treatment of such plan; provided, however, that the Executive shall
-------- -------
have no right under this Agreement to participate in any additional stock
option, stock purchase or other plan relating to shares of capital stock of the
Company or its affiliates. The Executive acknowledges and agrees that the Board
may in its discretion terminate at any time or modify from time to time any such
benefit plans.
4. Termination.
-----------
(a) The employment of the Executive under this Agreement may be
terminated by the Company upon giving the Executive ten days' prior written
notice if the Executive has been unable to discharge his essential job duties by
reason of illness or injury for either (A) a period of ninety (90) consecutive
days or (B) one hundred eighty (180) days in any twelve-month period. In the
event of any dispute regarding the existence of Executive's Disability
hereunder, the matter will be resolved by the determination of a majority of
three physicians qualified to practice medicine in New Jersey, one to be
selected by each of Executive and the Board and the third to be selected by the
two designated physicians. For this purpose, Executive will submit to
appropriate medical examinations.
(b) The employment of the Executive under this Agreement shall
terminate on the date of the Executive's death.
(c) The employment of the Executive under this Agreement may be
terminated by the Company for Cause. For purposes of this Agreement, "Cause"
shall mean (i) the willful failure or refusal by the Executive to perform his
duties hereunder which has not ceased within ten (10) business days after
written notice for substantial performance is delivered to the Executive by the
Company, which notice identifies the manner in which the Company believes that
the Executive has not performed such duties; (ii) the Executive shall
intentionally engage in misconduct toward the Company which is materially
injurious to the Company or its Subsidiaries, monetarily or otherwise
(including, but not limited to, conduct in violation of the confidentiality or
solicitation agreements herein or the non-competition agreement executed with
respect to the merger of Quality Botanical Ingredients, Inc. and the Company);
or (iii) the conviction of the Executive of or the entering of a plea of nolo
contendere by the Executive with respect to, a felony or a crime involving moral
turpitude.
(d) The employment of the Executive under this Agreement shall
terminate upon receipt by the Board of a written notice of resignation signed by
the Executive or, if no notice is given, on the date on which the Executive
voluntarily terminates his or her employment relationship with the Company.
(e) In addition to the circumstances described in subsections
(a), (b), (c) and (d) above, the Company may terminate the Executive's
employment for any reason or no reason and with or without cause or prior
notice.
-3-
<PAGE>
(f) If the Executive's employment is terminated pursuant to this
Section 4 or for any other reason, the Executive shall not be entitled to any
compensation or benefits from the Company, under Section 3 of this Agreement or
otherwise, except for the following:
(i) base salary and vacation pay accrued, and reasonable
business expenses incurred, under Section 3 of this Agreement through the date
of such termination;
(ii) such benefits, if any, as may be required to be
provided by the Company under the Comprehensive Omnibus Budget Reconciliation
Act (COBRA);
(iii) if the Executive's employment is terminated pursuant
to subsection (e) above, the Company shall continue to pay to the Executive the
base salary described in Section 3(a) above and his automobile allowance
described in Section 3(e) above until the earlier of (A) twelve (12) months
following such termination or (B) the termination date set forth in Section
1(a)(i) of this Agreement; and
(iv) if the Executive's employment is terminated pursuant
to subsections (a), (b) or (e) above or subsection (g) below, one-half of his
then uninvested employee stock options granted pursuant to his employment by the
Company shall immediately vest.
(g) The Executive may terminate his employment hereunder for
"Good Reason" (as hereinafter defined).
- ------------
(i) For purposes of this Agreement, "Good Reason" shall
mean a termination of the Executive's employment by the Executive within 180
days after the occurrence of any of the following after a "Change in Control"
-----------------
(as hereinafter defined): (A) a reduction in the Executive's base salary then in
effect; (B) a material reduction in the Executive's positions, duties and
responsibilities from those described in Section 1(a) of this Agreement; or (C)
the failure of the Company to obtain the assumption of this Agreement by any
successor to the extent required pursuant to Section 12(a) of this Agreement.
(ii) For purposes of this Agreement, the term "Change in
Control" shall mean the occurrence of any of the following events with respect
to the Company, other than with the consent of the Company's Board of Directors:
(A) All or substantially all of the assets of the
Company are sold or transferred to another corporation or entity; or
(B) The Company is sold, transferred, merged,
consolidated or reorganized into or with another corporation or entity,
with the result that upon conclusion of the transaction less than a
majority of the outstanding securities entitled to vote generally in the
election of directors or other capital interests of the acquiring
corporation or entity are owned, directly or indirectly, by the
shareholders of the Company immediately prior to the sale, transfer,
merger, consolidation, venture or reorganization; or
(C) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report), each as
promulgated
-4-
<PAGE>
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
--------
Act"), disclosing that any person (as the term "person" is used in Section
---
13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial
owner (as the term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange Act) of
securities representing more than 50% of the combined voting power of the
then-outstanding voting securities of the Company; or
(D) The Company shall file a report or proxy statement
with the Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Item 1 of Form 8-K thereunder or Item 14 of
Schedule 14A thereunder (or any successor schedule, form or report or item
therein) that a change in control of the Company has or may have occurred
or will or may occur in the future pursuant to any then-existing contract
or transaction; or
(E) The individuals who, at the beginning of any
period of two consecutive calendar years, constituted members of the Board
cease for any reason to constitute at least a majority thereof unless the
nomination for election by the Company's stockholders of each new director
of the Company was approved by a vote of at least two-thirds of the
directors of the Company still in office who were Directors of the Company
at the beginning of any such period.
(iii) Notwithstanding the foregoing, a termination shall
not be treated as a termination for Good Reason (A) if the Executive shall have
specifically consented in writing to the occurrence of the event giving rise to
the claim of termination for Good Reason or (B) except pursuant to a failure of
the Company pursuant to Section 4(g)(i)(C) above, unless the Executive, within
30 days after receiving written notice from the Company specifying in reasonable
detail the occurrence of one of such events, shall have delivered a written
notice to the Company stating that he intends to terminate his employment for
Good Reason and specifying the factual basis for such termination and such
event, if capable of being cured, shall not have been cured within 30 days of
the receipt by the Company of such notice.
(iv) If the Executive shall terminate his employment for
Good Reason pursuant to this subsection (g), the Company shall pay the Executive
(or, in the event of his death, his devisee, legatee or, if there is none, his
estate) a lump-sum amount equal to the lesser of (A) the Executive's monthly
base salary in effect on the date of the Change in Control, multiplied by a
factor of twelve (12), or (B) the Executive's monthly base salary in effect on
the date of the Change in Control, multiplied by the number of months remaining
until the termination date set forth in Section 1(a)(i) of this Agreement. The
Executive will also be entitled to any vested benefits under any employee
benefit plans.
(h) As a condition to and in consideration of the payments under
subsections (f) and (g) hereof, the Executive and the Company shall execute a
mutual general release as to both known and unknown matters occurring prior to
the date of termination.
(i) Upon the termination of the Executive's employment
hereunder, he shall have the right, exercisable within 30 days thereafter, upon
reimbursement to the Company of the cash value, if any, of any policy, to assume
(if permitted by the policy terms) and be assigned any life or disability
insurance for the Executive.
-5-
<PAGE>
5. Executive's and Company's Representations.
-----------------------------------------
(a) The Executive and the Company represent that they each,
respectively, have full authority to enter into this Agreement and that they are
free to enter into this Agreement and not under any contractual restraint which
would prohibit them from satisfactorily performing their duties under this
Agreement.
(b) Each hereby agrees to indemnify and hold harmless the other
from and against any losses, liabilities, damages or costs (including reasonable
attorney's fees) arising out of a breach, or claimed breach, of any of the
representations, warranties and covenants set forth in this Agreement.
(c) The Executive acknowledges that he is free to seek advice
from independent counsel with respect to this Agreement. The Executive has
either obtained such advice or, after carefully reviewing this Agreement, has
decided to forego such advice. The Executive is not relying on any
representation or advice from the Company or any of its officers, directors,
attorneys or other representatives regarding this Agreement, its content or
effect.
6. Confidentiality; Non-Solicitation.
---------------------------------
(a) Disclosure. The Executive acknowledges that, in the
----------
performance of duties on behalf of the Company, the Executive shall have access
to, receive and be entrusted with confidential information, including but in no
way limited to development, marketing, organizational, financial, management,
administrative, production, distribution and sales information, data,
specifications and processes presently owned or at any time in the future
developed by, the Company or its agents or consultants, or used presently or at
any time in the future in the course of its business that is not otherwise part
of the public domain (collectively, the "Confidential Material"). All such
Confidential Material is considered secret and will be available to the
Executive in confidence. Except in the performance of the Executive's duties on
behalf of the Company, the Executive shall not, directly or indirectly for any
reason whatsoever, disclose or use any such Confidential Material, unless such
Confidential Material ceases (through no fault of Executive's) to be
confidential because it has become part of the public domain. All records,
files, drawings, documents, equipment and other tangible items, wherever
located, relating in any way to the Confidential Material or otherwise to the
Company's business, which the Executive prepares, uses, or encounters, shall be
and remain the Company's sole and exclusive property and shall be included in
the Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, the Executive shall promptly deliver to the
Company any and all of the Confidential Material not previously delivered to the
Company that may be or at any previous time has been in the Executive's
possession or under the Executive's control.
(b) Unfair Competition. The Executive hereby acknowledges that
------------------
the sale or unauthorized use or disclosure of any of the Company's Confidential
Material by Executive by any means whatsoever at any time before, during or
after the Executive's employment with the Company shall constitute "Unfair
Competition." The Executive agrees that the Executive shall not engage in
Unfair Competition either during the time the Executive is employed by the
Company or at any time thereafter.
-6-
<PAGE>
(c) Other. In the event of the termination of the Executive's
-----
employment for any reason, the Executive (and any corporation or entity of which
the Executive is a director, officer, employee or greater than ten percent (10%)
shareholder) shall not, directly or indirectly, for a period of two (2) years
from the date of such termination:
(i) solicit for employment and/or employ any employee of
the Company or any of its affiliates or Subsidiaries (or any such employee who
has been employed by the Company during the six (6) month period prior to the
termination of this Agreement) or induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company or any Subsidiary
to cease doing business with the Company or such Subsidiary or interfere in any
way with the relationship between any such customer, supplier, licensee or
business relation and the Company or any Subsidiary; or
(ii) make any public statement concerning the Company, any
of its affiliates or subsidiaries, or the Executive's employment unless
previously approved by the Company, except as may be required by law.
(d) In the event of the breach or a threatened breach by the
Executive of any of the provisions of this Section 6, the Company, in addition
and supplementary to other rights and remedies existing in its favor, may apply
to any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions thereof (without posting a bond or other security).
(e) Upon termination of this Agreement, the Executive shall be
deemed to have resigned from all offices and directorships then held with the
Company or any affiliate entity.
7. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement or any breach hereof or the Executive's employment by the
Company or termination thereof, shall be settled by arbitration by one
arbitrator in accordance with the rules of the American Arbitration Association,
and judgment upon such award rendered by the arbitrator may be entered in any
court having jurisdiction thereof. The arbitration shall be held in New York,
New York or such other place as may be agreed upon at the time by the parties to
the arbitration.
8. Mitigation of Damages. In the event of any termination of the
---------------------
Executive's employment by the Company, the Executive may but shall not be
required to seek other employment to mitigate damages.
9. Equitable Relief. The Executive acknowledges that the Company is
----------------
relying for its protection upon the existence and validity of the provisions of
this Agreement, that the services to be rendered by the Executive are of a
special, unique and extraordinary character, and that irreparable injury will
result to the Company from any violation or continuing violation of the
provisions of this Agreement for which damages may not be an adequate remedy.
Accordingly, the Executive hereby agrees that in addition to the remedies
available to the Company by law or under this Agreement, the Company shall be
entitled to obtain such equitable relief as may be permitted by law in a court
of competent jurisdiction including, without limitation, injunctive relief from
any violation or continuing violation by the Executive of any term or provision
of this Agreement. In addition, nothing herein shall prevent either party from
seeking declaratory relief with respect to any obligation herein. In
-7-
<PAGE>
the event of an action pursuant to this Agreement, the prevailing party shall be
entitled to its costs and expenses, including reasonable attorneys' fees.
10. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the internal substantive laws (and not the laws
of conflicts) of the State of New Jersey.
11. Entire Agreement. This Agreement constitutes the whole agreement
----------------
of the parties hereto in reference to any employment of the Executive by the
Company and in reference to any of the matters or things herein provided for or
hereinabove discussed or mentioned in reference to such employment; all prior
agreements, promises, representations and understandings relative thereto being
herein merged.
12. Assignability.
-------------
(a) In the event the Company shall merge or consolidate with any
other corporation, partnership or business entity, or all or substantially all
of the Company's business or assets shall be transferred in any manner to any
other corporation, partnership or business entity, then such successor to the
Company shall thereupon succeed to, and be subject to, all rights, interests,
duties and obligations of, and shall thereafter be deemed for all purposes
hereof to be, the "Company" under this Agreement. This Agreement shall inure to
the benefit of and be enforceable by Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Executive should die, any amounts payable to him
hereunder shall be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, if there be no such
designee, to his estate.
(b) This Agreement is personal in nature and the Executive shall
not, without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing
expressed or implied in this Agreement is intended or shall be construed to
confer upon or give to any person, other than the parties to this Agreement, any
right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition of this Agreement.
13. Amendments; Waivers. This Agreement may be amended, modified,
-------------------
superseded, canceled, renewed or extended and the terms or covenants of this
Agreement may be waived only by a written instrument executed by the parties to
this Agreement or, in the case of a waiver, by the party waiving compliance.
Any such written instrument must be approved by the Board to be effective as
against the Company. The failure of any party at any time or times to require
performance of any provision of this Agreement shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of the breach
of any term or provision contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such breach, or a waiver of the breach of
any other term or covenant contained in this Agreement.
14. Notice. All notices, requests or consents required or permitted
------
under this Agreement shall be made in writing and shall be given to the other
parties by personal delivery, overnight air courier or certified mail (with
receipt signature), sent to such parties'
-8-
<PAGE>
addresses as are set forth below such parties' signatures to this Agreement, or
such other addresses of which the parties have given notice pursuant to this
Section 14. Each such notice, request or consent shall be deemed effective upon
the date of actual receipt, receipt signature or confirmation of transmission,
as applicable.
15. Severability. Any provision of this Agreement that is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. Survival. The representations and agreements of the parties set
--------
forth in Sections 5, 6, 7, 8 and 9 of this Agreement shall survive the
expiration or termination of this Agreement (irrespective of the reason for such
expiration of termination).
[SIGNATURE PAGE FOLLOWS]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Employment Agreement as of the date first above written.
ADVANCED NUTRACEUTICALS, INC.,
a Delaware corporation
By:________________________________
Name: _________________________
Title: _________________________
Address for Notices:
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Mr. Barry Loder
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
555 S. Flower Street, 23rd Floor
Los Angeles, CA 90071-2371
Facsimile: (213) 627-0705
Attention: David L. Gersh
_______________________________
JOSEPH SCHORTZ
Address for Notices:
C/o Quality Botanical Ingredients, Inc.
500 Metuchen Road
South Plainfield, New Jersey 07080
Facsimile: (908) 561-9682
with a copy to:
McLaughlin Bennett Gelson & Cramer, P.C.
1305 Campus Parkway
Neptune, NJ 07753
Facsimile: (732) 919-1240
Attention: John F. Gelson, Esq.
-10-
<PAGE>
EXHIBIT 10.6
------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
---------
__________, 1998 between AC Acquisition Co., Inc., a Delaware corporation (the
"Company") and David Chang (the "Executive").
- -------- ---------
R E C I T A L S
- - - - - - - -
A. This Agreement is entered into in connection with the acquisition
by the Company of ACTA Products Corporation and ACTA Products International,
Inc., California corporations (collectively, "ACTA"), pursuant to that certain
Agreement and Plan of Merger dated _________, 1998 (the "Merger Agreement") by
----------------
and among the Company, its wholly-owned subsidiary AC Acquisition Co., Inc., a
Delaware corporation, ACTA, and the shareholders of ACTA.
B. The Company desires to employ the Executive, and the Executive
desires to be so employed by the Company, on the terms and subject to the
conditions set forth in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth in this Agreement, the Company and the Executive hereby agree
as follows:
1. Employment.
----------
(a) Subject to the terms and conditions contained herein, the
Company employs the Executive, and the Executive accepts such employment, from
the date hereof until the earlier of (i) ________, 2001 or (ii) the date such
employment is terminated pursuant to Section 4 of this Agreement. During the
Executive's employment under this Agreement, the Executive shall perform such
duties for the Company as may from time to time be assigned to the Executive by
the Board of Directors of the Company (the "Board"), commensurate with his
offices with the Company. The Executive shall have the title of President and
such other titles as from time to time may be assigned to the Executive by the
Board.
(b) Except as set forth in Section 1(c) hereof, the Executive
will devote his entire business time, energy, attention and skill to the
services of the Company and its affiliates and to the promotion of their
interests. So long as the Executive is employed by the Company, the Executive
shall not, without the written consent of the Company:
(i) engage in any other activity for compensation, profit or
other pecuniary advantage, whether received during or after the term of this
Agreement;
<PAGE>
(ii) render or perform services of a business, professional,
or commercial nature other than to or for the Company, either alone or as an
employee, consultant, director, officer, or partner of another business entity,
whether or not for compensation, and whether or not such activity, occupation or
endeavor is similar to, competitive with, or adverse to the business or welfare
of the Company; or
(iii) invest in or become a shareholder of another corporation
or other entity; provided, that the Executive's investment solely as a
shareholder in another corporation (of which he is not a director, to which he
is not a consultant and with which he has no other relationship) shall not be
prohibited hereby so long as such investment is not in excess of two percent
(2%) of any class of shares that are traded on a national securities exchange or
quoted on the NASDAQ National Market or ten percent (10%) of a privately held
entity.
2. Location of Employment. The Executive's principal place of
----------------------
employment shall be at the executive offices of the Company located in
Sunnyvale, California or in the same general area; provided, that at the
--------
direction of the Board, the Executive may from time to time be required to
travel to various domestic and foreign locations.
3. Compensation.
------------
(a) In exchange for full performance of the Executive's
obligations and duties under this Agreement, the Company shall pay the Executive
a base salary at a monthly rate of $12,500.00 payable in accordance with the
Company's standard payroll practices. In any month in which the Executive shall
be employed for less than the entire number of days in such month, the
compensation payable under this Section 3(a) shall be prorated on the basis of
the number of days during which the Executive was actually employed divided by
the number of days in such month. The base salary described in subsection (a)
hereof is a gross amount, and the Company shall be required to withhold from
such amount deductions with respect to Federal, state and local taxes, FICA,
unemployment compensation taxes and similar taxes, assessments or withholding
requirements.
(b) In addition to the base salary, Executive shall be entitled to
a performance bonus (the "Bonus") at the discretion of the Board.
-----
(c) During the Executive's employment under this Agreement, the
Executive shall also be reimbursed by the Company for reasonable business
expenses actually incurred or paid by the Executive, consistent with the
policies established by the Board, in rendering to the Company the services
provided for in this Agreement, upon presentation of expense statements or such
other supporting information as is consistent with the policies of the Company.
(d) The Executive shall be entitled to 20 business days vacation
for each full year of employment under this Agreement, which vacation time will
accrue in accordance with the vacation policy of the Company.
-2-
<PAGE>
(e) The Executive shall be entitled to participate in all benefit
plans (including deferred compensation plans and any medical, dental or life
insurance plans) which shall be available from time to time to the senior
management employees of the Company generally, except to the extent such
participation in any plan would alter the intended tax treatment of such plan;
provided, however, that the Executive shall have no right under this Agreement
- -------- -------
to participate in the initial grant of any additional stock option, stock
purchase or other plan relating to shares of capital stock of the Company or its
affiliates. The Executive acknowledges and agrees that the Board may in its
discretion terminate at any time or modify from time to time any such benefit
plans.
(f) The Executive shall be entitled to a car allowance of seven
hundred fifty dollars ($750) per month. The Company shall provide auto
insurance.
4. Termination.
-----------
(a) The employment of the Executive under this Agreement may be
terminated by the Company immediately upon giving the Executive notice if the
Executive has been unable to discharge his essential job duties by reason of
illness or injury for either (A) a period of ninety (90) consecutive days or (B)
one hundred eighty (180) days in any twelve-month period. In the event of any
dispute regarding the existence of Executive's Disability hereunder, the matter
will be resolved by the determination of a majority of three physicians
qualified to practice medicine in Los Angeles, one to be selected by each of
Executive and the Board and the third to be selected by the two designated
physicians. For this purpose, Executive will submit to appropriate medical
examinations.
(b) The employment of the Executive under this Agreement shall
terminate on the date of the Executive's death.
(c) The employment of the Executive under this Agreement may be
terminated by the Company for Cause. For purposes of this Agreement, "Cause"
shall mean (i) the willful and unreasonable failure or refusal by the Executive
to perform his duties hereunder which has not ceased within ten (10) business
days after written demand for substantial performance is delivered to the
Executive by the Company, which demand identifies the manner in which the
Company believes that the Executive has not performed such duties; (ii) the
Executive shall intentionally engage in misconduct toward the Company which is
materially injurious to the Company or its Subsidiaries, monetarily or otherwise
(including, but not limited to, conduct in violation of the confidentiality or
solicitation agreements herein or the non-competition agreement executed with
respect to the merger of ACTA and the Company); or (iii) the conviction of the
Executive of or the entering of a plea of nolo contendere by the Executive with
respect to, a felony or a crime involving moral turpitude.
(d) The employment of the Executive under this Agreement shall
terminate upon receipt by the Board of a written notice of resignation signed by
the Executive or, if no notice is given, on the date on which the Executive
voluntarily terminates his employment relationship with the Company.
-3-
<PAGE>
(e) In addition to the circumstances described in subsections
(a), (b), (c) and (d) above, the Company may terminate the Executive's
employment for any reason or no reason and with or without cause or prior
notice.
(f) If the Executive's employment is terminated pursuant to this
Section 4 or for any other reason, the Executive shall not be entitled to any
compensation or benefits from the Company, under Section 3 of this Agreement or
otherwise, except for the following:
(i) base salary and vacation pay accrued, and reasonable
business expenses incurred, under Section 3 of this Agreement through the date
of such termination;
(ii) such benefits, if any, as may be required to be provided
by the Company under the Comprehensive Omnibus Budget Reconciliation Act
(COBRA); and
(iii) if the Executive's employment is terminated pursuant to
subsection (e) above, the Company shall continue to pay to the Executive the
base salary described in Section 3(a) above until the earlier of (A) twelve (12)
months following such termination or (B) the termination date set forth in
Section 1(a)(i) of this Agreement.
(g) Executive may terminate his employment hereunder for "Good
----
Reason" (as hereinafter defined).
- ------
(i) For purposes of this Agreement, "Good Reason" shall mean:
(A) a reduction in Executive's base salary then in effect; (B) a material
reduction in Executive's positions, duties and responsibilities from those
described in Section 1(a) of this Agreement; or (C) the failure of the Company
to obtain the assumption of this Agreement by any successor to the extent
required pursuant to Section 12(a) of this Agreement.
(ii) Notwithstanding the foregoing, a termination shall not
be treated as a termination for Good Reason (A) if Executive shall have
specifically consented in writing to the occurrence of the event giving rise to
the claim of termination for Good Reason or (B) unless Executive, within 30 days
after the occurrence of one of such events, shall have delivered a written
notice to the Company stating that he intends to terminate his employment for
Good Reason and specifying the factual basis for such termination and such
event, if capable of being cured, shall not have been cured within 30 days of
the receipt by the Company of such notice.
(iii) If Executive shall terminate his employment for Good
Reason pursuant to this subsection (g), the Company shall pay Executive (or, in
the event of his death, his devisee, legatee or, if there is none, his estate) a
lump-sum amount equal to the lesser of (A) the Executive's monthly base salary
in effect on the date of termination, multiplied by a factor of twelve (12), or
(B) the Executive's monthly base salary in effect on the date of termination,
multiplied by the number of months remaining until the termination date set
forth in Section 1(a)(i) of this Agreement. Executive will also be entitled to
any vested benefits under any employee benefit plans.
-4-
<PAGE>
(h) As a condition to and in consideration of the payments under
subsections (f) and (g) hereof, the Executive shall execute a general release as
to both known and unknown matters occurring prior to the date of termination.
5. Executive's Representations.
---------------------------
(a) The Executive represents that he has full authority to enter
into this Agreement and that he is free to enter into this Agreement and not
under any contractual restraint which would prohibit the Executive from
satisfactorily performing his duties to the Company under this Agreement.
(b) The Executive hereby agrees to indemnify and hold harmless
the Company, its officers, directors and stockholders from and against any
losses, liabilities, damages or costs (including reasonable attorney's fees)
arising out of a breach, or claimed breach, of any of the representations,
warranties and covenants of the Executive set forth in this Agreement.
(c) The Executive acknowledges that he is free to seek advice
from independent counsel with respect to this Agreement. The Executive has
either obtained such advice or, after carefully reviewing this Agreement, has
decided to forego such advice. The Executive is not relying on any
representation or advice from the Company or any of its officers, directors,
attorneys or other representatives regarding this Agreement, its content or
effect.
6. Confidentiality; Non-Solicitation.
---------------------------------
(a) Disclosure. The Executive acknowledges that, in the
----------
performance of duties on behalf of the Company, the Executive shall have access
to, receive and be entrusted with confidential information, including but in no
way limited to development, marketing, organizational, financial, management,
administrative, production, distribution and sales information, data,
specifications and processes presently owned or at any time in the future
developed by, the Company or its agents or consultants, or used presently or at
any time in the future in the course of its business that is not otherwise part
of the public domain (collectively, the "Confidential Material"). All such
Confidential Material is considered secret and will be available to the
Executive in confidence. Except in the performance of the Executive's duties on
behalf of the Company, the Executive shall not, directly or indirectly for any
reason whatsoever, disclose or use any such Confidential Material, unless such
Confidential Material ceases (through no fault of Executive's) to be
confidential because it has become part of the public domain. All records,
files, drawings, documents, equipment and other tangible items, wherever
located, relating in any way to the Confidential Material or otherwise to the
Company's business, which the Executive prepares, uses, or encounters, shall be
and remain the Company's sole and exclusive property and shall be included in
the Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, the Executive shall promptly deliver to the
Company any and all of the Confidential Material not previously delivered to the
Company that may be or at any previous time has been in the Executive's
possession or under the Executive's control.
-5-
<PAGE>
(b) Unfair Competition. The Executive hereby acknowledges that the
------------------
sale or unauthorized use or disclosure of any of the Company's Confidential
Material by Executive by any means whatsoever at any time before, during or
after the Executive's employment with the Company shall constitute "Unfair
Competition." The Executive agrees that the Executive shall not engage in
Unfair Competition either during the time the Executive is employed by the
Company or at any time thereafter.
(c) Other. In the event of the termination of the Executive's
-----
employment for any reason, the Executive (and any corporation or entity of which
the Executive is a director, officer, employee or greater than ten percent (10%)
shareholder) shall not, directly or indirectly, for a period of two (2) years:
(i) solicit for employment and/or employ any employee, consultant,
agent or representative (an "employee") of the Company or any of its affiliates
or subsidiaries (or any such employee who has been "employed" by the Company
during the six (6) month period prior to the termination of this Agreement) or
induce or attempt to induce any customer, supplier, licensee or other business
relation of the Company or any Subsidiary to cease doing business with the
Company or such Subsidiary or interfere in any way with the relationship between
any such customer, supplier, licensee or business relation and the Company or
any Subsidiary; or
(ii) make any public statement concerning the Company, any of its
affiliates or subsidiaries, or the Executive's employment unless previously
approved by the Company, except as may be required by law.
(d) In the event of the breach or a threatened breach by the Executive
of any of the provisions of this Section 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions thereof (without posting a bond or other security).
(e) Upon termination of this Agreement, the Executive shall be deemed
to have resigned from all offices and directorships then held with the Company
or any affiliate entity.
7. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement or any breach hereof or the Executive's employment by the
Company or termination thereof, shall be settled by arbitration (other than
injunctive relief) by one arbitrator in accordance with the rules of the
American Arbitration Association, and judgment upon such award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
arbitration shall be held in San Francisco, California or such other place as
may be agreed upon at the time by the parties to the arbitration.
8. Mitigation of Damages. In the event of any termination of the
---------------------
Executive's employment by the Company, the Executive shall not be required to
seek other employment to mitigate damages.
-6-
<PAGE>
9. Equitable Relief. The Executive acknowledges that the Company is
----------------
relying for its protection upon the existence and validity of the provisions of
this Agreement, that the services to be rendered by the Executive are of a
special, unique and extraordinary character, and that irreparable injury will
result to the Company from any violation or continuing violation of the
provisions of this Agreement for which damages may not be an adequate remedy.
Accordingly, the Executive hereby agrees that in addition to the remedies
available to the Company by law or under this Agreement, the Company shall be
entitled to obtain such equitable relief (without bond) as may be permitted by
law in a court of competent jurisdiction including, without limitation,
injunctive relief from any violation or continuing violation by the Executive of
any term or provision of this Agreement. In the event of an action pursuant to
this Agreement, the prevailing party shall be entitled to its costs and
expenses, including reasonable attorneys' fees.
10. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the internal substantive laws (and not the laws
of conflicts) of the State of Delaware.
11. Entire Agreement. This Agreement constitutes the whole agreement
----------------
of the parties hereto in reference to any employment of the Executive by the
Company and in reference to any of the matters or things herein provided for or
hereinabove discussed or mentioned in reference to such employment; all prior
agreements, promises, representations and understandings relative thereto being
herein merged.
12. Assignability.
-------------
(a) In the event the Company shall merge or consolidate with any
other corporation, partnership or business entity, or all or substantially all
of the Company's business or assets shall be transferred in any manner to any
other corporation, partnership or business entity, then such successor to the
Company shall thereupon succeed to, and be subject to, all rights, interests,
duties and obligations of, and shall thereafter be deemed for all purposes
hereof to be, the "Company" under this Agreement. This Agreement shall inure to
the benefit of and be enforceable by Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Executive should die, any amounts payable to him
hereunder shall be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, if there be no such
designee, to his estate.
(b) This Agreement is personal in nature and the Executive shall
not, without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing
expressed or implied in this Agreement is intended or shall be construed to
confer upon or give to any person, other than the parties to this Agreement, any
right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition of this Agreement.
13. Amendments; Waivers. This Agreement may be amended, modified,
-------------------
superseded, canceled, renewed or extended and the terms or covenants of this
Agreement may be waived only by a written instrument executed by the parties to
this Agreement or,
-7-
<PAGE>
in the case of a waiver, by the party waiving compliance. Any such written
instrument must be approved by the Board to be effective as against the Company.
The failure of any party at any time or times to require performance of any
provision of this Agreement shall in no manner affect the right at a later time
to enforce the same. No waiver by any party of the breach of any term or
provision contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such breach, or a waiver of the breach of any other
term or covenant contained in this Agreement.
14. Notice. All notices, requests or consents required or permitted
------
under this Agreement shall be made in writing and shall be given to the other
parties by personal delivery, overnight air courier (with receipt signature) or
facsimile transmission (with "answerback" confirmation of transmission), sent to
such parties' addresses or telecopy numbers as are set forth below such parties'
signatures to this Agreement, or such other addresses or telecopy numbers of
which the parties have given notice pursuant to this Section 14. Each such
notice, request or consent shall be deemed effective upon the date of actual
receipt, receipt signature or confirmation of transmission, as applicable.
15. Severability. Any provision of this Agreement that is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. Survival. The representations and agreements of the parties set
--------
forth in Sections 5, 6, 7, 8 and 9 of this Agreement shall survive the
expiration or termination of this Agreement (irrespective of the reason for such
expiration of termination).
[SIGNATURE PAGE FOLLOWS]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Employment Agreement as of the date first above written.
AC ACQUISITION CO., INC.,
a Delaware corporation
By:_________________________
Name: __________________
Title: __________________
Address for Notices:
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Mr. Barry Loder
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
555 So. Flower Street, 23rd Floor
Los Angeles, CA 90071-2371
Facsimile: (213) 627-0705
Attention: David L. Gersh
_______________________________
DAVID CHANG
Address for Notices:
1131 N. Fair Oaks Avenue
Sunnyvale, California 94089
Facsimile: (408) 734-1149
-9-
<PAGE>
EXHIBIT 10.9
------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
---------
_______, 1998 between [NL Acquisition Co., Inc.], a Delaware corporation (the
"Company") and Brett Richman (the "Executive").
- -------- ---------
R E C I T A L S
- - - - - - - -
A. This Agreement is entered into in connection with the acquisition
by the Company of Northridge Laboratories, Inc., a California corporation ("NL")
pursuant to that certain Agreement and Plan of Merger dated ______, 1998 (the
"Merger Agreement") by and among the Company, its wholly-owned subsidiary NL
- -----------------
Acquisition Co., Inc., a Delaware corporation, NL, and the shareholders of NL.
B. The Company desires to employ the Executive, and the Executive
desires to be so employed by the Company, on the terms and subject to the
conditions set forth in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth in this Agreement, the Company and the Executive hereby agree
as follows:
1. Employment.
----------
(a) Subject to the terms and conditions contained herein, the
Company employs the Executive, and the Executive accepts such employment, from
the date hereof until the earlier of (i) ________, 2000 or (ii) the date such
employment is terminated pursuant to Section 4 of this Agreement. During the
Executive's employment under this Agreement, the Executive shall perform such
duties for the Company as may from time to time be assigned to the Executive by
the Board of Directors of the Company (the "Board"). The Executive shall have
the title of President and such other titles as from time to time may be
assigned to the Executive by the Board. The Executive will report to the Board,
which will include the President of [parent].
------
(b) The Executive will devote his entire business time, energy,
attention and skill to the services of the Company and its affiliates and to the
promotion of their interests. So long as the Executive is employed by the
Company, the Executive shall not, without the written consent of the Company:
(i) engage in any other activity for compensation, profit or
other pecuniary advantage, whether received during or after the term of this
Agreement; provided, however, the Executive may spend a small portion of his
time in the purchase and sale of antiques for profit so long as such activity
does not materially affect the performance of his duties hereunder.
(ii) render or perform services of a business, professional,
or commercial nature other than to or for the Company, either alone or as an
employee,
<PAGE>
consultant, director, officer, or partner of another business entity, whether or
not for compensation, and whether or not such activity, occupation or endeavor
is similar to, competitive with, or adverse to the business or welfare of the
Company; or
(iii) invest in or become a shareholder of another
corporation or other entity; provided, that the Executive's investment solely as
--------
a shareholder in another corporation shall not be prohibited hereby so long as
such investment (i) is not in excess of two percent (2%) of any class of shares
that are traded on a national securities exchange or quoted on the NASDAQ
National Market, or (ii) in any privately-held entity where he is solely a
passive investor, does not serve as an officer, director or consultant, and
where his investment is not in excess of ten percent (10%) of any class of
securities.
(c) The Executive may continue his past practice of managing
the affairs of the Company during the winter seasons from his home in Vail,
Colorado, for a significant portion of the time, so long as there is not a
material adverse effect on the Company or its business.
(d) The Executive shall make up to four one-month trips to Asia
annually to conduct the business of the Company, or at the request of [the
---
President of parent], the business of [parent] or its affiliates.
- ------------------- ------
2. Location of Employment. The Executive's principal place of
----------------------
employment, subject to Section 1(c) above, shall be at the executive offices of
the Company located in Chatsworth, California, or in the same general area;
provided, that at the direction of the Board, the Executive may from time to
- --------
time be required to travel to various domestic and foreign locations.
3. Compensation.
------------
(a) In exchange for full performance of the Executive's
obligations and duties under this Agreement, the Company shall pay the Executive
a base salary at a monthly rate of $20,833.33, payable in accordance with the
Company's standard payroll practices. In any month in which the Executive shall
be employed for less than the entire number of days in such month, the
compensation payable under this Section 3(a) shall be prorated on the basis of
the number of days during which the Executive was actually employed divided by
the number of days in such month. The base salary described in subsection (a)
hereof is a gross amount, and the Company shall be required to withhold from
such amount deductions with respect to Federal, state and local taxes, FICA,
unemployment compensation taxes and similar taxes, assessments or withholding
requirements.
(b) In addition to the base salary, Executive shall be entitled
to a performance bonus (the "Bonus") at the discretion of the Board.
-----
(c) During the Executive's employment under this Agreement, the
Executive shall also be reimbursed by the Company for reasonable business
expenses actually incurred or paid by the Executive, consistent with the
policies established by the Board, in rendering to the Company the services
provided for in this Agreement, upon presentation of expense statements or such
other supporting information as is consistent with the policies of the Company.
Expenses for Asian trips shall be consistent with past practice.
(d) The Executive shall be entitled to 20 business days
vacation for each full year of employment under this Agreement, which vacation
time will accrue in accordance with the vacation policy of the Company.
-2-
<PAGE>
(e) The Executive shall be entitled to participate in all benefit
plans (including deferred compensation plans and any medical, dental or life
insurance plans) which shall be available from time to time to the management
employees of the Company generally, except to the extent such participation in
any plan would alter the intended tax treatment of such plan; provided, however,
-------- -------
that the Executive shall have no right under this Agreement to participate in
any additional stock option, stock purchase or other plan relating to shares of
capital stock of the Company or its affiliates. The Executive acknowledges and
agrees that the Board may in its discretion terminate at any time or modify from
time to time any such benefit plans.
(f) The Company shall provide to the Executive the use of a 1998
BMW 740i (the "Car") and pay for normal gas, maintenance and insurance with
respect to the Car.
4. Termination.
-----------
(a) The employment of the Executive under this Agreement may be
terminated by the Company immediately upon giving the Executive notice if the
Executive has been unable to discharge his essential job duties by reason of
illness or injury for either (A) a period of ninety (90) consecutive days or (B)
one hundred eighty (180) days in any twelve-month period. In the event of any
dispute regarding the existence of Executive's Disability hereunder, the matter
will be resolved by the determination of a majority of three physicians
qualified to practice medicine in Los Angeles, one to be selected by each of
Executive and the Board and the third to be selected by the two designated
physicians. For this purpose, Executive will submit to appropriate medical
examinations.
(b) The employment of the Executive under this Agreement shall
terminate on the date of the Executive's death.
(c) The employment of the Executive under this Agreement may be
terminated by the Company for Cause. For purposes of this Agreement, "Cause"
shall mean (i) the willful failure or refusal by the Executive to perform his
duties hereunder which has not ceased within ten (10) business days after
written demand for substantial performance is delivered to the Executive by the
Company, which demand identifies the manner in which the Company believes that
the Executive has not performed such duties; (ii) the Executive shall
intentionally engage in misconduct toward the Company which is materially
injurious to the Company or its Subsidiaries, monetarily or otherwise
(including, but not limited to, conduct in violation of the confidentiality or
solicitation agreements herein or the non-competition agreement executed with
respect to the merger of Northridge Laboratories, Inc. and the Company); or
(iii) the conviction of the Executive of or the entering of a plea of nolo
contendere by the Executive with respect to, a felony or a crime involving moral
turpitude.
(d) The employment of the Executive under this Agreement shall
terminate upon receipt by the Board of a written notice of resignation signed by
the Executive or, if no notice is given, on the date on which the Executive
voluntarily terminates his or her employment relationship with the Company.
(e) In addition to the circumstances described in subsections
(a), (b), (c) and (d) above, the Company may terminate the Executive's
employment for any reason or no reason and with or without cause or prior
notice.
-3-
<PAGE>
(f) If the Executive's employment is terminated pursuant to this
Section 4 or for any other reason, the Executive shall not be entitled to any
compensation or benefits from the Company, under Section 3 of this Agreement or
otherwise, except for the following (or in subsection (g) hereof):
(i) base salary and vacation pay accrued, and reasonable
business expenses incurred, under Section 3 of this Agreement through the date
of such termination;
(ii) such benefits, if any, as may be required to be
provided by the Company under the Comprehensive Omnibus Budget Reconciliation
Act (COBRA); and
(iii) if the Executive's employment is terminated pursuant to
subsection (e) above, the Company shall continue to pay to the Executive the
base salary described in Section 3(a) above until the earlier of (A) twelve (12)
months following such termination or (B) the termination date set forth in
Section 1(a)(i) of this Agreement.
(iv) if the Executive's employment is terminated other than
pursuant to subsections (c) or (d) hereof or upon the termination of this
Agreement pursuant to subsection (g) hereof or upon the expiration of this
Agreement without renewal, as additional severance, the Executive shall be
assigned and transferred the Car.
(g) The Executive may terminate his employment hereunder for
"Good Reason" (as hereinafter defined).
- ------------
(i) For purposes of this Agreement, "Good Reason" shall mean:
(A) a reduction in the Executive's base salary then in effect; (B) a material
reduction in Executive's positions, duties and responsibilities from those
described in Section 1(a) of this Agreement; or (C) the failure of the Company
to obtain the assumption of this Agreement by any successor to the extent
required pursuant to Section 12(a) of this Agreement.
(ii) Notwithstanding the foregoing, a termination shall not
be treated as a termination for Good Reason (A) if Executive shall have
specifically consented in writing to the occurrence of the event giving rise to
the claim of termination for Good Reason or (B) unless Executive, within 30 days
after receiving written notice from the Company specifying in reasonable detail
the occurrence of one of such events, shall have delivered a written notice to
the Company stating that he intends to terminate his employment for Good Reason
and specifying the factual basis for such termination and such event, if capable
of being cured, shall not have been cured within 30 days of the receipt by the
Company of such notice.
(iii) If Executive shall terminate his employment for Good
Reason pursuant to this subsection (g), the Company shall pay Executive (or, in
the event of his death, his devisee, legatee or, if there is none, his estate) a
lump-sum amount equal to the lesser of (A) the Executive's monthly base salary
in effect on the date of termination, or (B) the Executive's monthly base salary
in effect on the date of termination, multiplied by the number of months
remaining until the termination date set forth in Section 1(a)(i) of this
Agreement. Executive will also be entitled to any vested benefits under any
employee benefit plans.
5. Executive's Representations.
---------------------------
-4-
<PAGE>
(a) The Executive represents that he has full authority to enter
into this Agreement and that he is free to enter into this Agreement and not
under any contractual restraint which would prohibit the Executive from
satisfactorily performing his duties to the Company under this Agreement.
(b) The Executive hereby agrees to indemnify and hold harmless
the Company, its officers, directors and stockholders from and against any
losses, liabilities, damages or costs (including reasonable attorney's fees)
arising out of a breach, or claimed breach, of any of the representations,
warranties and covenants of the Executive set forth in this Agreement.
(c) The Executive acknowledges that he is free to seek advice
from independent counsel with respect to this Agreement. The Executive has
either obtained such advice or, after carefully reviewing this Agreement, has
decided to forego such advice. The Executive is not relying on any
representation or advice from the Company or any of its officers, directors,
attorneys or other representatives regarding this Agreement, its content or
effect.
6. Confidentiality; Non-Solicitation.
---------------------------------
(a) Disclosure. The Executive acknowledges that, in the
----------
performance of duties on behalf of the Company, the Executive shall have access
to, receive and be entrusted with confidential information, including but in no
way limited to development, marketing, organizational, financial, management,
administrative, production, distribution and sales information, data,
specifications and processes presently owned or at any time in the future
developed by, the Company or its agents or consultants, or used presently or at
any time in the future in the course of its business that is not otherwise part
of the public domain (collectively, the "Confidential Material"); provided,
however, (i) information that has been published or is otherwise readily
available to the public other than by breach of this Agreement, (ii) information
that has been rightfully received by the Executive from a third party without
breach or confidential limitations, or (iii) the learned skill of the Executive
in formulating products, known to him prior to the date hereof, is not
Confidential Material. All such Confidential Material is considered secret and
will be available to the Executive in confidence. Except in the performance of
the Executive's duties on behalf of the Company, the Executive shall not,
directly or indirectly for any reason whatsoever, disclose or use any such
Confidential Material, unless such Confidential Material ceases (through no
fault of Executive's) to be confidential because it has become part of the
public domain. All records, files, drawings, documents, equipment and other
tangible items, wherever located, relating in any way to the Confidential
Material or otherwise to the Company's business, which the Executive prepares,
uses, or encounters, shall be and remain the Company's sole and exclusive
property and shall be included in the Confidential Material. Upon termination of
this Agreement by any means, or whenever requested by the Company, the Executive
shall promptly deliver to the Company any and all of the Confidential Material
not previously delivered to the Company that may be or at any previous time has
been in the Executive's possession or under the Executive's control.
(b) Unfair Competition. The Executive hereby acknowledges that
------------------
the sale or unauthorized use or disclosure of any of the Company's Confidential
Material by Executive by any means whatsoever at any time before, during or
after the Executive's employment with the Company shall constitute "Unfair
Competition." The Executive agrees that the Executive shall not engage in
Unfair Competition either during the time the Executive is employed by the
Company or at any time thereafter.
-5-
<PAGE>
(c) Other. In the event of the termination of the Executive's
-----
employment for any reason, the Executive (and any corporation or entity of which
the Executive is a director, officer, employee or greater than ten percent (10%)
shareholder) shall not, directly or indirectly, for a period of one (1) year:
(i) solicit for employment and/or employ any employee,
consultant, agent or representative (an "employee") of the Company or any of its
affiliates or subsidiaries (or any such employee who has been "employed" by the
Company during the six (6) month period prior to the termination of this
Agreement) or induce or attempt to induce any customer, supplier, licensee or
other business relation of the Company or any Subsidiary to cease doing business
with the Company or such Subsidiary or interfere in any way with the
relationship between any such customer, supplier, licensee or business relation
and the Company or any Subsidiary; or
(ii) make any public statement concerning the Company, any
of its affiliates or subsidiaries, or the Executive's employment unless
previously approved by the Company, except as may be required by law.
(d) In the event of the breach or a threatened breach by the Executive
of any of the provisions of this Section 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions thereof (without posting a bond or other security).
(e) Upon termination of this Agreement, the Executive shall be deemed
to have resigned from all offices and directorships then held with the Company
or any affiliate entity.
7. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement or any breach hereof or the Executive's employment by the
Company or termination thereof, shall be settled by arbitration (other than
injunctive relief) by one arbitrator who shall be a retired judge in accordance
with the rules of J.A.M.S./Endispute, and judgment upon such award rendered by
the arbitrator may be entered in any court having jurisdiction thereof. The
arbitration shall be held in Los Angeles, California or such other place as may
be agreed upon at the time by the parties to the arbitration.
8. Mitigation of Damages. In the event of any termination of the
---------------------
Executive's employment by the Company, the Executive shall not be required to
seek other employment to mitigate damages.
9. Equitable Relief. The Executive acknowledges that the Company is
----------------
relying for its protection upon the existence and validity of the provisions of
this Agreement, that the services to be rendered by the Executive are of a
special, unique and extraordinary character, and that irreparable injury will
result to the Company from any violation or continuing violation of the
provisions of this Agreement for which damages may not be an adequate remedy.
Accordingly, the Executive hereby agrees that in addition to the remedies
available to the Company by law or under this Agreement, the Company shall be
entitled to obtain such equitable relief (without bond) as may be permitted by
law in a court of competent jurisdiction including, without limitation,
injunctive relief from any violation or continuing violation by the Executive of
any term or provision of this Agreement. If any action (including arbitration)
shall be brought pursuant to this Agreement, the prevailing party shall be
entitled to its costs and expenses, including reasonable attorneys' fees.
-6-
<PAGE>
10. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the internal substantive laws (and not the laws
of conflicts) of the State of Delaware.
11. Entire Agreement. This Agreement constitutes the whole agreement
----------------
of the parties hereto in reference to any employment of the Executive by the
Company and in reference to any of the matters or things herein provided for or
hereinabove discussed or mentioned in reference to such employment; all prior
agreements, promises, representations and understandings relative thereto being
herein merged.
12. Assignability.
-------------
(a) In the event the Company shall merge or consolidate with any
other corporation, partnership or business entity, or all or substantially all
of the Company's business or assets shall be transferred in any manner to any
other corporation, partnership or business entity, then such successor to the
Company shall thereupon succeed to, and be subject to, all rights, interests,
duties and obligations of, and shall thereafter be deemed for all purposes
hereof to be, the "Company" under this Agreement. This Agreement shall inure to
the benefit of and be enforceable by Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Executive should die, any amounts payable to him
hereunder shall be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, if there be no such
designee, to his estate.
(b) This Agreement is personal in nature and the Executive shall
not, without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing
expressed or implied in this Agreement is intended or shall be construed to
confer upon or give to any person, other than the parties to this Agreement, any
right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition of this Agreement.
13. Amendments; Waivers. This Agreement may be amended, modified,
-------------------
superseded, canceled, renewed or extended and the terms or covenants of this
Agreement may be waived only by a written instrument executed by the parties to
this Agreement or, in the case of a waiver, by the party waiving compliance.
Any such written instrument must be approved by the Board to be effective as
against the Company. The failure of any party at any time or times to require
performance of any provision of this Agreement shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of the breach
of any term or provision contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such breach, or a waiver of the breach of
any other term or covenant contained in this Agreement.
14. Notice. All notices, requests or consents required or permitted
------
under this Agreement shall be made in writing and shall be given to the other
parties by personal delivery, overnight air courier (with receipt signature) or
facsimile transmission (with "answerback" confirmation of transmission), sent to
such parties' addresses or telecopy numbers as are set forth below such parties'
signatures to this Agreement, or such other addresses or telecopy numbers of
which the parties have given notice pursuant to this Section 14. Each such
notice, request or consent shall be deemed effective upon the date of actual
receipt, receipt signature or confirmation of transmission, as applicable.
-7-
<PAGE>
15. Severability. Any provision of this Agreement that is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. Survival. The representations and agreements of the parties set
--------
forth in Sections 5, 6, 7, 8 and 9 of this Agreement shall survive the
expiration or termination of this Agreement (irrespective of the reason for such
expiration of termination).
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Employment Agreement as of the date first above written.
[NL ACQUISITION CO., INC.],
a Delaware corporation
By:_________________________
Name: __________________
Title: __________________
Address for Notices:
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Mr. Barry Loder
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
555 So. Flower Street, 23rd Floor
Los Angeles, CA 90071-2371
Facsimile: (213) 627-0705
Attention: David L. Gersh, Esq.
_______________________________
BRETT RICHMAN
Address for Notices:
_______________________________
_______________________________
_______________________________
-8-
<PAGE>
EXHIBIT 10.10
-------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
---------
_______, 1998 between BP Acquisition Co., Inc., a Delaware corporation (the
"Company") and Pailla Reddy (the "Executive").
- -------- ---------
R E C I T A L S
- - - - - - - -
A. This Agreement is entered into in connection with the acquisition
by the Company of Bactolac Pharmaceuticals, Inc., a New York Corporation ("BP")
--
pursuant to that certain Agreement and Plan of Merger dated ______, 1998 (the
"Merger Agreement") by and among the Company, its wholly-owned subsidiary BP
- -----------------
Acquisition Co., Inc., a Delaware corporation, BP, and the shareholder of BP.
B. The Company desires to employ the Executive, and the Executive
desires to be so employed by the Company, on the terms and subject to the
conditions set forth in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the mutual
promises set forth in this Agreement, the Company and the Executive hereby agree
as follows:
1. Employment.
----------
(a) Subject to the terms and conditions contained herein, the Company
employs the Executive, and the Executive accepts such employment, from the date
hereof until the earlier of (i) ________, 2000 or (ii) the date such employment
is terminated pursuant to Section 4 of this Agreement. During the Executive's
employment under this Agreement, the Executive shall perform such duties for the
Company as may from time to time be assigned to the Executive by the Board of
Directors of the Company (the "Board"). The Executive shall have the title of
President and such other titles as from time to time may be assigned to the
Executive by the Board.
(b) The Executive will devote his entire business time, energy,
attention and skill to the services of the Company and its affiliates and to the
promotion of their interests; provided, however, the Executive may from time to
time render some services to Maxus Worldwide, Inc., which will not interfere in
any material respect with his duties to the Company. So long as the Executive
is employed by the Company, the Executive shall not, without the written consent
of the Company:
(i) engage in any other activity for compensation, profit or other
pecuniary advantage, whether received during or after the term of this
Agreement;
<PAGE>
(ii) ender or perform services of a business, professional, or
commercial nature other than to or for the Company, either alone or as an
employee, consultant, director, officer, or partner of another business entity,
whether or not for compensation, and whether or not such activity, occupation or
endeavor is similar to, competitive with, or adverse to the business or welfare
of the Company; or
(iii) invest in or become a shareholder of another corporation or
other entity; provided, that the Executive's investment solely as a shareholder
--------
in another corporation shall not be prohibited hereby so long as such investment
is not in excess of two percent (2%) of any class of shares that are traded on a
national securities exchange or quoted on the NASDAQ National Market; and,
provided further, shareholder may maintain his stock ownership interest in Maxus
- -------- -------
Worldwide, Inc., a company in the business of pharmaceuticals which Executive
represents is not in, nor will it enter, the nutritional supplement business.
2. Location of Employment. The Executive's principal place of
----------------------
employment shall be at the executive offices of the Company located in Westbury,
New York or in the same general area; provided, that at the direction of the
--------
Board, the Executive may from time to time be required to travel to various
domestic and foreign locations.
3. Compensation.
------------
(a) In exchange for full performance of the Executive's
obligations and duties under this Agreement, the Company shall pay the Executive
a base salary at a monthly rate of $16,666.66, payable in accordance with the
Company's standard payroll practices. In any month in which the Executive shall
be employed for less than the entire number of days in such month, the
compensation payable under this Section 3(a) shall be prorated on the basis of
the number of days during which the Executive was actually employed divided by
the number of days in such month. The base salary described in subsection (a)
hereof is a gross amount, and the Company shall be required to withhold from
such amount deductions with respect to Federal, state and local taxes, FICA,
unemployment compensation taxes and similar taxes, assessments or withholding
requirements.
(b) In addition to the base salary, Executive shall be entitled
to a performance bonus (the "Bonus") at the discretion of the Board.
-----
(c) During the Executive's employment under this Agreement, the
Executive shall also be reimbursed by the Company for reasonable business
expenses actually incurred or paid by the Executive, consistent with the
policies established by the Board, in rendering to the Company the services
provided for in this Agreement, upon presentation of expense statements or such
other supporting information as is consistent with the policies of the Company.
(d) The Executive shall be entitled to 15 business days vacation
for each full year of employment under this Agreement, which vacation time will
accrue in accordance with the vacation policy of the Company.
(e) The Executive shall be entitled to participate in all benefit
plans (including deferred compensation plans and any medical, dental or life
insurance plans) which shall be available from time to time to the domestic
management employees of the Company generally, except to the extent such
participation in any plan would alter the
-2-
<PAGE>
intended tax treatment of such plan; provided, however, that the Executive shall
-------- -------
have no right under this Agreement to participate in any additional stock
option, stock purchase or other plan relating to shares of capital stock of the
Company or its affiliates. The Executive acknowledges and agrees that the Board
may in its discretion terminate at any time or modify from time to time any such
benefit plans.
(f) The Executive shall be entitled to the continued use of the
car presently leased by Bactolac.
4. Termination.
-----------
(a) The employment of the Executive under this Agreement may be
terminated by the Company immediately upon giving the Executive notice if the
Executive has been unable to discharge his essential job duties by reason of
illness or injury for either (A) a period of ninety (90) consecutive days or (B)
one hundred eighty (180) days in any twelve-month period. In the event of any
dispute regarding the existence of Executive's Disability hereunder, the matter
will be resolved by the determination of a majority of three physicians
qualified to practice medicine in New York, one to be selected by each of
Executive and the Board and the third to be selected by the two designated
physicians. For this purpose, Executive will submit to appropriate medical
examinations.
(b) The employment of the Executive under this Agreement shall
terminate on the date of the Executive's death.
(c) The employment of the Executive under this Agreement may be
terminated by the Company for Cause. For purposes of this Agreement, "Cause"
shall mean (i) the willful failure or refusal by the Executive to perform his
duties hereunder which has not ceased within ten (10) business days after
written demand for substantial performance is delivered to the Executive by the
Company, which demand identifies the manner in which the Company believes that
the Executive has not performed such duties; (ii) the Executive shall
intentionally engage in misconduct toward the Company which is materially
injurious to the Company or its Subsidiaries, monetarily or otherwise
(including, but not limited to, conduct in violation of the confidentiality or
solicitation agreements herein or the non-competition agreement executed with
respect to the merger of Bactolac Pharmaceuticals, Inc. and the Company); or
(iii) the conviction of the Executive of or the entering of a plea of nolo
contendere by the Executive with respect to, a felony or a crime involving moral
turpitude.
(d) The employment of the Executive under this Agreement shall
terminate upon receipt by the Board of a written notice of resignation signed by
the Executive or, if no notice is given, on the date on which the Executive
voluntarily terminates his or her employment relationship with the Company.
(e) In addition to the circumstances described in subsections
(a), (b), (c) and (d) above, the Company may terminate the Executive's
employment for any reason or no reason and with or without cause or prior
notice.
(f) If the Executive's employment is terminated pursuant to this
Section 4 or for any other reason, the Executive shall not be entitled to any
compensation or benefits from the Company, under Section 3 of this Agreement or
otherwise, except for the following:
-3-
<PAGE>
(i) base salary and vacation pay accrued, and reasonable business
expenses incurred, under Section 3 of this Agreement through the date of such
termination;
(ii) such benefits, if any, as may be required to be provided by
the Company under the Comprehensive Omnibus Budget Reconciliation Act (COBRA);
and
(iii) if the Executive's employment is terminated pursuant to
subsection (e) above, the Company shall continue to pay to the Executive the
base salary described in Section 3(a) above until the earlier of (A) twelve (12)
months following such termination or (B) the termination date set forth in
Section 1(a)(i) of this Agreement.
(g) Executive may terminate his employment hereunder for "Good Reason"
---- ------
(as hereinafter defined).
(i) For purposes of this Agreement, "Good Reason" shall mean: (A)
a reduction in Executive's base salary then in effect; (B) a material reduction
in Executive's positions, duties and responsibilities from those described in
Section 1(a) of this Agreement; or (C) the failure of the Company to obtain the
assumption of this Agreement by any successor to the extent required pursuant to
Section 12(a) of this Agreement.
(ii) Notwithstanding the foregoing, a termination shall not
be treated as a termination for Good Reason (A) if Executive shall have
specifically consented in writing to the occurrence of the event giving rise to
the claim of termination for Good Reason or (B) unless Executive, within 30 days
after receiving written notice from the Company specifying in reasonable detail
the occurrence of one of such events, shall have delivered a written notice to
the Company stating that he intends to terminate his employment for Good Reason
and specifying the factual basis for such termination and such event, if capable
of being cured, shall not have been cured within 30 days of the receipt by the
Company of such notice.
(iii) If Executive shall terminate his employment for Good
Reason pursuant to this subsection (g), the Company shall pay Executive (or, in
the event of his death, his devisee, legatee or, if there is none, his estate) a
lump-sum amount equal to the lesser of (A) the Executive's monthly base salary
in effect on the date of termination, multiplied by a factor of twelve (12), or
(B) the Executive's monthly base salary in effect on the date of termination,
multiplied by the number of months remaining until the termination date set
forth in Section 1(a)(i) of this Agreement. Executive will also be entitled to
any vested benefits under any employee benefit plans.
(h) As a condition to and in consideration of the payments under
subsections (f) and (g) hereof, the Executive shall execute a general release as
to both known and unknown matters occurring prior to the date of termination.
5. Executive's Representations.
---------------------------
(a) The Executive represents that he has full authority to enter into
this Agreement and that he is free to enter into this Agreement and not under
any contractual restraint which would prohibit the Executive from satisfactorily
performing his duties to the Company under this Agreement.
-4-
<PAGE>
(b) The Executive hereby agrees to indemnify and hold harmless the
Company, its officers, directors and stockholders from and against any losses,
liabilities, damages or costs (including reasonable attorney's fees) arising out
of a breach, or claimed breach, of any of the representations, warranties and
covenants of the Executive set forth in this Agreement.
(c) The Executive acknowledges that he is free to seek advice from
independent counsel with respect to this Agreement. The Executive has either
obtained such advice or, after carefully reviewing this Agreement, has decided
to forego such advice. The Executive is not relying on any representation or
advice from the Company or any of its officers, directors, attorneys or other
representatives regarding this Agreement, its content or effect.
6. Confidentiality; Non-Solicitation.
---------------------------------
(a) Disclosure. The Executive acknowledges that, in the
----------
performance of duties on behalf of the Company, the Executive shall have access
to, receive and be entrusted with confidential information, including but in no
way limited to development, marketing, organizational, financial, management,
administrative, production, distribution and sales information, data,
specifications and processes presently owned or at any time in the future
developed by, the Company or its agents or consultants, or used presently or at
any time in the future in the course of its business that is not otherwise part
of the public domain (collectively, the "Confidential Material"). All such
Confidential Material is considered secret and will be available to the
Executive in confidence. Except in the performance of the Executive's duties on
behalf of the Company, the Executive shall not, directly or indirectly for any
reason whatsoever, disclose or use any such Confidential Material, unless such
Confidential Material ceases (through no fault of Executive's) to be
confidential because it has become part of the public domain. All records,
files, drawings, documents, equipment and other tangible items, wherever
located, relating in any way to the Confidential Material or otherwise to the
Company's business, which the Executive prepares, uses, or encounters, shall be
and remain the Company's sole and exclusive property and shall be included in
the Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, the Executive shall promptly deliver to the
Company any and all of the Confidential Material not previously delivered to the
Company that may be or at any previous time has been in the Executive's
possession or under the Executive's control.
(b) Unfair Competition. The Executive hereby acknowledges that the
------------------
sale or unauthorized use or disclosure of any of the Company's Confidential
Material by Executive by any means whatsoever at any time before, during or
after the Executive's employment with the Company shall constitute "Unfair
Competition." The Executive agrees that the Executive shall not engage in
Unfair Competition either during the time the Executive is employed by the
Company or at any time thereafter.
(c) Other. In the event of the termination of the Executive's
-----
employment for any reason, the Executive (and any corporation or entity of which
the Executive is a director, officer, employee or greater than ten percent (10%)
shareholder) shall not, directly or indirectly, for a period of two (2) years:
(i) solicit for employment and/or employ any employee, consultant,
agent or representative (an "employee") of the Company or any of its affiliates
-5-
<PAGE>
or subsidiaries (or any such employee who has been "employed" by the Company
during the six (6) month period prior to the termination of this Agreement) or
induce or attempt to induce any customer, supplier, licensee or other business
relation of the Company or any Subsidiary to cease doing business with the
Company or such Subsidiary or interfere in any way with the relationship between
any such customer, supplier, licensee or business relation and the Company or
any Subsidiary; or
(ii) make any public statement concerning the Company, any of its
affiliates or subsidiaries, or the Executive's employment unless previously
approved by the Company, except as may be required by law.
(d) In the event of the breach or a threatened breach by the Executive
of any of the provisions of this Section 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions thereof (without posting a bond or other security).
(e) Upon termination of this Agreement, the Executive shall be deemed
to have resigned from all offices and directorships then held with the Company
or any affiliate entity.
7. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement or any breach hereof or the Executive's employment by the
Company or termination thereof, shall be settled by arbitration (other than
injunctive relief) by one arbitrator in accordance with the rules of the
American Arbitration Association, and judgment upon such award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
arbitration shall be held in New York, New York or such other place as may be
agreed upon at the time by the parties to the arbitration.
8. Mitigation of Damages. In the event of any termination of the
---------------------
Executive's employment by the Company, the Executive shall not be required to
seek other employment to mitigate damages.
9. Equitable Relief. The Executive acknowledges that the Company is
----------------
relying for its protection upon the existence and validity of the provisions of
this Agreement, that the services to be rendered by the Executive are of a
special, unique and extraordinary character, and that irreparable injury will
result to the Company from any violation or continuing violation of the
provisions of this Agreement for which damages may not be an adequate remedy.
Accordingly, the Executive hereby agrees that in addition to the remedies
available to the Company by law or under this Agreement, the Company shall be
entitled to obtain such equitable relief (without bond) as may be permitted by
law in a court of competent jurisdiction including, without limitation,
injunctive relief from any violation or continuing violation by the Executive of
any term or provision of this Agreement. In the event of an action pursuant to
this Agreement, the prevailing party shall be entitled to its costs and
expenses, including reasonable attorneys' fees.
10. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the internal substantive laws (and not the laws
of conflicts) of the State of Delaware.
-6-
<PAGE>
11. Entire Agreement. This Agreement constitutes the whole agreement
----------------
of the parties hereto in reference to any employment of the Executive by the
Company and in reference to any of the matters or things herein provided for or
hereinabove discussed or mentioned in reference to such employment; all prior
agreements, promises, representations and understandings relative thereto being
herein merged.
12. Assignability.
-------------
(a) In the event the Company shall merge or consolidate with any other
corporation, partnership or business entity, or all or substantially all of the
Company's business or assets shall be transferred in any manner to any other
corporation, partnership or business entity, then such successor to the Company
shall thereupon succeed to, and be subject to, all rights, interests, duties and
obligations of, and shall thereafter be deemed for all purposes hereof to be,
the "Company" under this Agreement. This Agreement shall inure to the benefit of
and be enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die, any amounts payable to him hereunder shall be paid in
accordance with the terms of this Agreement to Executive's devisee, legatee, or
other designee or, if there be no such designee, to his estate.
(b) This Agreement is personal in nature and the Executive shall not,
without the written consent of the Company, assign or transfer this Agreement or
any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing expressed or
implied in this Agreement is intended or shall be construed to confer upon or
give to any person, other than the parties to this Agreement, any right, remedy
or claim under or by reason of this Agreement or of any term, covenant or
condition of this Agreement.
13. Amendments; Waivers. This Agreement may be amended, modified,
-------------------
superseded, canceled, renewed or extended and the terms or covenants of this
Agreement may be waived only by a written instrument executed by the parties to
this Agreement or, in the case of a waiver, by the party waiving compliance.
Any such written instrument must be approved by the Board to be effective as
against the Company. The failure of any party at any time or times to require
performance of any provision of this Agreement shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of the breach
of any term or provision contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such breach, or a waiver of the breach of
any other term or covenant contained in this Agreement.
14. Notice. All notices, requests or consents required or permitted
------
under this Agreement shall be made in writing and shall be given to the other
parties by personal delivery, overnight air courier (with receipt signature) or
facsimile transmission (with "answerback" confirmation of transmission), sent to
such parties' addresses or telecopy numbers as are set forth below such parties'
signatures to this Agreement, or such other addresses or telecopy numbers of
which the parties have given notice pursuant to this Section 14. Each such
notice, request or consent shall be deemed effective upon the date of actual
receipt, receipt signature or confirmation of transmission, as applicable.
-7-
<PAGE>
15. Severability. Any provision of this Agreement that is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. Survival. The representations and agreements of the parties set
--------
forth in Sections 5, 6, 7, 8 and 9 of this Agreement shall survive the
expiration or termination of this Agreement (irrespective of the reason for such
expiration of termination).
[SIGNATURE PAGE FOLLOWS]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Employment Agreement as of the date first above written.
BP ACQUISITION CO., INC.,
a Delaware corporation
By:_________________________
Name: __________________
Title: __________________
Address for Notices:
2715 Bissonnett, Suite 305
Houston, Texas 77005
Telecopy: (713) 874-1443
Attention: Mr. Barry Loder
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
555 So. Flower Street, 23rd Floor
Los Angeles, CA 90071-2371
Facsimile: (213) 627-0705
Attention: David L. Gersh
_______________________________
PAILLA REDDY
Address for Notices:
_______________________________
_______________________________
_______________________________
-9-
<PAGE>
EXHIBIT 10.11
-------------
ADVANCED NUTRACEUTICALS, INC.
1998 STOCK OPTION PLAN
This 1998 Stock Option Plan (the "Plan") is adopted in consideration for
services rendered and to be rendered to Advanced Nutraceuticals, Inc. and
related companies.
1. Definitions.
-----------
The terms used in this Plan shall, unless otherwise indicated or required
by the particular context, have the following meanings:
Board: The Board of Directors of Advanced Nutraceuticals, Inc.
-----
Code: The Internal Revenue Code of 1986, as amended.
----
Common Stock: The $.001 par value Common Stock of Advanced
------------
Nutraceuticals, Inc.
Company: Advanced Nutraceuticals, Inc., a corporation incorporated under
-------
the laws of Delaware, and any successors in interest by merger, operation of
law, assignment or purchase of all or substantially all of the property, assets
or business of the Company.
Consultant: A Consultant is any person, including any advisor, engaged by
----------
the Company or any Related Company to render consulting services and may include
members of the Board.
Continuous Status as an Employee or Consultant: The employment by, or
----------------------------------------------
relationship as a Consultant with, the Company or any Related Company is not
interrupted or terminated. The Board, at its sole discretion, may determine
whether Continuous Status as an Employee or Consultant shall be considered
interrupted due to personal or other mitigating circumstances.
Date of Grant: The date on which an Option is granted under the Plan.
-------------
Employee: An Employee is an employee of the Company or any Related
--------
Company.
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Fair Market Value: The Fair Market Value of the Option Shares. Such Fair
-----------------
Market Value as of any date shall be reasonably determined by the Option
Committee; provided, however, that if there is a public market for the Common
Stock, the Fair Market Value of the Option Shares as of any date shall be the
officially quoted closing price, if available, through The Nasdaq Stock Market,
Inc., or a stock exchange, or if no officially quoted closing price is
available, the representative closing bid price, on the date in question. In
the event there is no officially quoted closing price or bid price or the Common
Stock is not traded publicly, the Fair Market Value of a share of Common Stock
on any date shall be determined, in good faith, by the Board or the Option
Committee after such consultation with outside legal, accounting and other
experts as the Board or the Option Committee may deem advisable, and the Board
or the Option Committee shall maintain a written record of its method of
determining such value.
<PAGE>
Incentive Stock Options ("ISOs"): "Incentive Stock Options" as that term
--------------------------------
is defined in Section 422 of the Code.
Key Employee: A person designated by the Option Committee who either is
------------
employed by the Company or a Related Company and upon whose judgment, initiative
and efforts the Company or a Related Company is largely dependent for the
successful conduct of its business; provided, however, that Key Employees shall
not include those members of the Board who are not employees of the Company or a
Related Company.
Non-Incentive Stock Options ("Non-ISOs"): Options which are not intended
----------------------------------------
to qualify as "Incentive Stock Options" under Section 422 of the Code.
Option: The rights granted to an Employee or Consultant to purchase
------
Common Stock pursuant to the terms and conditions of an Option Agreement.
Option Agreement: The written agreement (and any amendment or supplement
----------------
thereto) between the Company and an Employee or Consultant designating the terms
and conditions of an Option.
Option Committee: The Plan shall be administered by the Option Committee
----------------
which shall consist of the Board or a committee of the Board as the Board may
from time to time designate composed of not less than two members of the Board
who are not employees of the Company or a Related Company.
Option Shares: The shares of Common Stock underlying an Option granted to
-------------
an Employee or Consultant.
Optionee: An Employee or Consultant who has been granted an Option.
--------
Related Company: Any subsidiary of the Company and any other business
---------------
venture in which the Company has a significant interest as determined in the
discretion of the Option Committee.
Rule 16b-3: Rule 16b-3 as promulgated by the Securities and Exchange
----------
Commission under Section 16(b) of the Exchange Act.
2. Purpose and Scope.
-----------------
(a) The purpose of this Plan is to advance the interests of the Company
and its stockholders by affording Employees and Consultants an opportunity for
investment in the Company and the incentive advantages inherent in stock
ownership in this Company.
(b) This Plan authorizes the Option Committee to grant Options to
purchase shares of Common Stock to Employees and Consultants selected by the
Option Committee while considering criteria such as employment position or other
relationship with the Company, duties and responsibilities, ability,
productivity, length of service or association, morale, interest in the Company,
recommendations by supervisors, and other matters.
3. Administration of the Plan. The Plan shall be administered by the Option
--------------------------
Committee. The Option Committee shall have the authority granted to it under
this section and under each other section of the Plan.
2
<PAGE>
In accordance with and subject to the provisions of the Plan, the Option
Committee shall select the Optionees, shall determine (i) the number of shares
of Common Stock to be subject to each Option, (ii) the time at which each Option
is to be granted, (iii) whether an Option shall be granted in exchange for the
cancellation and termination of a previously granted option or options under the
Plan or otherwise, (iv) the purchase price for the Option Shares, (v) the option
period, and (vi) the manner in which the Option becomes exercisable. In
addition, the Option Committee shall fix such other terms of each Option as the
Option Committee may deem necessary or desirable. The Option Committee shall
determine the form of Option Agreement to evidence each Option.
The Option Committee from time to time may adopt such rules and regulations
for carrying out the purposes of the Plan as it may deem proper and in the best
interests of the Company. The Option Committee shall keep minutes of its
meetings and those minutes shall be distributed to every member of the Board.
All actions taken and all interpretations and determinations made by the
Option Committee in good faith (including determinations of Fair Market Value)
shall be final and binding upon all Employees, Consultants, the Company and all
other interested persons. No member of the Option Committee shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan, and all members of the Option Committee shall, in addition
to rights they may have if Directors of the Company, be fully protected by the
Company with respect to any such action, determination or interpretation.
4. The Common Stock. The Board is authorized to appropriate, issue and sell
----------------
for the purposes of the Plan, and the Option Committee is authorized to grant
Options with respect to, a total number, not in excess of 1,300,000 shares of
Common Stock, either treasury or authorized but unissued, or the number and kind
of shares of stock or other securities which in accordance with Section 10 shall
be substituted for the 1,300,000 shares or into which such 1,300,000 shares
shall be adjusted. All or any unsold shares subject to an Option that for any
reason expires or otherwise terminates may again be made subject to Options
under the Plan. No person may be granted Options under this Plan covering in
excess of 200,000 Option Shares in any calendar year, subject to adjustments in
connection with Section 9.
5. Eligibility. Options which are intended to qualify as ISOs will be
-----------
granted only to Key Employees. Key Employees and other Employees and
Consultants may hold more than one Option under the Plan and may hold Options
under the Plan and options granted pursuant to other plans or otherwise.
6. Option Price. The purchase price for the Option Shares shall be
------------
established by the Option Committee or shall be determined by a method
established by the Option Committee; provided that the purchase price to be paid
by Optionees for the Option Shares that are intended to qualify as ISOs, shall
not be less than 100 percent of the Fair Market Value of the Option Shares on
the Date of Grant, or the date on which the Optionee is hired or promoted (or
similar event), if the Date of Grant occurs not more than 90 days after the date
of such hiring, promotion or other event. The purchase price for the Option
Shares shall be a fixed, and cannot be a fluctuating, price.
7. Duration and Exercise of Options.
--------------------------------
(a) The option period shall commence on the Date of Grant and shall be as
set by the Option Committee, but not to exceed 7 years in length. Except as
otherwise provided herein or by the Option Committee, no Option shall be
exercised for the period of six months following the Date of Grant;
3
<PAGE>
provided, however, that this limitation shall not apply to the exercise of an
Option pursuant to the terms of the relevant Option Agreement upon the
Optionee's death.
(b) During the lifetime of the Optionee, the Option shall be exercisable
only by the Optionee; provided, that in the event of the legal disability of an
Optionee, the guardian or personal representative of the Optionee may exercise
the Option. However, if the Option is an ISO it may be exercised by the guardian
or personal representative of the Optionee only if such guardian or personal
representative obtains a ruling from the Internal Revenue Service or an opinion
of counsel to the effect that neither the grant nor the exercise of such power
is violative of the Code. Any opinion of counsel must be both from counsel and
in a form acceptable to the Option Committee.
(c) The Option Committee may determine whether any Option shall be
exercisable in installments only; if the Option Committee determines that an
Option shall be exercisable in installments, it shall determine the number of
installments and the percentage of the Option exercisable at each installment
date. All such installments shall be cumulative.
(d) In the event an Optionee's Continuous Status as an Employee or
Consultant terminates for any reason, any Option held by the Optionee on the
date of termination may be exercised within 30 days after the date of
termination, but only to the extent that the Option was exercisable according to
its terms on the date of termination. After such 30-day period, any unexercised
portion of an Option shall expire.
(e) Each Option shall be exercised in whole or in part by delivering to
the office of the Treasurer of the Company written notice of the number of
shares with respect to which the Option is to be exercised and by paying in full
the purchase price for the Option Shares purchased as set forth in Section 8;
provided, that an Option may not be exercised in part unless the purchase price
for the Option Shares purchased is at least $2,000.
(f) No Option may be exercised until the Plan is approved by the
shareholders of the Company as provided in Section 15 below.
8. Payment for Option Shares. If the purchase price of the Option Shares
-------------------------
purchased by any Optionee at one time exceeds $2,000, the Option Committee may
permit all or part of the purchase price for the Option Shares to be paid by
delivery to the Company for cancellation shares of the Company's Common Stock
previously owned by the Optionee with a Fair Market Value as of the date of
payment equal to the portion of the purchase price for the Option Shares that
the Optionee does not pay in cash. In the case of all other Option exercises,
the purchase price shall be paid in cash or certified funds upon exercise of the
Option, except that the Option Committee may permit an Optionee to elect to pay
the purchase price upon the exercise of an Option by authorizing a third party
to sell some or all of the Option Shares acquired upon exercise of an Option and
remit to the Company a sufficient portion of the sale proceeds to pay the entire
purchase price and any tax withholding resulting from such exercise.
4
<PAGE>
9. Change in Stock, Adjustments, Etc. In the event that each of the
----------------------------------
outstanding shares of Common Stock (other than shares held by dissenting
shareholders which are not changed or exchanged) should be changed into, or
exchanged for, a different number or kind of shares of stock or other securities
of the Company, or, if further changes or exchanges of any stock or other
securities into which the Common Stock shall have been changed, or for which it
shall have been exchanged, shall be made (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividends,
reclassification, split-up, combination of shares or otherwise), then there
shall be substituted for each share of Common Stock that is subject to the Plan
but not subject to an outstanding Option thereunder, the number and kind of
shares of stock or other securities into which each outstanding share of Common
Stock (other than shares held by dissenting shareholders which are not changed
or exchanged) shall be so changed or for which each outstanding share of Common
Stock (other than shares held by dissenting shareholders) shall be exchanged.
Any securities so substituted shall be subject to similar successive
adjustments.
In the event of any such changes or exchanges, the Option Committee shall
determine whether, in order to prevent dilution or enlargement of rights, an
adjustment should be made in the number, or kind, or option price of the shares
or other securities then subject to an Option or Options granted pursuant to the
Plan and the Option Committee shall make any such adjustment, and such
adjustments shall be made and shall be effective and binding for all purposes of
the Plan.
10. Relationship to Employment or Position. Nothing contained in the Plan,
--------------------------------------
or in any Option granted pursuant to the Plan, shall confer upon any Optionee
any right with respect to continuance of employment by the Company, as an
Employee or as a Consultant or interfere in any way with the right of the
Company to terminate the Optionee's employment as an Employee or position as a
Consultant, at any time.
11. Nontransferability of Option. Except as otherwise provided by the Option
----------------------------
Committee, no Option granted under the Plan shall be transferable by the
Optionee, either voluntarily or involuntarily, except by will or the laws of
descent and distribution.
12. Rights as a Stockholder. No person shall have any rights as a
-----------------------
shareholder with respect to any share covered by an Option until that person
shall become the holder of record of such share and, except as provided in
Section 9, no adjustments shall be made for dividends or other distributions or
other rights as to which there is an earlier record date.
13. Securities Laws Requirements. No Option Shares shall be issued unless
----------------------------
and until, in the opinion of the Company, any applicable registration
requirements of the Securities Act of 1933, as amended, any applicable listing
requirements of any securities exchange on which stock of the same class is then
listed, and any other requirements of law or of any regulatory bodies having
jurisdiction over such issuance and delivery, have been fully complied with.
Each Option and each Option Share certificate may be imprinted with legends
reflecting federal and state securities laws, restrictions and conditions, and
the Company may comply therewith and issue "stop transfer" instructions to its
transfer agent and registrar in good faith without liability.
14. Disposition of Shares. Each Optionee, as a condition of exercise, shall
---------------------
represent, warrant and agree, in a form of written certificate approved by the
Company, as follows: (a) that all Option Shares are being acquired solely for
his own account and not on behalf of any other person or entity; (b) that no
Option Shares will be sold or otherwise distributed in violation of the
Securities Act of 1933, as amended,
5
<PAGE>
or any other applicable federal or state securities laws; (c) that if he is
subject to reporting requirements under Section 16(a) of the Exchange Act, he
will (i) not violate Section 16(b) of the Exchange Act, (ii) furnish the Company
with a copy of each Form 4 and Form 5 filed by him, and (iii) timely file all
reports required under the federal securities laws; and (d) that he will report
all sales of Option Shares to the Company in writing on a form prescribed by the
Company.
15. Effective Date of Plan; Termination Date of Plan. Subject to the
------------------------------------------------
approval of the Plan by the affirmative vote of the holders of a majority of the
Company's securities entitled to vote and represented at a meeting duly held in
accordance with applicable law, the Plan shall be deemed effective August 5,
1998. The Plan shall terminate at midnight on August 4, 2008, except as to
Options previously granted and outstanding under the Plan at that time. No
Options shall be granted after the date on which the Plan terminates. The Plan
may be abandoned or terminated at any earlier time by the Board, except with
respect to any Options then outstanding under the Plan.
16. Ten Percent Shareholder Rule. With respect to ISO's, no Option may be
----------------------------
granted to a Key Employee who, at the time the Option is granted, owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company, unless at the time the Option is granted the
purchase price for the Option Shares is at least 110 percent of the Fair Market
Value of the Option Shares on the Date of Grant and such Option by its terms is
not exercisable after the expiration of five years from the Date of Grant.
17. Withholding Taxes. The Company, or any Related Company, may take such
-----------------
steps as it may deem necessary or appropriate for the withholding of any taxes
which the Company, or any Related Company, is required by any law or regulation
or any governmental authority, whether federal, state or local, domestic or
foreign, to withhold in connection with any Option including, but not limited
to, the withholding of all or any portion of any payment or the withholding of
issuance of Option Shares to be issued upon the exercise of any Option.
18. Effect of Changes in Control and Certain Reorganizations.
--------------------------------------------------------
(a) In the event of a Change in Control of the Company (as defined
below), the Option Committee may, in its discretion, make any or all of the
following adjustments: (i) provide that all Options granted pursuant to the Plan
shall become exercisable immediately upon such Change in Control (or such other
time as the Committee shall determine), (ii) provide for the payment to an
Optionee upon surrender of an Option (or portion thereof) of an amount in cash
equal to the excess of (a) the higher of (I) the aggregate Fair Market Value of
the Option Shares covered by such Option (or portion thereof) on the date of
surrender or (II) the average price per share paid for the most highly priced
one percent of the Common Stock acquired in connection with the Change in
Control times the number of Option Shares covered by such Option (or portion
thereof) over (b) the aggregate exercise price; (iii) make any other
adjustments, or take such other action, as the Option Committee, in its
discretion, shall deem appropriate. In the event that the Option Committee
provides for the surrender of Options pursuant to clause (ii) above, to the
extent any Option is surrendered, it shall be deemed to have been exercised for
purposes of Section 4. For purposes of this Section 18, a "Change in Control" of
the Company shall mean a change in control of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act, whether or not the Company is then subject
to such reporting requirement; provided that, without limitation, a Change in
Control shall be deemed to have occurred if (i) any individual, partnership,
firm, corporation, association, trust, unincorporated organization or other
entity, or
6
<PAGE>
any syndicate or group deemed to be a person under Section 14(d)(2) of the
Exchange Act, is or becomes the "beneficial owner" (within the meaning of
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder), directly or indirectly, of securities of the Company representing
35% or more of the combined voting power of the Company's then outstanding
securities entitled to vote in the election of directors of the Company; or (ii)
during any period of two consecutive years (not including any period prior to
the adoption of this Plan), individuals who at the beginning of such period
constituted the Board and any new directors, whose appointment by the Board or
nomination for election by the Company's shareholders was approved by a vote of
at least a majority of the directors then still in office who either were
directors at the beginning of the period or whose appointment or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof.
(b) In the event that (i) the Company is merged or consolidated with
another corporation, (ii) one person becomes the beneficial owner of all of the
issued and outstanding equity securities of the Company (for purposes of this
Section 18(b), the terms "person" and "beneficial owner" shall have the meanings
assigned to them in Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder), (iii) a division or subsidiary of the
Company is acquired by another corporation, person or entity, (iv) all or
substantially all of the assets of the Company are acquired by another
corporation, (v) the Company is reorganized, dissolved or liquidated (each such
event in (i), (ii), (iii), (iv) or (v) being hereinafter referred to as a
"Reorganization Event"), or (vi) the Board shall propose that the Company enter
into a Reorganization Event, then the Option Committee may, in its sole
discretion, make any or all of the following adjustments: (A) by written notice
to each Optionee provide that such Optionee's Options shall be terminated or
cancelled, unless exercised within thirty (30) days (or such other period as the
Option Committee shall determine) after the date of such notice; (B) subject to
Section 16 with respect to ISOs, advance the dates upon which any or all
outstanding Options shall be exercised; (C) provide for the payment upon
termination or cancellation of an Option of an amount in cash or securities
equal to the excess, if any, of the Fair Market Value of the Option Shares
subject to the Option at the time of such termination or cancellation over the
exercise price of such Option; and (D) make any other adjustments, or take such
other action, as the Option Committee, in its discretion, shall deem
appropriate. Any action taken by the Option Committee may be made conditional
upon the consummation of the applicable Reorganization Event.
19. Amendment.
---------
(a) The Board may amend, alter or discontinue the Plan, but no
amendment, alteration or discontinuation shall be made which would (i) impair
the right of an Optionee under an Option theretofore granted without the
Optionee's consent, except such an amendment made to cause the Plan to qualify
for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the
exemption provided by Rule 16b-3. In addition, no such amendment shall be made
without the approval of the Company's shareholders to the extent such approval
is required by law or agreement.
(b) The Committee may amend the terms of any Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Optionee without the Optionee's consent except such an amendment made to
cause the Plan to qualify for the exemption provided by Rule 16b-3.
(c) Subject to the above provisions, the Board shall have authority to
amend the Plan to take into account changes in law and tax and accounting rules
as well as other developments, and to grant Options which qualify for beneficial
treatment under such rules without shareholder approval.
7
<PAGE>
20. Other Provisions.
----------------
(a) The use of a masculine gender in the Plan shall also include within
its meaning the feminine, and the singular may include the plural, and the
plural may include the singular, unless the context clearly indicates to the
contrary.
(b) Any expenses of administering the Plan shall be borne by the
Company.
(c) This Plan shall be construed to be in addition to any and all other
compensation plans or programs. Neither the adoption of the Plan by the Board
nor the submission of the Plan to the shareholders of the Company for approval
shall be construed as creating any limitations on the power of authority of the
Board to adopt such other additional incentive or other compensation
arrangements as the Board may deem necessary or desirable.
(d) The validity, construction, interpretation, administration and
effect of Plan and of its rules and regulations, and the rights of any and all
personnel having or claiming to have an interest therein or thereunder shall be
governed by and determined exclusively and solely in accordance with the laws of
the State of Delaware.
* * * * * * * *
8
<PAGE>
EXHIBIT 10.12
-------------
ADVANCED NUTRACEUTICALS, INC.
NON-DISCRETIONARY STOCK OPTION PLAN
This Non-Discretionary Stock Option Plan (the "Plan") is adopted by Advanced
Nutraceuticals, Inc. (the "Company"), to be effective as of August 5, 1998.
1. Definitions.
-----------
Unless otherwise indicated or required by the particular context, the terms
used in this Plan shall have the following meaning:
Board: The Board of Directors of the Company.
-----
Code: The Internal Revenue Code of 1986, as amended.
----
Common Stock: The $.001 par value common stock of the Company.
------------
Company: Advanced Nutraceuticals, Inc., a corporation incorporated under the
-------
laws of Delaware, any current or future wholly owned subsidiaries of the
Company, and any successors in interest by merger, operation of law, assignment
or purchase of all or substantially all of the property, assets or business of
the Company.
Date Of Grant: The date on which an Option, as defined below, is granted
-------------
under the Plan.
Fair Market Value: The Fair Market Value of the Option Shares. Such Fair
-----------------
Market Value as of any date shall be reasonably determined by the Board;
provided, however, that if there is a public market for the Common Stock, the
Fair Market Value of the Option Shares as of any date shall be the officially
quoted closing price, if available, through The Nasdaq Stock Market, Inc., or a
stock exchange, or if no officially quoted closing price is available, the
representative closing bid price, on the date in question. In the event there
is no officially quoted closing price or bid price or the Common Stock is not
traded publicly, the Fair Market Value of a share of Common Stock on any date
shall be determined, in good faith, by the Board after such consultation with
outside legal, accounting and other experts as the Board may deem advisable, and
the Board shall maintain a written record of its method of determining such
value.
Non-Employee Director: A person who is a member of the Board of Directors and
---------------------
who is not an employee of the Company.
Option: The rights to purchase Common Stock granted pursuant to the terms and
------
conditions of an Option Agreement.
Option Agreement: The written agreement (including any amendments or
----------------
supplements thereto) between the Company and a Non-Employee Director designating
the terms and conditions of an Option.
Option Shares: The shares of Common Stock underlying an Option granted
-------------
pursuant to
<PAGE>
this Plan.
Optionee: A Non-Employee Director who has been granted an Option.
--------
SEC: The Securities and Exchange Commission.
---
2. Purpose And Scope.
-----------------
(a) The purpose of the Plan is to advance the interests of the Company and
its stockholders by affording Non-Employee Directors, whose participation and
guidance contributes to the successful operation of the Company, an opportunity
for investment in the Company and the incentive advantages inherent in stock
ownership in the Company.
(b) This Plan provides that Options be granted to Non-Employee Directors
according to the formula set forth in Section 3 of this Plan.
3. Operation Of The Plan.
---------------------
(a) Grant Of Options: Amount And Timing. Options to purchase 10,000
-----------------------------------
shares of Common Stock shall be granted under the Plan to each person who is a
Non-Employee Director on the effective date of the first registration statement
for a public offering of securities of the Company, other than a registration
statement relating either to the sale of securities to employees of the Company
pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145
transaction (the "IPO"). Each person who is a Non-Employee Director at the time
of the IPO automatically shall be granted Options under the Plan to purchase
5,000 shares of Common Stock on the date of each annual meeting of stockholders
after such IPO for so long as such person remains a Non-Employee Director.
Provided, that, no Options will be granted to the Non-Employee Directors on the
date of the first annual meeting of stockholders after the IPO if such annual
meeting of stockholders is held within three months of the IPO.
Options to purchase 10,000 shares of Common Stock shall be granted under the
Plan to each Non-Employee Director who is initially elected to the Board after
the IPO on the date of his election and Options to purchase 5,000 shares of
Common Stock under the Plan automatically shall be granted to each such Non-
Employee Director on the date of each annual meeting of stockholders after such
initial election for so long as such person remains a Non-Employee Director.
Provided, that, no Options will be granted on the date of the first annual
meeting of stockholders after such person's initial election to the Board if
such annual meeting of stockholders is held within the three months of such
person's initial election to the Board.
(b) Option Exercise Price. The exercise price for the Options shall be the
---------------------
Fair Market Value of the Common Stock on the Date Of Grant. The Fair Market
Value on the date of the IPO shall be equal to the initial public offering price
of the Common Stock in the IPO.
(c) Term. The Options shall be exercisable six months after the Date of
----
Grant and shall expire upon the earlier to occur of (i) seven years from the
Date Of Grant and (ii) 30 days after the Optionee ceases to be a director of the
Company.
-2-
<PAGE>
(d) Amendments. This Plan may be changed or modified from time to time
----------
provided, however, that (A) no such change or modification shall impair any
Option previously granted under the Plan, (B) no change shall disqualify the
Plan from the exemption provided by SEC Rule 16b-3, and (C) the approval by
written consent of a majority of the holders of the Company's securities
entitled to vote, or by the affirmative votes of the holders of a majority of
the Company's securities entitled to vote at a meeting duly held in accordance
with the applicable laws of the state of Delaware, shall be required for any
amendment which would increase the limit imposed under Section 4 on the maximum
number of shares of Common Stock reserved and available for grant under the Plan
or to the extent such approval is required by law or agreement.
4. Number of Shares.
----------------
The Board is authorized to appropriate, issue and sell for the purposes of
the Plan an aggregate maximum of 300,000 shares of Common Stock, including both
treasury and newly issued shares, or the number and kind of shares of stock or
other securities which in accordance with Section 8 shall be substituted for the
300,000 shares or into which such 300,000 shares shall be adjusted. All or any
unsold shares subject to an Option, that for any reason expires or otherwise
terminates before it has been exercised, again may be made subject to other
Options under the Plan.
5. Eligibility.
-----------
Options shall be granted under the Plan only to Non-Employee Directors
provided that any Non-Employee Director may waive his right to participate in
the Plan.
6. Exercise Of Options.
-------------------
(a) During the lifetime of the Optionee, the Option shall be exercisable
only by the Optionee; provided that, subject to Section 3(c), in the event of
the legal disability of an Optionee, the guardian or personal representative of
the Option may exercise the Option.
(b) Each Option shall be exercised in whole or in part by delivering to the
office of the Treasurer of the Company written notice of the number of shares
with respect to which the Option is to be exercised and by paying in full the
purchase price for the Option Shares purchased as set forth in Section 7 herein;
provided, that an Option may not be exercised in part unless the purchase price
for the Option Shares purchased is at least $1,000.
(c) No Option Shares may be sold, transferred or otherwise disposed of for
a period of at least six months following the Date Of Grant of the Option.
7. Payment For Option Shares. If the purchase price of the Option Shares
-------------------------
purchased by any Optionee at one time exceeds $2,000, the Board may permit all
or part of the purchase price for the Option Shares to be paid by delivery to
the Company for cancellation shares of the Company's Common Stock previously
owned by the Optionee with a Fair Market Value as of the date of payment equal
to the portion of the purchase price for the Option Shares that the Optionee
does not pay in cash. In the case of all other Option exercises, the purchase
price shall be paid in cash or certified funds upon exercise of the Option,
except that the Board may permit an Optionee to elect to pay the purchase price
upon the exercise of an Option by authorizing a third party to sell some or all
of the Option Shares acquired upon exercise of an
-3-
<PAGE>
Option and remit to the Company a sufficient portion of the sale proceeds to pay
the entire purchase price and any tax withholding resulting from such exercise.
8. Change In Stock, Adjustments, Etc.
----------------------------------
In the event that each of the outstanding shares of Common Stock (other
than shares held by dissenting stockholders which are not changed or exchanged)
should be changed into, or exchanged for, a different number or kind of shares
of stock or other securities of the Company, or if further changes or exchanges
of any stock or other securities into which the Common Stock shall have been
changed, or for which it shall have been exchanged, shall be made (whether by
reason of merger, consolidation, reorganization, recapitalization, stock
dividends, reclassification, split-up, combination of shares or otherwise), then
there shall be substituted for each share of Common Stock that is subject to the
Plan but not subject to an outstanding Option hereunder, the number and kind of
shares of stock or other securities into which each outstanding share of Common
Stock (other than shares held by dissenting stockholders which are not changed
or exchanged) shall be so changed or for which each outstanding share of Common
Stock (other than shares held by dissenting stockholders) shall be so changed or
for which each such share shall be exchanged. Any securities so substituted
shall be subject to similar successive adjustments.
In the event of any such changes or exchanges, (i) the Company shall
adjust the number, or kind, or option price of the shares or other securities
that are then subject to an Option or Options granted pursuant to the Plan in
order to prevent dilution or enlargement of rights and (ii) such adjustments
shall be effective and binding for all purposes of the Plan.
9. Status As Director.
------------------
Nothing contained in the Plan, or in any Option granted or Option Shares
issued pursuant to the Plan, (i) shall confer upon any Optionee any right with
respect to continuance of his position as a director of the Company, or (ii)
shall interfere in any way with the right of the Company at any time to elect
not to continue or to terminate the Optionee's position as a director of the
Company.
10. Nontransferability Of Option.
----------------------------
No option granted under the Plan shall be transferable by the Optionee,
either voluntarily or involuntarily, except by will or by the laws of descent
and distribution, or pursuant to a qualified domestic relations order as defined
in the Code, the Employee Retirement Income Security Act, or rules promulgated
thereunder. Except as provided in the preceding sentence, any attempt to
transfer an Option shall void the Option.
11. Rights As A Stockholder.
-----------------------
No person shall have any rights as a stockholder with respect to any share
covered by an Option until that person shall become the holder of record of such
share and, except as provided in Section 8, no adjustments shall be made for
dividends or other distributions or other rights as to which there is an earlier
record date.
-4-
<PAGE>
12. Securities Laws Requirements.
----------------------------
No Option Shares shall be issued unless and until, in the opinion of the
Company, any applicable registration requirements of the Securities Act of 1933,
as amended, any applicable listing requirements of any securities exchange on
which stock of the same class is then listed, and any other requirement of law
or of any regulatory bodies having jurisdiction over such issuance and delivery,
have been fully complied with. Each Option Agreement and each Option Share
certificate may be imprinted with legends reflecting federal and state
securities laws restrictions and conditions, and the Company may comply
therewith and issue "stop transfer" instructions to its transfer agent and
registrar in good faith without liability.
13. Disposition Of Shares.
---------------------
To the extent reasonably requested by the Company, each Optionee, as a
condition of exercise, shall represent, warrant and agree, in a form of written
certificate approved by the Company, as follows: (a) that all Option Shares are
being acquired solely for his own account and not on behalf of any other person
or entity; (b) that no Option Share will be sold for at least six months
following the Date Of Grant of the Option; (c) that no Option Shares will be
sold or otherwise distributed in violation of the Securities Act of 1933, as
amended, or any other applicable federal or state securities laws; (d) that he
will report all sales of Option Shares to the Company in writing on a form
prescribed by the Company; and (e) that if he is subject to reporting
requirements under Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (i) he will not violate Section 16(b) of the
Exchange Act, (ii) he will furnish the Company with a copy of each Form 4 and
Form 5 filed by him, and (iii) he will timely file all reports required under
the federal securities laws.
14. Effective Date Of Plan; Termination Date Of Plan.
------------------------------------------------
The Plan shall be deemed effective as of August 5, 1998 and shall
terminate at midnight on August 4, 2008, except as to Options previously granted
and outstanding under the Plan at that time. No Options shall be granted after
the date on which the Plan terminates. The Plan may be abandoned or terminated
at any earlier time by the affirmative vote of the holders of a majority of the
shares of Common Stock entitled to vote and represented at a meeting duly held
in accordance with the applicable laws of the State of Delaware, except with
respect to any Options then outstanding under the Plan.
15. Withholding Taxes.
-----------------
The Option Agreement shall provide that the Company may take steps as it
may deem necessary or appropriate for the withholding of any taxes which the
Company is required by any law or regulation or any governmental authority,
whether federal, state or local, domestic or foreign, to withhold in connection
with any Option including, but not limited to, the withholding of all or any
portion of any payment or the withholding of issuance of Option Shares to be
issued upon the exercise of any Option.
16. Other Provisions.
----------------
The following provisions are also in effect under the Plan:
-5-
<PAGE>
(a) The use of a masculine gender in the Plan shall also include within its
meaning the feminine, and the singular may include the plural, and the
plural may include the singular, unless the context clearly indicates to
the contrary.
(b) Any expenses of administering the Plan shall be borne by the Company.
(c) This Plan shall be construed to be in addition to any and all other
compensation plans or programs. The adoption of the Plan by the
stockholders of the Company shall not be construed as creating any
limitations on the power or authority of the Board to adopt such other
additional incentive or other compensation arrangements as the Board may
deem necessary or desirable.
(d) The validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and the rights of any and all
persons having or claiming to have an interest therein or thereunder shall be
governed by and determined exclusively and solely in accordance with the laws of
the State of Delaware.
-6-
<PAGE>
[LETTERHEAD OF HALLO ASSOCIATES]
EXHIBIT 10.18
-------------
May 8, 1998
Mr. Reddi, President
Bactolac Pharmaceuticals
51 Brooklyn Avenue
Westbury, N.Y. 11590
Dear Mr. Reddi:
This letter shall serve as a lease extension and expansion of your space at 40
New York Avenue (51 Brooklyn Avenue).
You shall have a 5 year lease on all the same terms and conditions as the
existing lease, except that the rent for the entire building shall be as
follows:
$ Annual Month
-------- -----
Year 1 93,000.00 7,750.00
Year 2 97,185.00 8,098.75
Year 3 101,558.32 8,463.19
Year 4 106,128.44 8,844.03
Year 5 110,904.21 9,242.01
You will have a new tax base as of the commencement date of the new 5 year
lease. The new lease will be 100% of various charges rather than 43% which is
the percentage based on the existing lease.
The new lease will commence within 10 days after LIN Industries vacates its
space. You further agree take the space as is, broom clean.
Accepted & Agreed Accepted & Agreed
HARLO ASSOCIATES BACTOLAC
By: /s/ By: /s/
-------------- ---------------
<PAGE>
HARLO ASSOCIATES, Landlord
and
BACTOLAC PHARMACEUTICALS, INC.
------------------------------
I N D E X
---------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PREMISES..........................................................1
TERM..............................................................1
USE...............................................................1
RENT..............................................................1
REPAIRS...........................................................1
COMPLIANCE WITH LAWS..............................................2
ASSIGNMENT........................................................2
NOTICE OF FIRE OR DEFECTIVE CONDITIONS............................2
LANDLORD'S RIGHT TO INSPECT.......................................3
LANDLORD'S RIGHT TO SHOW PREMISES.................................3
OPTION............................................................3
REPAIR OF GLASS...................................................4
AUTHORITY TO SIGN.................................................4
SIGNS.............................................................4
LANDLORD'S EXEMPTION FROM LIABILITY...............................4
LANDLORD'S RIGHT TO RE-ENTER......................................5
SUBORDINATION.....................................................5
SECURITY..........................................................5
NON-ASSIGNABILITY OF SECURITY.....................................5
DEFAULTS..........................................................6
WATER AND SEWER CHARGES...........................................6
TENANT'S LIABILITY AND FIRE INSURANCE.............................6
NO WAIVER OF LANDLORD'S RIGHTS....................................6
CONDEMNATION......................................................7
REMOVAL OF TRADE FIXTURES.........................................7
TENANT'S LIABILITY AFTER TERMINATION
OF LEASE..........................................................7
TENANT'S WAIVER OF REDEMPTION.....................................7
LANDLORD'S INABILITY TO SUPPLY SERVICE............................7
NO DIMINUTION OR ABATEMENT OF RENT................................8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
-------
<S> <C>
LANDLORD NOT LIABLE FOR FAILURE TO GIVE POSSESSION..................... 8
REAL ESTATE TAXES...................................................... 8
NO OBSTRUCTIONS........................................................ 9
NO ALTERATIONS......................................................... 9
ENVIRONMENTAL LAW...................................................... 9 & 10
UTILITIES.............................................................. 11
UTILITIES EASEMENTS.................................................... 11
DEFINITION OF STRUCTURAL REPAIRS....................................... 11
MECHANIC LIENS......................................................... 11
SUMMARY PROCEEDINGS.................................................... 12
SURRENDER OF PREMISES.................................................. 12
EVENT OF DEFAULT....................................................... 12
COUNTERCLAIM........................................................... 13
LANDLORD NO PERSONAL LIABILITY......................................... 13
NOTICES................................................................ 14
BROKER................................................................. 14
TENANT'S INDEMNIFICATION............................................... 14
TENANT ESTOPPEL LETTER................................................. 15
QUIET ENJOYMENT........................................................ 15
LANDLORD'S WORK LETTER................................................. 15
LATE CHARGE............................................................ 15
EXTERIOR MAINTENANCE................................................... 16
HEAT, WATER AND HVAC................................................... 16
ENTIRE AGREEMENT....................................................... 16
INDEPENDENT CONVENANTS................................................. 16
RENT SCHEDULE.......................................................... 18
SKETCH OF DEMISED PREMISED............................................. 19
</TABLE>
<PAGE>
THIS AGREEMENT between HAROL ASSOCIATES, a partnership with offices at
275 Broad Hollow Road, Melville, New York, as Landlord, and BACTOLAC
PHARMACEUTICALS, INC. a New York corporation having offices at 52-02 Grand
Avenue, Maspeth, New York 11378, as Tenant.
W I T N E S S E T H:
--------------------
The Landlord hereby leases to the Tenant a portion of premises 40 New
York Avenue, New Castle, New York for a term of three (3) years to commence on
the 1st day of June, 1996 and to end on the 31st day of May, 1999. Said
premises are to be used and occupied only for office space and manufacturing of
pharmaceutical products except for "gel caps" the manufacturing of which is
strictly prohibited or any ancillary use in connection therewith and
warehousing permitted by the Zoning and Building Code of the Town of North
Hempstead, County of Nassau. Leased premises are 6,500 square feet, plus or
minus. That annexed hereto is a sketch of the leased premises. Landlord
represents that the building is 15,500 square feet and that this Tenant will be
occupying forty two (42%) percent of said building.
RENT
----
1. That the Tenant shall pay for the first year of the Lease, the
annual rental of $32,500.00 payable in equal monthly payments of $2,708.33 per
month on the first day of each and every month. Attached hereto is a Rent
Schedule which sets forth the annual rental and monthly rental for the entire
term of this Lease. The Landlord and the Tenant agree that the basic rent shall
be paid to the Landlord absolutely net without notice or demand and without
abatement, deduction of setoff of any amount. All costs, expenses and
obligations of any kind or nature whatsoever relating to the premises and the
use or occupancy thereof, except for Landlord's debt service, shall be paid by
the Tenant, except as otherwise expressly provided herein. All payments required
to be paid by the Tenant under this Lease shall be deemed as additional rent.
Landlord acknowledges receipt of three (3) months rent for the months of June,
July and August, in the amount of $8,125.00. It being the understanding of the
parties that the next rent payment shall be September 1, 1996.
REPAIRS
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2. That the Tenant shall take good care of the premises and shall,
at the Tenant's own cost and expense make all non-structural repairs and at the
end or other expiration of the term, shall deliver up the demised premises in
good order or condition, damages by the elements excepted.
<PAGE>
COMPLIANCE WITH LAWS
--------------------
3. That the Tenant shall promptly execute and comply with all
statutes, ordinances, rules, orders, regulations and requirements of the
Federal, State and Local Governments and of any and all their Departments and
Bureaus applicable to said premises during said term; and shall also promptly
comply with and execute all rules, orders and regulations of the New York Board
of Fire Underwriters, or any other similar body at the Tenant's own cost and
expense.
ASSIGNMENT
----------
4. (A) That the Tenant, successors, heirs, executors or
administrators shall not assign this agreement, the premises, or any part
thereof, or make any alterations on the premises, without the Landlord's consent
in writing, which consent shall not be unreasonably withheld, or occupy, or
permit or suffer the same to be occupied for any business or purpose deemed
disreputable or extra-hazardous on account of fire, under the penalty of damages
and forfeiture and in the event of a breach thereof, the term herein shall
immediately cease and terminate at the option of the Landlord as if it were the
expiration of the original term. In the event said consent is obtained, it is
agreed that such assignment shall not in any way affect the obligations of the
Tenant under this lease, and Tenant shall continue liable therefor, and provided
that with respect to any assignment: (1) Written notice thereof shall be given
to Landlord within ten (10) days from the date thereof; and (2) The assignee
shall assume in writing all the terms, covenants and conditions of this lease;
and (3) That an executed and acknowledged copy of the assignment and assumption
agreement shall be furnished to the Landlord within ten (10) days from the date
thereof. The foregoing provisions shall be applicable to each and every
assignment. Acceptance of rent by the Landlord from an assignee Tenant without
such notice and receipt of a copy of assumption of lease shall not constitute a
waiver of this provision. Provided, however, the Tenant shall not be entitled to
assign pursuant to this paragraph at any time during which it is in default
under any of the terms of the within lease, including but not limited to any
time during which it is in default of the payment of rent.
(B) Acceptance of rent by the Landlord from any occupant of the
demised premises or assignee, or any successor alleged successor in interest,
whatsoever of the Tenant from its obligation to pay notice, shall not relieve
the Tenant from its obligation to pay rent under the terms of this lease or any
other obligation thereunder. Further, acceptance of such rent shall not
constitute recognition of any other occupant or person, firm or corporation as
lawful Tenant of the demised premises under this lease.
(C) PURPOSELY OMITTED.
(D) PURPOSELY OMITTED.
NOTICE OF FIRE OR DEFECTIVE CONDITIONS
--------------------------------------
5. (A) Tenant must give Landlord prompt notice of fire, accident,
damage or dangerous or defective condition. If the Premises cannot be used
because of fire or other casualty, Tenant is not required to pay rent for the
time the Premises are unusable. If part of the Premises can not be used, Tenant
must pay rent for the usable part. Landlord shall have the right to decide
which part of the Premises is usable. Landlord need only repair the damaged
structural parts of the
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<PAGE>
Premises. Landlord is not required to repair or replace any equipment,
fixtures, furnishings or decorations unless originally installed by Landlord.
Landlord is not responsible for delays due to settling insurance claims
obtaining estimates, labor and supply problems or any other cause not fully
under landlord's control.
(B) PURPOSELY OMITTED.
(C) Landlord has the right to demolish or rebuild the Building
if there is substantial damage by fire or other casualty. Substantial damage
shall mean if in excess of fifty (50%) percent of the building has been damaged.
Landlord may cancel this Lease within 30 days after the substantial fire or
casualty by giving Tenant notice of Landlord's intention to demolish or rebuild.
The Lease will end 30 days after Landlord's cancellation notice to Tenant.
Tenant must deliver the Premises to Landlord on or before the cancellation date
in the notice and pay all rent due to the date of the fire or casualty. If the
Lease is cancelled Landlord is not required to repair the Premises or Building.
The cancellation does not release Tenant of liability in connection with the
fire or casualty. This Section is intended to replace the terms of New York Real
Property Law Section 227.
LANDLORD'S RIGHT TO INSPECT
---------------------------
6. The said Tenant agrees that the said Landlord and the Landlord's
agents and other representatives shall have the right to enter into and upon
said premises, or any part thereof, at all reasonable hours for the purpose of
examining the same, or making such repairs or alterations therein as may be
necessary for the safety and preservation thereof.
LANDLORD'S RIGHT TO SHOW PREMISES
---------------------------------
7. The Tenant also agrees to permit the Landlord or the Landlord's
agents to show the premises to persons wishing to hire or purchase the same;
and the Tenant further agrees that on and after the sixth month, next preceding
the expiration of the term hereby granted, the Landlord or the Landlord's agents
shall have the right to place notices on the front of said premises, or any part
thereof, offering the premises "To Let" or "For Sale", and the Tenant hereby
agrees to permit the same to remain thereon without hindrance or molestation.
Landlord agrees wherever possible to give Tenant Notice reference to showing the
premises and further to do it only during business hours.
OPTION
------
8. The Landlord will advise the Tenant that if at the end of the
three (3) year terms of this Lease the front portion of the building
representing fifty-eight (58%) percent of the building is not vacant, the Tenant
shall have the option to extend this Lease for a further term of two (2) years
commencing June 1, 1999 and terminating May 31, 2001, upon the same terms and
conditions set forth, except that the rental shall be as stated in the Rent
Schedule annexed hereto. However, in the event the front portion of the
building is vacant at the time of the termination of this Lease, then the Tenant
shall have the option to rent the entire building, the rental to be agreed upon
by the parties at that time. In the event the Tenant does not elect to rent the
front portion of the building and the Landlord is able to rent the front portion
of the building prior to the termination date of this Lease, then
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<PAGE>
[ILLEGIBLE] shall have the option to extend this Lease for an additional two (2)
years under the terms hereinabove provided.
The Landlord shall notify the Tenant in writing three (3) months prior
to the expiration of this Lease as to the status of the front portion of the
building, and Tenant at that time shall exercise whatever options are available
as hereinabove provided.
REPAIR OF GLASS
---------------
9. Landlord may insure, and keep insured, all plate glass in the
demised premises for and in the name of Landlord. Bills, for the premiums
therefor shall be rendered by Landlord to Tenant at such times as Landlord may
elect, and shall be due from, and payable by Tenant when rendered, and the
amount thereof shall be deemed to be, and be paid as, additional rental. Damage
and injury to the said premises, caused by the carelessness, negligence or
improper conduct on the part of the said Tenant or the Tenant's agents or
employees shall be repaired as speedily as possible by the Tenant at the
Tenant's own cost and expense. The Tenant shall have the right, at its own costs
and expense, to repair any broken glass in and about the demised premises.
AUTHORITY TO SIGN
-----------------
10. Landlord and Tenant represent to each other that the party
executing this lease has full authority to sign said lease on behalf of said
party.
SIGNS
-----
11. (A) The Tenant shall neither place, or cause or allow to be
placed any sign or signs of any kind whatsoever at, in or about the entrance to
said premises or any other part of same, except in or at such place or places as
may be indicated by the Landlord and consented to by the Landlord in writing.
And in case the Landlord or the Landlord's representative shall deem it
necessary to remove any such sign or signs in order to paint the said premises
or the building wherein same is situated or make any other repairs, alterations
or improvements in or upon said premises or building or any part thereof, the
Landlord shall have the right to do so, providing the same be removed and
replaced at the Landlord's expense, whenever the said repairs, alterations or
improvements shall be completed.
(B) Notwithstanding the provisions of subparagraph (a) above,
permission is given to the Tenant to maintain upon the premises such sign and/or
signs as the Tenant in its discretion shall from time to time determine provided
the Tenant at its own cost and expense shall obtain all necessary permits and
licenses in connection therewith. Subject, however, to the written consent of
the Landlord, as to the size and design of said sign and to the method of
attaching said sign to the building. No sign may be attached to the roof of the
said premises. No signs of any kind may be painted on the building and all
signs are to be removed upon the termination of the Lease.
LANDLORD'S EXEMPTION FROM LIABILITY
-----------------------------------
12. That the Landlord is exempt from any and all liability for any
damage or injury to persons or property caused by or resulting from steam,
electricity, gas, water,
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<PAGE>
rain, ice or snow, or any leak or flow from or into any part of said
building or from any damage or injury resulting or arising from any
other cause or happening whatsoever unless said damage or injury be
caused by or be due to the negligence of the Landlord.
LANDLORD'S RIGHT TO RE-ENTER
----------------------------
13. PURPOSELY OMITTED.
SUBORDINATION
-------------
14. (A) That this instrument shall not be a lien against said
premises in respect to any mortgages that are now on or that hereafter
may be placed against said premises, and that the recording of such
mortgage shall have preference and precedence and be superior and prior
in lien of this lease, irrespective of the date of recording and the
Tenant agrees to execute without cost, any such instrument which may be
deemed necessary or desirable by the Landlord's lending institution to
further effect the subordination of this lease to any such mortgage or
mortgages, and a refusal to execute such instrument shall entitle the
Landlord to hold the Tenant in default and to commence a summary
proceeding to terminate the Lease.
(B) Supplementing paragraph 14 of the lease, the Tenant
agrees that the Tenant will execute and deliver any instrument that may
be required subordinating this lease to any mortgage which the Landlord
may place on the subject premises.
(C) In the event the Landlord mortgagee requires any
modifications of this Lease, the tenant shall give its consent to such
changes provided such changes do not interfere with Tenant's use and
occupancy of the premises, nor imposes upon the Tenant any additional
payments.
SECURITY
--------
15. (A) The Tenant has this day deposited with the Landlord
the sum of $2,708.34 as one month security. As additional security the
Tenant shall deposit with the Landlord as additional security the sum of
$2,708.34 on September 1, 1996 and an additional security deposit of
$2,708.34 on October 1, 1996. These payments shall serve as security for
the full and faithful performance by the Tenant of all the terms,
covenants and conditions of this lease upon the Tenant's part to be
performed, which said sum shall be returned to the Tenant after the time
fixed as the expiration of the term herein, provided the Tenant has
fully and faithfully carried out all of said terms, covenants and
conditions on Tenant's part to be performed. In the event of a bonafide
sale, subject to this lease, the Landlord shall have the right to
transfer the security to the vendee for the benefit of the Tenant and
the Landlord shall be considered released by the Tenant from all
liability for the return of such security; and the Tenant agrees to look
to the new Landlord solely for the return of the said security, and it
is agreed that this shall apply to every transfer or assignment made of
the security to a new Landlord.
(B) The Tenant hereby authorizes the Landlord the use of
the security and waives having said security being put in a separate
bank account.
NON-ASSIGNABILITY OF SECURITY
-----------------------------
16. That the security deposited under this lease shall not be
mortgaged, assigned or encumbered by the Tenant
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<PAGE>
without the written consent of the Landlord.
DEFAULTS
--------
17. It is expressly understood and agreed that in case the
demised premises shall be deserted or vacated without the consent of the
Landlord, or if default be made in the payment of the rent or any part
thereof as herein specified, or if, without the consent of the Landlord,
the Tenant shall sell, assign, or mortgage this lease or if default be
made in the performance of any of the covenants and agreements in this
lease contained on the part of the Tenant to be kept and performed, or if
the Tenant shall fail to comply with any of the statutes, ordinances,
rules, orders, regulations and requirements of the Federal, State and
Local Governments or of any and all their Departments and Bureaus,
applicable to said premises, or if the Tenant shall file or there be filed
against Tenant a petition in bankrupt or arrangement, or Tenant be
adjudicated a bankrupt or make an assignment for the benefit of creditors
or take advantage of any insolvency act, the Landlord may, if the Landlord
so elects, at any time thereafter terminate this lease and the term
hereof, on giving to the Tenant five days' notice in writing by certified
mail of the Landlord's intention so to do, and this lease and the term
hereof shall expire and come to an end on the date fixed in such notice as
if the said date were the date originally fixed in this lease for the
expiration hereof. Such notice may be given by mail to the Tenant
addressed to the demised premises.
WATER AND SEWER CHARGES
-----------------------
18. Tenant shall pay forty-two (42%) of all of the sewer rent
or charges imposed upon the building. All such rents or charges or
expenses shall be paid as additional rent and shall be added to the next
month's rent thereafter to become due.
TENANT'S LIABILITY AND FIRE INSURANCE
-------------------------------------
19. The Landlord represents that he will arrange for fire and
liability insurance for both the landlord and the Tenant in the amounts of
$500,000.00 for any one person; $1,000,000.00 for any incident. That the
cost of this insurance shall be born by the Tenant. The Landlord
represents that the premium for the first year of the lease will be in the
amount of $4,149.45 which the Tenant agrees to pay to the Landlord forty
two (42%) percent of said premium, to wit: the sum of $1,742.69. Said
payments are to be made not more than quarterly nor more than semi-
annually as bills from the insurance company are received. Landlord to
supply copy of quarterly or semi-annual insurance bill to Tenant. Tenant
is to make payment within twenty (20) days. Landlord represents said
policy also insures the Landlord for full replacement of premises in the
event of fire. Tenant to secure own insurance for contents. All such
payments required to be made by the Tenant shall be deemed as additional
rent.
NO WAIVER OF LANDLORD'S RIGHTS
------------------------------
20. The failure of the Landlord to insist upon a strict
performance of any of the terms, conditions and covenants herein, shall
not be deemed a waiver of any rights or remedies that the Landlord may
have, and shall not be deemed a waiver of any subsequent breach or default
in the terms, conditions and covenants herein contained. This instrument
may
<PAGE>
CONDEMNATION
------------
21. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim against
Landlord for the value of any unexpired term of said lease. No part of any award
shall belong to the Tenant.
REMOVAL OF TRADE FIXTURES
-------------------------
22. If after default in payment of rent or violation of any other provision
of this lease, or upon the expiration of this lease, the Tenant moves out or is
dispossessed and fails to remove any trade fixtures or other property prior to
such said default, then and in that event, the said fixtures and property shall
be deemed abandoned by the said Tenant and shall become the property of the
Landlord.
TENANT'S LIABILITY AFTER TERMINATION OF LEASE
---------------------------------------------
23. In the event that the relation of the Landlord and Tenant may cease or
terminate, by the ejectment of the Tenant by summary proceeding or otherwise, or
after the abandonment of the premises by the Tenant, it is hereby agreed that
the Tenant shall remain liable and shall pay in monthly payments the rent which
accrues subsequent to the possession by the Landlord, and Tenant expressly
agrees to pay as damages for the breach of the covenants herein contained, the
difference between the rent reserved and the rent collected and received, if
any, by the Landlord during the remainder of the unexpired term, such difference
or deficiency between the rent herein reserved and the rent collected if any,
shall become due and payable in monthly payments during the remainder of the
unexpired term, as the amounts of such difference or deficiency shall from time
to time be ascertained; and it is mutually agreed between Landlord and Tenant
that the respective parties hereto shall and hereby do waive trial by jury in
any action, proceeding or counterclaim brought by either of the parties against
the other on any matters whatsoever arising out of or in any way connected with
this lease, the Tenant's use or occupancy of said premises, and/or any claim of
injury or damage.
TENANT'S WAIVER OF REDEMPTION
-----------------------------
24. The Tenant waives all rights to redeem under any law of the State of
New York.
LANDLORD'S INABILITY TO SUPPLY SERVICE
--------------------------------------
25. This lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in nowise be affected, impaired or excused because Landlord
is unable to supply or is delayed in supplying any service expressly or
impliedly to supplied or is unable to make, or is delayed in making any repairs,
additions, alterations or decorations or is unable to supply or is delayed in
supplying any equipment or fixtures if Landlord is prevented or delayed
[ILLEGIBLE]
<PAGE>
rule, order or regulation of any department or subdivision thereof of any
governmental agency or by reason of the condition of supply and demand which
have been or are affected by war or other emergency.
NO DIMINUTION OR ABATEMENT OF RENT
----------------------------------
26. No diminution or abatement of rent, or other compensation,
shall be claimed or allowed for inconvenience or discomfort arising from the
making of repairs or improvements to the building or to its appliances, nor for
any space taken to comply with any law, ordinance or order of a governmental
authority. In respect to the various "services," if any, herein expressly or
impliedly agreed to be furnished by the Landlord to the Tenant, it is agreed
that there shall be no diminution or abatement of the rent, or any other
compensation, for interruption or curtailment of such "service" when such
interruption or curtailment shall be due to accident, alterations or repairs
desirable or necessary to be made or to the inability or difficulty in securing
supplies or labor for the maintenance of such "service" or to some other cause,
not gross negligence on the part of the Landlord. No such interruption or
curtailment of any such "service" shall be deemed a constructive eviction. The
Landlord shall not be required to furnish, and the Tenant shall not be entitled
to receive, any of such "services" during any period wherein the Tenant shall be
in default in respect to the payment of rent. Neither shall there be any
abatement or diminution of rent because of making repairs, improvements or
decorations to the demised premises after the date above fixed for the
commencement of the term, it being understood that rent shall, in any event,
commence to run at such date so above fixed.
LANDLORD NOT LIABLE FOR FAILURE TO GIVE POSSESSION
--------------------------------------------------
27. Landlord shall not be liable for failure to give possession of
the premises upon commencement date by reason of the fact that premises are not
ready for occupancy or because a prior Tenant or any other person is wrongfully
holding over or is in wrongful possession, or for any other reason. The rent
shall not commence until possession is given or is available, but the term
herein shall not be extended. Anything to the contrary notwithstanding the
Tenant is hereby given permission to enter upon the premises and take possession
of same upon the execution of this Lease and the payment of all monies required
hereunder and shall not be liable for the payment of any rent until September 1,
1996, as rent for the months of June, July and August have been paid in advance
as provided for under Article I of this Lease.
REAL ESTATE TAXES
-----------------
28. In the event the real property tax for the demised premises are
increased at any time during the term hereof over and above the 1995/96 School
Tax, which tax this Landlord represents is $19,848.00 and 1996 Town Tax which
Landlord represents is $11,475.00 forty two (42%) percent difference
representing the increase of any subsequent year over the aforesaid year shall
--------
be paid by the Tenant as additional rental to be paid within thirty (30) days
after said tax becomes due and payable to the proper taxing authority. Increases
of taxes herein shall be deemed to include any increase due to an increase of
the rate of tax for each hundred dollars of assessed valuation over the rate in
the aforesaid tax years. Landlord represents that the building has been fully
assessed.
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<PAGE>
NO OBSTRUCTIONS
---------------
29. The Tenant shall neither encumber or obstruct the sidewalk or areas,
if any, in front of the building or the entrance of the building, nor allow the
same to be obstructed or encumbered in any manner in violation of the law.
Tenant shall at the Tenant's expense expressly assume the obligation of keeping
the area in and about the demised premises free and clear of all dirt, rubbish,
refuse, debris, snow, sleet and ice.
NO ALTERATIONS
--------------
30. No changes, alterations or additions shall be made to the demised
premises by Tenant without the prior approval of Landlord, which approval shall
not be unreasonably withheld. Prior to making any such changes, alterations or
additions, Tenant shall submit written plans and drawings respecting same to
Landlord and Landlord shall approve or disapprove same within fifteen (15) days
after receipt thereof, and if Landlord fails to disapprove such plans and
drawings by notice in writing to Tenant within such time, they shall be deemed
approved. All changes, alterations and additions shall comply with the
applicable City, County and State laws, statutes, orders, ordinances, rules and
regulations. Landlord agrees, if necessary, to join in any applications to
governmental authorities for such permits as may be required to do the work
contemplated in this paragraph. Any permanent additions to or alterations of
the demised premises which cannot be removed without material damage to the
demised premises, except removable paneling and wall fixtures and furniture and
trade fixtures (and further excluding all signs, and goods and materials used in
the Tenant's business) shall become a part of the realty and belong to Landlord
unless otherwise agreed by Landlord and Tenant. Tenant's removable paneling and
wall fixtures and furniture, trade fixtures, signs, goods and materials used in
Tenant's business shall at all times remain personal property and may be removed
from time to time by Tenant or other occupants of the demised premises,
provided, however, that Tenant shall be responsible for the cost or repair of
any physical injury to the demised premises caused by the removal of any such
property, but not for any diminution in value of the demised premises caused by
the absence of the property removed or by any necessity for replacing such
property.
ENVIRONMENTAL LAW
-----------------
31. (A) In the event the Tenant uses contaminated or hazardous materials,
it shall give prompt notice of same to the Department of Environmental Agency of
the State of New York and the County Board of Health or any other governmental
agency requiring same. The Tenant agrees not to discharge any item other than
sanitary waste into the existing cesspool which is connected to the bathrooms'
waste line.
The Tenant agrees not to discharge any contaminated materials or toxic
waste arising from any processes used in connection with the Tenant's business
operation into the ground, the cesspool, drainage, or sewer system, and the
Tenant shall comply with all rules and regulations of all governmental agencies
having jurisdiction over the disposal of toxic waste. It being understood that
if failure to comply with the rules and regulations of any governmental agency
shall be deemed a major default in the lease.
If the Tenant receives any notice of the [ILLEGIBLE]
<PAGE>
happening of any event involving the use, spill, discharge or clean-up of any
hazardous or toxic substance or waste or any oil or pesticide on or about the
demised premises or into the sewer septic system or waste treatment systems
servicing the demised premises (any such event is hereinafter referred to as
"Hazardous Discharge") or of any complaint, order, citation or notice with
regard to air omissions, water discharges, noise omissions or any other
environmental health or safety matter affecting the Tenant ("Environmental
Complaint") from any person or entity including the Department of Environmental
Conservation ("DEC"), United States Environmental Protection Agency ("EPA") or
any other governmental agency, the Tenant shall give immediate oral or written
notice of same to the Landlord detailing all relevant facts and circumstances.
The Tenant gives the Landlord and/or its agent, the right to make
periodic inspections of the demised premises for the purposes of investigating
and ascertaining the Tenant's use of contaminated materials and conducting a
complete environmental audit. In the event the Landlord, upon reasonable cause,
elects to have environmental tests, the Tenant shall be liable for the costs of
these tests if the results of said tests show that there is a violation of any
environmental law. In such event, the cost of said tests shall be deemed as
additional rent and failure to pay same within thirty (30) days after demand
shall be deemed a breach of the Lease for non payment of rent. In further
addition thereto, the Tenant shall be liable to the Landlord for all damages
resulting from their action in violation of any environmental law.
The Landlord shall have the right but not the obligation to enter onto
the premises or to take such actions as it deems necessary or advisable to clean
up, remove, resolve or minimize the impact of or otherwise deal with any
Hazardous Discharge or Environmental Complaint upon its receipt of any notice
from any person or entity asserting the happening of a Hazardous Discharge or
any Environmental Complaint on or pertaining to the premises. All costs and
expenses incurred by the landlord in the exercise of any such rights shall be
deemed to be additional rent hereunder and shall be payable by the tenant to the
Landlord upon demand. This paragraph shall survive the expiration date or sooner
termination or this Lease. In addition thereto, the Landlord shall have the
right to obtain injunctive relief to prohibit the Tenant from being in violation
of any Environmental Law and shall be further entitled to any further relief he
may be entitled to either at law or equity.
(B) The Tenant shall indemnify and save the Landlord, its heirs,
successors or assigns, harmless against any and all claims, obligations,
liabilities, violations, penalties, governmental orders, suits, causes of
action, judgments, damages, whether civil or criminal or both, of any and all
kind or nature to which Landlord may be subject in connection with any pollution
and/or hazardous wastes resulting from spills of any chemicals or other waste
materials or otherwise at the demised premises or any other property caused by
or resulting from the use and the operation of the demised premises by the
Tenant, its successors or assigns during Tenant's occupancy of the demised
premises, whether such pollution and/or hazardous waste shall affect the demised
premises or other premises or both, including injuries to persons, loss of life
and damage to property. This indemnification and save harmless agreement shall
also cover any and all liens for hazardous waste clean-up expenses in favor of
the United States, New York State or any political subdivision thereof including
the County of Nassau and Town of Hempstead and any governmental department of
any of the foregoing as well as the Landlord.
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<PAGE>
This indemnification shall include but not be limited to, reasonable
legal fees and other charges to which the Landlord may be put in defending
against any proceedings in connection with the foregoing. This indemnification
and save harmless agreement shall survive the termination of the Lease.
UTILITIES
---------
32. Landlord represents that the premises being leased herein has its
electric meter and that the Tenant shall be solely responsible for the payment
of all utilities for all the electrical use of said demised premises. Tenant
agrees to open in his own name an account with the Long Island Lighting Company
prior to taking occupancy, but in no event later than June 1, 1996.
UTILITY EASEMENTS
-----------------
33. This Lease is subject and subordinate to any utility or drainage
easement or easements now in effect with respect to the demised premises and/or
to any utility or drainage easements hereafter granted by the Landlord, provided
same could not unreasonably interfere with the Tenant's use or enjoyment of the
premises. The Tenant further agrees at the request of the Landlord, at any time
during the term hereof, to execute any and all instruments to effect
subordination to any such utility easement or easements.
DEFINITION OF STRUCTURAL REPAIRS
--------------------------------
34. (A) Structural repairs as herein provided for, as being the
responsibility of the Landlord are defined as follows: the exterior walls, the
foundations and the steel framing, roof and columns. It being understood that
the liability to the Landlord for the repair of said structural repairs is
limited to such repair, as is not the result of the acts, omission or default on
the part of the Tenant, its agents, employees or any third-party conducting
business with the Tenant.
(B) In the event there is any structural repair that is the obligation
of the Landlord to make, the landlord's liability is limited to the making of
said repair only and in no event shall the landlord be responsible for the
consequential damages, direct or indirect. In the event of an emergency,
however, the Tenant shall have the right upon giving Landlord written notice, or
(telegram) to make the repair and have the right to offset the cost of said
repair against the next month's rent. Said repair shall be made by a reputable
contractor and copy of the repair bill shall be submitted to the Landlord.
(C) The Landlord agrees to maintain the roof, provided any repairs
that are required are not the result of the acts, omissions or default upon the
Tenant, its agents, employees or any third party conducting business with the
Tenant. Tenant agrees not to make any openings in the roof without the
Landlord's written consent.
MECHANIC LIENS
--------------
35. The Tenant will not permit any mechanic's or materialsmen's or other
liens to stand against the demised premises for any labor or material furnished
the Tenant in connection with work of any character performed on said premises
by or at the direction of the Tenant; and the Landlord will not permit any such
liens for [ILLEGIBLE]
<PAGE>
Landlord to stand against such premises. However, the Landlord and the Tenant
shall respectively have the right to contest the validity or amount of any such
lien, but upon the final determination of such questions shall immediately pay
any adverse judgment rendered with all proper costs and charges and shall have
the lien released at the contestant's own expense. If Landlord or Tenant desires
to contest any such lien, then prior to commencing such contest it will furnish
the other party with a bond, if requested, to secure the payment of such
obligation.
SUMMARY PROCEEDINGS
-------------------
36. In the event a summary proceeding is commenced by the Landlord or
his successors and assigns, for non-payment of rent during any part of the term
hereunder, then the Landlord shall be entitled to reasonable attorney's fees and
the usual court costs and said attorney's fees and court costs may be added to
the amount demanded in any such summary proceeding. A summary proceeding shall
be deemed to have been commenced hereunder upon service of petition and precept
upon the Tenant. Such legal expense shall be payable together with the defaulted
rent, and in default of payment may be added to the amount of the rent due for
the succeeding month's rent. This clause shall be applicable to any assignee of
the Tenant hereunder as well as the Tenant.
SURRENDER OF PREMISES
---------------------
37. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Landlord the demised premises, (including the
parking, driveways and landscaped areas) broom clean, in good order and
condition, reasonable wear and tear excepted, and Tenant shall remove all of its
property from the premises. Tenant's obligation to observe or perform this
covenant shall survive the expiration or other termination of the term of this
lease. If the last day of the term of this lease or any renewal thereof falls on
Sunday, this lease shall expire on the business day immediately preceding.
EVENT OF DEFAULT
----------------
38. If any one or more of the following events (hereinafter sometimes
called "Events of Default" shall occur:
(A) If this lease or the estate of Tenant hereunder shall be
transferred or assigned to any other person or party, except in the manner as
herein permitted, and Tenant shall fail to remedy or correct the same within
fifteen (15) days after notice by Landlord; or
(B) If default shall be made in the due and punctual payment of
the net rent or additional rent payable under this lease or any part thereof
when and as the same shall become due and payable, and such default shall
continue for a period of ten (10) days; or
(C) If Tenant shall fail to deposit with the Landlord the Tenant's
proportionate share of the real estate taxes assessed or imposed against the
Demised Premises or other monies as provided by the provisions under the terms
of this Article, or any further rent payments, and any such default shall
continue for a period of ten (10) days after notice by
<PAGE>
the performance of or compliance with any of the other covenants, agreements,
terms or conditions contained in this lease, and such default shall continue for
a period of twenty (20) days after written notice thereof from Landlord to
Tenant except if said default cannot reasonably be remedied within twenty (20)
days after written notice of such default, then no default shall be deemed
to exist, if Tenant shall have promptly commenced to cure said default within
said twenty (20) day period and continues to prosecute the within due diligence
to completion.
(E) If at any time during the term hereby demised, there shall be
filed by Tenant in any court pursuant to any statute, either of the United
States or any State, a petition in bankruptcy or insolvency, or for
reorganization, or for the appointment of a receiver or trustee of all or a
portion of Tenant's property, or if Tenant makes an assignment for the benefit
of creditors or petition for or enter into an arrangement; or
(F) If at any time during the term hereby demised, there shall be
filed against Tenant in any court pursuant to any statute either of the United
States or of any State, a petition in bankruptcy or insolvency, or for
reorganization, or for appointment of a receiver or trustee of all or a portion
of Tenant's property, and if within ninety (90) days after the commencement of
any such proceedings against Tenant the same shall not have been dismissed; then
and in any such event, Landlord may serve a written five (5) day notice of
cancellation and termination of this lease, and upon the expiration of said
five (5) days, this lease and the term thereunder shall end and expire as fully
and completely as if the date of expiration of such five (5) day period were the
day herein definitely fixed for the end and expiration of this lease and the
term thereof, and Tenant shall then quit and surrender to Landlord the Demised
Premises and each and every part thereof, but Tenant shall remain liable as
hereinafter provided.
COUNTERCLAIM
------------
39. The Tenant hereby agrees not to interpose any counterclaim or set off
of whatever nature or description in any action or summary proceedings by the
Landlord against the Tenant for non-payment of rent, damages or deficiencies,
whether such action or summary proceeding be brought under this lease or any
renewal, extension, holdover, or modification thereof. Nothing herein contained,
however, shall be construed as a waiver of the Tenant's right as a separate
action on a bona fide claim against the Landlord.
LANDLORD NO PERSONAL LIABILITY
------------------------------
40. It is specifically understood and agreed that there shall be absolutely
no personal liability on the part of the Landlord or its successors and interest
with respect to any of the terms, covenants and conditions of this lease, and
Tenant shall look solely to the equity of Landlord or such successor in interest
in the lease in the building for the satisfaction of each and every remedy of
Tenant in the event of any breach by Landlord or by the successor in interest of
any of the terms, covenants and conditions of this lease to be performed by
Landlord, such exculpation of personal liability to be absolutely and without
any exception whatsoever.
<PAGE>
NOTICES
-------
41. All notices required to be given the Tenant or Landlord under this
lease shall be given by certified mail addressed to the respective parties at
the addresses set forth below or such other place designated by them in writing:
LANDLORD: Harlo Associates
275 Broad Hollow Road
Melville, New York 11747
Attn: Herbert Haft
COPY TO: Roseman Roseman & Feldman, Esqs.
8 Fletcher Place
Melville, New York 11747
Attn: Gilbert Roseman, Esq.
TENANT: Bactolac Pharmaceuticals, Inc.
52-02 Grand Avenue-Unit H,
Maspeth, N.Y. 11378
Attn: Mr. Pailla Reddy
COPY TO: M.S. Chawla, Esq.
74-09 37th Avenue, Suite 419
Jackson Heights, N.Y. 11372
BROKER
------
42. The parties represent that SCHACKER REAL ESTATE CORP. is the broker
that brought about this agreement. Landlord agrees to be solely responsible for
the payment of broker's commissions reference this Lease, as per separate
agreement.
TENANT'S INDEMNIFICATION
------------------------
43. (A) Tenant shall indemnify and save Landlord harmless from and against,
and shall reimburse Landlord for, all liabilities, obligations, damages, fines,
penalties, claims, demands, costs, charges, judgments and expenses, including
but not limited to, reasonable architects; and attorneys' fees, which may be
imposed upon or incurred or paid by or asserted against Landlord or Landlord's
fee or reversionary or other interest in the demised premises by reason of or in
connection with any of the following occurring during the terms of this lease:
(i) Any Tenant's alterations and any part thereof in connection
therewith;
(ii) The Tenant's use, non-use, possession, occupation, condition,
operation, maintenance or management of the demised premises or any part
thereof;
(iii) Any negligent or tortious act on the part of Tenant or any of its
agents, contractors, servants, employees, sub-tenants or licensees;
(iv) Any accident, injury, death or damage to any person or property
occurring in, on or about the demised premises or any part thereof, limited to
the amount of insurance coverage for such damages provided the Tenant has
complied with the insurance requirements as set forth in this lease.
(v) Any failure on the part of Tenant to [ILLEGIBLE] with any of the
covenants, agreements, terms,
<PAGE>
provisions, conditions or limitations contained in this lease or its part to be
performed or complied with.
Nothing contained in this Sub-paragraph (A) shall be deemed to require
Tenant to indemnify Landlord with respect to any tortious act committed by
Landlord, or with respect to expenses incurred by Landlord which Tenant is not
obligated under the provisions of this lease to pay or reimburse Landlord for.
(B) In case any action or proceeding is brought against Landlord by
reason of any claim mentioned in this Article, Tenant, upon notice from
Landlord, shall, at Tenant's expense resist or defend such action or proceeding
in Landlord's name, if necessary, by counsel for the insurance company, if such
claim is covered by insurance, otherwise, by counsel approved by Landlord.
(C) The provisions of this Article shall not in any way be affected by
the absence in any case of any covering insurance or by the failure or refusal
of any insurance company to perform any obligation on its part.
TENANT ESTOPPEL LETTER
----------------------
44. Tenant agrees at any time and from time to time, upon not less than ten
(10) days prior notice by Landlord, to execute, acknowledge and deliver, without
charge, to Landlord, or to any person designated by Landlord, a statement in
writing certifying that this lease is unmodified (or if there have been
modifications, indentifying the same by the date thereof and specifying the
nature thereof), that Tenant has not received any notice of termination of this
lease (or if Tenant has received such a notice, that it has been revoked, if
such be the case), that to the knowledge of Tenant no Event of Default exists,
specifying the same and stating that the same has been cured, if such be the
case), that Tenant to its knowledge has no claims against Landlord hereunder (or
if Tenant has any such claims, specifying the same), and the dates to which the
net rent and the other sums and charges payable by Tenant hereunder have been
paid.
QUIET ENJOYMENT
---------------
45. And the said Landlord doth covenant that the said Tenant on paying the
said yearly rent, and performing the covenants aforesaid, shall and may
peacefully and quietly have, hold and enjoy the said demised premises for the
term aforesaid, provided, however, that this covenant shall be conditioned upon
the retention of title to the premises by the Landlord.
LANDLORD'S WORK LETTER
----------------------
46. Landlord agrees to do the following work at the premises:
SEE ANNEXED LETTER WHICH IS MADE PART OF THIS LEASE.
LATE CHARGE
-----------
47. When rent is not paid by the tenth of the month, for which it is due,
the Tenant agrees to pay a late charge of three (3%) percent of the rent due.
This shall also apply for any dishonored check which results in the failure of
<PAGE>
EXTERIOR MAINTENANCE
--------------------
48. The Tenant acknowledges that the leased premises are part of a
building in which this Tenant occupies forty two (42%) percent. The Tenant
agrees to cooperate with other Tenants reference maintaining the outside of the
demised premises, including but not limited to, snow removal, parking lot
maintenance, etc. This Tenant shall only be responsible for forty two (42%)
percent of the cost for said maintenance.
Landlord agrees that a similar clause as this will be contained
in any Lease given to any subsequent Tenant for the remainder of the property
and that said clause is included in any existing leases.
HEAT, WATER AND HVAC
--------------------
49. Landlord represents that the building is heated by oil and that
there is only one oil tank that supplies fuel for the heating system for the
entire building. Tenant agrees to cooperate with the Landlord and/or other
Tenant reference the purchase of oil and the payment of water bills. this Tenant
agrees to be responsible for the payment of forty two (42%) percent of all
heating and water costs. If Tenant cannot agree on supplier of oil, Landlord
will choose the oil company to service the building. The present Tenant of the
front portion of the premises is presently paying all of the heating and water
bills and is maintaining the heating, ventilating and air condition equipment.
Said Tenant will present the bills for said items and the Tenant herein will
reimburse that Tenant for forty-two (42%) percent of the cost of same. Failure
to make these payments to the Tenant shall be deemed a default in the payment of
rent.
ENTIRE AGREEMENT
----------------
50. This lease contains the entire agreement between the parties and
all prior negotiations and agreements are merged herein. Neither Landlord nor
Landlord's agent or representative has made any representation, or statement, or
promise, upon which Tenant has relied regarding any matter or thing relating to
the Building, the land allocated to it, (including parking area) or the demised
premises, or any other matter whatsoever, except as is expressly set forth in
this lease, including, but without limiting the generality of the forgoing, any
statement, representation or promise as to the fitness of the demised premises
for any particular use, the services to be rendered to the demised premises or
the prospective amount of any item of additional rent. No rights, easements or
licenses are or shall be acquired by Tenant by implication or otherwise unless
expressly set forth in this lease. This lease may not be changed, modified or
discharged, in whole or in part, orally, and no executory agreement shall be
effective to change, modify or discharge, in whole or in part, this lease or any
obligations under this lease, unless such agreement is set forth in a written
instrument executed by Landlord and Tenant.
INDEPENDENT COVENANTS
---------------------
51. Each and every covenant contained in the within lease shall be
deemed separate and independent and not dependent upon any other provision of
this lease nor the use and occupation of the premises by the Tenant. In the
event any portion or paragraph of this lease shall be declared invalid, the
balance of any affected paragraph and the balance of the
-16-
<PAGE>
provisions hereof shall remain in full force and effect.
AND IT IS MUTUALLY UNDERSTOOD AND AGREED that the covenants and
agreements contained in the within Lease shall be binding upon the parties
hereto and upon their respective successors, heirs, executors and
administrators.
IN WITNESS WHEREOF, the parties have interchangeably set their hands and
seals (or caused these presents to be signed by their proper corporate offices
and caused their proper corporate seal to be hereto affixed) this 15 day of
April, 1996.
Signed, sealed and delivered in the presence of
HARLO ASSOCIATES
By: /s/ Herbert Haft
--------------------------------
HERBERT HAFT, Partner
BACTOLAC PHARMACEUTICALS, INC.
By: /s/ Pailla Reddy
--------------------------------
PAILLA REDDY
-17-
<PAGE>
EXHIBIT 21.1
------------
List of Subsidiaries of Registrant
- ----------------------------------
AC Acquisition Co., Inc., a Delaware corporation
QBI Acquisition Co., Inc., a Delaware corporation
BP Acquisition Co., Inc., a Delaware corporation
NL Acquisition Co., Inc., a Delaware corporation
UNC Acquisition Co., Inc., a Delaware corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we consent to the use of the
reports included herein and to the reference to our Firm under the heading
"Experts" in this Registration Statement on Form S-1 filed by Advanced
Nutraceuticals, Inc.
GRANT THORNTON LLP
Houston, Texas
September 15, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation of our report dated April 15, 1997 on the
financial statements of Quality Botanical Ingredients, Inc. (formerly Island
Organics, Inc.) as of December 31, 1996 and for the year ended December 31,
1996, which is included in this Form S-1 dated September 1998 of Advanced
Nutraceuticals, Inc., and to the reference to our Firm under the caption
"Experts" in the Form S-1.
AMPER, POLITZINER & MATTIA P.A.
September 14, 1998
Edison, New Jersey
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<PERIOD-START> JAN-01-1998 JAN-01-1997
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