<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HAUSER, INC.
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant) Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
10,057,000
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$3.75
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$37,713,750
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(5) Total fee paid:
$7,542.75
- - - - - - - - - - - - - -------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(3) Filing Party:
- - - - - - - - - - - - - -------------------------------------------------------------------------------
(4) Date Filed:
<PAGE>
HAUSER, INC.
5555 AIRPORT BOULEVARD
BOULDER, CO 80301
_____________, 1999
Dear Hauser Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
(the "SPECIAL MEETING") of Hauser, Inc. ("HAUSER") on __________________, 1999,
at 10:00 a.m. Mountain Time at 5555 Airport Boulevard, Boulder, CO 80301.
At this important meeting, you will be asked to approve (1) the
Agreement and Plan of Merger, dated as of December 8, 1998 (the "MERGER
AGREEMENT"), among Hauser, Zuellig Group N.A., Inc. ("ZGNA"), Zuellig
Botanicals, Inc. ("ZBI"), a subsidiary of ZGNA, and certain other parties and
(2) the issuance to ZGNA and ZBI of shares of Common Stock of Hauser
representing 49% of the issued and outstanding shares after giving effect to
such issuance, subject to adjustment under certain circumstances. Pursuant to
the terms of the Merger Agreement, three newly formed subsidiaries of Hauser
will merge with and into three subsidiaries of ZGNA and, as a result, the three
ZGNA subsidiaries will become wholly owned subsidiaries of Hauser (the
"MERGER").
The proposed Merger is described in the accompanying Proxy Statement,
the beginning of which includes a summary of the terms of the Merger Agreement
and certain other information relating to the proposed transaction.
Adams Harkness & Hill ("AHH") was retained by Hauser to act as its
independent financial advisor in connection with the Merger. As discussed in the
accompanying Proxy Statement, AHH has delivered to the Hauser Board of Directors
(the "BOARD") its written opinion that, as of December 8, 1998, and based upon
and subject to certain matters stated in its written opinion, the terms of the
Merger Agreement are fair, from a financial point of view, to Hauser and its
shareholders.
ON DECEMBER 8, 1998 THE BOARD UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE PROPOSED STOCK ISSUANCE TO ZGNA AND ZBI. THE BOARD UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
At the Special Meeting, you will also be asked to consider and act upon
the adoption of the Hauser 1999 Stock Incentive Plan (the "1999 STOCK INCENTIVE
PLAN"). On January 28, 1999, the Board of Directors approved the 1999 Stock
Incentive Plan. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE 1999 STOCK
INCENTIVE PLAN CONTINGENT UPON THE APPROVAL OF THE MERGER AGREEMENT. THE
APPROVAL OF THE MERGER AGREEMENT IS NOT CONTINGENT ON ADOPTION OF THE 1999 STOCK
INCENTIVE PLAN, BUT ADOPTION OF THE 1999 STOCK INCENTIVE PLAN IS CONTINGENT UPON
APPROVAL OF THE MERGER AGREEMENT.
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Information concerning the matters to be considered and voted upon at
the Special Meeting is set forth in the attached Notice of Special Meeting and
Proxy Statement. All shareholders are cordially invited to attend the Special
Meeting in person. Your participation at this meeting is very important,
regardless of the number of shares you hold. Whether or not you plan to attend
the Special Meeting, please complete, date, sign and return the accompanying
proxy promptly in the enclosed envelope. If you attend the Special Meeting, you
may revoke your proxy and vote your shares in person.
Thank you for your prompt attention.
Sincerely,
HAUSER, INC.
DEAN P. STULL, Ph.D., Chairman
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HAUSER, INC.
5555 AIRPORT BOULEVARD
BOULDER, CO 80301
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held ______________, 1999
To Our Shareholders:
A Special Meeting of Shareholders of Hauser, Inc., a Colorado corporation
("HAUSER"), will be held at 10:00 a.m., Mountain Time, on _____________________,
1999, at 5555 Airport Boulevard, Boulder, CO, for the following purposes, all of
which are more completely set forth in the accompanying Proxy Statement.
1. To consider and vote upon the Agreement and Plan of Merger, dated as of
December 8, 1998 (the "MERGER AGREEMENT"), by and among Hauser, Zuellig
Group N.A., Inc. ("ZGNA"), Zuellig Botanicals, Inc. ("ZBI") and certain
other parties, and the issuance by Hauser to ZGNA and ZBI of shares of
Hauser common stock, par value $.001 per share, representing 49% of the
issued and outstanding shares after giving effect to such issuance, subject
to adjustment under certain circumstances;
2. To approve the Hauser 1999 Stock Incentive Plan, contingent upon approval
of the Merger Agreement and the issuance of shares to ZGNA and ZBI; and
3. To transact such other business as may properly come before the meeting, or
any adjournment thereof.
All shareholders are cordially invited to attend the meeting, although only
shareholders of record at the close of business on ___________________, 1999
will be entitled to notice of, and to vote at, the meeting or any and all
adjournments thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Dean P. Stull, Ph.D.
President and Chief Executive Officer
_____________, 1999
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE PREPAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. YOUR
PROMPT RETURN OF THE PROXY WILL HELP TO ASSURE A QUORUM AT THE MEETING AND AVOID
ADDITIONAL COMPANY EXPENSE FOR FURTHER SOLICITATION. YOUR PROXY MAY BE REVOKED
AT ANY TIME BEFORE IT IS VOTED.
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PRELIMINARY COPY
HAUSER, INC.
5555 AIRPORT BOULEVARD
BOULDER, CO 80301
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ______________, 1999
This Proxy Statement (the "PROXY STATEMENT") is being furnished to
holders of common stock, par value $.001 per share (the "COMMON STOCK"), of
Hauser, Inc., a Colorado corporation ("HAUSER"), in connection with the
solicitation of proxies by the Board of Directors of Hauser (the "BOARD") for
use at the Special Meeting of Shareholders of Hauser (the "SPECIAL MEETING") to
be held at 10:00 a.m. Mountain Time, on ____________________________, 1999 at
5555 Airport Boulevard, Boulder, Colorado, and at any and all adjournments of
the Special Meeting.
This Proxy Statement relates to the proposed acquisition by Hauser of
three subsidiaries of Zuellig Group, N.A., Inc., a Delaware corporation
("ZGNA"), pursuant to the Agreement and Plan of Merger, dated as of December 8,
1998, by and among Hauser, ZGNA, Zuellig Botanicals, Inc., a Delaware
corporation and a subsidiary of ZGNA ("ZBI"), and certain other parties (the
"MERGER AGREEMENT"). Pursuant to the Merger Agreement, ZGNA and ZBI will receive
shares of Common Stock representing 49% of the issued and outstanding shares of
Common Stock, after giving effect to such issuance, subject to adjustment as
described herein. Pursuant to applicable rules of the NASDAQ National Market
System ("NASDAQ"), the shareholders of Hauser must consent to the issuance of
shares of Common Stock contemplated by the Merger Agreement because the shares
to be issued to ZGNA and ZBI exceed 20% of Hauser's outstanding shares of Common
Stock and may be deemed to constitute a change in control. Consummation of the
Merger Agreement is subject to various conditions, including the approval of the
Hauser shareholders.
At the Special Meeting, Hauser shareholders will also be asked to
approve the Hauser, Inc. 1999 Stock Incentive Plan (the "1999 STOCK INCENTIVE
PLAN").
THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE ISSUANCE
OF COMMON STOCK TO ZGNA AND ZBI, AND THE 1999 STOCK INCENTIVE PLAN. THE BOARD
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND ISSUANCE OF COMMON STOCK TO ZGNA AND ZBI, AND THE 1999 STOCK
INCENTIVE PLAN. THE APPROVAL OF THE MERGER AGREEMENT AND ISSUANCE OF SHARES OF
COMMON STOCK TO ZGNA AND ZBI ARE NOT CONTINGENT ON ADOPTION OF THE 1999 STOCK
INCENTIVE PLAN, BUT ADOPTION OF THE 1999 STOCK INCENTIVE PLAN IS CONTINGENT UPON
APPROVAL OF THE MERGER AGREEMENT AND THE ISSUANCE OF COMMON STOCK TO ZGNA AND
ZBI.
Shareholders who execute proxies for the Special Meeting may revoke
their proxies at any time prior to their exercise by delivering written notice
of revocation to Hauser, by delivering a duly executed Proxy Card bearing a
later date, or by attending the Special Meeting and voting in person.
The Board has established _______, 1999 as the record date (the "RECORD
DATE") for the Special Meeting. Only shareholders of record at the close of
business on the Record Date will be entitled to receive notice of and to vote at
the Special Meeting.
It is anticipated that this Proxy Statement and the accompanying Proxy
Card and Notice will be mailed to shareholders on or about ___________________,
1999.
The date of this Proxy Statement is ______, 1999.
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TABLE OF CONTENTS
<TABLE>
<C> <C>
SUMMARY..............................................................................1
RISK FACTORS.........................................................................4
THE SPECIAL MEETING..................................................................6
THE MERGER...........................................................................7
THE MERGER AGREEMENT................................................................15
CERTAIN ANCILLARY AGREEMENTS........................................................20
MANAGEMENT AFTER THE MERGER.........................................................25
EMPLOYMENT AGREEMENTS...............................................................27
DESCRIPTION OF HAUSER...............................................................28
DESCRIPTION OF THE CONTRIBUTED SUBSIDIARIES.........................................29
SELECTED HISTORICAL FINANCIAL DATA OF HAUSER........................................31
SELECTED HISTORICAL FINANCIAL DATA OF THE CONTRIBUTED SUBSIDIARIES..................33
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTRIBUTED SUBSIDIARIES.....................34
UNAUDITED PRO FORMA FINANCIAL STATEMENTS............................................37
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS......................45
ARRANGEMENTS AFFECTING CONTROL OF THE COMPANY.......................................46
APPROVAL OF THE 1999 STOCK INCENTIVE PLAN...........................................47
DIRECTOR AND EXECUTIVE COMPENSATION.................................................49
SUMMARY COMPENSATION TABLE..........................................................53
OPTION GRANTS IN LAST FISCAL YEAR...................................................55
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES.....................................................................56
SHAREHOLDER RETURN..................................................................56
INDEPENDENT AUDITORS ...............................................................57
OTHER MATTERS.......................................................................57
SHAREHOLDER PROPOSALS...............................................................57
FORWARD LOOKING STATEMENTS..........................................................57
AVAILABLE INFORMATION...............................................................58
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...................................58
</TABLE>
Appendix A - Opinion of Adams Harkness & Hill
Appendix B - Agreement and Plan of Merger dated December 8, 1998, as amended
Appendix C - Form of Governance Agreement, as amended
Appendix D - Audited Financial Statements - Hauser, Inc. as of April 30, 1998
and 1997 and for each of the three fiscal years then ended
Appendix E - Unaudited Financial Statements - Hauser, Inc. as of October 31,
1998 and April 30, 1998 and for the three and six month periods ended October
31, 1998 and 1997
Appendix F - Hauser, Inc. - Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal years ended April 30, 1998,
1997 and 1996 and for the three and six month periods ended October 31, 1998 and
1997
Appendix G - Audited Financial Statements - Contributed Subsidiaries - as of
March 31, 1998, 1997 and 1996 and for each of the three years in the period
ended March 31, 1998
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Appendix H - Unaudited Financial Statements - Contributed Subsidiaries - as of
October 31, 1998 and March 31, 1998 and for the seven months ended October 31,
1998 and 1997
Appendix I - 1999 Stock Incentive Plan
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<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS INTENDED ONLY TO HIGHLIGHT CERTAIN INFORMATION
CONTAINED ELSEWHERE IN THIS PROXY STATEMENT AND THE APPENDIXES HERETO. THIS
SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE
MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT.
SHAREHOLDERS SHOULD READ CAREFULLY THIS PROXY STATEMENT IN ITS ENTIRETY. THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT WITH RESPECT TO HAUSER, ITS
SUBSIDIARIES AND AFFILIATES HAS BEEN SUPPLIED BY HAUSER, AND THE INFORMATION
WITH RESPECT TO ZGNA, ITS SUBSIDIARIES AND AFFILIATES HAS BEEN SUPPLIED BY ZGNA.
CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS
PROXY STATEMENT.
THE COMPANIES
HAUSER. Hauser is a premier supplier of bulk natural extracts and
ingredients to dietary supplement and food ingredient suppliers in the United
States. Its proprietary extraction and purification technologies allow the
extraction of botanical extracts at a high quality, yield and concentration.
Hauser's Technical Services business unit ("TECHNICAL SERVICES") has earned a
national reputation for scientific and problem-solving excellence. Technical
Services offers innovative technical solutions and has developed expertise in
natural product isolation, pharmaceutical development, and food products and
nutraceuticals formulation. In December 1998, Hauser announced its intention to
terminate its paclitaxel business to focus its corporate resources on its
Natural Products and Technical Services business units. The principal executive
offices of Hauser are located at 5555 Airport Boulevard, Boulder, CO 80301 and
its telephone number is (303) 443-4662.
ZGNA. ZGNA owns all of the issued and outstanding shares of ZBI,
ZetaPharm, Inc., a New York corporation ("ZETAPHARM"), and Wilcox Drug Company,
Inc., a Delaware corporation ("WILCOX"). ZBI owns all of the issued and
outstanding shares of Zuellig Botanical Extracts, Inc., a Delaware corporation,
("ZBE"). ZetaPharm, Wilcox and ZBE are collectively referred to as the
"CONTRIBUTED SUBSIDIARIES" and the shares of common stock of the Contributed
Subsidiaries are referred to as the "SUBSIDIARY SHARES". ZGNA, through its
subsidiaries, sells nutraceutical extracts, nutritional supplements,
pharmaceutical ingredients and food additives used in a variety of products in
the dietary supplement, health food, pharmaceutical, and food and beverage
industries. Nutraceutical extracts are extracted from botanical products and are
used in dietary supplements which may be consumed in capsules, tablets, liquids
or as ingredients in processed food. In addition, certain subsidiaries are
engaged in the cultivation and sourcing of high-quality botanical raw materials
used in the manufacture of such products.
ZBI and Wilcox are suppliers of botanical raw materials worldwide and
ZBE sells nutraceutical extracts to manufacturers of dietary supplements in the
United States. ZetaPharm imports and sells bulk vitamins, dietary supplements,
pharmaceutical ingredients and food additives for the health food,
pharmaceutical and food and beverage industries.
The principal executive offices of ZBE are located at 2550 El Presidio
Street, Long Beach, CA 90810 and the telephone number is (310) 637-9566. The
principal executive offices of ZetaPharm are located at 70 West 36th Street, New
York, NY 10018 and the telephone number is (212) 643-2310. The principal
executive offices of Wilcox are located at 755 George Wilson Road, Boone, NC
28697 and the telephone number is (828) 264- 3615.
THE SPECIAL MEETING
TIME, PLACE AND DATE
The Special Meeting will be held at 10:00 am, Mountain Time, on ____,
1999, at 5555 Airport Boulevard, Boulder, CO 80301.
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PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, Hauser shareholders will consider and vote upon
the Merger Agreement, the issuance by Hauser of shares of Common Stock to ZGNA
and ZBI, and the 1999 Stock Incentive Plan. Hauser shareholders will also
consider and vote upon any other matter that may properly come before the
Special Meeting. Pursuant to applicable rules of the NASDAQ National Market
System, the shareholders of Hauser must consent to the issuance of Common Stock
to ZGNA and ZBI pursuant to the Merger Agreement because the shares of Common
Stock to be issued to ZGNA and ZBI exceed 20% of Hauser's outstanding shares of
Common Stock and may be deemed to constitute a change in control.
REQUIRED VOTE; RECORD DATE
The presence in person or by proxy of the holders of forty percent
(40%) of the total issued and outstanding shares of Common Stock is necessary in
order to constitute a quorum for the Special Meeting. Assuming a quorum is
present in person or by proxy, each proposal will be approved if the votes cast
in favor of adoption of the proposal exceed the votes cast against the proposal.
Abstentions and broker non-votes, if any, will not be included in vote totals
and, as such, will have no effect on the proposed vote on the Merger Agreement
and stock issuance to ZGNA and ZBI, and the 1999 Stock Incentive Plan. Only
holders of Common Stock on the close of business on the Record Date will be
entitled to notice of and to vote at the Special Meeting.
THE MERGER AGREEMENT
GENERAL
Pursuant to the Merger Agreement, at the Effective Time, a newly
formed, wholly owned subsidiary of Hauser will merge into each of the
Contributed Subsidiaries (the "MERGER"). As a result of the Merger, each of the
Contributed Subsidiaries will become wholly owned subsidiaries of Hauser, and
the former shareholders of the Contributed Subsidiaries, ZGNA and ZBI will be
entitled to receive shares of Common Stock aggregating 49% of the issued and
outstanding shares of Common Stock after giving effect to such issuance. The
number of shares to be issued to ZGNA and ZBI are subject to downward adjustment
under certain circumstances. See "THE MERGER AGREEMENT - The Escrow
Agreement". The Common Stock issued pursuant to the Merger Agreement will not
be registered with the Securities and Exchange Commission and will be issued
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended. See "THE MERGER AGREEMENT - General".
CONDITIONS
Consummation of the Merger Agreement is subject to the satisfaction or
waiver of conditions, including (i) obtaining requisite Hauser shareholder
approval; (ii) the absence of any injunction or other similar order; (iii) the
availability of certain financing arrangements; and (iv) the receipt of certain
consents or approvals. See "THE MERGER AGREEMENT - Conditions of the Merger".
TERMINATION
The Merger Agreement may be terminated at any time with the consent of
the parties and under certain other circumstances at the election of either ZGNA
or Hauser. Under certain circumstances, Hauser will be obligated upon
termination of the Merger Agreement to pay all of ZGNA's reasonable
out-of-pocket expenses incurred in connection with the transaction, up to
$500,000, as well as a break-up fee of $1,500,000. See "THE MERGER AGREEMENT-
Break-Up Fee". In addition, Hauser has granted to ZGNA an option to acquire
2,000,000 shares of Common Stock at a price of $4.11 per share (the "OPTION").
The Option becomes exercisable if the Merger does not occur and Hauser, within
nine months of the termination of the Merger Agreement, has had 20% or more of
its stock acquired by, has merged with, or has sold all or substantially all its
assets to a person or entity other than ZGNA or its affiliates. See "CERTAIN
ANCILLARY AGREEMENTS Agreement for Option to Acquire Common Stock of Hauser".
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GOVERNANCE AND MANAGEMENT OF HAUSER AFTER THE MERGER
Upon consummation of the Merger, the Board will consist of nine
directors, three of whom will be appointed by the current Board (the "CONTINUING
DIRECTORS"), three of whom will be appointed by ZGNA (the "ZGNA DIRECTORS"), and
three of whom will be independent directors (the "INDEPENDENT DIRECTORS"). ZGNA
and ZBI have agreed to vote the Common Stock owned by them for the persons
designated as Independent Directors and Continuing Directors for five years,
unless ZGNA owns less than 20% of the Common Stock. In addition, at the time of
the Merger, Mr. Volker Wypyszyk, the Chief Executive Officer of ZGNA, will
become the Co- Chief Executive Officer of Hauser with Dr. Dean Stull. See
"MANAGEMENT AFTER THE MERGER".
RECOMMENDATION OF THE BOARD
THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND ISSUANCE OF
COMMON STOCK TO ZGNA AND ZBI , AND THE 1999 STOCK INCENTIVE PLAN AND RECOMMENDS
THAT SHAREHOLDERS VOTE FOR THE MERGER AGREEMENT AND ISSUANCE OF COMMON STOCK TO
ZGNA AND ZBI, AND THE 1999 STOCK INCENTIVE PLAN. SEE "THE SPECIAL MEETING -
PURPOSE OF THE SPECIAL MEETING".
OPINION OF FINANCIAL ADVISOR
Adams, Harkness & Hill, Inc., the financial advisor to the Board
("AHH"), delivered its written opinion to the Board to the effect that as of
December 8, 1998, the consideration to be paid to ZGNA and ZBI pursuant to the
Merger Agreement was fair to the Hauser shareholders, from a financial point of
view. The full text of the written opinion of AHH, which sets forth the
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached hereto as Appendix A. HOLDERS OF COMMON
STOCK ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. See "THE MERGER - Opinion
of Hauser's Financial Advisors".
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RISK FACTORS
Holders of Common Stock should consider carefully all of the
information contained in this Proxy Statement, including the following risk
factors:
RISKS RELATED TO THE MERGER
Hauser entered into the Merger Agreement with the expectation that the
Merger will result in certain benefits to Hauser's business operations and
activities in the extract and nutraceutical markets. Achieving the benefits of
the Merger will depend in part upon the integration of the businesses of Hauser
and the Contributed Subsidiaries in an efficient manner, and there can be no
assurance that this will occur. The transition to a combined company will
require substantial attention from management. Hauser management does not have
the experience in integrating diverse operations on the scale represented by the
Merger. The diversion of management attention and any difficulties encountered
in the transition process could have an adverse effect on the revenues and
operating results of Hauser. In addition, the process of combining the two
organizations could cause the interruption of, or a disruption in, the
activities of the businesses of Hauser, which could have a material adverse
effect on Hauser. There can be no assurance that Hauser will realize any of the
anticipated benefits of the Merger.
Following the Merger, the current shareholders of Hauser will own
approximately 51%, subject to adjustment under certain circumstances, (see
"THE MERGER AGREEMENT - The Escrow Agreement") of the outstanding shares of
Common Stock. This represents substantial dilution of the ownership interest
in Hauser of the current Hauser shareholders.
NUTRACEUTICAL EXTRACTS -- SUPPLIERS AND CUSTOMERS
For the past eight years, ZBE has purchased approximately 75% of its
annual requirements of nutraceutical extracts from two subsidiaries of Martin
Bauer GmbH & Co., a German manufacturer ("MARTIN BAUER"). The purchases have
been made pursuant to an agreement which designated ZBE as the exclusive
distributor for such products in the United States and Canada. A notice of
termination was given to ZBE by the suppliers in July 1998. Martin Bauer
continues to sell nutraceutical extracts to ZBE. Hauser intends and believes
that it has the capability to manufacture most of the extracts previously
supplied to ZBE pursuant to the distribution agreement or to acquire other
products from third parties. However, Hauser will not be able to supply all
of the nutraceutical extract requirements of ZBE at the time of the Merger.
Hauser will need to expand its production staff, acquire and modify plant and
equipment, and develop particular expertise to manufacture certain products.
Customers of ZBE have generally indicated to ZBE that Hauser-manufactured
nutraceutical extracts, meeting customer specifications, would be acceptable.
Although Hauser believes that it has both the technical ability and
manufacturing capacity to manufacture such extracts, there can be no
assurance that Hauser will be able to produce all of such nutraceutical
extracts required by ZBE or that all of the present ZBE customers will accept
nutraceutical extracts produced by Hauser.
COMPETITION FOR CUSTOMERS AND RAW MATERIALS
Nutraceutical extracts have historically been produced by relatively
small companies. However, because the market for consumer products containing
such extracts has grown at the rate of 15% or more in each of the past three
years, larger companies, including pharmaceutical companies, are beginning to
sell consumers products that contain nutraceutical extracts. Such companies have
stronger financial, research, technical, manufacturing, marketing and sales
capabilities than Hauser and, therefore, can become effective competitors of
Hauser.
Hauser expects that the subsidiaries of Martin Bauer will seek to
compete with Hauser in the sale of nutraceutical extracts to those customers of
ZBE which previously purchased products manufactured by such subsidiaries and to
other potential customers.
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Since nutraceutical extracts are derived from botanical raw materials,
a substantial portion of which are collected in the wild, the ability to locate
such products and purchase them at competitive prices plays a significant, if
not determinative, role in the capability of a manufacturer to produce
nutraceutical extracts. The continued growth of the nutraceutical extract market
will increase the competition for the purchase of botanical products and will
likely increase the price of such products. Adverse growing conditions, loss of
habitat, plant disease and international politics can also reduce the amount of
botanical raw materials which are available to manufacturers of extracts.
BUSINESS CONCENTRATION
Although the Merger will provide Hauser with a much broader product
range and potential geographic scope of customers, Hauser will no longer be in
the paclitaxel business and the herb, nutraceutical and extracts business will
be a far higher percentage of total revenues relative to its Technical Services
division. As such, Hauser will be more greatly affected by any adverse business
conditions unique to the herb, nutraceutical or extracts business. Rapid growth
in the herb and nutraceuticals industry in general has tended in the recent past
to be significantly affected by "new" products gaining the attention of the
consuming public. If new products do not become available or attract the
attention of the consuming public, or if the consuming public in general becomes
less interested in natural health products, the growth rate of consumer health
products could decline or even reverse. See "Unaudited Pro Forma Financial
Statements".
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THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, Hauser shareholders will consider and vote upon
the Merger Agreement, the issuance of Common Stock to ZGNA and ZBI, and the 1999
Stock Incentive Plan. Hauser shareholders will also consider and vote upon any
other matter that may properly come before the Special Meeting.
Pursuant to applicable rules of the NASDAQ National Market System,
Hauser's shareholders must approve the issuance of Common Stock to ZGNA and ZBI
in accordance with the Merger Agreement because the Common Stock to be issued
exceeds 20% of Hauser's outstanding shares of Common Stock and may be deemed to
constitute a change in control.
The Board has unanimously approved the Merger Agreement and issuance of
Common Stock to ZGNA and ZBI, and the 1999 Stock Incentive Plan. The Board
unanimously recommends that shareholders vote FOR the approval of the Merger
Agreement, the issuance of Common Stock to ZGNA and ZBI, and the 1999 Stock
Incentive Plan. THE APPROVAL OF THE MERGER AGREEMENT IS NOT CONTINGENT ON
ADOPTION OF THE 1999 STOCK INCENTIVE PLAN, BUT ADOPTION OF THE 1999 STOCK
INCENTIVE PLAN IS CONTINGENT UPON APPROVAL OF THE MERGER AGREEMENT AND ISSUANCE
OF COMMON STOCK TO ZGNA AND ZBI.
REQUIRED VOTE; RECORD DATE
The presence in person or by proxy of the holders of forty percent
(40%) of the total issued and outstanding shares of Common Stock is necessary in
order to constitute a quorum for the Special Meeting. Assuming a quorum is
present in person or by proxy, each proposal will be approved if the votes cast
in favor of adoption of the proposal exceed the votes cast against the proposal.
Abstentions and broker non-votes, if any, will not be included in vote totals
and, as such, will have no effect on the proposals relating to the Merger
Agreement or the 1999 Stock Incentive Plan.
The Board has fixed ______, 1999 as the Record Date for determining
holders entitled to notice of and to vote at the Special Meeting. As of the
Record Date, there were ___________ shares of Common Stock outstanding, each of
which entitles the holder thereof to one vote on each matter to come before the
Special Meeting. Hauser also has authorized 800,000 shares of preferred stock,
$1.00 par value, none of which were outstanding as of the Record Date.
SOLICITATION OF PROXIES
The costs of the Special Meeting, including the costs of preparing and
mailing the Proxy Statement, Notice and Proxy Card, will be borne by Hauser.
Hauser may, in addition, use the services of its directors, officers and
employees to solicit proxies, personally or by telephone, but at no additional
salary or compensation. Hauser will also request banks, brokers, and others who
hold shares of Common Stock in nominee names to distribute proxy solicitation
materials to beneficial owners, and will reimburse such banks and brokers for
reasonable out-of-pocket expenses which they may incur in so doing.
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THE MERGER
BACKGROUND OF THE MERGER
Since fiscal year 1997, during strategic planning sessions,
budgeting meetings and meetings of the Board of Directors, Hauser's
management and Board have been discussing the need to expand Hauser's sales
force in the nutraceuticals market and to acquire a significant source of raw
material supply.
In December 1997, ZGNA initiated discussions with Hauser regarding a
possible business combination. At that time, ZGNA was in discussions with Martin
Bauer regarding the purchase by Martin Bauer of equity from ZGNA. The Martin
Bauer discussions also contemplated the acquisition of a facility in the United
States by ZGNA for the manufacturing of nutraceutical extracts which had been
supplied to ZGNA by Martin Bauer from its facilities located in Germany. In the
Martin Bauer discussions, a business combination with Hauser was considered as
the preferred means of obtaining such a United States facility. ZGNA and Hauser
exchanged confidentiality agreements in January 1998, and Hauser was advised by
ZGNA of the discussions with Martin Bauer.
In February 1998, the Board met with representatives of AHH, an
investment banking firm with experience in providing advice to participants
in the dietary supplement industry, and other investment banking firms, to
discuss possible engagement as its investment advisor in connection with
potential strategic business transactions.
In May 1998, ZGNA and Martin Bauer met with Hauser in Boulder,
Colorado, to discuss a possible business combination and to tour the herbal
extract manufacturing facilities of Hauser.
In June 1998, Hauser retained AHH to advise Hauser in the discussions
with ZGNA and Martin Bauer.
In June 1998, Martin Bauer terminated discussions with ZGNA stating
that the business structure proposed by ZGNA for the combination with Hauser,
whereby the Contributed Subsidiaries would have merged with Hauser, was not
acceptable. Martin Bauer advised that it was not prepared to contribute what it
viewed as its United States sales of nutraceutical extracts to Hauser, a public
company, in which Martin Bauer would have only a minority interest through its
ownership of ZGNA equity. ZGNA notified Hauser that the discussions with Martin
Bauer had terminated.
During the period from July 1998 through early December 1998, Hauser
and ZGNA continued to discuss a combination of Hauser and the Contributed
Subsidiaries and the terms upon which it could occur. During such period,
investment banking, accounting and legal representatives of Hauser and ZGNA
engaged in due diligence efforts on behalf of their respective clients. At
meetings held in August, September, October and December, 1998, presentations
regarding the proposed Merger were made to the Board by Hauser management,
investment bankers and lawyers. The presentations included discussions of the
terms of the Merger Agreement and several other agreements (collectively, the
"ANCILLARY AGREEMENTS"), including a Governance Agreement (the "GOVERNANCE
AGREEMENT") which would establish both the membership of the Board after the
Merger and the corporate governance obligations of ZGNA during the five-year
period after the Merger. See "MANAGEMENT AFTER THE MERGER".
During the Merger discussions with ZGNA, Hauser received inquiries,
from time to time, from other companies regarding possible business
combinations. Such inquiries were reviewed by AHH and discussions were entered
into with one company. No definitive proposals were presented after such
discussions.
On December 8, 1998, Hauser, ZGNA and ZBI entered into the Merger
Agreement with the approval of the Board following a meeting in which the final
terms of the Merger Agreement and the Ancillary Agreements were described by
Hauser representatives. At such meeting, AHH advised that the Merger was fair to
the Hauser shareholders from a financial point of view. See "THE MERGER -
Opinion of Hauser's Financial Advisors".
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In February 1999, the parties amended the Merger Agreement to (i)
change the required shareholder vote needed to approve the Merger from a
majority of all outstanding shares to a majority of the quorum present in person
or by proxy at the Special Meeting, (ii) provide for settlement of disputes by
arbitration, and (iii) make various changes to certain of the Ancillary
Agreements, as described herein.
HAUSER'S REASONS FOR THE MERGER
In reaching its determination to approve and recommend the Merger
Agreement and related documents, the Board consulted with Hauser's management
and its financial, accounting and legal advisors. After careful deliberation of
presentations by such advisors and other factors discussed below, the Board
determined that the Merger, including the terms of the Merger Agreement and
Ancillary Agreements, is in the best interests of Hauser and its shareholders.
The Board considered a number of factors, including the future prospects of
Hauser following the Merger, the businesses of Hauser and the Contributed
Subsidiaries and the fairness of the terms of the Merger Agreement and the
Ancillary Agreements from an economic and commercial standpoint.
Specific factors that the Board considered included the following:
(1) Hauser and the Contributed Subsidiaries bring unique and
complementary strengths in nutraceutical sourcing, sales,
manufacturing, and extract functions and markets to the
proposed combined business enterprise. Hauser has developed
expertise in proprietary extraction and purification
technologies which enable the production of purified
materials with a readily ascertainable concentration of
active ingredients. The strength of the Contributed
Subsidiaries include their superior raw biomass material
sourcing capabilities and an established sales force in the
nutrition supplements, fine chemicals, generic
pharmaceutical products and botanical raw materials markets.
The combination of Hauser's technical and manufacturing
expertise with the sourcing and sales and marketing
experience of the Contributed Subsidiaries represents an
opportunity for significant revenue and profit enhancement
for Hauser following the Merger. The success of the combined
business enterprise depends, however, on the ability of
Hauser to continue to employ the sales force and
distribution network of the Contributed Subsidiaries and to
successfully integrate Hauser, the Contributed Subsidiaries
and their employees after the Merger.
(2) Following the Merger, Hauser expects to increase its market
share to become a leading supplier of herbal extracts,
botanical raw materials, and related products to the
nutritional market in the United States. Hauser believes it
will be the only United States based company with a fully
vertically integrated operation able to source, process,
manufacture, and distribute nutraceuticals to the wholesale
market including branded product sellers. In addition,
Hauser's integrated research and development capability and
proprietary extraction technology will uniquely allow it to
work with its customers to provide a full range of solutions
to their product needs.
(3) Because of the reputation and experience of Wilcox as a
purchaser of botanical raw materials and as a cultivator of
botanicals, the Merger will provide additional sources,
worldwide, from which Hauser may obtain the botanical raw
materials required for the manufacturing of nutraceutical
extracts.
(4) The Merger will permit Hauser to focus its manufacturing
facilities and capabilities in a market where Hauser has
demonstrated an ability to substantially increase its
revenues. Currently, Hauser's manufacturing plant is
operating at only approximately 35% to 40% of capacity,
excluding equipment which will be decommissioned or sold as
a result of terminating its involvement in the production of
paclitaxel. Most of that capacity is available for
production of products currently marketed by the Contributed
Subsidiaries.
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(5) The Merger will provide financing to Hauser through the
credit agreement with Wells Fargo Bank, National Association
(the "BANK") which will permit Hauser to repay its $6
million indebtedness to First National Bank of Boston, to
finance required capital expenditures for the extraction of
nutraceuticals and to provide required working capital for
the manufacture and sale of nutraceutical extracts.
In reaching its conclusions that the Merger Agreement is in the best
interests of Hauser and its shareholders, the Board also considered, among other
things, the following factors: (1) its knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of
Hauser and the Contributed Subsidiaries; (2) current industry, economic and
market conditions; (3) presentations by Hauser's management with respect to the
transactions contemplated by the Merger Agreement; (4) the opinion of AHH as to
the fairness, from a financial point of view, of the terms of the Merger
Agreement to Hauser and its shareholders; (5) the terms of the Merger Agreement
(see "THE MERGER AGREEMENT"); and (6) the opportunity for Hauser shareholders to
participate in a larger, more diversified company.
The Board also considered the risks in the transaction, including the
potential for downward pricing pressure on Hauser's products as larger companies
enter the nutraceuticals business, the inherent challenges of integrating two
separate organizations, the need to modify and expand both the work force and
production capability of Hauser to fulfill the need for products previously
supplied to the Contributed Subsidiaries by Martin Bauer, and the need to
acquire from third parties some products previously supplied from other sources
which Hauser does not have the capacity to produce in the short term.
In view of the variety of factors considered in connection with its
evaluation of the Merger Agreement, the Board did not find it practicable to and
did not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination.
ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND ANCILLARY AGREEMENTS AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board to approve the Merger
Agreement, shareholders should be aware that certain members of Hauser's
management and the Board have interests in the transactions contemplated by the
Merger Agreement in addition to the interests in the Merger Agreement as
shareholders of Hauser generally.
OPTION PLANS
Pursuant to Hauser's 1999 Incentive Bonus Plan (the "1999 BONUS PLAN"),
281,300 options granted under the 1999 Bonus Plan will become immediately vested
and exercisable upon a change of control of Hauser. Of this amount, 219,552, or
78% of the options granted under the 1999 Bonus Plan are held by executive
officers of Hauser or its wholly owned subsidiary. The proposed stock issuance
to ZGNA and ZBI constitutes a change of control of Hauser for the purpose of the
1999 Bonus Plan.
Although no options will be granted pursuant to the proposed 1999
Stock Incentive Plan prior to the Merger, the 1999 Stock Incentive Plan does
include provisions for accelerated vesting of options granted thereunder upon
a change in control of Hauser. See "APPROVAL OF THE 1999 STOCK INCENTIVE
PLAN". A change in control may or may not be more likely following the
Merger. Although a significant block of stock will be controlled by ZGNA and
ZBI, thus perhaps increasing the likelihood of a change in control event, it
may also be less likely that a third party would attempt to acquire the
Company in the next five years as ZGNA and ZBI, under the terms of the Merger
Agreement, agree not to participate in certain change in control events
without the approval of the Board.
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DIRECTORS AND OFFICERS
Upon completion of the Merger, the Board will consist of nine
directors, three of whom will be directors currently serving on Hauser's Board,
namely, Dr. Stull, currently Chief Executive Officer and Chairman of the Board,
who will be Chairman of the Board and a Co-Chief Executive Officer of Hauser
following the Merger, William E. Coleman, an outside director, and Robert F.
Saydah, an outside director. The remaining current directors will resign from
the Board and no longer be directors of Hauser after the Merger.
In addition, the Board and management of Hauser determined that
since the Contributed Subsidiaries have employment agreements with certain of
their executives which would continue with Hauser or its subsidiaries after
the Merger, it would be appropriate and in the best interests of Hauser and
its shareholders to have corresponding employment agreements with Dr. Stull,
Martin C. Wehr, currently Chief Operating Officer of Hauser, and David I.
Rosenthal, currently Chief Financial Officer of Hauser. See "MANAGEMENT AFTER
THE MERGER". It is unlikely such agreements will be entered into with Messrs.
Stull, Wehr and Rosenthal if the Merger does not close.
On January 27, 1999, the Compensation Committee of the Board
recognized the long term board service of Drs. Cristol and Tolbert, founding
directors of Hauser, by extending the exercise period of a total of 16,700
non-statutory stock options held by them contingent upon shareholder approval
of the Merger. The exercise period of the options that were extended all
expired less than five years from January 27, 1999. The expiration date on
these options was extended five years from their original expiration date.
Other than as provided herein, no officer or director has any interest
in the Merger other than as a shareholder or any agreement or understanding with
Hauser which provides for any increased or accelerated benefit or payment upon
the Merger or a change in control of Hauser.
OPINION OF HAUSER'S FINANCIAL ADVISOR
AHH was retained by Hauser in February 1998 and signed an exclusive
engagement agreement with Hauser on June 1, 1998, to participate in the
negotiation, review and analysis of the terms of any proposed strategic
transaction and related transactions and documentation and, at the request of
the Board, render a written opinion to the Board concerning the fairness from
a financial point of view, to Hauser and its shareholders, of the
consideration received by or paid by Hauser in the strategic transaction.
AHH delivered to the Board on December 1, 1998, its oral opinion,
subsequently confirmed in writing as of December 8, 1998, to the effect that, as
of the date of the written opinion, based on and subject to the assumptions,
factors and limitations set forth in the opinion and as described below, the
consideration proposed to be received by ZGNA and ZBI in the Merger was fair,
from a financial point of view, to Hauser and its shareholders. THE FULL TEXT OF
THE OPINION LETTER DATED DECEMBER 8, 1998, FROM AHH (THE "AHH OPINION"), WHICH
SETS FORTH THE PROCEDURES FOLLOWED, THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN BY AHH, IS ATTACHED AS APPENDIX A TO THIS
PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. ALL SHAREHOLDERS ARE
URGED TO READ THE AHH OPINION IN ITS ENTIRETY.
NOTE THAT CAPITALIZED TERMS USED IN THIS DESCRIPTION OF THE OPINION
HAVE THE MEANING ASCRIBED TO THEM IN THE AHH OPINION AND NOT IN THIS PROXY
STATEMENT, EXCEPT WHERE OTHERWISE INDICATED.
The AHH Opinion was rendered to the Board and does not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote at the Special Meeting. The AHH Opinion does not address the
Company's underlying business decision to proceed with or effect the Merger.
In arriving at the AHH Opinion, AHH (1) reviewed Hauser's Annual
Reports, Forms 10-K and related financial information for the three fiscal years
ended April 30, 1998, and Hauser's Form 10-Q and the related unaudited financial
information for the six month period ended October 31, 1998; (2) reviewed the
audited
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financial statements of ZGNA, Wilcox and ZetaPharm for the three fiscal years
ended March 31, 1998, and the audited financial statements of ZBI for the two
fiscal years ended March 31, 1997; (3) analyzed certain internal financial
statements and other financial and operating data concerning Hauser prepared
by the management of Hauser; (4) analyzed certain internal financial
statements and other financial and operating data concerning the Contributed
Subsidiaries prepared by the management of ZGNA; (5) analyzed the potential
pro forma financial effects of the Merger on Hauser and the Contributed
Subsidiaries; (6) conducted due diligence discussions with members of senior
management of Hauser and ZGNA and discussed with members of senior management
of Hauser and ZGNA their views regarding future business, financial and
operating benefits arising from the Merger; (7) reviewed the historical
market prices and trading activity for the Common Stock and compared them
with those of certain publicly traded companies (collectively, the "PEER
GROUPS") it deemed to be relevant and comparable to Hauser and the
Contributed Subsidiaries, respectively; (8) compared the results of
operations of Hauser and the Contributed Subsidiaries with that of companies
making up the Peer Groups; (9) compared the financial terms of the Merger
with the financial terms of certain other mergers and acquisitions it deemed
to be relevant and comparable to the Merger; (10) participated in certain
discussions among representatives of Hauser and ZGNA and their financial and
legal advisors; (11) reviewed the Merger Agreement and agreements which are
Exhibits thereto; and (12) reviewed such other financial studies and analyses
and performed such other investigations and took into account such other
matters as it deemed necessary, including its assessment of general economic,
market and monetary conditions.
In delivering the AHH Opinion to the Board, AHH prepared and delivered
to the Board certain written materials containing various analyses and other
information material to the AHH Opinion. The following is a summary of these
materials.
MARKET ANALYSIS. AHH reviewed general background information and
selected market trading data for Hauser relative to three Peer Groups consisting
of publicly traded companies: (1) seven branded nutritional supplement
manufacturers; (2) six private label nutritional supplement manufacturers; and
(3) seven value added distributors of specialty raw materials.
IMPLIED TRANSACTION ECONOMICS. Based on the 20 day trading average of
the Common Stock as of November 25, 1998, of $3.594 and the proposed amount of
Common Stock to be issued by Hauser, AHH calculated an implied Market Value
(i.e., the product of the 20 day trading average and the proposed number of
shares of Common Stock) as of that date of the Contributed Subsidiaries of
$36,137,000 and, including long term debt of $6,000,000, an implied Enterprise
Value (i.e., Market Value plus long term debt assumed) of $42,137,000 for the
Contributed Subsidiaries. These implied values served as the numerator for
various ratios, being: (1) Enterprise Value divided by last twelve months
("LTM") revenue; (2) Enterprise Value divided by LTM earnings before interest
and taxes; (3) Market Value divided by LTM net profit after taxes; and (4)
Market Value divided by book value. Because of the diverse nature of the
combined companies, the ratios were then compared to ratios derived from the
three Peer Groups and 22 merger or acquisition transactions (the "PRECEDENT
TRANSACTIONS") announced since May 1996. (Of the 22 announced transactions, 21
were completed and one was terminated prior to completion). The Precedent
Transactions were considered representative of recent transactions in the
natural products industry and believed to possess characteristics similar to the
Merger. In each case the value range and a mean excluding maximum and minimum
values ("adjusted mean") were calculated and compared to the Merger.
For the Merger, the ratio of Enterprise Value to LTM revenue (i.e., the
consideration paid by Hauser relative to the Contributed Subsidiaries) was 2.1x,
while the adjusted means from the Peer Groups and the Precedent Transactions
ranged between 1.0x and 2.3x, representing a range of $87.6 million to $201.5
million. For the Merger, the ratio of Enterprise Value to LTM earnings before
interest and taxes was 10.2x, while the adjusted means from the Peer Groups and
the Precedent Transactions ranged between 8.8x and 18.4x, representing a range
of $36.4 million to $76.1 million. For the Merger, the ratio of Market Value to
LTM to net profit after taxes was 27.5x, while the adjusted means from the Peer
Groups and the Precedent Transactions ranged between 12.8x and 31.6x,
representing a range of $16.8 million to $41.5 million. For the Merger, the
ratio of Market Value to book value was 3.5x, while the adjusted means from the
Peer Groups and the Precedent Transactions ranged between 2.2x and 10.9x,
representing a range of $23.0 million to $114.2 million. No one
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ratio was determinative and each was considered in the analysis. Because of
the nature and timing of available data for the Contributed Subsidiaries,
forecast data for the Contributed Subsidiaries' fiscal year ending March 1999
was used in lieu of LTM data in the calculation of the ratios.
DILUTION/ACCRETION ANALYSIS. AHH examined the hypothetical pro forma
effect of the Merger on Hauser's forecasted earnings per share for the fiscal
years 1999 and 2000, without synergies or efficiencies anticipated by Hauser or
ZGNA management. This analysis indicated that the transaction would be accretive
to per share earnings in fiscal 2000. Estimated earnings for Hauser were based
on internal financial planning data furnished to AHH by management of Hauser.
Estimated earnings for the Contributed Subsidiaries were based on internal
financial planning data furnished to AHH by management of ZGNA and reviewed by
management of Hauser.
CONTRIBUTION ANALYSIS. AHH also analyzed the expected relative
contributions of the Contributed Subsidiaries and Hauser to revenue, gross
profit and operating profit for fiscal year 1999 and fiscal year 2000, based
upon the above described forecasts of the Contributed Subsidiaries and Hauser.
The analysis was done without consideration of expected synergies or
efficiencies or the one month difference in the fiscal year ends of the
Contributed Subsidiaries relative to Hauser. The analysis indicated that during
these periods Hauser's contribution to combined revenues would range from 29.1%
and 31.9%, Hauser's contribution to gross profit would range from 47.5% to 50.4%
and Hauser's contribution to operating profit for FY 2000 would represent 66.3%
of the total figure. Based upon these figures, the Contributed Subsidiaries'
implied valuation would range from minimal to $91 million, with an average of
$54 million.
In reaching its conclusion as to the fairness of the consideration to
be received in the Merger and in its presentation to the Board, AHH did not rely
on any single analysis or factor described above, assign relative weights to the
analyses or factors considered by it, or make any conclusions as to how the
results of any given analysis, taken alone, supported the AHH Opinion. The
preparation of a fairness opinion is a complete process and not necessarily
susceptible to partial analyses or summary description. AHH believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all factors
and analyses, would create a misleading view of the processes underlying the AHH
Opinion. The analyses of AHH are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. Analyses relating to the value of companies do not purport to
be appraisals or valuations or necessarily reflect the price at which companies
may actually be sold. No company or transaction used in any comparable analysis
as a comparison is identical to the Contributed Subsidiaries or Hauser, or the
Merger. Accordingly, an analysis of the results is not mathematical; rather, it
involves complex considerations and judgments concerning differences in the
various characteristics of the comparable companies and other factors that could
affect the public trading value of the comparable companies to which the
Contributed Subsidiaries and Hauser were compared.
In connection with its review and arriving at it's fairness opinion,
AHH did not independently verify any information received from Hauser, ZGNA or
Contributed Subsidiaries, relied on such information, and assumed that all such
information was complete and accurate in all material respects. With respect to
any internal forecasts reviewed relating to the prospects of Hauser and the
Contributed Subsidiaries, it has assumed that they had been reasonably prepared
on bases reflecting the best currently available estimates and judgments of
Hauser's and ZGNA's management as to the future financial performance of Hauser
and the Contributed Subsidiaries. The fairness opinion was rendered on the basis
of securities market conditions prevailing as of the date of the opinion and on
the conditions and prospects, financial and otherwise, of Hauser and the
Contributed Subsidiaries as known to it on the date thereof. AHH did not
conduct, nor did it receive copies of, any independent valuation or appraisal of
any of the assets of Hauser and the Contributed Subsidiaries. In addition, it
assumed, with the consent of Hauser, that: (1) the Merger will be accounted for
under the purchase method in accordance with generally accepted accounting
principles as described in Accounting Principles Board Opinion Number 16; (2)
the Merger will constitute a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended; and (3) any material liabilities
(contingent or otherwise, known or unknown) of Hauser and the Contributed
Subsidiaries are as set forth in the financial statements of Hauser and the
Contributed Subsidiaries, respectively.
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Hauser did not set limitations on the scope of AHH's investigation or the
procedures to be followed in rendering its opinion.
Financial planning data and forecasts of Hauser and the Contributed
Subsidiaries was prepared based on numerous variables and assumptions that are
inherently uncertain, including, without limitation, factors related to general
economic and competitive conditions, and actual results could vary significantly
from those set forth in such financial planning data. AHH has assumed no
liability for such financial planning data and forecasts.
AHH, as a customary part of its investment banking business, is engaged
in the evaluation of businesses and their securities in connection with mergers
and acquisitions, underwritings and other distributions of securities, private
placements and evaluations for estate, corporate and other purposes. The Board
selected AHH because of its expertise, reputation and familiarity with the
nutraceuticals and nutritional supplement industry in general. AHH does not make
a market in the Common Stock nor currently provide analyst coverage of Hauser.
In the ordinary course of its business, AHH and its affiliates may actively
trade securities of Hauser for its own account or the accounts of its customers
and, accordingly, may at any time hold a long or short position in the
securities.
For rendering its services to Hauser's Board in connection with the
Merger, Hauser paid AHH a $50,000 non-refundable cash retainer and $150,000 for
rendering the AHH Opinion upon rendering the AHH Opinion. Hauser will pay an
additional fee of 1.5% of the total consideration paid in the transaction upon
consummation of the Merger. The contingent nature of a portion of these fees may
have created a potential conflict of interest in that Hauser would be unlikely
to consummate the Merger unless it had received the AHH Opinion. Whether or not
the Merger is consummated, Hauser has agreed to pay the reasonable out-of-pocket
expenses of AHH and to indemnify AHH against certain liabilities incurred
(including liabilities under the federal securities laws) in connection with the
engagement of AHH by Hauser or the Merger. AHH had not otherwise been previously
engaged by, or provided services to, Hauser in the preceding two years.
DISSENTERS' RIGHTS
If the Merger Agreement and issuance of Common Stock to ZGNA and ZBI
are approved and the Merger is consummated, Hauser shareholders who oppose the
proposal will not have dissenters' rights to receive cash payment for the fair
market value of their shares under the Colorado Business Corporation Act or
otherwise.
NASDAQ LISTING
Hauser has applied for listing on the NASDAQ National Market System of
the Common Stock to be issued in connection with the Merger Agreement or the
Option. Such shares have been approved for listing, subject to notice of
issuance.
EXPECTED ACCOUNTING TREATMENT
It is expected that the Merger will be accounted for under the purchase
method of accounting for financial reporting purposes, with Hauser as the
acquiror. Under the purchase method, assets acquired and liabilities assumed are
adjusted based upon estimates of fair market value as of the date of the closing
of the Merger ("CLOSING DATE"). Goodwill of approximately $33,778,000 will be
recorded as part of the Merger which will be amortized over twenty years.
However, the amount assigned to goodwill could decrease significantly if Hauser
is successful in generating net proceeds in excess of $3,000,000 from the sale
of its paclitaxel business. See "THE MERGER AGREEMENT--The Escrow Agreement".
FEDERAL INCOME TAX CONSEQUENCES
Hauser and ZGNA expect that the Merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986 (the "CODE"), as amended, and that for federal income
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tax purposes, no gain or loss will be recognized by Hauser upon receipt of
the shares of the Surviving Corporations or by ZGNA upon receipt of the
Common Stock.
Section 382 of the Code provides that if shareholders of a corporation
owning individually more than 5% of the stock of a corporation increase their
collective ownership by 50% or more percentage points within a three year
period, the result will be an "ownership change". As a result of the Merger,
ZGNA will increase its ownership of Hauser by as much as 49 percentage points.
Based upon information required to be provided to Hauser pursuant to
the rules and regulations of the Securities and Exchange Commission, to the best
of Hauser's knowledge and belief no shareholder of Hauser either owned more than
5% of the Common Stock or increased ownership to the 5% level within the 3 year
period prior to the Merger. Accordingly, Hauser believes that the Merger will
not trigger an ownership change. However, it is very possible that the 50
percentage points threshold could be reached within three years of the Merger,
resulting in an ownership change at that time.
The consequences of the ownership change would be that the utilization
of Hauser's net operating losses and credit carryovers available at that date
would be limited, on an annual basis, to an amount equal to the value of Hauser
immediately prior to the ownership change (reduced by the value of the
Contributed Subsidiaries at the Closing Date if the ownership change were to
occur within two years of the Merger), multiplied by the long term tax-exempt
rate (as defined in the Code). In addition, if Hauser should have a "net
unrealized built-in loss" (as defined in Section 382 of the Code) at the date of
the ownership change, the utilization of such losses when recognized would be
included with the carryovers subject to the limitation.
The amount of net operating losses, credit carryforwards and net
unrealized built-in losses subject to the limitation, as well as the amount
of the limitation, would be determined at the time of any ownership change.
As of April 30, 1998, Hauser had net operating loss carryforward of
approximately $4,300,000. In addition, Hauser expects to incur an additional
loss prior to the Closing Date.
NEITHER HAUSER NOR ZGNA HAS REQUESTED, NOR WILL THEY RECEIVE, AN
ADVANCE RULING FROM THE INTERNAL REVENUE SERVICE AS TO THE TAX CONSEQUENCES OF
THE MERGER.
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THE MERGER AGREEMENT
THE FOLLOWING SUMMARY OF THE MATERIAL FEATURES OF THE MERGER AGREEMENT
AND RELATED AGREEMENTS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY
STATEMENT AS APPENDIX B.
GENERAL
Subject to the terms and conditions of the Merger Agreement, on the
effective date of the Merger (the "EFFECTIVE TIME"), three newly formed, wholly
owned subsidiaries of Hauser will merge with and into each of the Contributed
Subsidiaries, with the Contributed Subsidiaries continuing as the surviving
corporations. As a result of the Merger, each of the Contributed Subsidiaries
will become a wholly owned subsidiary of Hauser. The corporate existence and
identity of Hauser will continue unaffected by the Merger.
As a result of the Merger, ZGNA and ZBI will become entitled to receive
shares of Common Stock representing an aggregate of 49% of the issued and
outstanding shares at the Effective Time, after giving effect to such issuance.
Based on the _______________ shares of Common Stock outstanding on the Record
Date, ZGNA and ZBI would receive __________ shares of Common Stock.
The Common Stock issued as consideration for the Merger pursuant to
the Merger Agreement (the "SHARES") will not be registered with the
Securities and Exchange Commission ("SEC") and will be issued pursuant to an
exemption from the registration requirements of the Securities Act of 1933,
as amended (the "SECURITIES ACT"). As a result, the Shares will be subject to
certain restrictions on transfer, except transfers in connection with an
effective registration statement under the Securities Act and any applicable
state securities laws, or an exempt transaction under such laws. ZGNA and ZBI
have been granted certain rights to have the Shares registered for resale.
See "CERTAIN ANCILLARY AGREEMENTS - Registration Rights Agreement".
THE ESCROW AGREEMENT
Upon consummation of the Merger, certain shares of Common Stock
otherwise issuable to ZGNA and ZBI will be placed in escrow pursuant to an
escrow agreement to be entered into on the Closing Date between Hauser, ZGNA,
ZBI and American Securities Transfer & Trust, Inc., as escrow agent (the "ESCROW
AGREEMENT"). The number of shares to be placed in escrow (the "ESCROW SHARES")
will be equal to the lesser of such number of shares of Common Stock as will
result in ZGNA and ZBI owning 42% of the shares of Common Stock outstanding and
such number of shares as will result in ZGNA and ZBI holding 40% of the shares
of Common Stock outstanding on a fully diluted basis (each after giving effect
to the proposed issuance of Common Stock to ZGNA and ZBI and excluding the
shares in escrow). If Hauser sells all or substantially all of its paclitaxel
business for an amount in excess of $3,000,000 by October 31, 1999, certain of
the Escrow Shares will be returned to Hauser to be canceled. The exact number of
Escrow Shares to be returned will equal the proceeds received by Hauser, less
all transaction costs and expenses of the sale, in excess of $3,000,000 divided
by $3.50. If all of the Escrow Shares are returned to Hauser, Hauser
shareholders may hold up to 58% of the outstanding Common Stock and ZGNA and ZBI
may hold 42% of the outstanding Common Stock following the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Hauser and its subsidiaries, ZGNA, ZBI, and the Contributed Subsidiaries
customary for transactions of this type (which representations and warranties
are subject, in certain cases, to specified exceptions), including without
limitation representations and warranties as to: (1) corporate organization,
existence and good standing; (2) corporate power and authority to consummate the
transactions contemplated by the Merger Agreement; (3) capitalization of Hauser
and the Contributed Subsidiaries; (4) consents and approvals to perform the
obligations under the Merger Agreement; (5) compliance with applicable laws and
regulations, including environmental laws and regulations; (6) the absence of
litigation and other proceedings; (7) the absence of, as a result of the Merger,
any material adverse change in the business operations of the parties, the
acceleration of the vesting of any outstanding options, warrants or other
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rights to acquire any shares of stock of Hauser, ZGNA or the Contributed
Subsidiaries, any obligation to grant, extend or enter into any commitment,
or any right in favor of any other person to terminate or cancel any key
agreement or instrument; (8) the absence of defaults or conflicts with
agreements with third parties, organizational documents or court orders or
decrees; (9) preparation of reports and financial statements in accordance
with generally accepted accounting principles ("GAAP"); (10) compliance by
Hauser with securities law filing requirements; (11) absence of certain
material adverse developments; (12) the absence of undisclosed liabilities;
(13) intellectual property rights; (14) title to tangible assets; (15)
insurance policies; and (16) the absence of undisclosed transactions with
related parties.
CERTAIN COVENANTS AND AGREEMENTS
Hauser and ZGNA have agreed (subject to an exception for Hauser's sale
of its paclitaxel business) that prior to the Closing Date, they will, and will
cause their subsidiaries to, among other things, conduct their respective
businesses in the ordinary course consistent with past practice and use
reasonable efforts to preserve intact their business organizations and
relationships with third parties.
With certain limited exceptions, from the date of the Merger Agreement
to the Closing Date, neither Hauser and its subsidiaries nor the Contributed
Subsidiaries may: (1) amend or propose to amend its organizational documents in
any material respect; (2) issue, grant, sell, pledge, dispose, or propose to do
the same, any shares of, or rights of any kind to acquire or sell any shares of,
its capital stock, except for (a) the issuance of shares in connection with
employee or management stock option plans of Hauser and (b) options granted
pursuant to the Incentive Plan or stock option plan for directors in effect as
of the signing date of the Merger Agreement for attendance at meetings of the
Board, on terms and in amounts consistent with past practices; (3) split,
combine, reclassify or redeem any shares or declare any dividend or other
distribution in respect of shares of capital stock, (4) incur any new
indebtedness or make, assume, guarantee or otherwise become liable for any new
loans, advances, capital contributions or investments to any other person
outside the ordinary course of business; (5) acquire the stock or assets of, or
merge or consolidate with, any other person outside the ordinary course of
business; (6) sell, transfer, mortgage, pledge or otherwise dispose of or
encumber any material assets or property outside of the ordinary course of
business; or (7) fail to maintain insurance policies required by the Merger
Agreement.
Prior to the Closing, and for three months thereafter, the timing and
content of all public announcements relating to the Merger and the transactions
contemplated thereby will be determined by mutual agreement of Hauser and ZGNA,
with the exception of disclosures that legal counsel advises are required by
applicable laws or rules of the National Association of Securities Dealers, Inc.
For two years after the Closing Date, Hauser has agreed not to
liquidate or transfer outside the ordinary course of business more than an
insubstantial amount of the assets of ZBE to Hauser or one of its affiliates or
take any action that would jeopardize the characterization of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
STANDSTILL AGREEMENT. ZGNA and ZBI have agreed, from the date of the
Merger Agreement to the Closing Date (or, if the Merger Agreement is terminated,
in accordance with its terms, for a period of 18 months from the date of the
Merger Agreement, if any), that they will not without the prior written consent
of the Board (1) acquire any voting stock or right to acquire voting stock,
other than upon exercise of the Option; (2) directly or indirectly make or
participate in any solicitation of proxies to vote or any agreement to vote, or
attempt to advise or influence any voting of Common Stock (except to the extent
necessary for ZGNA to have its three representatives on the Board); (3) make any
public announcement relating to any transaction or proposed transaction between
Hauser and any of its shareholders and ZGNA or any of its affiliates; (4)
disclose any intention or plan relating to any of the above; or (5) sell or
otherwise transfer any shares of Common Stock except in a transaction approved
by the Board.
For a period of five years from the Closing Date, ZGNA and ZBI have
agreed that they will not without the prior written consent of the Board (1)
acquire
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more than 49% of Hauser's voting stock, or the right to acquire more than 49%
of Hauser's voting stock; (2) directly or indirectly make or participate in
any solicitation of proxies to vote or any agreement to vote, or attempt to
advise or influence any voting of Common Stock (except to the extent
necessary for ZGNA to have its three representatives on the Board); (3) make
any public announcement relating to any transaction or proposed transaction
between Hauser and any of its shareholders and ZGNA or any of its affiliates;
(4) disclose any intention or plan relating to any of the above; or (5)
except in an underwritten transaction, sell or otherwise transfer to the
public more than the greater of 1% of the outstanding shares of Common Stock
in any two-week period or 20% of the weekly trading volume of the Common
Stock. In addition, for a period of 18 months after the Closing Date and with
certain limited exceptions, ZGNA and ZBI will not sell or otherwise dispose
of any of its shares of Common Stock without the prior written consent of the
Board.
CONTINUED OWNERSHIP OF THE SHARES. In order to insure that ZGNA will
meet certain indemnification obligations under the Merger Agreement, ZGNA and
ZBI have agreed to own the shares of Common Stock, or other liquid assets of
approximately equivalent value to such shares, until the later of (1) the second
anniversary of the Closing; or (2) until final resolution of any claims for
indemnification asserted by Hauser under the Merger Agreement. However, after
the first anniversary of the Closing, ZGNA and ZBI are only required to hold
Shares or other liquid assets having a value of 60% of the initial value of the
Shares plus an amount equal to the value of any asserted or pending claims made
for indemnification under the Merger Agreement.
NON-COMPETE. For a period of five years after the Closing Date, ZGNA,
and its parent corporation and affiliates have agreed to not directly or
indirectly engage in any businesses selling products or services in direct
competition with Hauser or its subsidiaries in North America as conducted on the
Closing Date or to acquire botanical raw materials used by Hauser for the
purpose of retail or wholesale sales in North America for use as a consumed
nutraceutical, or solicit any managerial, sales or purchasing employees with the
intent of enticing such employees away from their employment with Hauser or its
subsidiaries.
CONTINUED EMPLOYMENT. ZGNA and its affiliates agree to use their
reasonable best efforts to cause Mr. Wypyszyk, for the first 12 months after the
Closing Date, to devote a significant amount of his time to the business of
Hauser, and after 12 months, to devote substantially all of his time to the
business of Hauser, and to not require Mr. Wypyszyk to devote time to the
business of ZGNA or its affiliates that would be inconsistent with this
obligation.
SUBSCRIPTION RIGHT. If Hauser issues equity securities of any kind
after the date of the Merger Agreement, ZGNA has the right to purchase a portion
of the offered securities equal to the percentage of shares of Common Stock
beneficially owned by ZGNA prior to the proposed issuance. The subscription
right does not apply to a registered offering to the public in a firm commitment
underwriting or an acquisition of another entity by merger, purchase of
substantially all of the assets or stock or other form of acquisition or to
other customer exceptions.
RECOMMENDATION. Hauser's Board will recommend to Hauser shareholders
that they approve the proposed Merger Agreement and issuance of Common Stock to
ZGNA and ZBI and related transactions, unless in the opinion of its legal
counsel its fiduciary obligations require it to modify or withdraw such
recommendation.
CONDITIONS OF THE MERGER
The respective obligation of the parties to effect the Merger are
subject to the satisfaction or waiver prior to or upon the Closing Date of
certain conditions, including: (1) the absence of any injunction or order of any
nature directing that the contemplated transaction not be completed; (2) the
approval of the Merger Agreement by a the requisite holders of Common Stock; (3)
the appointment of Volker Wypyszyk to the office of President and Co-Chief
Executive Officer and election to the Board, effective as of the Closing Date;
(4) reconstitution of the Board in accordance with the Governance Agreement,
effective as of the Closing; (5) the absence of any material adverse
developments in the business of Hauser or its subsidiaries or the Contributed
Subsidiaries; (6) the execution of new definitive credit agreements by the
parties with their respective lenders; (7) the receipt of certain consents,
approvals and authorizations necessary for Hauser and the Contributed
Subsidiaries to execute, deliver
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and perform the Merger Agreement and to be able to lawfully conduct business;
(8) the expiration or termination of all waiting periods under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR
ACT"); (9) the listing of the proposed stock issuance to ZGNA and ZBI on
NASDAQ or other exchange; (10) the availability of employees responsible for
at least 75% of all sales of products for the Contributed Subsidiaries in the
90 days prior to the date of the Merger Agreement to work in substantially
the same capacity for the surviving corporations after the Closing Date and
not more than 25% of such individuals having stated in writing to ZGNA that
they intend to stop working for the Contributed Subsidiaries in such role;
(11) the availability of purchasing agents responsible for at least 75% of
all purchases of botanical raw materials of the Contributed Subsidiaries in
the 90 days prior to the date of the Merger Agreement to work in
substantially the same capacity for the surviving corporations after the
Closing Date if offered a comparable salary and compensation and benefit
arrangements and not more than 25% of such individuals having stated in
writing to ZGNA that they intend to stop working for the Contributed
Subsidiaries in such role; and (12) the termination of an exclusive
distributorship agreement of ZBI without further liability to ZBI or the
Contributed Subsidiaries, including the restrictions on the ability to engage
in business contained therein.
Other than approval of the Merger Agreement by Hauser shareholders and
the expiration of certain waiting periods under the HSR Act, substantially all
of the conditions to the Merger may be waived, without the approval of the
Hauser shareholders. Under the HSR Act and the regulations promulgated
thereunder, the Merger may not be consummated until notifications have been
given and certain information has been furnished to the Federal Trade Commission
(the "FTC") and the Antitrust Division of the Department of Justice (the
"ANTITRUST DIVISION") and the applicable waiting period has expired or been
terminated. Notwithstanding the termination of the waiting period, at any time
before or after consummation of the Merger, the FTC, the Antitrust Division or
any state entity could seek to enjoin the Merger, among other things, under
federal or state antitrust laws.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Closing Date, notwithstanding any requisite approval of
the Merger Agreement and the Merger by the shareholders of Hauser: (1) by mutual
written consent of Hauser and ZGNA; (2) by either Hauser or ZGNA if either (a)
the Closing does not occur on or before May 31, 1999, unless extended by mutual
consent of the parties by 45 days; or (b) any governmental entity threatens to
or issues an order, decree or ruling or takes other action restraining,
enjoining or otherwise prohibiting any of the transactions contemplated by the
Merger Agreement; or (3) by ZGNA if the Board withdraws or modifies its
recommendation that the Merger Agreement be approved by the shareholders.
However, neither party may terminate the Merger Agreement whose failure to
perform any of its obligations under the Merger Agreement results in the failure
of the Closing by May 31, 1999.
If the Merger Agreement is terminated in accordance with these
provisions of the Merger Agreement, no party will have any liability to any
other party to the Merger Agreement, except for any intentional breach or
misrepresentation of the terms of the Merger Agreement, for the destruction or
return of confidential information disclosed to or obtained by a party in
connection with the Merger, and for the continuing obligations of the parties to
maintain such confidential information in strict confidence following any
termination of the Merger Agreement.
With the exception of certain covenants in the Merger Agreement, the
Merger Agreement will terminate and be void and have no effect upon termination
in accordance with its terms.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties made by the parties as to compliance
with applicable environmental laws and regulations and the filing of all tax
returns and payment of all required taxes, and any third party claims arising
out of misrepresentation of any of the representations or warranties made by the
parties in the Merger Agreement, shall survive the Closing and remain in full
force and effect for a period of 24 months following the Closing Date. The
representations and warranties made by Hauser as to manufacturing capacity shall
terminate as of the Closing. All other representations and warranties in the
Merger Agreement or the agreements entered
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into in connection with the Merger Agreement shall survive the Closing and
remain in full force and effect for a period of 18 months following the
Closing Date. All covenants and agreements in the Merger Agreement shall
survive the Closing and remain in full force and effect for a period of 60
days after the expiration of the applicable statute of limitations (including
any extensions thereof). In addition, the subscription right granted pursuant
to the Merger Agreement will terminate upon the Closing Date or, if the
Merger Agreement is terminated, seven months after the date of the Merger
Agreement.
BREAK-UP FEE
The Merger Agreement provides for the payment of a break-up fee in the
event: (1) Hauser shareholders do not approve the Merger Agreement; or (2) the
Board withdraws, modifies or amends its recommendation that the Merger Agreement
be approved by Hauser shareholders. If either of these events occurs, Hauser
will be required to pay all of the reasonable out-of-pocket expenses ZGNA
incurred in connection with the transactions contemplated by the Merger
Agreement, including fees of counsel and financial advisors, up to $500,000. In
addition, if Hauser within 12 months of a termination of the Merger Agreement
under the circumstances described above sells a number of shares of Common Stock
equal to 49% or more of the issued and outstanding shares of Common Stock in a
sale of securities, merger or reorganization, or sells all or substantially all
of its assets, Hauser will be required to pay to ZGNA $1,500,000 as a
termination fee. If Hauser fails to promptly pay a break-up fee or termination
fee and ZGNA is required to bring an action to obtain payment, Hauser will be
required to pay ZGNA's costs and expenses, including attorneys' fees, plus
interest, incurred by ZGNA in such action. In addition, if ZGNA exercises its
option under the Agreement for Option to Acquire Common Stock of Hauser (the
"OPTION AGREEMENT"), it agrees to return to Hauser any profit ZGNA makes on the
exercise of the option, up to the amount of the termination fee received by it.
See "CERTAIN ANCILLARY AGREEMENTS" below.
INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE
From and after the Closing Date, the Merger Agreement provides for the
indemnification by Hauser of ZGNA and by ZGNA of Hauser, and their respective
officers, directors and affiliates, from and against any liabilities, costs,
expenses, judgments, fines, losses, claims, damages and amounts paid in
settlement arising from or in connection with (1) any inaccuracy in any
representation or the breach of any warranty of the parties under the Merger
Agreement or an Ancillary Agreement; and (2) the failure of the parties to
perform or observe any term, provision, covenant or agreement to be performed or
observed pursuant to an Ancillary Agreement. Indemnification is only available
for a breach of a representation, however, to the extent the aggregate amount
subject to indemnification exceeds $750,000 and the maximum aggregate liability
for indemnification shall not exceed $15 million. No party is entitled to
indemnification for matters for which that party had knowledge at or prior to
Closing by reason of written notice in a supplemented disclosure schedule or an
officer's certificate at or prior to Closing and, if the closing conditions were
not met by reason of the matters disclosed, that party waived its right not to
close. This exception does not apply, however, if the other party made a knowing
misrepresentation about the matter at the date of the Merger Agreement, unless
Hauser or ZGNA had the explicit right under the Merger Agreement to notify the
other party about the matter at or prior to Closing and modify the corresponding
disclosures.
In addition, from and after the Effective Date, persons who become
directors, officers or employees of Hauser will be entitled to indemnification,
subject to certain limitations, under the Bylaws and Articles of Incorporation
of Hauser, as may be amended from time to time in accordance with applicable
law. All rights to indemnification, and all limitations thereto, in favor of a
director, officer or employee of the Contributed Subsidiaries as provided in the
respective bylaws and certificate of incorporation of the Contributed
Subsidiaries in effect on the date of the Merger Agreement shall continue in
full force and effect with respect to directors, officers and employees of the
surviving corporations.
The Merger Agreement also provides that all insurance policies of
Hauser, including directors and officers liability insurance, shall not be
terminated or reduced as a result of the Merger.
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WAIVER OR AMENDMENT
At any time prior to the Closing Date, the parties may change or modify
the Merger Agreement, or waive the observance of any term, upon written notice
signed by the parties. After shareholder approval of the Merger and issuance of
Common Stock to ZGNA and ZBI, the parties may terminate or amend the Merger
Agreement and the Ancillary Agreements, or waive their provisions, as permitted
by applicable law.
CERTAIN ANCILLARY AGREEMENTS
In addition to the Escrow Agreement described above under "THE MERGER
AGREEMENT" and the Governance Agreement described below under "MANAGEMENT AFTER
THE MERGER", the parties entered into, or agreed to enter into at or prior to
the Closing Date, several other Ancillary Agreements. Each of these agreements
is summarized below.
INVENTORY PURCHASE AGREEMENT
In connection with the Merger Agreement, Hauser executed an Inventory
Purchase Agreement (the "INVENTORY PURCHASE AGREEMENT") with ZGNA in which
Hauser sold ZGNA raw material and finished goods inventory for a total of
$3,000,000. In addition, Hauser may subsequently, at its discretion, require
ZGNA to purchase an additional amount of its raw material inventory,
substantially similar to the purchased inventory, or finished product inventory,
acceptable to ZGNA in its reasonable discretion, of a value of up to $1,000,000
per month to an aggregate of $3,000,000. The purchase price for the inventory is
the lower of cost or market. Hauser agreed to use the proceeds from the sale of
the inventory in accordance with its cash flow projections for the five-month
period after the initial inventory purchase.
At any time, Hauser may require ZGNA to resell to Hauser all or any
portion of the inventory purchased by ZGNA under the Inventory Purchase
Agreement at the same price at which ZGNA purchased the inventory and require
ZGNA, in its reasonable discretion, to purchase substantially similar raw
material and finished product inventory, having a value equivalent to the
repurchased inventory.
On the Closing Date of the Merger, Hauser has an option to repurchase
all inventory purchased by ZGNA under the agreement at the same prices at which
ZGNA purchased the inventory. If the Merger Agreement terminates, Hauser has 45
days after the termination to repurchase all or any portion of the inventory.
AGREEMENT FOR OPTION TO ACQUIRE COMMON STOCK OF HAUSER
Contemporaneously with the Merger Agreement, Hauser and ZGNA entered
into the Option Agreement. See "THE MERGER AGREEMENT - Break-Up Fee". The Option
Agreement grants ZGNA the option to purchase up to 2,000,000 shares of Common
Stock for $4.11 per share (the "OPTION"). ZGNA may exercise the Option in whole
or in part upon the occurrence of an "Exercise Event," which consists of (1) the
recommendation by Hauser that its shareholders approve any merger, business
combination, sale of all or substantially all of its assets, or the issuance and
sale of shares representing more than 20% of its outstanding stock, other than
the Merger; (2) the beneficial ownership, or the right to acquire beneficial
ownership, by a person or group other than, or not including, ZGNA or its
affiliates or associates of 20% or more of the voting power of Hauser; or (3) a
merger or consolidation, or sale of substantially all the assets of Hauser, with
any person other than ZGNA or its affiliates or associates. ZGNA may not,
however, exercise the Option to acquire 20% or more of the Common Stock, or
exercise the Option in any other manner that would require the approval of
Hauser's shareholders under Rule 4310H of the National Association of Securities
Dealers, Inc.
The Option terminates: (1) on the Effective Date of the Merger; (2) on
the date the Merger Agreement is terminated, if terminated by reason of the
failure to receive the credit facility contemplated by the Merger Agreement; or
(3) nine months after the date the Merger Agreement is terminated, if terminated
for any other
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reason. In addition, if the Board approves a transaction involving a merger
or other consolidation with any other corporation or entity which is not an
affiliate of Hauser, or sale of all or substantially all its assets as part
of a plan of liquidation, the Board may require the holder of the Option to
exercise the Option simultaneously with the consummation of such merger,
consolidation or sale. If the holder does not exercise the Option in such
case, the Option will terminate on the business day preceding the closing of
such merger, consolidation or sale.
In lieu of exercising the Option, ZGNA may elect to receive a payment
equal to the difference between (1) the market price (as defined in the Option
Agreement) of the Common Stock multiplied by the number of shares underlying the
Option for which payment is being elected, and (2) the exercise price of such
Option shares, payable by Hauser to the holder of the Option in shares of Common
Stock valued at the market price on the exercise date.
REGISTRATION RIGHTS AGREEMENT
In connection with the Merger Agreement and the Option Agreement,
Hauser, ZGNA and ZBI entered into a Registration Rights Agreement (the
"REGISTRATION RIGHTS AGREEMENT") which provides ZGNA, ZBI or their transferees
certain demand and piggyback registration rights in connection with the Common
Stock. Subject to certain limitations, the holders of the registration rights
have the right to request two demand registrations, provided the anticipated
aggregate public offering price for the shares to be sold pursuant to such
request exceeds $10,000,000. In addition, the holders have unlimited piggyback
registration rights.
With certain limited exceptions, Hauser bears all expenses of
registration, qualification or compliance and ZGNA and ZBI or their transferees
bear all selling expenses, including underwriting discounts, selling commissions
and all fees and disbursements of counsel for such holders.
The Registration Rights Agreement provides for Hauser's indemnification
of the holders of the registration rights, including indemnification for
violations of the Securities Act.
Hauser is not obligated to effect a registration of securities under
the Registration Rights Agreement if in the opinion of counsel to Hauser, all of
the Registrable Securities a holder desires to sell may be sold in any 90-day
period pursuant to Rule 144 issued under the Securities Act (without giving
effect to Rule 144(k)).
AGREEMENT FOR OPTION TO ACQUIRE POWDERS BUSINESS FROM ZBI
Effective as of the Closing Date, Hauser and ZGNA have agreed to enter
into an Agreement for Option to Acquire Powders Business from ZBI (the "POWDERS
OPTION AGREEMENT") which grants Hauser the right to purchase the powders
business of ZBI, including without limitation all assets related thereto and all
associated liabilities, other than the shares of capital stock of Hauser held by
ZBI (the "POWDERS OPTION"). The business of ZBI is primarily purchasing
botanical raw materials throughout the world and converting the botanical raw
materials, through a milling process, into powder at its facility in Long Beach,
California. The powders are sold by ZBI to manufacturers of dietary supplements.
The assets of ZBI consist primarily of inventory, receivables and fixed assets
used in the production of the powders.
At the request of Hauser and in lieu of the exercise of the Powders
Option, ZBI agrees to make commercially reasonable efforts to sell the capital
stock of ZBI to Hauser (after distribution of the shares of Hauser capital stock
held by ZBI) provided that there is not at such time, and will not be, any
adverse tax consequences to ZBI or ZGNA from the sale of ZBI stock instead of
assets to Hauser.
Hauser may exercise the Powders Option, in whole only, at any time
after 12 months from the date of the Powders Option Agreement but not later than
two years after the date of the Powders Option Agreement. Upon exercise of the
Powders Option, Hauser and ZBI will enter into a purchase agreement containing
substantially the same representations and warranties, covenants and conditions
concerning ZBI as in the Merger Agreement, and substantially similar
indemnification provisions of ZBI as of ZGNA under the Merger Agreement.
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The purchase price for the powders business shall be equal to the fair
market value of the powder business on the exercise date as determined by Hauser
and ZBI. Hauser can pay the purchase price in cash or in shares of Common Stock
with a market price equal to the purchase price of the powders business, or a
combination thereof.
ZBI has agreed that during the term of the Powders Option Agreement it
(a) will not change its capitalization or debt structure in a manner that would
frustrate the intent of the Powders Option Agreement, (b) will use commercially
reasonable efforts to conduct the powders business in the ordinary course and
preserve the powders business intact, and (c) not solicit or negotiate for the
sale of the powders business or the capital stock of ZBI with any person other
than Hauser.
THE SHAREHOLDERS OF HAUSER ARE NOT VOTING UPON OR APPROVING HAUSER'S
EXERCISE OF THE POWDERS OPTION. IF REQUIRED BY APPLICABLE LAW OR THE APPLICABLE
RULES OF THE NASDAQ NATIONAL MARKET SYSTEM OR AN EXCHANGE ON WHICH THE COMMON
STOCK IS LISTED FOR TRADING, SUCH EXERCISE WILL BE SUBJECT TO A SEPARATE VOTE IF
AND WHEN HAUSER EXERCISES THE POWDERS OPTION.
AGREEMENT REGARDING EMPLOYEES
Pursuant to the Merger Agreement, Hauser will execute and deliver an
Agreement Regarding Employees (the "EMPLOYEE AGREEMENT") with ZBI, effective as
of the Closing Date, for an initial term of two years. The Employee Agreement
provides that certain employees of ZBI who provide sales and marketing services
to ZBI and to Hauser shall be, while performing services for ZBI, employees
solely of ZBI and under ZBI's control and ZBI shall be responsible for the
payment of compensation for services rendered on its behalf. When performing
services for Hauser, each such employee shall be solely an employee of Hauser
and under Hauser's control and Hauser shall be responsible for the payment of
compensation for services rendered on its behalf. ZBI and Hauser further agreed
to use their best efforts to ensure that no employee under the Employee
Agreement holds himself out as an employee, representative or agent of ZBI when
performing services for Hauser, or of Hauser when performing services for ZBI,
as the case may be. Hauser and ZBI agree not to object to the employee spending
one half his or her normal working time in the active employment of the other.
Each party agrees to indemnify the other party against (i) any claims
by any third party resulting from actions of an employee while such employee is
conducting the business of the party, and (ii) any claims by any employee
resulting from any actions of the party while such employee is providing
services for the party.
Upon termination of the Employee Agreement, ZBI and its affiliates
(except Hauser, if considered an affiliate of ZBI) will no longer seek to employ
the employees covered under the Employee Agreement.
THE SOURCING AGENCY AGREEMENT
The botanical raw materials sourcing personnel of ZBE and Wilcox
currently provide sourcing for ZBI. Hauser will execute a Sourcing Agency
Agreement (the "SOURCING AGREEMENT") with ZBI effective as of the Closing Date
relating to the purchase of certain botanical raw materials for use in the
manufacturing activities of ZBI. Under the Sourcing Agreement, Hauser will act
as ZBI's exclusive sourcing agent for ZBI's botanical raw materials requirements
and will use its best efforts to obtain offers from sources to sell to ZBI the
requested botanical raw materials.
If Hauser purchases botanical raw materials for ZBI, ZBI will pay
Hauser a commission upon delivery of the botanical raw materials to ZBI. For the
first full six months after the effective date of the Sourcing Agreement, the
assumed commission rate will be $0.05 per kilogram of botanical raw materials
purchased by Hauser for ZBI. Thereafter, the assumed commission rate will be
adjusted based on Hauser's actual purchasing costs and the actual weight of the
botanical raw materials purchased by Hauser for ZBI during the initial period
relative to the weight of the botanical raw materials purchased for Hauser's own
purposes. For each successive six calendar month period, the assumed commission
rate will be adjusted based on Hauser's purchasing costs and the weight of the
botanical raw materials purchased by Hauser for the preceding six-month period.
22
<PAGE>
The Sourcing Agreement arrangement will commence on the Closing Date of
the Merger and terminate (1) by either party upon three months written notice
prior to the end of any calendar year that is at least two years after the
effective date of the Sourcing Agreement, (2) by mutual consent of the parties,
(3) by Hauser upon 60 days prior written notice after receiving notice of a
change of control of ZBI; (4) by either party upon 30 days prior written notice
of a material uncured breach of the Sourcing Agreement, or (5) by either party
if the other party has made an assignment for the benefit of creditors, admitted
insolvency, instituted voluntary proceedings in bankruptcy, or involuntary
proceedings in bankruptcy or insolvency have begun against the other party and
have not been dismissed within 60 days, or an application that has been made for
receivership with respect to the other party or any material part of its assets
or business that has been granted or not been dismissed within 60 days.
CREDIT FACILITY
Hauser has obtained a commitment letter from the Bank subject to the
closing of the Merger. The commitment letter provides two credit facilities to
Hauser up to an aggregate amount of $45,000,000, to be guaranteed by each of its
subsidiaries: a revolving line of credit up to $35,000,000 for general working
capital maturing two years after the loan closing, and a $10,000,000
non-revolving term commitment for financing the acquisition of fixed assets with
a draw down period of two years and a maturity date five years following the
loan closing (collectively, the "CREDIT FACILITY").
The Credit Facility includes a $1,000,000 sublimit for the issuance of
commercial letters of credit up to 150 days in term. The advance rates for the
revolving facility are 80% of eligible accounts receivable and 50% of eligible
inventory (and up to 65% of eligible inventory during the seasonal peak
borrowing period of September through December). Inventory collateral for loan
purposes may not exceed $15,000,000, except during the September through
December period when it may not exceed $25,000,000.
For the revolving loan, the interest rate is the Bank's prime rate
minus .75% or the Bank's quoted LIBOR plus 1.5% per annum. For the term loan
fixed asset facility, the interest rate is the Bank's prime rate minus .5%, or
the Bank's quoted LIBOR plus 1.75% per annum, or on an unspecified fixed rate
basis. A commitment fee will be charged of .25% per annum on the unused portion
of the term loan fixed asset commitment.
A first lien will be granted to the Bank on all the assets of Hauser
and its subsidiaries (including the Contributed Subsidiaries). The definitive
agreements for the Credit Facility will contain certain affirmative and negative
covenants, including certain financial covenants.
Hauser's subsidiaries will guarantee the debt of Hauser, and Hauser may
guarantee the debt of its subsidiaries, in connection with the proposed Credit
Facilities. The Bank commitment prohibits Hauser or its subsidiaries from having
additional indebtedness.
The Bank commitment requires that Mr. Wypyszyk be Co-Chief Executive
Officer of Hauser with key management responsibilities acceptable to the Bank.
The Bank commitment is subject to the closing of the Merger, certain
representations and warranties and covenants of Hauser, no material adverse
changes in the business, assets (except for the charge related to the paclitaxel
business), financial condition, income or prospects of the parties, no material
misstatements in or omissions from the materials furnished to the Bank by the
parties, no material adverse change in government regulation or policy governing
the parties, and the absence of any litigation or other action pending or
threatened relating to the facilities. Hauser must also execute and deliver
definitive loan documents in form and substance satisfactory to the Bank,
including such representations, warranties, conditions, covenants and events of
default as the Bank deems appropriate.
The execution of definitive agreements relating to the Credit Facility
is a condition to the closing of the transactions contemplated by the Merger
Agreement.
23
<PAGE>
Based on the financial projections of Hauser immediately after the
Closing, Hauser will be in compliance with the covenants specified in the
commitment letter and will have sufficient availability to pay in full its
current credit facility with the First National Bank of Boston (which facility
will terminate), the debt representing the Contributed Subsidiaries' obligations
to ZGNA's current principal lender. There is no assurance the Bank will provide
the credit facility described above, that if provided, the terms will be exactly
as described above, or that the maximum amount of credit availability will
exist.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND THE ISSUANCE OF COMMON STOCK TO ZGNA AND ZBI.
24
<PAGE>
MANAGEMENT AFTER THE MERGER
After the Merger and in accordance with the Governance Agreement
described below, the Board will consist of the following persons:
<TABLE>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- - - - - - - - - - - - - ---- --- --------------------- --------------
<S> <C> <C> <C>
Rodolfo C. Bryce 55 Chairman, Schering-Plough Health Care NA
Products and Executive Vice President,
Schering-Plough Corporation until
December 31, 1998; Trustee, St. Mary's
University, San Antonio, Texas
William E. Coleman, Ph.D 65 Chairman, Colorado Venture Management, 1988
Inc.; Chairman, Colorado Energy
Management, LLC; President, Cogen
Technology, Inc.; Chairman, Econalytic
Systems, Inc.; Director and Vice-
Chairman, B.I. Inc.; Director, Sienna
Imaging, Inc.
Herbert Elish 65 Director, The Carnegie Library of NA
Pittsburgh; Chief Executive Officer and
Director of Weirton Steel Corporation until
December 31, 1995; Director, Hampshire
Group Limited
Roger W. Norian 55 Chief Executive Officer and Director of NA
Kerr Group, Inc. until March 15, 1996;
Private Investor
Robert F. Saydah 71 Partner, Director, Heidrick & Struggles 1994
Harvey L. Sperry 68 Lawyer; Partner, Willkie Farr & NA
Gallagher; Director, Hampshire Group
Limited; Director, ZGNA
Dean P. Stull, Ph.D 49 Chairman, Co-Chief Executive Officer, 1983
Hauser
Volker Wypyszyk 53 President, Co-Chief Executive Officer, NA
Hauser; Chief Executive Officer and
Director of ZGNA
Peter Zuellig 48 Chief Executive Officer, Interpacific NA
Holding, Limited which is the Holding
Company for Zuellig Companies other than
ZGNA which is owned by Zatpack, Inc.;
Chairman and Director of ZGNA
</TABLE>
Pursuant to Hauser's bylaws, the Board may consist of three to nine
members, at the discretion of the Board, and any vacancies may be filled by the
approval of the majority of the remaining directors. On the Closing Date,
Hauser, ZGNA and ZBI will enter into a Governance Agreement relating to the
composition of the Board following the Merger. Under the Governance Agreement,
Hauser, ZGNA and ZBI will take all action within their power, including ZGNA's
and ZBI's voting of all of their respective shares of Common Stock, to cause the
Board to consist of nine directors and to elect three directors designated by
directors who served on the Board immediately prior to the Closing Date as the
Continuing Directors, three directors appointed by ZGNA as the ZGNA Directors,
and three independent directors as the Independent Directors to fill new and
vacant director positions following the resignation of Messrs. Cristol,
Daughenbaugh, Tolbert and Ms. Haddon after the Merger. The Continuing Directors
will be selected by the present Board. As defined in the Governance Agreement,
an Independent Director is a person
25
<PAGE>
who in the preceding five years has not been an affiliate or employee, or
retained as a consultant of Hauser or an affiliate of Hauser, or ZGNA or an
affiliate of ZGNA.
Pursuant to the Governance Agreement, Messrs. Coleman, Saydah and Stull
have been designated as the initial Continuing Directors; Messrs. Bryce, Elish
and Norian have been designated as the initial Independent Directors and Messrs.
Sperry, Wypyszyk and Zuellig have been designated as the initial ZGNA Directors.
For as long as ZGNA shall own at least 20% of the outstanding Common Stock but
not later than five years after the Merger, ZGNA has agreed to vote all shares
of the Common Stock owned by ZGNA to elect the Continuing Directors, or
successors designated by a majority of the remaining Continuing Directors if any
Continuing Director cannot serve, and the Independent Directors, or successors
designated by a majority of the remaining Independent Directors if any
Independent Director cannot serve. The Governance Agreement will remain in
effect for five years after the Closing Date, unless ZGNA ceases to own at least
20% of the outstanding Common Stock.
The foregoing summary of the material terms of the Governance Agreement
is qualified in its entirety by reference to the full text of the Governance
Agreement, a copy of which is attached to this Proxy Statement as Appendix C.
After the Merger, the corporate officers of Hauser shall consist of the
following:
<TABLE>
NAME OFFICE
- - - - - - - - - - - - - ---- ------
<S> <C>
Dean P. Stull, Ph.D. Chairman and Co-Chief Executive Officer
Volker Wypyszyk President and Co-Chief Executive Officer
David I. Rosenthal Treasurer and Chief Financial Officer
Patricia A. Roberts Corporate Secretary
</TABLE>
26
<PAGE>
EMPLOYMENT AGREEMENTS
The executive officers of Hauser, including Dr. Stull, President and
Chief Executive Officer, Martin C. Wehr, Executive Vice President and Chief
Operating Officer, and David I. Rosenthal, Treasurer and Chief Financial
Officer, do not currently have employment agreements with Hauser. After the
Merger, Dr. Stull will have an employment agreement which provides a base salary
of $200,000 per year, annual incentive compensation as determined by the
Compensation Committee of the Board and a severance payment, if terminated
without cause, of base salary for two years. Mr. Wehr will have an employment
agreement which provides a base salary of $160,000 per year, annual incentive
compensation as determined by the Compensation Committee and a severance
payment, if terminated without cause, of base salary for six months. Mr.
Rosenthal will have an employment agreement with a base salary of $115,000 per
year, annual incentive compensation as determined by the Compensation Committee
and a severance payment, if terminated without cause, of base salary for six
months. If any of the three employment agreements are terminated for cause, no
severance payment will be due. The compensation of Mr. Wypyszyk as President and
Co-Chief Executive officer of Hauser will be established by the Board after the
Merger.
27
<PAGE>
DESCRIPTION OF HAUSER
Hauser was incorporated under the laws of the State of Colorado in
December 1996, under the name Hauser, Inc. as the successor company to a
Delaware corporation (Hauser Chemical Research, Inc.) formed in 1983.
Hauser develops, manufactures and markets superior natural products and
offers product development, research, testing and other technical services.
Hauser operates three business units: Natural Products, Technical
Services and Pharmaceuticals. Under the Natural Products unit, Hauser develops,
manufactures and markets special products from natural sources under the
NaturEnhance(R) trademark. It is a premier supplier of bulk natural ingredients
to dietary supplement and food ingredient suppliers in the United States.
Hauser's proprietary extraction and purification processes enable the production
of bulk natural extracts at a high quality, yield and concentration.
Hauser's Technical Services business unit offers innovative technical
services to a diverse customer base and has earned a national reputation for
scientific and problem-solving excellence. It is comprised of Hauser
Laboratories in Boulder, CO, and Shuster Laboratories in Quincy, MA and Smyrna,
GA. The expertise of the Technical Services business unit in natural product
isolation, pharmaceutical development, and formulation of food products and
nutraceuticals supports Hauser's other business units.
Hauser's pharmaceutical products include natural and custom synthesized
compounds used in a variety of drug development and commercial applications.
This business unit is built on substantial experience and capabilities
manufacturing under Food and Drug Administration and Good Manufacturing
Practices. In December 1998, Hauser announced its intention to terminate its
paclitaxel business to focus its corporate resources on its Natural Products and
Technical Services business units. A corresponding one-time accounting charge of
$25,000,000 to $30,000,000 will be recorded in the quarter ended January 31,
1999. In February 1999, Hauser signed a contract for the sale of the majority of
its paclitaxel inventory as part of the planned closure of its paclitaxel
business. The purchase agreement will gross approximately $9.5 million to Hauser
over the next six to nine months. In connection with the termination of the
paclitaxel business, Hauser intends to negotiate settlements of its yew tree
cultivation agreements and a termination of a multi-year non-exclusive agreement
to supply paclitaxel to a customer. The expected costs of such settlements and
terminations are included in the $25,000,000 to $30,000,000 write off.
Hauser is a "CUSTOMER CONNECTED" company whose customer support
utilizes Hauser's technical and regulatory expertise to help ensure the success
of each project. "CUSTOMER CONNECTED", a management strategy implemented at
Hauser, defines a company that totally focuses on customers' needs, owns and
solves customers' problems, builds strong customer/company relationships at all
levels, and capitalizes on customer problems as company opportunities.
In January 1999, Hauser was served with a Demand for Arbitration by a
supplier of raw materials. The Demand alleges that Hauser has breached its
contract by failing to pay for certain raw materials. Hauser believes that the
claims are unfounded, has retained legal counsel and intends to vigorously
defend its position in arbitration.
28
<PAGE>
DESCRIPTION OF THE CONTRIBUTED SUBSIDIARIES
ZBE
ZBE, as a distributor, has sold bulk standardized and non-standardized
nutraceutical extracts to manufacturers of dietary supplements since 1990.
Standardized extracts represent approximately 75% of the current annual sales of
ZBE. ZBE, which initially operated as a division of ZBI, was incorporated in
August 1998.
The standardized extracts sold by ZBE contain specified concentrations
of the active ingredients and marker compounds of the particular botanical raw
materials being extracted. The standardized extracts are primarily sold by ZBE
to manufacturers of dietary supplements located in the United States. The
primary standardized nutraceutical extracts sold by ZBE are St. John's Wort,
Kava Kava, Gingko and Saw Palmetto. Since 1990, a substantial portion of the
standardized extracts sold by ZBE have been primarily manufactured by two
subsidiaries of Martin Bauer. See "RISK FACTORS -- Nutraceutical Extracts --
Customers and Suppliers." ZBE believes that it supplied approximately 10% of the
standardized nutraceutical extracts sold to manufacturers of dietary supplements
in 1998.
Non-standardized nutraceutical extracts sold by ZBE contain the levels
of active ingredients that are present in the botanical raw materials being
extracted. Non-standardized nutraceutical extracts are primarily exported by
ZBE. Non-standardized nutraceutical extracts are primarily manufactured for ZBE
by a contract manufacturer located in the United States.
ZBE sells nutraceutical extracts through its sales force consisting of
thirteen employees, ten in California, one in Utah, one in Maryland and one in
Florida. Five of the thirteen sales employees also provide customer support.
ZBE sells standardized nutraceutical extracts to more than 180
customers and no customer accounts for more than 25% of the annual standardized
nutraceutical extracts sales. ZBE sells non-standardized nutraceutical extracts
to more than 90 customers. Currently, one customer accounts for approximately
half of the nonstandardized extract annual sales.
Major competitors of ZBE in the sale of nutraceutical extracts to
manufacturers of dietary supplements are Indena (Italy), Martin Bauer (Germany),
Euromed (Spain) and PureWorld Botanicals (United States), all of whom
manufacture the extracts. In addition, there are a number of smaller
competitors. ZBE competes on the basis of quality, service, product development
and price.
ZETAPHARM
ZetaPharm, which was founded in 1976, is a distributor of bulk fine
chemicals, excipients and active ingredients used in the manufacture of generic
pharmaceuticals.
Fine chemicals sold by ZetaPharm include bulk vitamins, nutritional
supplements, over-the-counter pharmaceutical ingredients and food additives.
Such products are sold to manufacturers and processors of health food,
pharmaceuticals, food and beverages.
ZetaPharm is the exclusive distributor in the United States for the
excipients line of Blanver Farmoquimica, Brazil, a leading manufacturer of
excipients. Excipients are derived from cellulose and are used as binders in the
production of tablets. Excipients are also used as ingredients in the slow
release process of tablets and capsules. Excipients are sold to manufacturers of
vitamins and dietary supplements.
ZetaPharm distributes bulk generic active ingredients manufactured by
Zambon, which is located in Italy, and by China Chemical Synthesis, Inc., which
is located in Taiwan. Generic active ingredients are sold by ZetaPharm to
pharmaceutical manufacturers for use in human and veterinary applications. The
sale of generic active ingredients purchased from Cilag, located in Switzerland,
represented 54% and 45% of ZetaPharm total
29
<PAGE>
sales in the fiscal year ended March 31, 1998 and the seven months ended October
31, 1998, respectively. In 1998, ZetaPharm was advised that Cilag had elected to
sell its products directly. As a result, ZetaPharm expects that the revenue from
the sale of generic active ingredients will be insignificant in the fiscal year
ended March 31, 2000. ZetaPharm is actively seeking additional sources of
generic active ingredients to distribute.
ZetaPharm primarily imports the products that it sells. ZetaPharm
suppliers are primarily located in Europe, China, India, and South America.
In the sale of its products, ZetaPharm competes with major
pharmaceutical companies, major manufacturers of food supplements and excipients
and other distributors of such products. ZetaPharm competes on the basis of
service, product quality and price.
ZetaPharm has twenty three employees. Thirteen are engaged in sales and
ten are engaged in customer service. ZetaPharm's principal office is located in
New York, and it has offices in Florida, Missouri, California and Oregon.
WILCOX
Wilcox, which does business as Wilcox Natural Products, is a leading
supplier to customers in the United States, Asia and Europe of botanical raw
materials wild gathered in the United States and cultivated botanical raw
materials. Wilcox has been engaged in purchasing botanical raw materials since
1900. Wilcox was purchased by ZGNA in 1982.
The primary botanical raw materials products sold by Wilcox are saw
palmetto berries, echinacea purpurea, echinacea angustifolia, goldenseal,
American wild ginseng, black cohosh, passion flower, slippery elm bark, witch
hazel and Missouri snake root.
The botanical raw materials sold by Wilcox are used in the manufacture
of nutraceutical extracts or the production of botanical powders, both of which
are sold to manufacturers of dietary supplements. In 1998, approximately 38% of
Wilcox sales were made to ZBI. The next largest customer accounted for 16% of
1998 sales. Approximately 60% of Wilcox annual sales are made pursuant to annual
contracts with customers.
Wilcox purchases the wild gathered botanical raw materials, which are
acquired in the United States, at buying stations located in North Carolina,
Florida, Kentucky and Missouri. Wilcox purchases the botanical raw materials
from the collectors of the botanical raw materials. Since more than 80% of the
botanical raw materials purchased by Wilcox is wild gathered, production is
dependent on the price of the product, growing conditions and available habitat.
Wilcox has approximately 1,000 acres of botanical raw materials under contract
cultivation in the United States, Canada and Costa Rica, of which approximately
300 acres are leased to Wilcox. Wilcox leases four acres in Boone, North
Carolina, where it conducts botanical cultivation experimentation.
Wilcox is the largest purchaser of botanical raw materials wild
gathered in the United States. The major competitors of Wilcox for botanical raw
materials wild gathered in the United States are M.F. Neal and Plantation
Botanicals Inc.
Wilcox has approximately thirty employees. Seven are engaged in
purchasing of botanical raw materials; two are engaged in the sale of botanical
raw materials; two are engaged in cultivation; and the balance are engaged in
processing, warehousing and administration.
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF HAUSER, INC.
The following is a summary of selected historical financial data which
Hauser believes highlights trends in its financial condition and results of
operations. The data is derived from the audited consolidated financial
statements and is as of and for Hauser's fiscal years ended April 30, 1994,
1995, 1996, 1997 and 1998. This information should be read in conjunction with
the audited consolidated financial statements of Hauser, including the notes
thereto, appearing elsewhere in this Proxy Statement. See "Available
Information," and Appendix D.
<TABLE>
YEAR ENDED APRIL 30,
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Natural product processing $17,530,104 $16,190,979 $ 8,123,760 $11,460,116 $57,481,911
Technical services 14,507,424 9,034,787 9,315,672 3,796,559 2,902,546
------------- -------------- -------------- ------------- --------------
Total revenues 32,037,528 25,225,766 17,439,432 15,256,675 60,384,457
Cost of revenues 25,193,098 21,310,463 18,459,170 12,580,463 36,399,299
------------- -------------- -------------- ------------- --------------
Gross profit (loss) 6,844,430 3,915,303 (1,019,738) 2,676,212 23,985,158
Operating expenses 11,489,972 9,956,699 9,562,314 7,686,276 9,076,719
------------- -------------- -------------- ------------- --------------
Income (loss) from operations (4,645,542) (6,041,396) (10,582,052) (5,010,064) 14,908,439
Other income (expense):
Interest income 315,280 528,424 1,047,734 1,857,406 1,231,204
Interest expense (44,931) (18,947) (40,738) (42,667) --
Gain (loss) from investments 361,461 -- (1,000,000) -- --
------------- -------------- -------------- ------------- --------------
Total other income (expense) 631,810 509,477 6,996 1,814,739 1,231,204
Income (loss) from continuing operations before
provision for income taxes (4,013,732) (5,531,919) (10,575,056) (3,195,325) 16,139,643
------------- -------------- -------------- ------------- --------------
Benefit (provision) for income taxes 879,723 1,628,993 4,134,812 1,246,666 (5,818,000)
------------- -------------- -------------- ------------- --------------
Income (loss) from continuing operations (3,134,009) (3,902,926) (6,440,244) (1,948,659) 10,321,643
Loss from discontinued operations -- (2,628,610) (1,296,092) (748,491) --
------------- -------------- -------------- ------------- --------------
Net income (loss) $(3,134,009) $(6,531,536) $ (7,736,336) $(2,697,150) $10,321,643
============= ============== ============== ============= ==============
Diluted income (loss) per share from continuing
operations $ (0.30) $ (0.38) $ (0.62) $ (0.19) $ 0.98
Diluted income (loss) per share from
discontinued operations -- (0.25) (0.13) (0.07) --
------------- -------------- -------------- ------------- --------------
Diluted net income (loss) per share $ (0.30)$ (0.63) $ (0.75) $ (0.26) $ 0.98
============= ============== ============== ============= ==============
Weighted average number of shares outstanding 10,439,800 10,389,111 10,344,169 10,478,545 10,504,075
============= ============== ============== ============= ==============
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF APRIL 30,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Working capital $16,671,596 $21,162,501 $32,054,242 $34,403,946 $37,656,042
Property and equipment, net 22,344,618 23,186,057 24,605,560 25,128,717 25,751,356
Total assets 68,293,581 66,797,878 74,410,380 82,575,167 84,568,740
Long-term debt 692,733 121,764 130,271 111,078 --
Stockholders' equity 60,553,700 63,691,554 70,183,619 77,391,459 80,770,038
</TABLE>
The following is a summary of selected historical financial data which
Hauser believes highlights trends in its financial condition and results of
operations. The selected financial data as of October 31, 1998 and 1997 and for
the six months then ended are derived from the unaudited interim consolidated
financial statements of Hauser and include only normal recurring adjustments
necessary for fair presentation. This information should be read in conjunction
with the Audited Consolidated Financial Statements of Hauser, Inc. as of April
30, 1998 and 1997 and for each of the three fiscal years then ended, including
the notes thereto, and the Unaudited Consolidated Financial Statements of
Hauser, Inc., as of October 31, 1998 and April 30, 1998 and for the three and
six month periods ended October 31, 1998 and 1997, including the notes thereto,
appearing elsewhere in this Proxy Statement. See "Available Information" and
Appendix D and E.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
STATEMENT OF OPERATIONS DATA: 1998 1997
(UNAUDITED) (UNAUDITED)
-------------- ---------------
<S> <C> <C>
Revenues:
Natural product processing $ 8,337,968 $ 7,865,704
Technical services 8,312,479 5,778,243
-------------- ---------------
Total revenues 16,650,447 13,643,947
Cost of revenues 11,939,746 10,932,282
-------------- ---------------
Gross profit 4,710,701 2,711,665
Operating expenses 5,615,981 5,185,672
-------------- ---------------
Loss from operations (905,280) (2,474,007)
Other income (expense):
Interest income 49,808 199,877
Interest expense (179,478) (6,663)
Gain from investments 42,037 361,461
-------------- ---------------
Total other income (expense) (87,633) 554,675
Loss before provision for income taxes (992,913) (1,919,332)
Benefit for income taxes -- 671,600
-------------- ---------------
Net loss $ (992,913) $(1,247,732)
============== ===============
Basic and diluted net loss per share (0.09) (0.12)
============== ===============
Weighted average basic and diluted shares outstanding 10,467,519 10,429,458
============== ===============
BALANCE SHEET DATA: AS OF OCTOBER 31,
-------------------------------
1998 1997
-------------- ---------------
Working capital $11,243,626 $19,065,460
Property and equipment, net 21,652,997 22,397,362
Total assets 72,384,446 66,367,372
Long-term debt 629,262 74,666
32
<PAGE>
Stockholders' equity 59,576,544 62,242,771
</TABLE>
SELECTED FINANCIAL DATA OF THE CONTRIBUTED SUBSIDIARIES
The following tables show certain selected combined financial data of
the Contributed Subsidiaries (collectively, the "SELECTED FINANCIAL DATA"). The
Selected Financial Data as of March 31, 1998 and 1997 and for each of the three
years in the period ended March 31, 1998 are derived from the audited combined
financial statements of the Contributed Subsidiaries. The Selected Financial
Data as of March 31, 1996, 1995 and 1994 and for the years ended March 31, 1995
and 1994 are derived from the unaudited combined financial statements of the
Contributed Subsidiaries. The Selected Financial Data as of October 31, 1998 and
1997 and for the seven months ended October 31, 1998 and 1997 are derived from
the unaudited combined interim financial statements of the Contributed
Subsidiaries and include only normal recurring adjustments necessary for fair
presentation. The balances as of October 31, 1998 and 1997 and for the seven
month periods then ended are not necessarily indicative of annual results.
This information should be read in conjunction with the audited
combined financial statements of the Contributed Subsidiaries, including
respective notes thereto, appearing elsewhere in this Proxy Statement. See
Appendix G and H.
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED MARCH 31,
OCTOBER 31,
------------------------ ------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1998 1997 1996 1995 1994
----------- ------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $50,142,872 $51,782,276 $101,126,620 $73,140,247 $61,441,614 $30,271,701 $27,851,403
Cost of Sales 42,579,756 43,293,466 84,318,709 62,285,139 49,861,090 25,526,459 24,594,796
----------- ------------ ------------ ------------- ------------ ------------- ------------
Gross Profit 7,563,116 8,488,810 16,807,911 10,855,108 11,580,524 4,745,242 3,256,607
Commissions and Other Income 114,261 84,664 282,939 1,389,012 5,515 -- --
----------- ------------ ------------ ------------- ------------ ------------- ------------
7,677,377 8,573,474 17,090,850 12,244,120 11,586,039 4,745,242 3,256,607
Selling, General and Admin 5,146,887 5,668,286 10,171,306 7,284,451 6,153,154 3,775,643 4,277,677
Expense
Net Income (loss) 1,050,898 1,278,652 3,339,660 2,617,370 3,398,749 81,703 (2,989,796)
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31,
------------------------ ------------------------------------------------------------------
BALANCE SHEET DATA: 1998 1997 1998 1997 1996 1995 1994
----------- ------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Current Assets $41,882,756 $34,682,641 $33,014,592 $31,369,974 $20,781,049 $11,568,005 $8,660,184
Total Assets 42,757,560 35,633,022 33,917,000 32,252,013 21,654,343 12,191,300 9,671,980
Current Liabilities 31,060,494 27,047,962 23,270,932 24,945,605 16,910,305 10,591,011 7,798,091
Long Term Debt -- -- -- -- 55,000 110,000 65,303
Stockholders' Equity 11,697,066 8,585,060 10,646,068 7,306,408 4,689,038 1,490,289 1,808,586
</TABLE>
33
<PAGE>
CONTRIBUTED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
NET SALES. Net sales increased 38% from $73,140,247 in 1997 to $101,126,620 in
1998. This increase is due to increases in extract and bulk generic active
ingredient sales. The increase in sales of 19% from 1996 to 1997 can also be
attributed to increases in extract and bulk generic active ingredient sales,
offset by a decrease in sales of botanical raw materials.
The sale of generic active ingredients represented 30% of sales in 1998 and are
expected to represent approximately 17% of sales in the fiscal year ending March
31, 1999.
GROSS PROFIT. Gross profit increased 55% from $10,855,108 in 1997 to $16,807,911
in 1998. As a percentage of net sales, gross profit increased from 15% in 1997
to 17% in 1998. Margins generated in 1997 were lower than historical margins due
primarily to sales of one product at a loss of approximately $500,000. No losses
were incurred with respect to the sale of such product in 1998.
Gross profit decreased 6% from $11,580,524 in 1996 to $10,855,108 in 1997. As a
percentage of net sales, gross profit decreased from 19% in 1996 to 15% in 1997.
The deterioration in gross profit in absolute dollars as well as a margin
percentage is due primarily to sales of one product in 1996 at higher than
average margins, and sales of the same product in 1997 at a loss.
COMMISSION AND OTHER INCOME. Commission and other income decreased by 80% from
$1,389,012 in 1997 to $282,939 in 1998. Other income in 1997 included a reversal
of an environmental cleanup reserve in the amount of $805,282. During 1996,
commission and other income was insignificant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A" expenses) rose from $7,284,451 in 1997 to
$10,171,306 in 1998, a 40% increase, and increased by 18% in 1997 from a level
of $6,153,154 in 1996. As a percentage of sales, SG&A expenses remained
consistent at 10% in all three years. The increase in SG&A expenses in absolute
dollars is due to an expansion in the businesses of the Contributed
Subsidiaries, which required an increase in sales personnel and marketing
expenditures.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased from $6,424,369 at March 31, 1997 to
$9,743,660 at March 31, 1998. The increase is attributed primarily to increased
inventory and receivables, as well as increased cash at March 31, 1998.
Additionally, total current liabilities decreased from 1997 to 1998. The
increased assets and decreased liabilities were funded through cash from
operations. The shift from short-term debt to trade accounts payable from 1997
to 1998 is attributed to favorable payment terms granted by a principal
supplier.
RESULTS OF CONTINUING OPERATIONS FOR THE SEVEN MONTHS ENDED OCTOBER 31, 1998
AND 1997
NET SALES. Net sales decreased 3% from $51,782,276 in 1997 to $50,142,872 in
1998. The decrease is attributed primarily to a decrease in sales of bulk
generic active ingredients, offset by an increase in the sale of botanical raw
materials. Sales of bulk generic active ingredients were 23% and 33% of sales
generated during the seven months ended October 31, 1998 and 1997, respectively.
GROSS PROFIT. Gross profit decreased 11% from $8,488,810 for the seven months
ended October 1997 to $7,563,116 for the seven months ended October 1998. As a
percentage of net sales, gross profit decreased from 16% in 1997 to 15% in 1998.
The decrease in gross profit from the prior year is due primarily to a reduction
in sales of bulk generic active ingredients. While extract sales were relatively
the same for the seven months ended
34
<PAGE>
October 1998 and 1997, margins achieved on these products declined. The
reduction in extract margins is due primarily to a reduction in margins
generated on one product, which achieved favorable margins in 1997 and
significantly less favorable margins in 1998. Sales of this product represented
7% and 16% of total sales generated during the seven months ended October 1998
and 1997, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased 9% from
$5,668,286 for the seven months ended October 1997 to $5,146,887 for the seven
months ended October 1998. As a percentage of sales, SG&A expenses decreased
from 11% of sales for the seven months ended October 1997 to 10% of sales for
the seven months ended October 1998. The decrease in SG&A expense can be
attributed primarily to decreased sales commissions and related costs.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased from $9,743,660 at March 31, 1998 to
$10,822,262 at October 31, 1998. The increase is attributed primarily to
increased inventory at October 1998. The increased inventory has been financed
primarily through increased short-term borrowings.
SEASONALITY
Historically, the Contributed Subsidiaries' strongest selling season has been
the months of January through March. While the Contributed Subsidiaries
purchase inventory throughout the year, a substantial portion of the
inventory requirements are purchased during the harvest seasons of botanical
raw materials. This harvest season generally begins in August and concludes
in December. As a result of the seasonality, inventory and short term debt
are substantially higher in the second and third quarters.
YEAR 2000
The Year 2000 problem is the result of computer programs recognizing a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Contributed Subsidiaries have undertaken
a thorough review of their current information technology ("IT") and non-IT
systems. This review is expected to be a continuing process. Based on this
review and the resulting changes that were implemented, the majority of the
Contributed Subsidiaries' hardware has now been upgraded to comply with Year
2000 requirements. The total cost for these upgrades is not expected to exceed
$75,000.
As another part of Year 2000-compliance review, the Contributed Subsidiaries
have also undertaken a logical process of updating or deleting software systems
known to have problems handling two-digit date information properly. The testing
and identification phase of the review of core applications supporting
accounting, human resources and manufacturing processes has now been completed.
Upgrade or replacement of these applications is expected to be completed in the
spring of 1999. The net cost of these upgrades is not expected to exceed
$100,000.
The Contributed Subsidiaries have also implemented a Year 2000 compliance
inquiry program with its current and potential major vendors and suppliers as to
both the status of their equipment and systems and any delays they anticipate in
supplying goods and services to the Contributes Subsidiaries. If a third party's
systems are not Year 2000 compliant, that problem will be addressed directly
with that third party.
Management recognizes that failure to meet all Year 2000 issues could result in
significant degradation of the Contributed Subsidiaries ability to provide
laboratory testing, to track and record manufacturing processes, invoice
customers and pay vendors. Management is addressing these issues directly,
aggressively pursuing upgrading all mission-critical systems.
If, because of unforeseen circumstances, installed hardware and software systems
cease to function on January 1, 2000, a disaster recovery contingency plan will
be activated to handle the emergency situation. The Contributed Subsidiaries
have established relationships with several computer system vendors who will
provide the necessary hardware and software to support the contingency plan.
35
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial data as of October
31, 1998 and for the twelve months ended April 30, 1998 and the six months ended
October 31, 1998 give effect to the Merger, accounted for under the "purchase"
accounting method. The unaudited pro forma condensed combined financial data is
based on the historical consolidated financial statements of Hauser and the
historical combined financial statements of the Contributed Subsidiaries under
the assumptions and adjustments set forth in the notes to such pro forma
financial data.
The unaudited pro forma condensed combined balance sheet data assumes
that the Merger was consummated on October 31, 1998, and the unaudited pro forma
condensed combined statements of operations data assumes that the Merger was
consummated on May 1, 1997. The fiscal year of Hauser ends on April 30, and the
fiscal year of the Contributed Subsidiaries ends on March 31. For purposes of
presenting the unaudited pro forma condensed combined statements of operations
data, the historical financial statements of Contributed Subsidiaries for the
year ended March 31, 1998 were combined with the historical financial statements
of Hauser for the year ended April 30, 1998. The historical financial statements
of Hauser for the six months ended October 31, 1998 have been combined with the
unaudited historical financial statements of the Contributed Subsidiaries for
the six months ended October 31, 1998.
For the purpose of presenting the unaudited pro forma condensed
combined balance sheet data, the assets and liabilities of the Contributed
Subsidiaries have been adjusted to their estimated fair market values and the
excess purchase price has been assigned to goodwill, which is being amortized
over a 20-year period. The fair value of the Contributed Subsidiaries' assets
and liabilities is based on preliminary estimates. Upon completion of a
detailed review of assets and liabilities, certain adjustments may be
required to finalize the purchase accounting. These adjustments may be the
result of changes in assets and liabilities as of the date of closing,
results of a valuation of the fair value of assets and liabilities, and the
impact of the Escrow Agreement (see "THE MERGER AGREEMENT - The Escrow
Agreement"). The unaudited pro forma condensed combined statements of
operations data excludes any benefit that may result due to synergies that
may be derived and elimination of duplicative efforts in connection with the
acquisition of the Contributed Subsidiaries.
The pro forma adjustments included herein are based on available
information and certain assumptions that management believe are reasonable
and are described in the accompanying notes. The unaudited pro forma
condensed combined financial statement data may not be indicative of the
results that actually would have occurred if the acquisition of the
Contributed Subsidiaries had been consummated on the dates indicated or which
may be obtained in the future. The unaudited pro forma condensed combined
financial statement data should be read in conjunction with the historical
consolidated financial statements for Hauser and the historical combined
financial statements of the Contributed Subsidiaries.
36
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1998
-----------------------------------------------------------------------------------------------
COSTS RELATED
CONTRIBUTED TO PACLITAXEL PRO FORMA HAUSER
HAUSER SUBSIDIARIES BUSINESS(1) ADJUSTMENTS PRO FORMA
--------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,061,328 $ 21,707 $ -- $ -- $ 3,083,035
Accounts receivable, net 7,705,689 10,575,393 -- -- 18,281,082
Inventories, current 10,440,734 27,660,177 (1,225,736) -- 36,875,175
Assets held for sale -- -- 9,817,000 -- 9,817,000
Prepaid expenses and other 258,286 3,184,936 -- -- 3,443,222
Net deferred income tax assets 1,956,229 440,543 -- -- 2,396,772
--------------- ---------------- ---------------- --------------- ----------------
Total current assets 23,422,266 41,882,756 8,591,264 -- 73,896,286
--------------- ---------------- ---------------- --------------- ----------------
PROPERTY AND
EQUIPMENT:
Land and buildings 7,650,010 444,630 -- -- 8,094,640
Lab and processing equipment 33,149,081 1,292,779 (11,196,582) -- 23,245,278
Furniture and fixtures 4,911,360 337,526 (66,072) -- 5,182,814
--------------- ---------------- ---------------- --------------- ----------------
Total property and equipment 45,710,451 2,074,935 (11,262,654) -- 36,522,732
Accumulated depreciation (24,057,454) (1,538,765) 6,538,032 -- (19,058,187)
--------------- ---------------- ---------------- --------------- ----------------
Net property & equipment 21,652,997 536,170 (4,724,622) -- 17,464,545
--------------- ---------------- ---------------- --------------- ----------------
OTHER ASSETS:
Goodwill, net 1,815,403 -- (330,891) 33,778,464 (2) 35,262,976
Inventories, non-current 18,398,250 -- (18,398,250) -- --
Deposits 5,226,782 -- (4,419,797) -- 806,985
Net deferred income tax assets 1,010,154 -- -- -- 1,010,154
Other 858,594 338,634 (791,467) -- 405,761
--------------- ---------------- ---------------- --------------- ----------------
Total other assets 27,309,183 338,634 (23,940,405) 33,778,464 37,485,876
--------------- ---------------- ---------------- --------------- ----------------
$ 72,384,446 $ 42,757,560 $ (20,073,763) $ 33,778,464 $ 128,846,707
--------------- ---------------- ---------------- --------------- ----------------
--------------- ---------------- ---------------- --------------- ----------------
</TABLE>
See accompanying notes to unaudited proforma condensed combined balance sheet.
37
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1998
--------------------------------------------------------------------------------------------
COSTS RELATED
CONTRIBUTED TO PACLITAXEL PRO FORMA HAUSER
HAUSER SUBSIDIARIES BUSINESS (1) ADJUSTMENTS PRO FORMA
--------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,425,053 $ 7,912,408 $ -- $ -- $ 11,337,461
Current portion long-term debt 6,464,099 21,003,903 -- (23,003,903)(3) 4,464,099
Accrued salaries and benefits 1,176,766 521,934 -- -- 1,698,700
Deposits 516,070 -- -- -- 516,070
Product warranty 108,616 -- -- -- 108,616
Other accrued current liabilities 488,036 1,622,249 5,000,000 1,000,000 (4) 8,110,285
--------------- ---------------- ---------------- --------------- ----------------
Total current liabilities 12,178,640 31,060,494 5,000,000 (22,003,903) 26,235,231
--------------- ---------------- ---------------- --------------- ----------------
LONG TERM DEBT 629,262 -- -- 23,003,903 (3) 23,633,165
--------------- ---------------- ---------------- --------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock 10,468 1,061 -- 8,996 (5) 20,525
Preferred stock -- 2,000,000 -- (2,000,000) (5) --
Additional paid-in capital 58,880,048 1,003,499 -- 43,461,974 (5) 103,345,521
Treasury stock -- (400,000) -- 400,000 (5) --
Retained earnings 686,028 7,130,129 (25,073,763) (7,130,129)(5) (24,387,735)
Divisional equity -- 1,962,377 -- (1,962,377)(5) --
--------------- ---------------- ---------------- --------------- ----------------
Total stockholders' equity 59,576,544 11,697,066 (25,073,763) 32,778,464 78,978,311
--------------- ---------------- ---------------- --------------- ----------------
$72,384,446 $42,757,560 $(20,073,763) $33,778,464 $128,846,707
--------------- ---------------- ---------------- --------------- ----------------
--------------- ---------------- ---------------- --------------- ----------------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined balance sheet.
38
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF OCTOBER 31, 1998
(1) Reflects the estimated costs to exit the paclitaxel business including
the write down of paclitaxel and other assets to estimated net
realizable value and contract termination costs. As part of the Merger,
Hauser will exit the business of producing bulk paclitaxel. All
paclitaxel assets have been reduced to their net realizable value of
approximately $9,817,000. Hauser also estimates that it will incur
additional costs of approximately $5,000,000, principally to terminate
contractual commitments.
(2) Reflects the estimated goodwill associated with the Merger. The
estimated fair value of the Common Stock to be issued was based on the
average closing price of Hauser's stock for three days prior and three
days after the announcement of the Merger. Approximately 2,412,000
shares issued to shareholders of ZGNA and ZBI will be held in escrow
pending Hauser's sale of the paclitaxel business. The shares are to be
released from escrow and subsequently retired based upon the net
proceeds realized from Hauser's sale of the paclitaxel business in
excess of $3,000,000. The shares are to be released from escrow and
retired at a rate of $3.50 per share (see "The Escrow Agreement"). The
ultimate amount of goodwill will depend on the net proceeds received
from the sale of the paclitaxel business and the fair value of the
Contributed Subsidiaries assets and liabilities on the Effective Date
of the Merger.
(3) Reflects the new revolving and term credit facility entered into in
conjunction with the Merger. Upon consummation of the Merger, Hauser
will enter into two credit facilities for an aggregate amount of
$45,000,000 to be guaranteed by each of its subsidiaries: a revolving
line of credit up to $35,000,000 for general working capital purposes
maturing two years after the loan closing, and a $10,000,000
non-revolving term commitment for financing the acquisition of fixed
assets with a draw down period of two years and a maturity date of five
years following the loan closing. The interest rate on the revolving
credit facility is the Bank's prime rate minus 0.75% per annum or the
Bank's quoted LIBOR rate plus 1.5% per annum. For the term loan fixed
asset facility, the interest rate is the Bank's prime rate minus 0.5%
per annum or the Bank's quoted LIBOR plus 1.75% per annum or on a
specific fixed rate basis. A commitment fee will be charged of 0.25%
per annum on the unused portion of the term loan fixed asset
commitment.
(4) Reflects the estimated merger related costs consisting principally of
transaction costs for financial advisory fees, attorneys, accountants
and financial printing related to the Merger.
(5) Reflects the issuance of approximately 10,057,000 shares of Hauser's
Common Stock to ZGNA and ZBI shareholders. This includes approximately
2,412,000 shares held in escrow,. The number of shares of Hauser's
common stock that will ultimately be issued to ZGNA and ZBI is based on
a formula defined in the Escrow Agreement(see "The Escrow Agreement").
At the completion of Merger, ZGNA and ZBI will own between 42% and 49%
of the outstanding common stock of the Company based on the ultimate
net proceeds received from the sale of Hauser's paclitaxel business in
excess of $3,000,000. Because the cancellation of the shares held in
escrow is not highly probable, Hauser has assumed that none of the
shares will be retired and ZGNA and ZBI will own 49% of the outstanding
common stock. If all escrow shares are returned to Hauser and canceled,
pro forma equity and goodwill would be reduced by approximately
$10,666,000.
39
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1998
------------------------------------------------------------------------------------------------
COSTS RELATED
CONTRIBUTED TO PACLITAXEL PRO FORMA HAUSER
HAUSER SUBSIDIARIES BUSINESS(1) ADJUSTMENTS PRO FORMA
--------------- ---------------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural products $ 17,530,104 101,126,620 $ (3,855,272) $ -- $ 114,801,452
Technical services 14,507,424 -- -- 14,507,424
--------------- ---------------- ---------------- --------------- ------------------
Total revenues 32,037,528 101,126,620 (3,855,272) -- 129,308,876
--------------- ---------------- ---------------- --------------- ------------------
COST OF REVENUES:
Natural products 15,091,082 84,318,709 (2,761,989) -- 96,647,802
Technical services 10,102,016 -- -- -- 10,102,016
--------------- ---------------- ---------------- --------------- ------------------
Total cost of revenues 25,193,098 84,318,709 (2,761,989) -- 106,749,818
--------------- ---------------- ---------------- --------------- ------------------
GROSS PROFIT (LOSS) 6,844,430 16,807,911 (1,093,283) -- 22,559,058
--------------- ---------------- ---------------- --------------- ------------------
OPERATING EXPENSES:
Research and development 2,229,843 -- (655,444) -- 1,574,399
Selling, general and
administrative 7,697,329 10,171,306 (425,023) -- 17,443,612
Goodwill 62,800 - (62,800) 1,688,923(2) 1,688,923
Product warranty 1,500,000 - -- -- 1,500,000
--------------- ---------------- ---------------- --------------- ------------------
Total operating expenses 11,489,972 10,171,306 (1,143,267) 1,688,923 22,206,934
--------------- ---------------- ---------------- --------------- ------------------
INCOME (LOSS) FROM
OPERATIONS: (4,645,542) 6,636,605 49,984 (1,688,923) 352,124
--------------- ---------------- ---------------- --------------- ------------------
OTHER INCOME (EXPENSE):
Interest income 315,280 -- -- -- 315,280
Interest expense (44,931) (1,190,689) -- -- (1,235,620)
Other income 361,461 282,939 -- -- 644,400
--------------- ---------------- ---------------- --------------- ------------------
Total other income (expense) 631,810 (907,750) -- -- (275,940)
--------------- ---------------- ---------------- --------------- ------------------
INCOME (LOSS)
BEFORE INCOME TAX (4,013,732) 5,728,855 49,984 (1,688,923) 76,184
INCOME TAX (EXPENSE)
BENEFIT 879,723 (2,389,195) -- 809,472(3) (700,000)
--------------- ---------------- ---------------- --------------- ------------------
NET INCOME (LOSS) $ (3,134,009) $ 3,339,660 $ 49,984 $ (879,451) $ (623,816)
--------------- ---------------- ---------------- --------------- ------------------
--------------- ---------------- ---------------- --------------- ------------------
LOSS PER SHARE
BASIC AND DILUTED: $ (0.30) N/A N/A N/A $ (0.03)
WEIGHTED AVERAGE
SHARES OUTSTANDING
BASIC AND DILUTED 10,439,800 N/A N/A 10,057,028 20,496,828
--------------- ---------------- ---------------- --------------- ------------------
--------------- ---------------- ---------------- --------------- ------------------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined statement
of operations.
40
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1998
(1) Reflects the removal of revenues and expenses related to the paclitaxel
business. As part of the Merger, Hauser will exit the business of producing
bulk paclitaxel.
(2) Reflects the estimated amortization of goodwill using a twenty year life
that would have occurred during the pro forma period. Goodwill amortization
expense would have been approximately $1,689,000 during the year ended
April 30, 1998. Goodwill is dependent upon the number of shares ultimately
issued and the fair value of the assets and liabilities of the contributed
subsidiaries, which could differ significantly from the amounts assumed for
purposes of the unaudited pro forma statements. If all escrow shares are
returned to Hauser and canceled, pro forma goodwill amortization expense
would be approximately $1,156,000. See "The Escrow Agreement".
(3) Reflects estimated pro forma income tax at the combined statutory rate of
approximately 40% and includes the effect of goodwill amortization, which
is non-deductible for tax purposes.
41
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 31, 1998
-------------------------------------------------------------------------------------------
COSTS
RELATED TO
CONTRIBUTED PACLITAXEL PRO FORMA HAUSER
HAUSER SUBSIDIARIES BUSINESS(1) ADJUSTMENTS PRO FORMA
-------------- ---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural product processing $ 8,337,968 $ 40,011,926 $ (1,996,075) $ 720,517 (2) $ 47,074,336
Technical services 8,312,479 -- -- -- 8,312,479
-------------- ---------------- --------------- --------------- -----------------
Total revenues 16,650,447 40,011,926 (1,996,075) 720,517 55,386,815
-------------- ---------------- --------------- --------------- -----------------
COST OF REVENUES:
Natural product processing 6,001,826 34,229,671 (1,167,262) -- 39,064,235
Technical services 5,937,920 -- -- -- 5,937,920
-------------- ---------------- --------------- --------------- -----------------
Total cost of revenues 11,939,746 34,229,671 (1,167,262) -- 45,002,155
-------------- ---------------- --------------- --------------- -----------------
GROSS PROFIT (LOSS) 4,710,701 5,782,255 (828,813) 720,517 10,384,660
-------------- ---------------- --------------- --------------- -----------------
OPERATING EXPENSES:
Research and development 817,898 -- (190,489) -- 627,409
Selling, general and
administrative 4,763,073 4,441,656 (91,328) -- 9,113,401
Goodwill 35,010 - (35,010) 844,462 (3) 844,462
-------------- ---------------- --------------- --------------- -----------------
TOTAL OPERATING EXPENSES 5,615,981 4,441,656 (316,827) 844,462 10,585,272
-------------- ---------------- --------------- --------------- -----------------
INCOME (LOSS)
FROM OPERATIONS (905,280) 1,340,599 (511,986) (123,945) (200,612)
-------------- ---------------- --------------- --------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 49,808 -- -- -- 49,808
Interest expense (179,478) (616,044) -- -- (795,522)
Other income 42,037 110,973 -- -- 153,010
-------------- ---------------- --------------- --------------- -----------------
Total other income (expense) (87,633) (505,071) -- -- (592,704)
-------------- ---------------- --------------- --------------- -----------------
INCOME (LOSS) BEFORE
INCOME TAX (992,913) 835,528 (511,986) (123,945) (793,316)
INCOME TAX (EXPENSE)
BENEFIT -- (384,335) -- 364,335 (4) (20,000)
-------------- ---------------- --------------- --------------- -----------------
NET INCOME (LOSS) $ (992,913) $ 451,193 $ (511,986) $ 240,390 $ (813,316)
-------------- ---------------- --------------- --------------- -----------------
-------------- ---------------- --------------- --------------- -----------------
LOSS PER SHARE
BASIC AND DILUTED $ (0.09) N/A N/A N/A $ (0.04)
WEIGHTED AVERAGE
SHARES OUTSTANDING
BASIC AND DILUTED 10,467,519 N/A N/A 10,057,028 20,524,547
-------------- ---------------- --------------- --------------- -----------------
-------------- ---------------- --------------- --------------- -----------------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined
statement of operations.
42
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS
OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1998
(1) Reflects the removal of revenues and expenses related to the paclitaxel
business. As part of the Merger, Hauser will exit the business of producing
bulk paclitaxel.
(2) Reflects the estimated additional revenue to be realized from the sale of
product from Wilcox (a Contributed Subsidiary) to ZBI during the six months
ended October 31, 1998. During this period, Wilcox sold product to ZBI at
cost. The parties have agreed that Wilcox will charge ZBI prices no less
favorable than those charged to unrelated third parties.
(3) Reflects the estimated amortization of goodwill using a twenty year life
that would have occurred during the pro forma period. Goodwilll
amortization expense would have been approximately $844,000 during the six
months ended October 31, 1998. Goodwill is dependent upon the number of
shares ultimately issued and the fair value of the assets and liabilities
of the contributed subsidiaries which could differ significantly from the
amounts assumed for purposes of the unaudited pro forma statements. If all
escrow shares are returned to Hauser and canceled, pro forma goodwill
amortization expense would be approximately $578,000. See "THE MERGER
AGREEMENT - The Escrow Agreement".
(4) Reflects estimated pro forma income tax at a combined statutory rate of
approximately 40% and includes the effect of goodwill amortization, which
is non-deductible for tax purposes.
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth as of January 15, 1999, the number of
shares of Common Stock owned by any person who is known by Hauser to be the
beneficial owner of more than 5% of the Hauser's voting securities, by all
individual Directors, by the Company's Chief Executive Officer and the four most
highly paid executives with annual base salaries of $100,000 or more (the "NAMED
EXECUTIVE OFFICERS"), and by all Named Executive Officers and Directors as a
group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS
------------------------ ------------------------ -------------
<S> <C> <C>
Directors:
Dean P. Stull (2) 308,294 2.9%
Randall J. Daughenbaugh (2) 173,252 1.6%
William E. Coleman (3) 56,805 (*)
Stanley J. Cristol (4) 120,793 1.2%
Bert M. Tolbert (5) 74,177 (*)
Beverly J. Haddon (6) 5,450 (*)
Robert F. Saydah (7) 30,000 (*)
Named Executive Officers:
Philip H. Katz (8) 4,017 (*)
Kenneth P. Gordon (8) 350 (*)
Eugene W. Damon (8) 1,017 (*)
Martin C. Wehr (2) 49,500 (*)
All Officers and Directors as a Group: (13 persons) 874,420 8.0%
5% Shareholders:
Fidelity Management & Research Company (9) 1,042,000 10.0%
T. Rowe Price Associates (10) 1,059,800 10.1%
1,226,000 11.4%
</TABLE>
- - - - - - - - - - - - - --------------------
(1) Includes the following number of shares which could be acquired within 60
days through the exercise of stock options: Dr. Stull, 118,320 shares; Dr.
Daughenbaugh, 66,234 shares; Dr. Cristol, 19,800 shares; Mr. Saydah, 22,500
shares; Dr. Tolbert, 20,850 shares; and all directors and officers as a
group, 351,003 shares.
(2) Their business address is 5555 Airport Boulevard, Boulder, CO 80301.
(3) Includes 24,359 shares owned by Dr. Coleman directly, 1 share owned by CVM
Equity Fund II, Ltd., of which Dr. Coleman is a general partner; 4,695
shares owned by Colorado Venture Management, Inc., of which Dr. Coleman is
Chairman; and shares which could be acquired within 60 days through the
exercise of options to purchase 27,750 shares held by CVM, Inc. Dr.
Coleman's address is Colorado Venture Management, Inc., 4845 Pearl East
Circle, Suite 300, Boulder, CO 80301.
(4) Dr. Cristol's address is University of Colorado, Department of Chemistry
and Biochemistry, Campus Box 215, Boulder, CO 80309.
(5) Dr. Tolbert's address is 444 Kalmia Avenue, Boulder, CO 80304.
(6) Ms. Haddon's address is CRL Associates, Inc., 1625 Broadway, Suite 2450,
Denver, CO 80202.
(7) Mr. Saydah's address is Heidrick & Struggles, Four Embarcadero Center,
Suite 3570, San Francisco, CA 94111.
(8) The business address for Messrs. Katz, Gordon and Damon is Shuster, Inc.,
Quincy Research Park, 5 Hayward St., Quincy, MA 02171.
(9) The business address for Fidelity Management & Research Company is 82
Devonshire Street, Boston, MA 02109.
(10) The business address for T. Rowe Price Associates, Inc., is 100 E. Pratt
Street, Baltimore, MD 21202.
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<PAGE>
ARRANGEMENTS AFFECTING CONTROL OF THE COMPANY
As of January 15, 1999, the Officers and Directors of the Company
beneficially owned 874,420 shares of Common Stock or approximately 8.0% of the
total shares issued and outstanding (assuming exercise of all warrants and
options deemed to be beneficially owned by these persons).
POSSIBLE APPLICATION OF CALIFORNIA CORPORATIONS CODE
Pursuant to Section 2115 of the California Corporations Code, a foreign
parent corporation (even though it does not itself transact intrastate business)
is subject to certain provisions of the California Corporations Code if both (1)
more than 50% of the outstanding Common Stock is held by persons having
addresses in California and (2) if the average of the property, payroll and
sales tax factors under California law is more than 50% during its latest full
income year. If applicable, Hauser shareholders would have certain rights under
California law that may be different than under the Articles of Incorporation of
Hauser and under Colorado law relating to the election and removal of directors,
filling of director vacancies, directors' standard of care, liability of
directors for unlawful distributions, indemnification of directors and officers,
liability of shareholders who receive unlawful distributions, annual
shareholders meetings, cumulative voting, supermajority voting requirement,
limitations on sale of assets, limitations on mergers, reorganizations,
dissenters' rights, records and reports and rights of inspection. ZGNA and ZBI
currently have addresses in California, but based upon the proforma financial
information, Hauser does not believe the average property, payroll or sales tax
factors will exceed 50%. However, there is no assurance that in the future such
average will not exceed 50%, particularly if the Powders Option is exercised.
45
<PAGE>
APPROVAL OF THE 1999 STOCK INCENTIVE PLAN
On January 28, 1999, the Board adopted, subject to shareholder
approval, the Hauser, Inc. 1999 Stock Incentive Plan, under which 1,000,000
shares of Common Stock were reserved for issuance pursuant to stock and
option awards.
The Board believes that the 1999 Stock Incentive Plan is in the best
interests of Hauser and its shareholders so that Hauser may offer to current
and prospective key employees, consultants and directors an opportunity to
participate in the equity of Hauser. The purpose of the 1999 Stock Incentive
Plan is to promote the interests of Hauser and its shareholders by helping
Hauser and its subsidiaries attract, retain and motivate individuals who are
essential to the success of Hauser and its subsidiaries. Upon the closing of
the Merger, Hauser will be a significantly larger company with additional key
personnel. In order to provide incentives to these individuals and closely
align their interests with those of the shareholders, the Board believes that
an equity incentive plan such as the 1999 Stock Incentive Plan is necessary
and in the best interests of Hauser and its shareholders.
Hauser is seeking shareholder approval of the 1999 Stock Incentive
Plan in order to comply with the requirements of Sections 162(m) and 422 of
the Code and the requirements of the NASDAQ National Market System ("NASDAQ").
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE 1999 STOCK INCENTIVE
PLAN
The 1999 Stock Incentive Plan will be approved upon the affirmative
vote of the holders of a majority of the quorum at the Special Meeting.
Unless otherwise specified, proxies solicited by the Board will be voted FOR
the adoption of the 1999 Stock Incentive Plan. The approval of the Merger is
not conditioned upon approval of the 1999 Stock Incentive Plan, but the
approval of the 1999 Stock Incentive Plan is conditioned upon approval of the
Merger. The following summary of the 1999 Stock Incentive Plan is qualified
in its entirety by express reference to the text of the 1999 Stock Incentive
Plan, a copy of which is attached to this Proxy Statement as Appendix I.
EFFECTIVE DATE; DURATION
The 1999 Stock Incentive Plan will become effective upon approval by
the shareholders of Hauser. The expiration date of the 1999 Stock Incentive
Plan, after which no further awards may be granted, is February 1, 2009.
ELIGIBILITY; AWARDS
Key employees, directors and consultants of Hauser and its
subsidiaries are eligible to receive discretionary stock-based awards under
the 1999 Stock Incentive Plan. Options to purchase Common Stock ("OPTIONS")
may be granted to all eligible individuals. Options granted to eligible
employees may be qualified as "incentive stock options" within the meaning of
Section 422 of the Code ("ISOs") or may be Options which are not so qualified
("NQSOs"). In addition, shares of Common Stock may be granted to members of
the Board, who are not employees of Hauser or any subsidiary in lieu of cash
compensation. As of January 15, 1999, the approximate number of employees
eligible to participate in the 1999 Stock Incentive Plan was 325.
Approximately 65 additional employees of the Contributed Subsidiaries will be
eligible under the 1999 Stock Incentive Plan if the Merger is approved and
closes. There are currently 5 outside directors on the Board and, following
the Merger, Hauser expects that there will be 6 outside directors eligible
under the 1999 Stock Incentive Plan. The benefits received by or allocated to
eligible persons under the 1999 Stock Incentive Plan are not determinable.
ADMINISTRATION
The 1999 Stock Incentive Plan will be administered by the Board or a
committee of at least two individuals appointed by the Board (the
"Committee"). The Committee, in its sole discretion, has full authority to
determine which individuals may participate in the 1999 Stock Incentive Plan
and the type, extent and terms of the stock-based awards to be granted. The
Committee may reprice and accelerate vesting schedules with respect to
outstanding Options. In addition, the Committee will interpret the 1999 Stock
Incentive Plan and make all other determinations with respect to the
administration of the 1999 Stock Incentive Plan.
TERMS AND CONDITIONS OF AWARDS
The terms and conditions of Options will be set forth from time to
time in agreements between Hauser and the individuals receiving such awards.
Such terms include vesting conditions and the expiration dates for the
Options, which may not exceed ten years from the date of grant. Options may
expire earlier than the expiration date set forth in the Option agreement
upon an optionee's termination of employment, as determined by the Committee.
The exercise price per share of an Option is determined by the Committee at
the time of grant, but must be at least the Fair Market Value (as defined in
the 1999 Stock Incentive Plan) of a share of Common Stock on the date of
grant. Unless otherwise determined by the Committee, either at
46
<PAGE>
the time of grant or prior to exercise, Options are not transferable otherwise
than by will or the laws of descent and distribution. ISOs may not be granted to
an individual who, at the date of grant, owns directly or indirectly stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of Hauser or of any parent or subsidiary of Hauser, unless the
ISO (i) has an exercise price of at least 110 percent of the Fair Market Value
of the Common Stock on the date of grant of the Option, and (ii) cannot be
exercised more than 5 years after the date of grant. To the extent that the
aggregate Fair Market Value per share with respect to which ISOs become
exercisable for the first time in any calendar year exceeds $100,000, such
Options will be NQSOs. The Option exercise price may be paid by cash or
certified check, or at the Committee's discretion, (i) with shares of Common
Stock held by the optionee for at least six months, (ii) by having Hauser
withhold shares of Common Stock being purchased, (iii) with other property
having a value equal to the aggregate exercise price, (iv) through a brokered
exercise, or (v) by delivery of a promissory note to Hauser.
The Committee may, in its sole discretion, make grants of Common Stock
to members of the Board who are not also employees of Hauser or a subsidiary in
lieu of cash compensation for their services as members of the Board. The
Committee may impose such terms and conditions as it deems appropriate for stock
grants to directors.
ADJUSTMENTS FOR RECAPITALIZATION, MERGER, ETC. OF HAUSER
In the event of any change in the outstanding shares of Common Stock
or capital structure of Hauser resulting from any recapitalization, merger,
consolidation, spin-off, combination or exchange of shares or other similar
corporate change or a change in the law or any other event which interferes
with the intended operation of the 1999 Stock Incentive Plan, the Committee
will make such substitution or adjustment, if any, as it deems equitable, as
to (i) the number or kind of shares of Common Stock or other securities
reserved for issuance pursuant to the 1999 Stock Incentive Plan, (ii) the
number or kind of shares of Common Stock or other securities covered by
outstanding Options, and (iii) the Option price thereof.
In the event (i) Hauser is merged with another corporation or entity
and, in connection therewith, consideration is received by shareholders of
Hauser in a form other than stock or other equity interests of the surviving
entity, (ii) all or substantially all of the assets of Hauser are acquired by
another person, or (iii) Hauser is reorganized or liquidated, then the Committee
may, in its sole discretion, with notice, cash-out and cancel any particular or
all outstanding Options.
CHANGE IN CONTROL
In the event of a Change in Control (as defined in the 1999 Stock
Incentive Plan), all then unexercised and unexpired outstanding Options,
which would otherwise become vested within twelve months after such Change in
Control, shall become immediately vested and exercisable.
SHARES SUBJECT TO THE INCENTIVE PLAN
As noted above, the total number of shares of Common Stock reserved
for issuance under the 1999 Stock Incentive Plan is 1,000,000. No more than
250,000 shares of Common Stock may be issued to any one person pursuant to
awards of Options during any one year.
MARKET VALUE
The market value of the Common Stock on NASDAQ on February 9, 1999 was
$3.75 per share.
AMENDMENT AND TERMINATION
The Board may at any time terminate the 1999 Stock Incentive Plan.
With the consent of optionees, the Board or the Committee may cancel, reduce
or otherwise alter outstanding Options. The Board or the Committee may, at
any time or from time to time, amend or suspend and, if suspended, reinstate,
the 1999 Stock Incentive Plan in whole or in part; provided, however that no
amendment which requires shareholder approval in order for Options granted
pursuant to the 1999 Stock Incentive Plan to be exempt from the application
of Section 162(m) of the Code or for ISOs to continue to meet the
requirements of Section 422 of the Code, shall be effective unless the same
is approved by the requisite vote of the shareholders of Hauser. Any options
outstanding after any such termination of the 1999 Stock Incentive Plan shall
remain in effect in accordance with their terms.
FEDERAL TAX CONSEQUENCES
The following is a brief discussion of the Federal income tax
consequences of Option transactions under the 1999 Stock Incentive Plan based
on the Code, as in effect as of the date of this Proxy Statement. This
discussion is not intended to be
47
<PAGE>
exhaustive and does not describe any state or local tax consequences. Recipients
of Common Stock or Options should consult with their own tax advisors to
determine the specific tax consequences to them.
ISOs. No taxable income is realized by the optionee upon the grant or
exercise of an ISO. If Common Stock is issued to an optionee pursuant to the
exercise of an ISO, and if no disqualifying disposition of such shares is made
by such optionee within two years after the date of grant or within one year
after the transfer of such shares to such optionee, then (1) upon the sale of
such shares, any amount realized in excess of the Option price will be taxed to
such optionee as a long-term capital gain and any loss sustained will be a
long-term capital loss, and (2) no deduction will be allowed to Hauser for
Federal income tax purposes.
If the Common Stock acquired upon the exercise of an ISO is disposed of
prior to the expiration of either holding period described above, generally, (1)
the optionee will realize ordinary income in the year of disposition in an
amount equal to the excess (if any) of the Fair Market Value of such shares at
exercise (or, if less, the amount realized on the disposition of such shares)
over the Option price paid for such shares and (2) Hauser will be entitled to
deduct such amount for Federal income tax purposes if the amount represents an
ordinary and necessary business expense. Any further gain (or loss) realized by
the optionee upon the sale of the Common Stock will be taxed as short-term or
long-term capital gain (or loss), depending on how long the shares have been
held, and will not result in any deduction by Hauser.
If an ISO is exercised more than three months following termination of
employment (subject to certain exceptions for disability or death), the exercise
of the Option will generally be taxed as the exercise of a NQSO, as described
below.
For purposes of determining whether an optionee is subject to an
alternative minimum tax liability, an optionee who exercises an ISO generally
would be required to increase his or her alternative minimum taxable income, and
compute the tax basis in the stock so acquired, in the same manner as if the
optionee had exercised a NQSO. Each optionee is potentially subject to the
alternative minimum tax. In substance, a taxpayer is required to pay the higher
of his/her alternative minimum tax liability or his/her "regular" income tax
liability. As a result, a taxpayer has to determine his/her potential liability
under the alternative minimum tax.
NQSOs. With respect to NQSOs: (1) no income is realized by the optionee
at the time the Option is granted; (2) generally, at exercise, ordinary income
is realized by the optionee in an amount equal to the excess, if any, of the
Fair Market Value of the shares on such date over the exercise price, and Hauser
is generally entitled to a tax deduction in the same amount, subject to
applicable tax withholding requirements; and (3) at sale, appreciation (or
depreciation) after the date of exercise is treated as either short-term or
long-term capital gain (or loss) depending on how long the shares have been
held.
SPECIAL RULES APPLICABLE TO CORPORATE INSIDERS
As a result of the rules under Section 16(b) of the Exchange Act
("SECTION 16(b)"), and depending upon the particular exemption from the
provisions of Section 16(b) utilized, officers and directors of Hauser and
persons owning more than 10 percent of the outstanding shares of stock of Hauser
("INSIDERS") may not receive the same tax treatment as set forth above with
respect to the grant and/or exercise of Options. Generally, Insiders will not be
subject to taxation until the expiration of any period during which they are
subject to the liability provisions of Section 16(b) with respect to any
particular Option. Insiders should check with their own tax advisers to
ascertain the appropriate tax treatment for any particular Option.
NEW PLAN BENEFITS
The grant of Options and Common Stock under the 1999 Stock Incentive
Plan is entirely within the discretion of the Committee. Hauser cannot
forecast the extent of Option and Common Stock grants that will be made in
the future. Therefore, Hauser has omitted the tabular disclosure of the
benefits or amounts allocated under the 1999 Stock Incentive Plan.
Information with respect to compensation paid and other benefits, including
Options and Common Stock, granted in the 1998 fiscal year to the Named
Executive Officers is set forth in the Summary Compensation Table below.
DIRECTOR AND EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Directors Coleman, Cristol, Saydah and Tolbert comprise Hauser's Compensation
Committee. All are non-employee directors and none have ever been officers of
Hauser.
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<PAGE>
DIRECTOR COMPENSATION
During fiscal 1998, Hauser's non-employee directors were granted
options to purchase a total of 17,250 shares of Common Stock for services
rendered to Hauser at an average price of $6.54 per share (100% of fair market
value on the date of grant). Directors receive an option to purchase 300 shares
for Board service and options to purchase 150 shares for attendance at each
meeting of the Board or each committee thereof. The options are exercisable for
a five-year period.
In May 1992, the Board approved a two-step plan to compensate outside
directors. The plan includes options for Board and committee service as
discussed above, and an annual cash payment of $10,000 per outside director plus
an annual payment of $2,500 for a committee chairman. During fiscal 1998,
Hauser's five outside directors received cash compensation of approximately
$45,375 in the aggregate pursuant to this plan, excluding reimbursement of
travel expenses. If the Merger closes, this cash and option compensation plan
for outside directors will terminate and outside directors will be compensated
through the Incentive Plan. See "APPROVAL OF THE 1999 STOCK INCENTIVE PLAN".
During the fiscal year ended April 30, 1998, Hauser's Board held nine
meetings. The Compensation Committee, consisting of directors Coleman, Cristol,
Saydah and Tolbert, held seven meetings during the fiscal year. The primary
function of the Compensation Committee is to recommend raises and bonuses, if
any, for Hauser's officers and to grant stock option awards to Hauser's
employees. The Audit Committee consisting of directors Haddon and Saydah held
five meetings during the fiscal year. The function of the Audit Committee is to
oversee management's internal controls, review periodic filings with the
Securities and Exchange Commission, and review any transactions between Hauser
and its officers, directors or affiliated entities. The Nominating Committee
consisting of directors Saydah and Coleman held three meetings during the fiscal
year. The function of the Nominating Committee is to investigate succession
planning for Hauser's executives and review nominations to the Board. The
Nominating Committee will consider shareholder recommendations for nominations
to the Board if presented in writing by July 31, 1999.
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Hauser's directors, executive officers and holders of more than 10% of
the Common Stock to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of the Common Stock.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished
to Hauser with respect to the fiscal year ended April 30, 1998, to the best of
Hauser's knowledge, Hauser's directors, officers and holders of more than 10% of
its Common Stock complied with all Section 16(a) filing requirements.
COMPENSATION COMMITTEE REPORT OF COMPENSATION OF EXECUTIVE OFFICERS OF HAUSER
The Compensation Committee of the Board and the Company's Chief
Executive Officer have furnished the following joint report on executive
compensation. The specific responsibility of the Chief Executive Officer to
furnish information to the Compensation Committee has been outlined below.
During fiscal 1998, the Compensation Committee set the salaries and bonus
compensation for the Chief Executive Officer, two Vice Presidents, the Chief
Financial Officer and the Corporate Secretary. The salaries and bonus plans for
the three Named Executives, Messrs. Katz, Damon and Gordon, are set by contracts
which the Company assumed as a result of the acquisition of Shuster
Laboratories, Inc., in July 1995. These contracts expired in July 1998. See
"Certain Transactions.
EXECUTIVE OFFICER COMPENSATION
The Committee has responsibility for making recommendations for
compensation and compensation policy. The Committee's first objective is to
provide a strong and direct link among shareholder value, Company performance
and executive compensation. The second objective is to promote long-term stable
growth and development. The Committee believes that the Company's corporate
development is dependent on its ability to attract and retain high quality
people. The Chief Executive Officer's responsibility is to evaluate for the
Compensation Committee the individual performance of the executive officers,
other than himself. He is also asked to report on the performance reviews of
these officers to the Compensation Committee and make suggestions of the
percentage of discretionary cash and discretionary stock bonuses to be awarded.
The Company's compensation program consists of three key elements: base
salary, short term discretionary bonuses and profit sharing, plus long term
discretionary incentive stock option awards. Compensation for Hauser's executive
officers involves a high proportion of pay which is at risk, a variable bonus
based on individual performance, and stock options, which directly relate a
portion of the officer's compensation to the long-term stock price appreciation
realized by the Company's shareholders. The executive officers also participate
in a 401(k) retirement plan and a medical insurance plan with other employees.
49
<PAGE>
BASE SALARY. The Compensation Committee's policy is to provide
compensation competitive within the Denver/Boulder metropolitan area while
giving consideration to national compensation. The Committee also considers the
salary recommendations and performance reviews submitted by the Chief Executive
Officer.
In evaluating the performance of the executive officers other than
himself, the Chief Executive Officer measures individual leadership skills,
business development skills, management skills, external relations and
communication skills. The executive officers' individual contribution to
corporate financial results for the fiscal year, including revenue growth and
changes in net income and earnings per share, were also evaluated. In addition,
extraordinary management and supervisory responsibilities were taken into
consideration. The Compensation Committee made no changes to the base salary of
the named executive officers during fiscal year 1998.
DISCRETIONARY CASH BONUSES PAID IN FISCAL YEAR 1998. During fiscal year
1997, the Compensation Committee developed a series of specific goal oriented
compensation awards for fiscal year 1998. Fiscal year 1998 awards for these
executives were based on achieving operating income goals which were not met.
After reviewing the Company's annual report and audited financial statements for
the fiscal year ended April 30, 1998, the Compensation Committee awarded no cash
bonuses for fiscal year 1998. Mr. Wehr received a $20,000 cash bonus during
fiscal year 1998 as part of his original employment agreement.
The Compensation Committee awarded phantom stock bonuses to Messrs.
Katz, Gordon and Damon, employees of the Company's wholly-owned subsidiary,
Shuster Laboratories. The bonuses represent phantom stock payments made to
Messrs. Katz, Damon and Gordon for their phantom stock in Shuster, Inc. The
Shuster Phantom Stock Plan was a bonus plan through which the individuals earned
an equity interest in Shuster, Inc. The payments were made monthly and
terminated in July 1998.
The Compensation Committee instructs the Chief Executive Officer to
complete performance evaluations for each of the executive officers other than
himself. The Chief Executive Officer's evaluation is an informal report to the
Compensation Committee along with informal suggestions of the percentage stock
and cash bonuses to be awarded. In evaluating the performance, the Chief
Executive Officer measures the leadership, strategic planning, financial
results, business development, management skills, external relations and
communication skills. The Compensation Committee does not adopt the suggestions
of the Chief Executive Officer but rather adjusts those suggestions to fit the
parameters of their overall knowledge and experience with the executive
officers. The Compensation Committee evaluates these performance reviews.
Factors, other than the report of the Chief Executive Officer, reviewed by the
Compensation Committee include increased management or supervisory
responsibilities and the direct impact of the departments supervised by those
executive officers on the net sales, operating income and earnings per share of
the Company.
STOCK OPTIONS. It is the Compensation Committee's policy that a
significant portion of the total compensation package for its executive officers
will be derived from stock options. The Board of Directors adopted the
Non-Qualified Stock Option Plan approved by shareholders in 1987 and the 1992
Incentive Stock Option Plan approved by shareholders in 1992.
During any fiscal year, the named executive officers of the Company may
receive incentive stock options or non-qualified stock options based on
performance. Discretionary stock options distributed to the named executive
officers were determined by the Compensation Committee and were based upon the
same performance review criteria previously stated. The number of options
granted were based upon the individual executive's performance during the fiscal
year, anticipated future contributions based on that performance, and the
officer's ability to impact corporate financial results. Additional factors
considered by the Committee included increased management or supervisory
responsibilities and the direct impact of the departments supervised by those
executive officers on the net sales, operating income and earnings per share of
the Company. During fiscal 1998, executive officers received stock options to
purchase 141,800 shares at an average price of $5.90.
Discretionary stock option awards granted to the Named Executive
Officers during fiscal year 1998, for fiscal year 1997 performance, were
determined based upon the Chief Executive Officer's evaluation report to the
Committee of individual performances plus the Compensation Committee's own
knowledge and experience with these same senior executive officers. The
Compensation Committee observes that the executive officers continue to own a
relatively low percentage of total outstanding stock and deems it beneficial to
shareholders as a whole to increase the equity ownership of the executive
officers.
The Compensation Committee regularly reviews other possible forms of
incentive compensation and modifies or supplements the existing programs when
appropriate. The stock awards continue the Committee's policy that Hauser's
executive officers should have a strong motivation to improve the performance of
Hauser and enhance Hauser's stock value. At present and in future years,
successful development of current and diversified projects and further growth
will be important considerations in discretionary bonuses, both cash and stock.
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CHIEF EXECUTIVE OFFICER COMPENSATION
As Chief Executive Officer, Dr. Stull is compensated based on a review
of his performance by the Compensation Committee. The key factor measured by the
Compensation Committee in determining Dr. Stull's compensation package was its
assessment of his ability and dedication to enhancing the long-term value of the
Company by continuing to provide the leadership and vision that he has provided
throughout his tenure as Chief Executive Officer. The base salary paid to the
Chief Executive Officer is based upon an assessment of the nature of the
position, the leadership exercised by, and the contribution, experience and
Company tenure of Dr. Stull. During fiscal 1998, Dr. Stull's base salary
remained the same. The Committee's failure to increase his base salary was
because of financial exigencies within Hauser and was not based on inadequate
performance.
Dr. Stull's compensation is substantially related to the Company's
performance because his compensation package includes a discretionary cash bonus
determination and discretionary incentive stock options which are granted at
100% of fair market value, based upon the Compensation Committee's review of Dr.
Stull's individual performance during the prior year in the following areas:
leadership, strategic planning, business development, management skills,
external relations and communication skills. During fiscal year 1998, Dr. Stull
received incentive stock options to purchase 20,000 shares of Common Stock which
options vested on the date of grant.
SUMMARY
The Compensation Committee will continue to review Hauser's executive
compensation programs to assure that such programs are consistent with the
objective of providing a strong and direct link among shareholder value, Company
performance and executive compensation.
By the Compensation Committee dated June 15, 1998
Dr. Bert M. Tolbert, Chairman
Dr. William E. Coleman, Director
Dr. Stanley J. Cristol, Director
Mr. Robert F. Saydah, Director
and by Dr. Dean P. Stull, Chief Executive Officer for the limited
purposes stated above.
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EXECUTIVE COMPENSATION TABLE
The following table sets forth the cash compensation Hauser paid during
the fiscal year ended April 30,1998 for services to the Chief Executive Officer
and to each of the four most highly paid executive officers whose salaries
exceed $100,000 (the "NAMED EXECUTIVE OFFICERS"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------- ---------------------------
RESTRICTED
NAME AND STOCK SECURITIES ALL OTHER
PRINCIPAL FISCAL AWARD(S) UNDERLYING COMPENSATION
POSITIONS YEAR SALARY($)(1) BONUS ($) ($) OPTIONS/(#) ($)(2)
--------- ---- ------------ --------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Dean P. Stull 1998 $155,500 -- -- 70,000 --
Chief Executive Officer and 1997 155,500 -- -- 25,000(1) --
Chairman 1996 152,212 -- -- 70,000(1) --
Randall J. Daughenbaugh 1998 138,500 -- -- 14,300 --
Executive Vice President 1997 138,500 -- -- 9,100(2) --
and Chief Technical Officer 1996 136,500 -- -- 10,206(2) --
Martin C. Wehr 1998 140,000 20,000 14,175(3) 52,500(4) 60,617(5)
Chief Operating Officer 1997 35,000 -- 10,350(3) 50,000(4) --
1996 N/A N/A N/A N/A N/A
Philip A. Katz 1998 117,000(6) 29,410(7) -- 4,000 4,212(8)
President, Shuster, Inc. 1997 117,500(6) 22,057(7) -- 350 38,408(8)
1996 111,000(6) 32,356(7) -- -- 18,596(8)
Kenneth A. Gordon 1998 117,000(6) 29,410(7) -- -- 2,161(8)
Senior Vice President, 1997 117,500(6) 22,057(7) -- 350 32,196(8)
Shuster, Inc. 1996 111,000(6) 32,356(7) -- -- 15,589(8)
Eugene W. Damon 1998 117,000(7) 29,410(7) -- -- 2,161(8)
Senior Vice President, 1997 117,500(7) 22,057(7) -- 350 36,732(8)
Shuster, Inc. 1996 111,000(7) 32,356(7) -- -- 17,785(8)
</TABLE>
- - - - - - - - - - - - - -----------------------
(1) Of these shares, 15,000 and 60,000 options were performance options based
upon operating income objectives for fiscal years 1997 and 1996,
respectively. These performance options never vested because operating
income goals were not met.
(2) Of these shares 6,000 and 6,000 options were performance options based upon
operative income objectives for fiscal years 1997 and 1996, respectively.
These performance options never vested because operating income goals were
not met.
(3) Represents grants of restricted stock based upon the fair market value on
the date of grant.
(4) Of these shares, 37,500 options were performance options based upon
operating income objectives for fiscal years 1998 and 1997. These
performance options never vested because operating income goals were not
met.
(5) Represents relocation expenses paid to Mr. Wehr.
(6) Messrs. Katz, Gordon and Damon became employees of Hauser's wholly-owned
subsidiary, Shuster, on July 20, 1995, pursuant to existing employment
agreements which were in effect when the acquisition took place. The
employment agreements provided for the annual salaries set forth above and
expired on July 20, 1998.
(7) The bonuses represent phantom stock payments made to Messrs. Katz, Damon
and Gordon for their phantom stock in Shuster. The Shuster Phantom Stock
Plan was a bonus plan through which the individuals earned an equity
interest in Shuster. The payments were made monthly. The individuals are
also entitled to share in an earnout which may be paid to former
shareholders of Shuster. No earnout was paid during 1996, 1997 or 1998.
52
<PAGE>
(8) The amounts represent distributions from Shuster's Employee Stock Ownership
Plan as a result of Hauser's acquisition and matching contributions from
Shuster's 401(k) Plan.
STOCK OPTION PLANS
1987 NON-STATUTORY STOCK OPTION PLAN
In 1987, Hauser adopted a non-statutory stock option plan (the
"NON-STATUTORY PLAN") under which 718,720 shares of its Common Stock have been
reserved for issuance. As of April 30, 1998, there were 813,237 shares of Common
Stock committed under the Non-Statutory Plan. The Non-Statutory Plan was amended
in 1997 to add 500,000 shares and extend the term to 2007.
During fiscal year 1998, the Compensation Committee of the Board
(consisting of Drs. Tolbert, Coleman, Cristol and Mr. Saydah) recommended the
distribution of 154,849 stock options pursuant to the Non-Statutory Plan to
directors and to employees who had been employed over one-half time for one full
year. The options are exercisable for periods ranging from one to five years
after grant, at an exercise price [ranging] of 100% of market price on the date
of grant. The amount of the award was determined by using a percentage of that
employee's annual salary as of the employee's anniversary date with Hauser.
During fiscal year 1998, under the Non-Statutory Plan options to purchase 16,594
shares were exercised and options to purchase 26,856 shares expired.
1992 INCENTIVE STOCK OPTION PLAN
The 1992 Incentive Stock Option Plan (the "1992 PLAN"), as amended,
provides for the granting of incentive stock options to Executive Officers and
key employees of Hauser and its subsidiaries to purchase a maximum of 1,218,720
shares of the Common Stock. As of April 30, 1998, 439,162 shares were committed
under the 1992 Plan. The 1992 Plan provides for the grant of incentive stock
options intended to qualify as such under Section 422 of the Code. The exercise
price of options granted under the 1992 Plan may not be less than 100% of the
fair market value of the Common Stock at the time of the grant. Options are not
transferable and may not be exercised more than ten (10) years from the date of
grant. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000. The 1992 Plan is administered by the Compensation Committee of
the Board, which has the authority to determine the persons to whom options will
be granted, the number of shares to be covered by each option, the time or times
at which options will be granted or exercised, and the term and provisions of
the options.
53
<PAGE>
The following table shows with respect to Hauser's Non-Statutory Plan
and the 1992 Plan, for each of the Named Executive Officers: (a) the number of
shares subject to options granted from May 1, 1997 to April 30, 1998, (b) the
percentage of total options granted to employees during the same period, (c) the
exercise price per share, (d) the expiration date of the options, and (e) the
potential realizable value of the options as of April 30,1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL RATES
OPTIONS OF STOCK PRICE
NUMBER OF GRANTED APPRECIATION FOR OPTION
SECURITIES TO MARKET TERM
UNDERLYING EMPLOYEES EXERCISE PRICE ON ----------------------------
OPTIONS IN FISCAL PRICE DATE OF EXPIRATION
NAME GRANTED (#) YEAR ($/SHARE) GRANT DATE 5% ($) 10% ($)
- - - - - - - - - - - - - ----------------- ------------- ------------ ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dean P. Stull 20,000 7.553% 5.938 5.938 02/17/2008 74,681.24 189,256.92
50,000 18.882% 5.813 5.813 04/30/2008 200,958.02 520,784.19
Randall J. 100 0.378% 6.125 6.125 05/21/2007 385.20 976.17
Daughenbaugh 100 0.038% 6.469 6.469 05/13/2007 406.81 1,030.95
10,000 3.776% 5.813 5.813 04/30/2008 40,191,60 104,156.84
4,000 11% 5.938 5.938 02/17/2008 14,936.25 37,851.38
100 0.038% 6.469 6.469 05/13/2007 406.81 1,030.95
Martin C. 15,000 5.665% 5.938 5.938 02/17/2008 56,010.93 141,942.60
Wehr 37,500 14.162% 5.813 5.813 04/30/2008 150,718.51 390,588.14
Philip A. Katz 4,000 1.511% 5.938 5.938 02/17/2008 14,936.25 37,851.38
Eugene W. 1,000 0.378% 5.938 5.938 02/17/2008 3,734.06 9,462.85
Damon
</TABLE>
54
<PAGE>
The following table shows with respect to each of Hauser's Named
Executive Officers, (a) the number of shares exercised during the fiscal year,
(b) the dollar value realized upon exercise (c) the total number of unexercised
stock options and (d) the aggregate dollar value of in-the-money, unexercised
options held at the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END (#) AT FY-END ($)(1)
NAME ACQUIRED ON VALUE --------------------------------- -----------------------------------
---- EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ ------------ ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Dean P. Stull -- -- 102,931 64,000 $ 173,440.33 $ 114,374.60
Randall J. -- -- 63,634 11,200 107,646.44 20,862.44
Daughenbaugh
Martin C. Wehr -- -- 25,000 77,500 44,062.50 142,968.75
Philip A. Katz -- -- 1,684 2,666 2,907.37 4,498.87
Kenneth A. -- -- 350 -- 656.25 --
Gordon
Eugene W. Damon -- -- 684 666 1,219.87 1,123.87
</TABLE>
- - - - - - - - - - - - - -------------------
The fair market value of the Common Stock at April 30, 1998, measured as the
mean of closing bid and asked prices of the Common Stock on such date, was
$7.625 per share.
EMPLOYEE BENEFIT PLAN
Effective July 1992, Hauser established a 401(k) plan for all employees
who have completed six months of service. Participants may contribute up to 20%
of their annual compensation subject to dollar limitations of Section 402(g) of
the Internal Revenue Code. The 401(k) Plan is subject to the provisions of the
Employee Retirement Income Security Act of 1974.
CERTAIN TRANSACTIONS
There were no transactions between officers, directors and their
affiliates and Hauser other than the payment of phantom payments to Messrs.
Katz, Damon and Gordon in connection with the acquisition of Shuster in July
1995. The phantom payments made in fiscal 1998 are included in the Compensation
Table. Messrs. Katz, Gordon and Damon are entitled to share in the performance
based earnout in future years.
SHAREHOLDER RETURN
The following chart compares the cumulative total return to
shareholders over the past five years for a holder of the Common Stock against
the cumulative total return of the NASDAQ Stock Market-US Index and the S & P
Chemicals (Specialty) Index. The chart depicts the value on April 30, 1998, of a
$100 investment made on April 30, 1993.
The value of a stock over time is affected by many factors, including
Hauser's earnings. The decline in the stock price in August 1993 occurred after
Bristol-Myers Squibb Company failed to renew Hauser's contract. A primary
objective of Hauser since August 1993 has been to diversify into specialty
natural ingredients markets. Hauser's revenue mix is currently made up of sales
of pharmaceuticals, natural ingredients and technical services.
55
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(1)
AMONG HAUSER, INC., NASDAQ STOCK MARKET - U.S. AND S & P CHEMICALS (SPECIALTY)
[TABLE]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD HAUSER NASDAQ - U.S. S & P SPECIALTY
<S> <C> <C> <C>
4/93 100 100 100
4/94 58 111 101
4/95 31 129 112
4/96 46 184 137
4/97 46 195 125
4/98 55 292 162
</TABLE>
[TABLE]
$100 invested on April 30, 1993 in stock or index - including reinvestment of
dividends. Fiscal Year ended April 30.
INDEPENDENT AUDITORS
The audited consolidated financial statements of Hauser, Inc. as of
April 30, 1998 and 1997 and for each of the fiscal years in the two-year period
ended April 30, 1998 included in this Proxy Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The audited consolidated financial statement of Hauser, Inc. for the
fiscal year ended April 30, 1996 included in this Proxy Statement has been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein.
The combined financial statements of Zuellig Botanical Extracts, Inc.,
ZetaPharm, Inc. and Wilcox Drug Company, Inc. as of March 31, 1998 and 1997 and
for each of the three years in the period ended March 31, 1998 included in this
Proxy Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein.
OTHER MATTERS
Management of Hauser knows of no other matter which may come before the
meeting. However, if any additional matters are properly presented at the
meeting, it is intended that the persons named in the enclosed Proxy, or their
substitutes, will vote such Proxy in accordance with their judgment on such
matters.
SHAREHOLDER PROPOSALS
Shareholder proposals intended for presentation at the Company's 1999
Annual Meeting of Shareholders, other than nominations for Board of Directors,
should be sent to 5555 Airport Boulevard, Boulder, Colorado 80301, Attention:
Corporate Secretary, and must be received by the Company not later than July 31,
1998.
FORWARD LOOKING STATEMENTS
The statements herein, which are not historical, are forward-looking
statements. The actual results of Hauser may vary materially from the
forward-looking statements made above because of important factors such
56
<PAGE>
as the risk that the Merger will not be approved by the shareholders of Hauser
or that any of the other conditions to the closing of the Merger will not be
met, the risk that the integration of the two organizations will be disruptive
to the operations of Hauser, the risk that Hauser will have difficulty in
eliminating its paclitaxel business, the risk that Hauser will not be successful
in securing funding to expand operations, the risk that new products will not be
developed on time or meet market expectations, the risk that management will not
be successful at gaining or retaining market share or controlling operating
expenses and product costs, the risk of increased governmental regulation, and
the risk that pricing and other competitive pressures worldwide will cause
margins to erode significantly. Additional information concerning factors that
could cause actual results to differ materially from those in the
forward-looking statements made above is contained in Hauser's disclosure
documents on file with the U.S. Securities and Exchange Commission, including
its Form 10-K for the year ended April 30,1998, and its Form 10-Q for the
quarter ended October 31,1998.
AVAILABLE INFORMATION
Hauser is subject to the disclosure and informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"COMMISSION"). The reports, proxy statements and other information filed by
Hauser with the Commission may be inspected and copied at the Commission's
public reference room located at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the public reference facilities in the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661. Copies of such material may be obtained at prescribed rates
by writing to the Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Certain of such reports, proxy statements and other
information are also available from the Commission over the Internet at
http://www.sec.gov. The shares Common Stock are traded over the counter on the
NASDAQ. Reports, proxy statements and other information concerning Hauser may
also be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by Hauser are
incorporated herein by reference:
1. Hauser's Quarterly Reports on Form 10-Q for the quarters ended July 31,
1998, October 31, 1998 and January 31, 1999 (including exhibits filed
therewith);
2. Hauser's Annual Report on Form 10-K for the year ended April 30, 1998;
3. Those portions of Hauser's 1998 Annual Report to Stockholders under the
captions "Corporate Profile" and "Common Stock" (but no other portion
of such Annual Report); and
4. The description of the Common Stock contained in Hauser's registration
statements filed pursuant to Section 12 of the Exchange Act and any
amendment or report updating such description.
All documents filed by Hauser pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the time at
which Hauser Special Meeting has been finally adjourned shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of such
filing. Any statement contained herein or in a document incorporated or deemed
to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
or in any other subsequently filed document which also is, or is deemed to be,
incorporated herein by reference modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed to constitute a part
hereof, except as so modified or superseded.
This Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. The documents relating to Hauser
(excluding exhibits unless specifically incorporated therein) are available to
each person, including any beneficial owner, to whom a copy of this Proxy
Statement is delivered,
57
<PAGE>
without charge, upon written or oral request to David I. Rosenthal, Chief
Financial Officer, Hauser, Inc., 5555 Airport Boulevard, Boulder, CO 80301,
telephone number (303) 443-4662. Hauser will send the requested documents by
first-class mail within three business days of the receipt of the request. In
order to ensure timely delivery of the documents, any request should be received
no later than five business days before the applicable meeting date. Persons
requesting copies of exhibits to such documents that are not specifically
incorporated by reference in such documents will be charged the costs of
reproduction and mailing. The delivery of this Proxy Statement shall not, under
any circumstances, create an implication that since the date of this Proxy
Statement there has been no change in the affairs of Hauser, ZGNA, ZBI or the
Contributed Subsidiaries.
SIGNATURE
By Order of the Board of Directors
Dean P. Stull, Chairman
Boulder, Colorado
____________, 1999
58
<PAGE>
APPENDIX A
December 8, 1998
Board of Directors
Hauser, Inc.
5555 Airport Blvd.
Boulder, CO 80301
Members of the Board:
You have requested our opinion (the "Fairness Opinion"), as investment
bankers, as to the fairness, from a financial point of view, to Hauser, Inc.
(the "Company") and the stockholders of the Company of the consideration to
be paid in connection with the proposed acquisitions via merger (the
"Mergers") of QQB Holdings I, Inc., QQB Holdings II, Inc., and QQB Holdings
III, Inc., all wholly owned subsidiaries of the Company (collectively, the
"Merger Subs"), respectively with and into Zuellig Botantical Extracts, Inc.
("ZBE"), ZetaPharm, Inc. ("ZetaPharm"), and Wilcox Drug Company, Inc.
("Wilcox") (collectively, the "Contributed Subsidiaries"), all directly or
indirectly wholly owned subsidiaries of Zuellig Group, N.A., Inc. ("ZGNA"),
pursuant to the draft Agreement and Plan of Merger dated December 7, 1998
(the "Merger Agreement"), among, ZGNA, Zuellig Botanicals, Inc. ("ZBI"), the
Contributed Subsidiaries, the Merger Subs and the Company. Adams, Harkness &
Hill, Inc., as part of its investment banking activities, is continually
engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
At the Effective Time (as defined in the Merger Agreement), Merger Sub 1
shall be merged with and into ZBE, Merger Sub 2 shall be merged with and into
ZetaPharm, and Merger Sub 3 shall be merged with and into Wilcox. Following
the Effective Time, the separate corporate existence of the Merger Subs shall
cease and ZBE, ZetaPharm and Wilcox each shall continue as the surviving
corporations, each wholly owned by the Company. As of the Effective Time, by
virtue of the Mergers, the shares of capital stock of ZBE, ZetaPharm and
Wilcox shall be cancelled and extinguished and converted into rights to
cumulatively receive a number of common shares of the Company (the "Company
Common Shares") equal to 0.49 multiplied by the quotient obtained by dividing
the number of common shares of the Company outstanding immediately prior to
the Closing (as defined in the Merger Agreement) by 0.51.
We are expressing no opinion as to what the value of the Company Common
Shares will be when issued to ZGNA and ZBI pursuant to the Mergers or the
prices at which the Company Common Shares will actually trade at any time.
Our Fairness Opinion
<PAGE>
Board of Directors
Hauser, Inc.
December 8, 1998
Page 2
as expressed herein is limited to the fairness, from a financial point of
view, of the consideration paid by the Company and does not address the
Company's underlying business decision to engage in the Mergers.
In developing our Fairness Opinion, we have, among other things: (i) reviewed
the Company's Annual Reports, Forms 10-K and related financial information
for the three fiscal years ended April 31, 1998, and the Company's Form 10-Q
and the related unaudited financial information for the six month period
ending October 31, 1998; (ii) reviewed the audited financial statements of
ZGNA, Wilcox and ZetaPharm for the three fiscal years ended March 31, 1998,
and the audited financial statements of ZBI for the two fiscal years ended
March 31, 1997; (iii) analyzed certain internal financial statements and
other financial and operating data concerning the Company prepared by the
management of the Company; (iv) analyzed certain internal financial
statements and other financial and operating data concerning the Contributed
Subsidiaries prepared by the management of ZGNA; (v) analyzed the potential
pro forma financial effects of the Mergers on the Company and the Contributed
Subsidiaries; (vi) conducted due diligence discussions with members of senior
management of the Company and ZGNA and discussed with members of senior
management of the Company and ZGNA their views regarding future business,
financial and operating benefits arising from the Mergers; (vii) reviewed the
historical market prices and trading activity for the Company Common Shares
and compared them with those of certain publicly traded companies we deemed
to be relevant and comparable to the Company and the Contributed
Subsidiaries, respectively; (viii) compared the results of operations of the
Company and the Contributed Subsidiaries with that of certain companies we
deemed to be relevant and comparable to the Company and the Contributed
Subsidiaries, respectively; (ix) compared the financial terms of the Mergers
with the financial terms of certain other mergers and acquisitions we deemed
to be relevant and comparable to the Mergers; (x) participated in certain
discussions among representatives of the Company and ZGNA and their financial
and legal advisors; (xi) reviewed the Merger Agreement and agreements which
are Exhibits thereto; and (xii) reviewed such other financial studies and
analyses and performed such other investigations and took into account such
other matters as we deemednecessary, including our assessment of general
economic, market and monetary conditions.
In connection with our review and arriving at our Fairness Opinion, we have
not independently verified any information received from the Company or ZGNA,
have relied on such information, and have assumed that all such information
is complete and accurate in all material respects. With respect to any
internal forecasts reviewed relating to the prospects of the Company and the
Contributed Subsidiaries, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the Company's and ZGNA's management as to the future financial
performance of the Company and the Contributed Subsidiaries. Our Fairness
Opinion is rendered on the basis of securities market conditions prevailing
as of the date hereof and on the conditions and prospects, financial and
<PAGE>
Board of Directors
Hauser, Inc.
December 8, 1998
Page 3
otherwise, of the Company and the Contributed Subsidiaries as known to us on
the date hereof. We have not conducted, nor have we received copies of, any
independent valuation or appraisal of any of the assets of the Company and
the Contributed Subsidiaries. In addition, we have assumed, with your
consent: (i) the Merger will be accounted for under the purchase method in
accordance with generally accepted accounting principles as described in
Accounting Principles Board Opinion Number 16; (ii) the Merger will
constitute a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended; and (iii) any material liabilities
(contingent or otherwise, known or unknown) of the Company and the
Contributed Subsidiaries are as set forth in the financial statements of the
Company and the Contributed Subsidiaries, respectively.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without
our prior written consent, except that this opinion may be included in its
entirety in any filing made by the Company with the Securities and Exchange
Commission with respect to the transactions contemplated by the Merger
Agreement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration is fair, from a financial point of view, to
the Company and the Company's stockholders.
Sincerely,
ADAMS, HARKNESS & HILL, INC.
By: /s/ James A. Simms
---------------------------
James A. Simms
Group Head, Mergers & Acquisitions
<PAGE>
APPENDIX B
- - - - - - - - - - - - - -------------------------------------------------------------------------------
- - - - - - - - - - - - - -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and among
ZUELLIG GROUP N.A., INC.
HAUSER, INC.
AND CERTAIN OTHER PARTIES
Dated
as of
December 8, 1998
and
Amended
as of
February 11, 1999
- - - - - - - - - - - - - -------------------------------------------------------------------------------
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2. THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1. The Mergers . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2. The Closing . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3. Effective Time. . . . . . . . . . . . . . . . . . . . . . . . 8
2.4. Effect of the Merger. . . . . . . . . . . . . . . . . . . . . 9
SECTION 3. EFFECT OF THE MERGER ON THE CAPITAL STOCK; MERGER
CONSIDERATION; EXCHANGE OF CERTIFICATES. . . . . . . . . . . . . . 9
3.1. Effect on Capital Stock; Merger Consideration . . . . . . . . 9
3.2. Certificate of Incorporation of Surviving Corporations. . . . 9
3.3. By-laws of the Surviving Corporations . . . . . . . . . . . .10
3.4. Directors and Officers. . . . . . . . . . . . . . . . . . . .10
3.5. Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . .10
3.6. Accounting Treatment. . . . . . . . . . . . . . . . . . . . .10
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . .10
4.1. Corporate Organization.. . . . . . . . . . . . . . . . . . . .10
4.2. Subsidiaries.. . . . . . . . . . . . . . . . . . . . . . . . .11
4.3. Capitalization.. . . . . . . . . . . . . . . . . . . . . . . .12
4.4. Corporate Proceedings, etc.. . . . . . . . . . . . . . . . . .12
4.5. Consents and Approvals.. . . . . . . . . . . . . . . . . . . .13
4.6. Compliance with Law. . . . . . . . . . . . . . . . . . . . . .13
4.7. Litigation.. . . . . . . . . . . . . . . . . . . . . . . . . .15
4.8. Change in Ownership. . . . . . . . . . . . . . . . . . . . . .16
4.9. Absence of Defaults, Conflicts, etc. . . . . . . . . . . . . .16
4.10. Reports and Financial Statements. . . . . . . . . . . . . . .17
4.11. Absence of Certain Developments.. . . . . . . . . . . . . . .18
4.12. Material Contracts. . . . . . . . . . . . . . . . . . . . . .18
4.13. Absence of undisclosed Liabilities. . . . . . . . . . . . . .19
4.14. Employees . . . . . . . . . . . . . . . . . . . . . . . . . .20
4.15. Tax Matters.. . . . . . . . . . . . . . . . . . . . . . . . .21
4.16. Employee Benefit Plans. . . . . . . . . . . . . . . . . . . .21
4.17. Patents, Licenses, etc. . . . . . . . . . . . . . . . . . . .22
4.18. Title to Tangible Assets. . . . . . . . . . . . . . . . . . .23
4.19. Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . .23
4.20. Transactions with Related Parties.. . . . . . . . . . . . . .23
(i)
<PAGE>
4.21. Registration Rights.. . . . . . . . . . . . . . . . . . . . .24
4.22. Private Offering. . . . . . . . . . . . . . . . . . . . . . .24
4.23. Investment. . . . . . . . . . . . . . . . . . . . . . . . . .24
4.24. Brokerage.. . . . . . . . . . . . . . . . . . . . . . . . . .25
4.25. Takeover Statute. . . . . . . . . . . . . . . . . . . . . . .25
4.26. Material Facts. . . . . . . . . . . . . . . . . . . . . . . .25
4.27. Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
4.28. Company Real Property.. . . . . . . . . . . . . . . . . . . .26
4.29. Corporate Minute Books. . . . . . . . . . . . . . . . . . . .27
4.30. Good Condition. . . . . . . . . . . . . . . . . . . . . . . .27
4.31. Manufacturing Capacity. . . . . . . . . . . . . . . . . . . .27
SECTION 5. REPRESENTATIONS AND WARRANTIES OF ZGNA. . . . . . . . . . . . . .28
5.1. Corporate Organization.. . . . . . . . . . . . . . . . . . . .28
5.2. Contributed Subsidiaries.. . . . . . . . . . . . . . . . . . .28
5.3. Capitalization.. . . . . . . . . . . . . . . . . . . . . . . .29
5.4. Corporate Proceedings, etc.. . . . . . . . . . . . . . . . . .29
5.5. Consents and Approvals.. . . . . . . . . . . . . . . . . . . .30
5.6. Compliance with Law. . . . . . . . . . . . . . . . . . . . . .30
5.7. Litigation.. . . . . . . . . . . . . . . . . . . . . . . . . .32
5.8. Change in Ownership. . . . . . . . . . . . . . . . . . . . . .33
5.9. Absence of Defaults, Conflicts, etc. . . . . . . . . . . . . .33
5.10. Reports and Financial Statements. . . . . . . . . . . . . . .34
5.11. Absence of Certain Developments.. . . . . . . . . . . . . . .34
5.12. Material Contracts. . . . . . . . . . . . . . . . . . . . . .35
5.13. Absence of undisclosed Liabilities. . . . . . . . . . . . . .35
5.14. Employees . . . . . . . . . . . . . . . . . . . . . . . . . .36
5.15. Tax Matters.. . . . . . . . . . . . . . . . . . . . . . . . .37
5.16. Employee Benefit Plans. . . . . . . . . . . . . . . . . . . .38
5.17. Patents, Licenses, etc. . . . . . . . . . . . . . . . . . . .38
5.18. Title to Tangible Assets. . . . . . . . . . . . . . . . . . .39
5.19. Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . .39
5.20. Transactions with Related Parties.. . . . . . . . . . . . . .40
5.21. Registration Rights.. . . . . . . . . . . . . . . . . . . . .40
5.22. Private Offering. . . . . . . . . . . . . . . . . . . . . . .40
5.23. Investment. . . . . . . . . . . . . . . . . . . . . . . . . .41
5.24. Brokerage.. . . . . . . . . . . . . . . . . . . . . . . . . .41
5.25. Material Facts. . . . . . . . . . . . . . . . . . . . . . . .41
5.26. Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
5.27. Financial Records . . . . . . . . . . . . . . . . . . . . . .42
5.28. Subsidiary Real Property. . . . . . . . . . . . . . . . . . .42
5.29. Company Security Holdings . . . . . . . . . . . . . . . . . .43
5.30. Bank Accounts; Powers of Attorney.. . . . . . . . . . . . . .43
5.31. Corporate Minute Books. . . . . . . . . . . . . . . . . . . .44
5.32. Sufficient Assets.. . . . . . . . . . . . . . . . . . . . . .44
(ii)
<PAGE>
5.33. Good Condition. . . . . . . . . . . . . . . . . . . . . . . .44
5.34. Bank Commitment.. . . . . . . . . . . . . . . . . . . . . . .44
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES . . . . . . . . . . . . . . .45
6.1. Resale of Securities.. . . . . . . . . . . . . . . . . . . . .45
6.2. Proxy Statement. . . . . . . . . . . . . . . . . . . . . . . .45
6.3. Access to Information. . . . . . . . . . . . . . . . . . . . .46
6.4. Stockholders Meeting.. . . . . . . . . . . . . . . . . . . . .47
6.5. Execution and Delivery of Agreements.. . . . . . . . . . . . .47
6.6. Ordinary Course. . . . . . . . . . . . . . . . . . . . . . . .47
6.7. Further Assurances.. . . . . . . . . . . . . . . . . . . . . .50
6.8. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . .50
6.9. Standstill.. . . . . . . . . . . . . . . . . . . . . . . . . .50
6.10. Ownership of Shares.. . . . . . . . . . . . . . . . . . . . .52
6.11. Noncompetition. . . . . . . . . . . . . . . . . . . . . . . .53
6.12. Resignation of Directors. . . . . . . . . . . . . . . . . . .54
6.13. Subscription Right. . . . . . . . . . . . . . . . . . . . . .54
6.14. Letters of Accountants. . . . . . . . . . . . . . . . . . . .55
6.15. Efforts to Satisfy Conditions; Notice of Inability to Meet
Conditions. . . . . . . . . . . . . . . . . . . . . . . . . .56
6.16. HSR.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
6.17. Public Announcement.. . . . . . . . . . . . . . . . . . . . .56
6.18. Cooperation in Defense. . . . . . . . . . . . . . . . . . . .57
6.19. Volker Wypyszyk.. . . . . . . . . . . . . . . . . . . . . . .57
6.20. Repayment of Debt.. . . . . . . . . . . . . . . . . . . . . .57
SECTION 7. ZGNA'S CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . .57
7.1. Representations and Warranties.. . . . . . . . . . . . . . . .57
7.2. Compliance with Agreement. . . . . . . . . . . . . . . . . . .58
7.3. Injunction.. . . . . . . . . . . . . . . . . . . . . . . . . .58
7.5. Consents and Approvals.. . . . . . . . . . . . . . . . . . . .58
7.6. NASDAQ Listing.. . . . . . . . . . . . . . . . . . . . . . . .58
7.7. Adverse Development. . . . . . . . . . . . . . . . . . . . . .58
7.9. Credit Agreements. . . . . . . . . . . . . . . . . . . . . . .59
7.10. HSR Act.. . . . . . . . . . . . . . . . . . . . . . . . . . .59
7.11. Election of Officer and Directors.. . . . . . . . . . . . . .59
7.12. Officer's Certificate.. . . . . . . . . . . . . . . . . . . .59
7.13. Counsel's Opinion.. . . . . . . . . . . . . . . . . . . . . .59
7.15. Approval of Proceedings.. . . . . . . . . . . . . . . . . . .59
7.16. Accountant's Letter.. . . . . . . . . . . . . . . . . . . . .60
SECTION 8. COMPANY CLOSING CONDITIONS. . . . . . . . . . . . . . . . . . . .60
8.1. Representations and Warranties.. . . . . . . . . . . . . . . .60
8.2. Compliance with Agreement. . . . . . . . . . . . . . . . . . .60
8.3. Injunction.. . . . . . . . . . . . . . . . . . . . . . . . . .60
(iii)
<PAGE>
8.4. Stockholder Approval.. . . . . . . . . . . . . . . . . . . . .60
8.5. Election of Officer and Directors. . . . . . . . . . . . . . .61
8.6. Adverse Development. . . . . . . . . . . . . . . . . . . . . .61
8.7. Credit Agreements. . . . . . . . . . . . . . . . . . . . . . .61
8.8. Consents and Approvals.. . . . . . . . . . . . . . . . . . . .61
8.9. HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . . .61
8.10. Transaction Documents.. . . . . . . . . . . . . . . . . . . .61
8.11. ZGNA's Certificates.. . . . . . . . . . . . . . . . . . . . .61
8.12. Counsel's Opinion.. . . . . . . . . . . . . . . . . . . . . .62
8.13. Completion of Mergers.. . . . . . . . . . . . . . . . . . . .62
8.14. Approval of Proceedings.. . . . . . . . . . . . . . . . . . .62
8.15. Accountant's Letter.. . . . . . . . . . . . . . . . . . . . .62
8.16. Employees.. . . . . . . . . . . . . . . . . . . . . . . . . .62
8.17. Exclusive Distributorship Agreement.. . . . . . . . . . . . .63
SECTION 9. TERMINATION AND INDEMNIFICATION . . . . . . . . . . . . . . . . .63
9.1. Termination. . . . . . . . . . . . . . . . . . . . . . . . . .63
9.2. Procedure and Effect of Termination. . . . . . . . . . . . . .63
9.3. Survival of Representations, Warranties and Covenants. . . . .64
9.4. Indemnification. . . . . . . . . . . . . . . . . . . . . . . .65
9.5. Break-Up Fee.. . . . . . . . . . . . . . . . . . . . . . . . .69
SECTION 10. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . .70
10.1. Governing Law.. . . . . . . . . . . . . . . . . . . . . . . .70
10.2. Paragraph and Section Headings. . . . . . . . . . . . . . . .70
10.3. Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . .70
10.4. Expenses and Taxes. . . . . . . . . . . . . . . . . . . . . .71
10.5. Successors and Assigns. . . . . . . . . . . . . . . . . . . .71
10.6. Entire Agreement; Amendment and Waiver. . . . . . . . . . . .71
10.7. Severability. . . . . . . . . . . . . . . . . . . . . . . . .72
10.8. Third Parties.. . . . . . . . . . . . . . . . . . . . . . . .72
10.9. Arbitration.. . . . . . . . . . . . . . . . . . . . . . . . .72
10.10. Counterparts.. . . . . . . . . . . . . . . . . . . . . . . .74
</TABLE>
(iv)
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as
of December 8, 1998, is by and among Hauser, Inc., a Colorado corporation
(the "COMPANY"), QQB Holdings I, Inc., a Delaware corporation and a wholly
owned subsidiary of the Company ("MERGER SUB 1"), QQB Holdings II, Inc., a
New York corporation and a wholly owned subsidiary of the Company ("MERGER
SUB 2"), QQB Holdings III, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company ("MERGER SUB 3"), Zuellig Group N.A., Inc., a
Delaware corporation ("ZGNA"), Zuellig Botanicals, Inc., a Delaware
corporation and a wholly owned subsidiary of ZGNA ("ZBI"), Zuellig Botanical
Extracts, Inc., a Delaware corporation and a wholly owned subsidiary of ZBI
("ZUELLIG BOTANICAL EXTRACTS"), ZetaPharm, Inc., a New York corporation and a
wholly owned subsidiary of ZGNA ("ZETAPHARM"), and Wilcox Drug Company, Inc.,
a Delaware corporation and a wholly owned subsidiary of ZGNA ("WILCOX").
R E C I T A L S :
WHEREAS, ZGNA owns, directly or indirectly, all of the issued
and outstanding capital stock (the "SUBSIDIARY SHARES") of Zuellig Botanical
Extracts, ZetaPharm and Wilcox (collectively, the "CONTRIBUTED SUBSIDIARIES");
WHEREAS, ZGNA and ZBI desire to assign, transfer and convey the
Subsidiary Shares to the Company solely in exchange for the Shares (as herein
defined), and the Company desires to issue and exchange the Shares to ZGNA
and ZBI solely in exchange for the Subsidiary Shares, all in accordance with
and subject to the terms and conditions of this Agreement;
WHEREAS, the acquisition of the Subsidiary Shares is to be
effected by a merger of Merger Sub 1 with and into Zuellig Botanical
Extracts, a merger of Merger Sub 2 with and into ZetaPharm and a merger of
Merger Sub 3 with and into Wilcox (collectively, the "MERGERS"); and
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Company and ZGNA are executing and delivering an Inventory
Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual representations, warranties, covenants
<PAGE>
and agreements herein contained, the parties hereby agree as follows:
SECTION 1. DEFINITIONS
The terms defined in this Section 1, whenever used herein,
shall have the following meanings for all purposes of this Agreement.
"AFFILIATE" means any Person or entity, directly or indirectly,
controlling, controlled by or under common control with such Person or entity.
"AGREEMENT" shall have the meaning set forth in the preamble
hereto.
"AGREEMENT REGARDING EMPLOYEES" shall mean the agreement
regarding employees, dated as of the Closing Date, by and between the Company
and ZBI, substantially in the form of Exhibit C.
"APPROVALS" shall have the meaning set forth in Section 4.6(b).
"BASKET AMOUNT" shall have the meaning set forth in Section
9.4(c).
"BENEFIT ARRANGEMENT" shall have the meaning set forth in
Section 4.16.
"BOARD" shall mean the board of directors of the Company.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday
or other day on which banks in the State of New York are not required or
authorized to close.
"BCL" shall mean the New York Business Corporation Law.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ.
"CERTIFICATES OF MERGER" shall have the meaning set forth in
Section 2.3.
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<PAGE>
"CLOSING" shall have the meaning set forth in Section 2.2(a).
"CLOSING DATE" shall have the meaning set forth in Section
2.2(a).
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMISSION" shall mean the Securities and Exchange Commission.
"COMMITMENT" shall have the meaning set forth in Section 4.8.
"COMMON STOCK" shall mean the common stock, par value $0.001
per share, of the Company.
"COMPANY" shall have the meaning set forth in the preamble
hereto.
"COMPANY INDEMNIFIED PARTIES" shall have the meaning set forth
in Section 9.4(b).
"COMPANY KEY AGREEMENTS AND INSTRUMENTS" shall have the meaning
set forth in Section 4.9(a).
"COMPANY LEASED REAL PROPERTIES" shall have the meaning set
forth in Section 4.28(b).
"COMPANY MATERIAL ADVERSE EFFECT" shall have the meaning set
forth in Section 4.1(c).
"COMPANY OWNED REAL PROPERTIES" shall have the meaning set
forth in Section 4.28(a).
"COMPANY PERMITTED ENCUMBRANCES" shall have the meaning set
forth in Section 4.28(a).
"COMPANY REAL PROPERTIES" shall have the meaning set forth in
Section 4.28(b).
"COMPANY SEC REPORTS" shall have the meaning set forth in
Section 4.10.
"CONTRIBUTED SUBSIDIARIES" shall have the meaning set forth in
the recitals hereto.
-3-
<PAGE>
"CS BALANCE SHEETS" shall have the meaning set forth in Section
5.10.
"DAMAGES" shall have the meaning set forth in Section 9.4(a).
"DELAWARE MERGERS" shall have the meaning set forth in Section
2.1.
"DGCL" shall have the meaning set forth in Section 2.1.
"EFFECTIVE TIME" shall have the meaning set forth in Section
2.3.
"ENVIRONMENTAL LAWS" shall have the meaning set forth in
Section 4.6(c).
"ENVIRONMENTAL PERMITS" shall have the meaning set forth in
Section 4.6(c).
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974.
"ESCROW AGREEMENT" shall mean the escrow agreement, dated as of
the Closing Date by and among the Company, ZGNA, ZBI and the Escrow Agent, as
defined therein, substantially in the form of Exhibit D.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
an amended.
"GAAP" shall have the meaning set forth in Section 4.10.
"GOVERNANCE AGREEMENT" shall mean the governance agreement,
dated as of the Closing Date, by and among the Company and ZGNA,
substantially in the form of Exhibit E.
"HAZARDOUS MATERIALS" shall have the meaning set forth in
Section 4.6(c).
"HSR" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section
9.4(h).
-4-
<PAGE>
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 9.4(h).
"INTELLECTUAL PROPERTY" shall have the meaning set forth in
Section 4.17.
"INVENTORY PURCHASE AGREEMENT" shall mean the inventory
purchase agreement between the Company and ZGNA, substantially as set forth
as Exhibit F hereto.
"LETTER AGREEMENT" shall mean the letter agreement relating to
the goodwill associated with the name and mark "Botanicals International" and
the name "Zuellig Botanical Extracts, Inc.", dated as of the Closing Date, by
and between the Company and ZBI, substantially in the form of Exhibit M.
"LICENSE AGREEMENT" shall mean the license agreement relating
to the name and mark "Botanicals International" and the name "Zuellig
Botanical Extracts, Inc.", dated as of the Closing Date, by and between ZBI
and Zuellig Botanical Extracts, substantially in the form of Exhibit L.
"MERGER SUBS" shall mean Merger Sub 1, Merger Sub 2 and Merger
Sub 3.
"MERGER SUB 1" shall have the meaning set forth in the preamble
hereto.
"MERGER SUB 2" shall have the meaning set forth in the preamble
hereto.
"MERGER SUB 3" shall have the meaning set forth in the preamble
hereto.
"MERGER SUBS ORGANIZATIONAL DOCUMENTS" shall have the meaning
set forth in Section 4.1(a).
"MERGERS" shall have the meaning set forth in the recitals
hereto.
"NEW YORK MERGER" shall have the meaning set forth in Section
2.1.
"OPTION" shall mean the option to acquire 2,000,000 shares of
Common Stock granted to ZGNA on the date hereof.
-5-
<PAGE>
"PERSON" shall mean an individual, partnership, joint-stock
company, corporation, limited liability company, trust or unincorporated
organization, or a government, agency, regulatory authority or political
subdivision thereof.
"POWDERS OPTION AGREEMENT" shall mean the agreement between the
Company and ZBI pursuant to which ZBI will grant the Company an option to
acquire the powders business of ZBI, substantially in the form set forth as
Exhibit G hereto.
"PREFERRED STOCK" shall have the meaning set forth in Section
4.3(a).
"PROCEEDING" shall have the meaning set forth in Section 4.7.
"PROPOSED SECURITIES" shall have the meaning set forth in
Section 6.13(a).
"PROXY STATEMENT" shall have the meaning set forth in Section
6.2(a).
"REGISTRATION RIGHTS AGREEMENT" shall mean the registration
rights agreement, dated as of the date hereof, by and between the Company,
ZBI and ZGNA, substantially in the form set forth as Exhibit H hereto.
"SECURITIES ACT" shall mean the Securities Act of 1933, an
amended.
"SHARES" shall mean such number of shares of Common Stock
obtained by multiplying (x) 0.49 times (y) the quotient obtained by dividing
the number of shares of Common Stock issued and outstanding immediately prior
to Closing by 0.51.
"SOURCING AGENCY AGREEMENT" means the sourcing agency agreement
by and between the Company and Zuellig Botanicals, Inc., substantially in the
form set forth as Exhibit I hereto.
"STOCK OPTION AGREEMENT" shall mean the agreement between the
Company and ZGNA pursuant to which the Company will grant ZGNA the Option,
substantially in the form set forth as Exhibit J hereto.
"SUBSCRIPTION SECURITIES" shall have the meaning set forth in
Section 6.13(a).
-6-
<PAGE>
"SUBSIDIARY" shall mean a corporation of which a Person owns,
directly or indirectly, more than 50% of the Voting Stock.
"SUBSIDIARY KEY AGREEMENTS AND INSTRUMENTS" shall have the
meaning set forth in Section 5.9.
"SUBSIDIARY LEASED REAL PROPERTIES" shall have the meaning set
forth in Section 5.28(b).
"SUBSIDIARY MATERIAL ADVERSE EFFECT" shall have the meaning set
forth in Section 5.1(c).
"SUBSIDIARY OWNED REAL PROPERTIES" shall have the meaning set
forth in Section 5.28(a).
"SUBSIDIARY PERMITTED ENCUMBRANCES" shall have the meaning set
forth in Section 5.28(a).
"SUBSIDIARY REAL PROPERTIES" shall have the meaning set forth
in Section 5.28(b).
"SUBSIDIARY SHARES" shall have the meaning set forth in the
recitals hereto.
"SURVIVING CORPORATIONS" shall have the meaning set forth in
Section 2.1.
"SURVIVING CORPORATIONS COMMON STOCK" shall have the meaning
set forth in Section 3.1(b).
"TAKEOVER STATUTE" shall mean any corporate takeover provision
under laws of the State of Colorado or any other state or federal "fair
price", "moratorium", "control share acquisition" or other similar
antitakeover statute or regulation.
"TAXES" shall mean all U.S. Federal, state, local or foreign
and other taxes, assessments, workers compensation contributions, duties,
withholdings, FICA and similar charges of any kind imposed by any taxing
authority, including interest, penalties and additions thereto.
"TERMINATION FEE" shall have the meaning set forth in Section
9.5.
"TRANSACTION DOCUMENTS" shall mean this Agreement, the
Governance Agreement, the Escrow Agreement, the Stock Option Agreement, the
Sourcing Agency Agreement, the Agreement Regarding
-7-
<PAGE>
Employees, the Registration Rights Agreement, the Powders Option Agreement,
the License Agreement and the Letter Agreement.
"VOTING STOCK" shall mean securities of any class or classes of
a corporation the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate directors (or
Persons performing similar functions).
"WILCOX" shall have the meaning set forth in the recitals
hereto.
"ZBI" shall have the meaning set forth in the preamble hereto.
"ZETAPHARM" shall have the meaning set forth in the recitals
hereto.
"ZUELLIG BOTANICAL EXTRACTS" shall have the meaning set forth
in the recitals hereto.
"ZGNA" shall have the meaning set forth in the preamble hereto.
"ZGNA INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 9.4(a).
SECTION 2. THE MERGER
2.1. THE MERGERS. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the General
Corporation Law of the State of Delaware (the "DGCL"), at the Effective Time,
Merger Sub 1 shall be merged with and into Zuellig Botanicals Extracts and
Merger Sub 3 shall be merged with and into Wilcox (the "DELAWARE MERGERS").
Upon the terms and subject to the conditions set forth in this Agreement, and
in accordance with the BCL, at the Effective Time, Merger Sub 2 shall be
merged with and into ZetaPharm (the "NEW YORK MERGER"). Following the
Effective Time, the separate corporate existence of the Merger Subs shall
cease and Zuellig Botanicals Extracts, ZetaPharm and Wilcox shall each
continue as the surviving corporation (the "SURVIVING CORPORATIONS") as a
corporation incorporated under the laws of the State of Delaware, in the case
of Zuellig Botanicals Extracts and Wilcox, and as a
-8-
<PAGE>
corporation under the laws of the State of New York, in the case of
ZetaPharm, and shall succeed to and assume all the rights and obligations of
the Merger Sub that merged into them in accordance with the DGCL and the BCL,
as the case may be.
2.2. THE CLOSING. The closing of the Mergers (the "CLOSING")
will take place at 10:00 a.m., New York City Time, on a date to be specified
by the parties (the "CLOSING DATE"), which shall be no later than the second
business day after the satisfaction or waiver of the conditions set forth in
Sections 6 and 7, at the offices of Willkie Farr & Gallagher, 787 Seventh
Avenue, New York, New York, unless another date or place is agreed to in
writing by the parties hereto. On the Closing Date, the Company shall issue,
sell and deliver to (i) ZGNA, as the stockholder of ZetaPharm and Wilcox, a
certificate representing the number of shares of Common Stock equal to 45%
multiplied by the Shares, duly registered in ZGNA's name and (ii) ZBI, as the
stockholder of Zuellig Botanical Extracts, a certificate representing the
number of shares of Common Stock equal to 55% multiplied by the Shares, duly
registered in ZBI's name.
2.3. EFFECTIVE TIME. Subject to the provisions of this
Agreement, the Contributed Subsidiaries and the Merger Subs shall file
Certificates of Merger (the "CERTIFICATES OF MERGER") executed in accordance
with the relevant provisions of the DGCL and the BCL and shall make all other
filings or recordings required under the DGCL and the BCL to effect the
Mergers as soon as practicable on or after the Closing Date. Each of the
Mergers shall become effective at such time as the Certificate of Merger in
respect of such Merger is duly filed with the Secretary of State of the State
of Delaware in the case of the Delaware Mergers, and the Secretary of State
of the State of New York in the case of the New York Merger, or at such later
time as may be specified in the relevant Certificate of Merger (the
"EFFECTIVE TIME"). The parties intend that all of the Mergers will become
effective simultaneously.
2.4. EFFECT OF THE MERGERS. Each Merger shall have the
effects set forth in the DGCL or the BCL, as the case may be. Without
limiting the generality of the foregoing, and subject thereto and any other
applicable laws, at the Effective Time, all the properties, rights,
privileges, powers and franchises of the Contributed Subsidiaries and the
Merger Subs shall vest in the Surviving Corporations, and all debts,
liabilities, restrictions, disabilities and duties of the Contributed
Subsidiaries and the
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Merger Subs shall become the debts, liabilities, restrictions, disabilities
and duties of the Surviving Corporation.
SECTION 3. EFFECT OF THE MERGER ON THE CAPITAL STOCK; MERGER
CONSIDERATION; EXCHANGE OF CERTIFICATES
3.1. EFFECT ON CAPITAL STOCK; MERGER CONSIDERATION. As of
the Effective Time, by virtue of the Mergers and without any action on the
part of any shareholder of the Contributed Subsidiaries:
(a) The shares of capital stock of each Contributed Subsidiary
issued and outstanding immediately before the Effective Time shall be
canceled and extinguished and be converted into the right to receive the
Shares.
(b) The shares of common stock of each Merger Sub outstanding
immediately prior to the Merger shall be converted into one share of the
common stock of the Surviving Corporation (the "SURVIVING CORPORATION COMMON
STOCK"), which one share of the Surviving Corporation Common Stock shall
constitute all of the issued and outstanding capital stock of the Surviving
Corporation and shall be owned by the Company.
(c) At the Effective Time, the stock transfer books of the
Contributed Subsidiaries shall be closed and no transfer of shares shall be
made thereafter.
3.2. CERTIFICATE OF INCORPORATION OF SURVIVING CORPORATIONS.
The Certificate of Incorporation of each Contributed Subsidiary in effect
immediately prior to the Effective Time shall become the Certificate of
Incorporation of the respective Surviving Corporation from and after the
Effective Time and until thereafter amended as provided by law.
3.3. BYLAWS OF THE SURVIVING CORPORATIONS. The Bylaws of
each Contributed Subsidiary in effect immediately prior to the Effective Time
shall be the Bylaws of the respective Surviving Corporation from and after
the Effective Time and until thereafter amended as provided by law.
3.4. DIRECTORS AND OFFICERS. The directors and officers of
the Surviving Corporation shall be such persons as mutually agreed by the
Company and ZGNA immediately prior to the Effective Time.
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3.5. TAX TREATMENT.
The Company and ZGNA intend to treat the transactions
contemplated by this Agreement to qualify for federal income tax purposes as
a reorganization pursuant to Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Code. Neither the Company nor ZGNA shall file or caused to be filed any tax
returns which is inconsistent with this tax treatment.
3.6. ACCOUNTING TREATMENT.
The parties acknowledge that the transactions contemplated
hereunder will not be accounted for as a pooling of interest.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE
COMPANY
The Company represents and warrants to ZGNA as of the date
hereof that except as expressly set forth in the corresponding numbered
section in that certain Company Disclosure Schedule of even date herewith by
and between the Company and ZGNA:
4.1. CORPORATE ORGANIZATION.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado. The
Articles of Incorporation and Bylaws of the Company and the Certificates of
Incorporation of the Merger Subs, each as amended through the date hereof
(collectively, the "MERGER SUBS ORGANIZATIONAL DOCUMENTS"), and which have
been delivered to ZGNA, are true and correct as of the date hereof. Merger
Sub I and Merger Sub III are corporations duly organized, validly existing
and in good standing under the laws of the State of Delaware and Merger Sub
II is a corporation duly organized, validly existing and in good standing
under the laws of New York.
(b) The Company has all requisite power and authority and
has all necessary approvals, licenses, permits and authorization to own its
properties and to carry on its business as now conducted. The Company has
all requisite power and authority to execute and deliver the Transaction
Documents and to perform its obligations hereunder and thereunder. The
Merger Subs have been organized for purposes of the Mergers and, except
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for transactions related to their formation, have conducted no business.
Each Merger Sub has all requisite power and authority to execute and deliver
this Agreement, to consummate the Mergers and otherwise to perform its
obligations hereunder.
(c) The Company has filed all necessary documents to qualify
to do business as a foreign corporation in, and the Company is in good
standing under the laws of each jurisdiction in which the conduct of the
Company's business or the nature of the property owned requires such
qualification, except where the failure to so qualify would not have a
material adverse effect on the business, properties, prospects, profits or
condition (financial or otherwise) of the Company and its Subsidiaries taken
as a whole (a "COMPANY MATERIAL ADVERSE EFFECT").
4.2. SUBSIDIARIES.
Except as set forth on SECTION 4.2 OF THE COMPANY DISCLOSURE
SCHEDULE, the Company has no Subsidiaries. Each Subsidiary listed on SECTION
4.2 OF THE COMPANY DISCLOSURE SCHEDULE has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation, has all requisite corporate power and authority to own
its properties and assets and to conduct its business and is duly registered,
qualified and authorized to transact business and is in good standing in each
jurisdiction in which the conduct of its business or the nature of its
properties requires such registration, qualification or authorization, except
where the failure to be so registered, qualified or authorized would not have
a Company Material Adverse Effect. A list of each jurisdiction in which the
Company is qualified to do business is set forth in SECTION 4.2 OF COMPANY
DISCLOSURE SCHEDULE. All of the issued and outstanding capital stock of each
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable, and is owned of record and beneficially, directly or
indirectly, by the Company free and clear of any mortgage, pledge, lien,
charge, security interest, claim or other legal or equitable encumbrance,
limitation or restriction other than the lien of The First National Bank of
Boston ("BANKBOSTON") pursuant to its Security Agreement, dated April 9,
1997, between the Company and BankBoston. There are no outstanding options,
warrants, agreements, conversion rights, preemptive rights or other rights to
subscribe for, purchase or otherwise acquire any issued or unissued shares of
capital stock of any Subsidiary.
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4.3. CAPITALIZATION.
(a) On the date hereof, the authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock and 800,000 shares of
preferred stock, par value $1.00 per share (the "PREFERRED STOCK"). On the
date hereof, the issued and outstanding shares of capital stock of the
Company consists of 10,468,163 shares of Common Stock and no shares of
Preferred Stock. The Company has 201,000 shares of treasury stock. As of the
date hereof, there are no bonds, debentures, notes or other evidences of
indebtedness having the right to vote on any matters on which the Company's
stockholders may vote issued or outstanding.
(b) All the outstanding shares of capital stock of the
Company have been duly and validly issued and are fully paid and
non-assessable, and were issued in accordance with the registration or
qualification requirements of the Securities Act and any relevant state
securities laws or pursuant to valid exemptions therefrom. Upon issuance,
sale and delivery as contemplated by this Agreement, the Shares will be duly
authorized and validly issued obligations of the Company, free and clear of
any and all security interests, pledges, liens, charges, claims, options,
rights, restrictions on transfer, preemptive rights, proxies and voting or
other agreements, or other encumbrances of any nature whatsoever, except for
those provided for in the Transaction Documents and other than restrictions
on transfer imposed by federal or state securities laws.
(c) Except for the conversion and exchange rights which
attach to the warrants, options and convertible securities which are listed
on SECTION 4.3 OF THE COMPANY DISCLOSURE SCHEDULE, there are no shares of
Common Stock or any other equity security of the Company issuable upon
conversion, exchange or exercise of any security of the Company or any
Subsidiary of the Company nor are there any rights, options, calls or
warrants outstanding or other agreements to acquire shares of Common Stock
nor is the Company contractually obligated to purchase, redeem or otherwise
acquire any of its outstanding shares. No stockholder of the Company is
entitled to any preemptive or similar rights to subscribe for shares of
capital stock of the Company.
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4.4. CORPORATE PROCEEDINGS, ETC.
(a) The Company has authorized the execution, delivery, and
performance of the Transaction Documents and each of the transactions and
agreements contemplated hereby and thereby. No other corporate action (other
than stockholder approval of the issuance of the Shares hereunder) is
necessary to authorize such execution, delivery and performance of the
Transaction Documents, and upon such execution and delivery by the parties
thereto each of the Transaction Documents shall constitute the valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, except that such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights and general principles
of equity. The Company has authorized the issuance and delivery of the
Shares in accordance with this Agreement.
(b) Each Merger Sub has authorized the execution, delivery,
and performance of this Agreement and each of the transactions contemplated
hereby. No other corporate action of a Merger Sub (including stockholder
approval) is necessary to authorize such execution, delivery and performance
of this Agreement, and upon such execution and delivery by the parties
thereto this Agreement shall constitute the valid and binding obligation of
each Merger Sub, enforceable against such Merger Sub in accordance with its
terms, except that such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and general principles of equity.
4.5. CONSENTS AND APPROVALS.
(a) The execution and delivery by the Company of the
Transaction Documents, the issuance of the Shares, the performance by the
Company of its obligations hereunder and thereunder and the consummation by
the Company of the transactions contemplated hereby and thereby do not
require the Company or any of its Subsidiaries to obtain any consent,
approval, clearance or action of, or make any filing, submission or
registration with, or give any notice to, any Person or judicial authority.
(b) Except for possible submission under the HSR, the
execution and delivery by the Merger Subs of this Agreement, the
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performance by the Merger Subs of their respective obligations hereunder and
the consummation by the Merger Subs of the transactions contemplated hereby
do not require the Merger Subs to obtain any consent, approval, clearance or
action of, or make any filing, submission or registration with, or give any
notice to, any Person or judicial authority.
4.6. COMPLIANCE WITH LAW.
(a) The Company and each of its Subsidiaries are in
compliance in all material respects with, and are not in violation or default
in any material respect under, all foreign, federal, state and local laws,
ordinances, government rules and regulations applicable to their business
operations, properties, or assets, including without limitation laws or
regulations relating to: the Food and Drug Administration; the Foreign
Corrupt Practices Act; the environment; occupational health and safety;
employer benefits; ERISA plans; wages; work place safety; equal employment
opportunity and race; and religious, sex and age discrimination. No material
expenditures are or will be required in order to cause the current operations
or properties of the Company or any of its Subsidiaries to comply with any
applicable laws, ordinances, governmental rules or regulations in effect at
the time of the Closing.
(b) The Company and each of its Subsidiaries have all
licenses, permits, franchises or other governmental authorizations
("APPROVALS") necessary to the ownership of their property and to the
operation of their respective businesses, which if violated or not obtained
could reasonably be expected to have a Company Material Adverse Effect.
Neither the Company nor any Subsidiary has finally been denied any
application for any such Approvals necessary for their property or for the
operation of their business. There is no action pending, or to the best
knowledge of the Company or any of its Subsidiaries, threatened or
recommended by appropriate local, state, federal or foreign agencies having
jurisdiction thereof, to revoke, withdraw, or suspend any such Approvals, or
which would have a material adverse effect on such Approvals.
(c) Notwithstanding anything to the contrary contained in
this Agreement and in addition to the other representations and warranties
contained herein: (i) the Company and its operations are in material
compliance with all applicable laws, regulations and other requirements of
governmental or regulatory
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authorities or duties under the common law relating to toxic or hazardous
substances, wastes, pollution or to the protection of health, safety or the
environment (collectively, "ENVIRONMENTAL LAWS") and have obtained and
maintained in effect all licenses, permits and other authorizations or
registrations (collectively "ENVIRONMENTAL PERMITS") required under all
Environmental Laws and are in material compliance with all such Environmental
Permits; (ii) the Company has not performed or suffered any act which could
give rise to, or has otherwise incurred, liability to any Person
(governmental or not) under CERCLA, or any other Environmental Laws, nor has
the Company received notice of any such liability or any claim therefor or
submitted notice pursuant to Section 103 of CERCLA to any governmental agency
with respect to any of its assets; (iii) no hazardous substance, hazardous
waste, contaminant, pollutant or toxic substance (as such terms are defined
in any applicable Environmental Law and collectively referred to herein as
"HAZARDOUS MATERIALS") has been released, placed, dumped or otherwise come to
be located on, at, beneath or near any of the assets or properties owned or
leased by the Company or any surface waters or groundwaters thereon or
thereunder in violation of any Environmental Laws or that could subject the
Company to liability under any Environmental Laws (provided, however, that as
to actions of Persons other than the Company and its Subsidiaries or their
predecessors this item (iii) is only to the best knowledge of the Company);
(iv) the Company does not own or operate, and has never owned or operated,
aboveground or underground storage tanks used for storing petroleum products
and which are subject to underground storage tank removal or clean-up
requirements in effect on the date hereof; (v) with respect to any or all of
the real properties leased by the Company, to the Company's best knowledge
(A) there are no asbestos-containing materials, urea formaldehyde insulation,
polychlorinated biphenyls or lead-based paints present at any such
properties, and (B) there are no wetlands as defined under any Environmental
Law located on any such properties; (vi) to the Company's best knowledge none
of the real properties leased by the Company (A) has been used or is now used
for the generation, transportation, storage, handling, treatment or disposal
of any Hazardous Materials (other than de minimis quantities of Hazardous
Materials used in the normal course of the Company's business in material
compliance with all applicable Environmental Laws), or (B) is identified on a
federal, state or local listing of sites which require or might require
environmental cleanup; (vii) to the best of the Company's knowledge, no
condition exists on any of the real properties
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leased by the Company that upon the failure to act, the passage of time or
the giving of notice would give rise to liability under any Environmental
Law; (viii) to the best of the Company's knowledge, there are no ongoing
investigations or negotiations, pending or threatened administrative,
judicial or regulatory proceedings, or consent decrees or other agreements in
effect that relate to environmental conditions in, on, under, about or
related to the Company, its operations or the real properties leased by the
Company; and (ix) neither the Company nor its operations is subject to
reporting requirements under the federal Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001 ET SEQ., or analogous state
statutes and related regulations.
4.7. LITIGATION.
Except as disclosed in the Company SEC Reports, there is no legal
action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding (whether federal, state,
local or foreign) (collectively "PROCEEDING") pending or, to the best of the
Company's knowledge, threatened against or affecting (i) the Company or any
Subsidiary or any of their respective properties, assets or businesses,
except for Proceedings that could not reasonably be expected to have a
Company Material Adverse Effect; or (ii) the transaction contemplated hereby.
To the best knowledge of the Company, the Company is not aware of any fact
which might result in or form the basis for any such Proceeding. Neither the
Company nor any Subsidiary is subject to any order, writ, judgment,
injunction, decree, determination or award of any court or of any
governmental agency or instrumentality (whether federal, state, local or
foreign) which could reasonably be expected to have a Company Material
Adverse Effect.
4.8. CHANGE IN OWNERSHIP.
Neither the acquisition of the Shares by ZGNA nor the consummation
of the transactions contemplated by this Agreement will result in (i) to the
knowledge of the Company, any material adverse change in the business
operations of the Company or any of its Subsidiaries, (ii) the acceleration
of the vesting of any outstanding option, warrant, call, commitment,
agreement, conversion right, preemptive right or other right to subscribe
for, purchase or otherwise acquire any of the shares of the capital stock of
the Company or any of its Subsidiaries, or debt
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securities of the Company or any of its Subsidiaries (collectively
"COMMITMENTS", and each individually a "COMMITMENT"), (iii) any obligation of
the Company to grant, extend or enter into any Commitment, or (iv) any right
in favor of any Person to terminate or cancel any Company Key Agreement or
Instrument.
4.9. ABSENCE OF DEFAULTS, CONFLICTS, ETC.
(a) The execution and delivery of the Transaction Documents
and the issuance, exchange and delivery by the Company of any of the Shares
do not, and the fulfillment of the terms hereof and thereof by the Company
will not, result in a breach of any of the terms, conditions or provisions
of, or constitute a default under, or result in the modification of, or
permit the acceleration of rights under or termination of, any agreement,
contract, commitment, understanding, arrangement, restriction, indenture,
mortgage, deed of trust, credit agreement, note or other evidence of
indebtedness, of the Company or any of its Subsidiaries (i) involving
$100,000 or more, (ii) the termination of which is reasonably likely to have
a Company Material Adverse Effect or (iii) which is required to be filed as
an exhibit to periodic reports filed by the Company pursuant to the Exchange
Act ("COMPANY KEY AGREEMENTS AND INSTRUMENTS"), or the Organizational
Documents, or any arbitration award applicable to the Company or any of its
Subsidiaries, or any law, ordinance, code, standard, judgment, rule or
regulation of any court or local, federal, state or foreign regulatory board
or body or administrative agency having jurisdiction over the Company or any
of its Subsidiaries or over their respective properties or businesses.
(b) Neither any of the Company nor any of its Subsidiaries
is in default under or in violation of (and no event has occurred and no
condition exists which, upon notice or the passage of time (or both), would
constitute a default under) (i) the Organizational Documents, (ii) any
Company Key Agreement and Instrument, or (iii) any order, writ, injunction or
decree of any court or any Federal, state, local or other domestic or foreign
governmental department, commission, board, bureau, agency or instrumentality
or arbitration award, except, in the case of clause (ii), for defaults or
violations which would not have a Company Material Adverse Effect.
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4.10. REPORTS AND FINANCIAL STATEMENTS.
The Company has furnished ZGNA with true and complete copies of
the Company's (i) Annual Reports on Form 10-K for the fiscal years ended
April 30, 1997 and April 30, 1998, as filed with the Commission, (ii)
Quarterly Report on Form 10-Q for the quarter ended July 31, 1998, as filed
with the Commission, (iii) proxy statements related to all meetings of its
stockholders (whether annual or special) held since May 1, 1996, and (iv) all
other reports filed with or registration statements declared effective by the
Commission since May 1, 1996, except registration statements on Form S-8
relating to employee benefit plans, which are all the documents (other than
preliminary material) that the Company was required to file with the
Commission since that date (clauses (i) through (iv) being referred to herein
collectively as the "COMPANY SEC REPORTS"). As of their respective dates,
the Company SEC Reports were duly filed and complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case
may be, and the rules and regulations of the Commission thereunder applicable
to such Company SEC Reports. As of their respective dates, the Company SEC
Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim financial statements of the Company included in the Company SEC
Reports comply as to form in all material respects with applicable accounting
requirements of the Securities Act and with the published rules and
regulations of the Commission with respect thereto. The financial statements
included in the Company SEC Reports (i) have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent
basis (except as may be indicated therein or in the notes thereto and, in the
case of unaudited interim financial statements, the absence of all GAAP
required footnotes and normal year-end audit adjustments), (ii) present
fairly, in all material respects, the financial position of the Company and
its Subsidiaries as at the dates thereof and the results of their operations
and cash flow for the periods then ended subject, in the case of the
unaudited interim financial statements, to normal year-end audit adjustments
and any other adjustments described therein and the fact that certain
information and notes have been condensed or omitted in accordance with the
Exchange Act and the rules promulgated thereunder, and (iii) are in all
material
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respects in accordance with the books of account and records of the Company
except as indicated therein.
4.11. ABSENCE OF CERTAIN DEVELOPMENTS.
Except as disclosed in the Company SEC Reports, since April 30,
1998, there has been no (i) change or event which could reasonably be
expected to have a Company Material Adverse Effect (other than general trends
or new laws, rules, or regulations applicable to similarly situated
companies), (ii) declaration, setting aside or payment of any dividend or
other distribution with respect to the capital stock of the Company, (iii)
issuance of capital stock (other than pursuant to the exercise of options,
warrants or convertible securities outstanding on the date hereof) or
options, warrants or rights to acquire capital stock (other than the rights
granted to ZGNA hereunder or to directors for attending meetings and serving
as directors in accordance with the historical arrangement), (iv) material
loss, destruction or damage to any property of the Company or any Subsidiary,
whether or not insured, (v) except as a result of the new bank credit
facility contemplated herein, acceleration or prepayment of any indebtedness
for borrowed money or capital leases or the refunding of any such
indebtedness, (vi) labor trouble involving the Company or any Subsidiary or
any material change in their personnel or the general terms and conditions of
employment of key employees, (vii) waiver of any valuable right in favor of
the Company or any Subsidiary, (viii) loan or extension of credit to any
officer or employee of the Company or any Subsidiary other than advances for
travel-related expenses and similar advances to officers and employees of the
Company in the ordinary course of business, (ix) acquisition, material
writedown or write-off for accounting purposes or disposition of any material
assets (or any contract or arrangement therefor) other than a possible sale
or writedown of the paclitaxel business and assets, (x) redemption or
repurchase of any capital stock of the Company, or any other material
transaction by the Company or any Subsidiary otherwise than for fair value in
the ordinary course of business or (xi) termination of an agreement or
arrangement which would be a Company Key Agreement or Instrument if in effect
on the date hereof.
4.12. MATERIAL CONTRACTS.
SECTION 4.12 OF THE COMPANY DISCLOSURE SCHEDULE sets forth a
true and complete list of each Company Key Agreement and
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Instrument (oral or written) to which the Company or its Subsidiary is a
party of its assets bound other than Company Key Agreements and Instruments
(i) filed as an exhibit to a Company SEC Report and (ii) under which the
Company has no further liabilities (whether accrued, absolute, contingent,
liquidated or otherwise, whether due or to become due, whether or not known
to the Company) or obligations as of the date hereof. Each Company Key
Agreement and Instrument that is currently in effect, is valid, binding and
enforceable against the Company or such Subsidiary and, to the Company's best
knowledge, the other parties thereto, in accordance with its terms, and in
full force and effect on the date hereof. A true and complete copy of each
Key Agreement and Instrument of the Company has been delivered or made
available to ZGNA. There is no breach, violation or default by the Company
and no event (including, without limitation, the consummation of the
transactions contemplated herein) which, with notice or lapse of time or
both, would (i) constitute a breach, violation or default by the Company
under any Company Key Agreement or Instrument, or (ii) give rise to any lien
or right of termination, modification, cancellation, prepayment, suspension,
limitation, revocation or acceleration against the Company under any Company
Key Agreement or Instrument except for breaches, violations or defaults that
would not have a Company Material Adverse Effect. To the best of the
Company's knowledge, no other party to any Company Key Agreement or
Instrument is in material breach of any such Company Key Agreement or
Instrument, no waiver or indulgence has been granted by any of the parties
thereto and no party to any such Company Key Agreement and Instrument has
repudiated any provision thereof. The Company is not a party to, nor are any
of its assets subject to, any guaranty, "make well" agreement or other
arrangement to be responsible for the obligations of another, including any
obligation to maintain the financial condition of another person.
4.13. ABSENCE OF UNDISCLOSED LIABILITIES.
Neither the Company nor any of its Subsidiaries has any debt,
obligation or liability (whether accrued, absolute, contingent, liquidated or
otherwise, whether due or to become due, whether or not known to the Company)
arising out of any transaction entered into at or prior to Closing, or any
act or omission at or prior to Closing, or any state of facts existing at or
prior to Closing, including Taxes with respect to or based upon transactions
or events occurring at or prior to Closing, and including, without
limitation, unfunded past service liabilities
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under any pension, profit sharing or similar plan, except liabilities
disclosed in the Company SEC Reports, current liabilities incurred since
April 30, 1998, current obligations (other than as a result of breach or
default) under agreements set forth on SECTION 4.12 OF THE COMPANY DISCLOSURE
SCHEDULE, and obligations under agreements which are not required to be set
forth on such schedule entered into in the usual and ordinary course of
business, none of which (individually or in the aggregate) could have a
Company Material Adverse Effect.
4.14. EMPLOYEES.
(a) The Company and its Subsidiaries are in full compliance
with all laws regarding employment, wages, hours, equal opportunity,
collective bargaining and payment of social security and other taxes except
to the extent that noncompliance would not have a Company Material Adverse
Effect. Since January 1, 1997, no complaint of any unfair labor practice or
discriminatory employment practice against the Company or any Subsidiary has
been filed or, to the best of the Company's knowledge, threatened to be filed
with or by the National Labor Relations Board, the Equal Employment
Opportunity Commission or any other administrative agency, local, foreign,
federal or state, that regulates labor or employment practices, nor is any
grievance filed or, to the best of the Company's knowledge, threatened to be
filed, against the Company or any Subsidiary by any employee pursuant to any
collective bargaining or other employment agreement to which the Company or
any Subsidiary is a party or is bound, except as would not reasonably be
expected to have a Company Material Adverse Effect. The Company and its
Subsidiaries are in compliance with all applicable foreign, federal, state
and local laws and regulations regarding occupational safety and health
standards except to the extent that noncompliance will not have a Company
Material Adverse Effect, and, since April 30, 1996, have received no
complaints from any foreign, federal, state or local agency or regulatory
body alleging violations of any such laws and regulations. The Company is
not bound or subject to any arrangement with any labor union, and, to the
Company's best knowledge no union organizing activities are ongoing or
threatened.
(b) All sums due for employee compensation and benefits and
all vacation time owing to any employees of the Company or any of its
Subsidiaries have been duly and adequately
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accrued on the accounting records of the Company and its Subsidiaries.
(c) The Company is not aware that any of its executive
officers or persons whose principal occupation is the creation of
intellectual property is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of such executive officer's or person's best efforts
to promote the interests of the Company or that would conflict with the
Company's business as proposed to be conducted.
(d) The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing.
(e) Set forth on SECTION 4.14 OF COMPANY DISCLOSURE SCHEDULE
is (i) a list of employees of the Company with an annual base compensation
over $50,000, (ii) a list of all officers of the Company and (iii) a list of
all employment agreements to which the Company is a party (copies of which
have been delivered to ZGNA).
4.15. TAX MATTERS.
There are no Taxes due and payable by the Company or any of its
Subsidiaries which have not been paid except those being disputed in good
faith by appropriate proceeding with appropriate reserves being made
therefore on the accounting books of the Company. The provisions for Taxes
on the audited and unaudited balance sheets delivered by the Company to ZGNA
will be sufficient for the payment in all material respects of all accrued
and unpaid Taxes of the Company and its Subsidiaries, whether or not assessed
or disputed in good faith as of the respective dates of such balance sheets.
The Company and its Subsidiaries have duly filed or received extensions to
filing all foreign, federal, state and local tax returns required to have
been filed by them, and there are in effect no waivers of applicable statutes
of limitations with respect to taxes for any year except where the failure to
file such returns or the existence of waivers of applicable statutes of
limitations is not reasonably likely to have a Company Material Adverse
Effect. All
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such returns (including those delivered by the Company to ZGNA) are true,
complete and correct in all material respects and have been prepared from,
and are in accordance with, the books and records of the Company and its
Subsidiaries. Neither the Company nor its Subsidiaries is a party to a Tax
sharing agreement or liable for the Taxes of any other person. Neither the
Company nor its Subsidiaries have filed a consent to the application of
Section 341(f) of the Code. The Company and its Subsidiaries have made all
estimated income tax deposits and all other required Tax payments or deposits
and have complied for all prior periods with the Tax withholding provisions
of all applicable foreign, federal, state and local laws applicable to them.
Neither the Company nor any of its Subsidiaries has been subject to a
foreign, federal or state tax audit since April 30, 1996.
4.16. EMPLOYEE BENEFIT PLANS.
The Company and its Subsidiaries have no employee benefit
plans (as defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974) covering former and current employees of the Company or any of
its Subsidiaries, or under which the Company or any of its Subsidiaries has
any obligation or liability. SECTION 4.16 OF THE COMPANY DISCLOSURE SCHEDULE
lists all material plans, contracts, bonuses, commissions, profit-sharing,
savings, stock options, insurance, deferred compensation, or other similar
fringe or employee benefits covering former or current employees of the
Company or any of its Subsidiaries or under which the Company or any of its
Subsidiaries has any obligation or liability (each, a "BENEFIT ARRANGEMENT").
True and complete copies of all Benefit Arrangements have been provided or
made available to ZGNA prior to the date hereof. The Benefit Arrangements
are and have been administered in substantial compliance with their terms and
with the requirements of applicable law. No "prohibited transaction" within
the meaning of Section 4475 of the Code or Section 406 of ERISA, has occurred
with respect to any Benefit Arrangements. All payments to current or former
employees of the Company or any of its Subsidiaries pursuant to the Benefit
Arrangements are and have been fully deductible under the Code.
4.17. PATENTS, LICENSES, ETC.
The Company or one of its Subsidiaries owns, free and clear of
all encumbrances, restrictions, liens, security interests and charges, and
has good and marketable title to, or
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holds adequate licenses or otherwise possesses all such rights as are
necessary to use all patents (and applications therefor), patent disclosures,
marks, trade names, copyrights (and applications therefor), inventions,
discoveries, processes, know-how, scientific, technical, engineering and
marketing data, formulae and techniques used or proposed to be used, in or
necessary for the conduct of its business as now conducted (collectively,
"INTELLECTUAL PROPERTY").
Neither the Company nor any of its Subsidiaries has received
notice nor has knowledge of any conflict or alleged conflict with the rights
of others pertaining to the Intellectual Property described in this Section
4.17 where the effect of such conflict could have a Company Material Adverse
Effect. To the Company's best knowledge, the Company's business, as
presently conducted, and as proposed to be conducted, does not infringe upon
or violate any patent rights, copyrights, marks, names, trade names or trade
secrets of others. To the Company's best knowledge, the Company and its
Subsidiaries have the right to use all trade secrets, processes, customer
lists and other rights incident to their respective businesses as now
conducted.
To the Company's best knowledge, no employee of the Company or
any of its Subsidiaries has violated any employment agreement, non-compete
agreement or proprietary information agreement which he or she had with a
previous employer or other person, or any intellectual property policy of
such employer, or is a party to or threatened by any litigation concerning
any patents, marks, trade secrets, service names, trade names, copyrights,
licenses and the like.
4.18. TITLE TO TANGIBLE ASSETS.
The Company and its Subsidiaries have good title to their
properties and assets and good title to all their leasehold estates, in each
case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than or resulting from Taxes which have not yet become delinquent and
minor liens and encumbrances which do not in any case materially detract from
the value of the property subject thereto or materially impair the operations
of the Company and its Subsidiaries and which have not arisen otherwise than
in the ordinary course of business.
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4.19. INSURANCE.
The Company and its Subsidiaries and their respective
properties are insured in such amounts, against such losses and with such
insurers as are prudent when considered in light of the nature of the
properties and businesses of the Company and its Subsidiaries and customary
in light of the Company's exposure. No notice of any termination, threatened
termination, or denial of a material claim made since January 1, 1997, of, or
under any of such policies has been received and such policies are in full
force and effect. A summary of all such policies, including whether they are
on a "claims made" basis, is attached as SECTION 4.19 OF THE COMPANY
DISCLOSURE SCHEDULE. None of such policies will be terminated or reduced in
coverage as a result of the transactions described herein. All such policies
are in full force and effect and all premiums with respect thereto have been
paid. The Company has not failed to give any notice or present any claim
under any such insurance policy in due and timely fashion or as required by
any of such insurance policies or has not otherwise, through any act,
omission or non-disclosure, jeopardized or impaired full recovery of any
claim under such policies, and there are no claims by the Company under any
of such policies to which any insurance company is denying liability or
defending under a reservation of rights or similar clause.
4.20. TRANSACTIONS WITH RELATED PARTIES.
Neither the Company nor any Subsidiary is a party to any
agreement with any of the Company's directors, officers or, to their best
knowledge stockholders holding more than 1/2% of the Company's stock, or, to
their best knowledge, any Affiliate or family member of any of the foregoing,
including but not limited to, under which it: (i) leases any real or
personal property (either to or from such Person), (ii) licenses technology
(either to or from such Person), (iii) is obligated to purchase any tangible
or intangible asset from or sell such asset to such Person, (iv) purchases
products or services from such Person or (v) has borrowed money from or lent
money to such Person. Neither the Company nor any Subsidiary employs as an
employee or engages as a consultant any family member of any of the Company's
directors or officers. To the best knowledge of the Company and except for
the Transaction Documents, there exist no agreements among stockholders of
the Company to act in concert with respect to their voting or holding of
Company securities.
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4.21. REGISTRATION RIGHTS.
Except as provided in the Registration Rights Agreement
executed on the date hereof between ZGNA and the Company, and except as
pursuant to its stock option plans, the Company is not under any obligation
to register any of its securities under the Securities Act.
4.22. PRIVATE OFFERING.
Neither the Company nor anyone acting on its behalf has sold
or has offered any of the Shares for sale to, or solicited offers to buy
from, or otherwise approached or negotiated with respect thereto with, any
prospective purchaser of the Shares, other than ZGNA and ZBI. Neither the
Company nor anyone acting on its behalf shall offer the Shares for issue or
sale to, or solicit any offer to acquire any of the same from, anyone so as
to bring the issuance and sale of the Shares, or any part thereof, within the
provisions of Section 5 of the Securities Act. Based in part upon the
representations of ZGNA and ZBI set forth in Section 5, the offer, issuance
and sale of the Shares are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act, and have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all
applicable state securities laws.
4.23. INVESTMENT.
(a) The Company is acquiring the Subsidiary Shares for its
own account for investment and not with a view towards the resale, transfer,
pledge or distribution thereof, nor with any present intention of
distributing the Subsidiary Shares other than a pledge in favor of the
Company's lender pursuant to the credit agreement referred to in Section 7.9.
(b) The Company has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits
and risks of its investment in the Contributed Subsidiaries as contemplated
by this Agreement, and is able to bear the economic risk of such investment
for an indefinite period of time. The Company has been furnished access to
such information and documents as it has requested and has been afforded an
opportunity to ask questions of and receive answers from representatives of
ZGNA and the Contributed Subsidiaries
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concerning the terms and conditions of this Agreement and the Mergers
contemplated hereby.
(c) The Company is an "accredited investor" as defined under
Regulation D of the Securities Act.
(d) The Company is located in Colorado and the offer and
sale of the Shares occurred in the States of Colorado and California.
4.24. BROKERAGE.
Except for the Company's agreement with Adams, Harkness & Hill,
Inc. whose fees and expenses shall be paid by the Company, there are no
claims for brokerage commissions or finder's fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement made by or on behalf of the Company, and the Company agrees to
indemnify and hold ZGNA harmless against any costs or damages incurred as a
result of any such claim.
4.25. TAKEOVER STATUTE.
ZGNA is not, as a result of its execution and delivery of this
Agreement, the performance of its obligations hereunder or the acquisition of
any Shares, prohibited from entering into a business combination with the
Company or any Subsidiary pursuant to the Business Corporation Act of the
State of Colorado. To the best knowledge of the Company, no other Takeover
Statute is applicable to the transactions contemplated hereby.
4.26. MATERIAL FACTS.
This Agreement, the Company Disclosure Schedules, and the other
agreements, documents, certificates or written statements furnished or to be
furnished to ZGNA through the Closing Date by or on behalf of the Company in
connection with the transactions contemplated hereby taken as a whole, do not
contain any untrue statement by the Company of a material fact or omit to
state a material fact necessary to make the statements contained therein or
herein, in light of the circumstances in which they were made, not
misleading. There is no fact which is known to the Company and which has not
been disclosed herein or otherwise by the Company to ZGNA which is reasonably
likely to have a Company Material Adverse Effect. Projections and
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forecasts prepared by or on behalf of the Company and delivered to ZGNA have
been prepared in good faith and on a basis believed by the Company's
management to be reasonable, but are not guarantees of performance.
4.27. DEBT.
As of the Closing Date, the "Debt" (as defined below) of the
Company will not exceed $10,000,000. For purposes of this Section, "Debt"
means debt for borrowed money (long term, for working capital purposes or
otherwise), obligations under letters of credit and capital lease obligations.
4.28. COMPANY REAL PROPERTY.
(a) SECTION 4.28 OF COMPANY'S DISCLOSURE SCHEDULE lists all
real property owned or leased by the Company and its Subsidiaries. The
Company and its Subsidiaries have title to its owned real properties
(collectively, the "COMPANY OWNED REAL PROPERTIES") in each case, free and
clear of all imperfections of title and all encumbrances, except for (i)
those consisting of zoning or planning restrictions, easements, permits and
other restrictions or limitations on the use of such property or
irregularities in title thereto which, individually and in the aggregate, do
not materially impair the use of such property, (ii) warehousemen's,
mechanics', carriers', landlords', repairmen's or other similar encumbrances
arising in the ordinary course of business and securing obligations not yet
due and payable, (iii) other encumbrances which arise in the ordinary course
of business and which individually and in the aggregate do not materially
impair its use of such property or its ability to obtain financing by using
such assets as collateral, (iv) any state of facts, including, without
limitation, easements, encroachments or encumbrances, either shown by any
survey or other inspection or granted by the Company prior to the date
hereof, of such Company Owned Real Property which do not materially adversely
interfere with the occupancy or use, as presently used or occupied, of such
Company Owned Real Property, (v) liens for taxes and/or assessments not yet
delinquent or which are being contested in good faith through appropriate
proceedings, (vi) all rights or easements, if any, of any municipality or
other public or private utility company, to maintain telephone wires, pipes,
conduits or other facilities which enter or cross such Company Owned Real
Property and (vii) any state of facts, including without limitation, rights,
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easements, liens, encroachments or encumbrances that any title report, title
commitment or title insurance policy would disclose (encumbrances referenced
in clauses (i) through (vii) collectively referred to as the "COMPANY
PERMITTED ENCUMBRANCES").
(b) The Company has delivered to ZGNA a true and complete list
of all of the leases and subleases to which the Company is a party as
described on SECTION 4.28 OF COMPANY'S DISCLOSURE SCHEDULE (collectively, the
"COMPANY LEASED REAL PROPERTIES," together with Company Owned Real
Properties, the "COMPANY REAL PROPERTIES"). The leases and subleases
described on SECTION 4.28 OF THE COMPANY DISCLOSURE SCHEDULE (i) have not
been further modified or amended and (ii) are in full force and effect. To
the knowledge of the Company, there is no default which remains uncured and
would materially adversely interfere with the occupancy or use, as presently
used or occupied, of any Company Leased Real Property. The Company is not
obligated to purchase any Company Leased Real Property and no Company Leased
Real Property is required to be accounted for under GAAP as a capitalized
lease.
4.29. CORPORATE MINUTE BOOKS.
The corporate records of the Company are correct and complete.
True and correct copies of all minutes of meetings or other actions by the
directors, stockholders or incorporators of the Company for the past five
years have been provided and since its inception have previously been
provided or made available to ZGNA.
4.30. GOOD CONDITION.
The buildings, facilities, machinery, equipment, furniture,
leasehold and other improvements, fixtures, vehicles, structures, any related
capitalized items and other tangible property owned by or leased to the
Company (i) are to the Company's best knowledge, in all material respects in
good operating condition and repair (normal wear and tear excepted) and, in
the case of buildings or structures located on the Company Real Properties,
free of any structural or engineering defects, and (ii) to the Company's best
knowledge, are suitable in all material respects for their current use. The
Company has not received notice of, and has no knowledge of, any pending,
threatened or contemplated condemnation proceeding or similar
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taking affecting the assets of the Company (including the Company Real
Properties).
4.31. MANUFACTURING CAPACITY.
The Company currently (i) has, except for drying capacity which
it may outsource, the manufacturing capacity to manufacture 500 tons of
nutraceutical extracts per year and (ii) has or can readily hire
manufacturing and support personnel reasonably necessary to support such
manufacturing capacity.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF ZGNA
ZGNA and ZBI represent and warrant to the Company as of the
date hereof that except (i) as expressly set forth in the corresponding
numbered section in that certain ZGNA Disclosure Schedule of even date
herewith by and between the Company and ZGNA, and, (ii) as to the Transaction
Documents, the representations and warranties of ZGNA and ZBI are only to the
extent that ZGNA, ZBI or a Contributed Subsidiary is a party to such
Transaction Documents:
5.1. CORPORATE ORGANIZATION.
(a) Each of ZGNA and ZBI is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware.
(b) Each of ZGNA and ZBI has all requisite power and
authority to execute and deliver the Transaction Documents and to perform its
obligations hereunder and thereunder.
(c) Each of ZGNA and ZBI has filed all necessary documents
to qualify to do business as a foreign corporation in, and each of ZGNA and
ZBI is in good standing under the laws of each jurisdiction in which the
conduct of its business or the nature of its property owned requires such
qualification, except where the failure to so qualify would not have a
material adverse effect on the business, properties, prospects, profits or
condition (financial or otherwise) of the Contributed Subsidiaries taken as a
whole (a "SUBSIDIARY MATERIAL ADVERSE EFFECT").
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5.2. CONTRIBUTED SUBSIDIARIES.
Each Contributed Subsidiary has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power and
authority to own its properties and assets and to conduct its business and is
duly registered, qualified and authorized to transact business and is in good
standing in each jurisdiction in which the conduct of its business or the
nature of its properties requires such registration, qualification or
authorization, except where the failure to be so registered, qualified or
authorized would not have a Subsidiary Material Adverse Effect. A list of
each jurisdiction in which a Contributed Subsidiary is qualified to do
business is set forth in SECTION 5.2 OF ZGNA DISCLOSURE SCHEDULE. All of the
issued and outstanding capital stock of each Contributed Subsidiary has been
duly authorized and validly issued, is fully paid and non-assessable, and is
owned of record and beneficially, directly or indirectly, by ZGNA or ZBI free
and clear of any mortgage, pledge, lien, charge, security interest, claim or
other legal or equitable encumbrance, limitation or restriction. There are
no outstanding options, warrants, agreements, conversion rights, preemptive
rights or other rights to subscribe for, purchase or otherwise acquire any
issued or unissued shares of capital stock of any Contributed Subsidiary. No
Contributed Subsidiary has a Subsidiary or interest in a general partnership
or any interest in excess of 5% of the equity interest of any other entity.
5.3. CAPITALIZATION.
(a) On the date hereof and as of the Closing, the authorized
capital stock of (i) Zuellig Botanical Extracts consists of 100 shares of
common stock, par value $0.01 per share, (ii) ZetaPharm consists of 1,000
shares of common stock, par value $1.00 per share, and 10 shares of
cumulative preferred stock, par value $200,000 per share, and (iii) Wilcox
consists of 1,000 shares of common stock, par value $1.00 per share. On the
date hereof, the issued and outstanding shares of capital stock of (i)
Zuellig Botanical Extracts consists of 100 shares of its common stock, (ii)
ZetaPharm consists of 960 shares of its common stock and 10 shares of its
cumulative preferred stock and (iii) Wilcox consists of 80 shares of its
common stock. There are no bonds, debentures, notes, other evidences of
indebtedness, or any person other than ZGNA as a stockholder of ZetaPharm and
Wilcox, or any person other than ZBI as a stockholder of Zuellig
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Botanical Extracts, having the right to vote on any matters on which the
Contributed Subsidiaries' stockholders may vote issued or outstanding. No
Contributed Subsidiary has any accrued but unpaid dividends.
(b) There are no shares of any equity or voting security of
the Contributed Subsidiaries issuable upon conversion, exchange or exercise
of any security of the Contributed Subsidiaries nor are there any rights,
options, calls or warrants outstanding or other agreements to acquire any
equity or voting security of any Contributed Subsidiaries nor is any
Contributed Subsidiary contractually obligated to purchase, redeem or
otherwise acquire any of its outstanding shares. No stockholder of any
Contributed Subsidiary is entitled to any preemptive or similar rights to
subscribe for shares of capital stock of the Contributed Subsidiaries.
5.4. CORPORATE PROCEEDINGS, ETC.
(a) Each of ZGNA and ZBI has authorized the execution,
delivery, and performance of the Transaction Documents and each of the
transactions and agreements contemplated hereby and thereby. No other
corporate action (including stockholder approval) is necessary to authorize
such execution, delivery and performance of the Transaction Documents, and
upon such execution and delivery by the parties thereto each of the
Transaction Documents shall constitute the valid and binding obligation of
ZGNA and ZBI, enforceable against ZGNA and ZBI in accordance with its terms,
except that such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and general principles of equity. Each of ZGNA
and ZBI has authorized the Mergers in accordance with this Agreement.
(b) The Contributed Subsidiaries have authorized the
execution, delivery, and performance of this Agreement and each of the
transactions contemplated hereby. No other corporate action (including
stockholder approval) is necessary to authorize such execution, delivery and
performance of this Agreement, and upon such execution and delivery by the
parties thereto this Agreement shall constitute the valid and binding
obligation of the Contributed Subsidiaries, enforceable against them in
accordance with its terms, except that such enforcement may be subject to
bankruptcy, insolvency, reorganization,
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moratorium or other similar laws now or hereafter in effect relating to
creditors' rights and general principles of equity. The Contributed
Subsidiaries have authorized the Mergers in accordance with this Agreement.
5.5. CONSENTS AND APPROVALS.
Except for submissions under the HSR, the execution and
delivery by ZGNA or ZBI of the Transaction Documents, the performance by
ZGNA, ZBI and the Contributed Subsidiaries of their obligations hereunder and
thereunder and the consummation by ZGNA, ZBI and the Contributed Subsidiaries
of the transactions contemplated hereby and thereby do not require ZGNA, ZBI
or any Contributed Subsidiaries to obtain any consent, approval, clearance or
action of, or make any filing, submission or registration with, or give any
notice to, any Person or judicial authority.
5.6. COMPLIANCE WITH LAW.
(a) Each of the Contributed Subsidiaries is in compliance in
all material respects with, and is not in violation or default in any
material respect under, all foreign, federal, state and local laws,
ordinances, government rules and regulations applicable to its business
operations, properties, or assets, including without limitation laws or
regulations relating to: the Food and Drug Administration; the environment;
the Foreign Corrupt Practices Act; occupational health and safety; employer
benefits; ERISA plans; wages; work place safety; equal employment opportunity
and race; and religious, sex and age discrimination. No material
expenditures are or will be required in order to cause the current operations
or properties of the Contributed Subsidiaries to comply with any applicable
laws, ordinances, governmental rules or regulations in effect at the time of
the Closing.
(b) Each of the Contributed Subsidiaries has all Approvals
necessary to the ownership of its property and to the operation of its
respective businesses, which if violated or not obtained could reasonably be
expected to have a Subsidiary Material Adverse Effect. None of the
Contributed Subsidiaries has finally been denied any application for any such
Approvals necessary for its property or for the operation of its business.
There is no action pending, or to the best knowledge of ZGNA or any of the
Contributed Subsidiaries, threatened or recommended by
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appropriate local, state, federal, or foreign agencies having jurisdiction
thereof, to revoke, withdraw, or suspend any such Approvals, or which would
have a material adverse effect on such Approvals.
(c) Notwithstanding anything to the contrary contained in
this Agreement and in addition to the other representations and warranties
contained herein: (i) the Contributed Subsidiaries and their respective
operations are in material compliance with all Environmental Laws and have
obtained and maintained in effect all Environmental Permits required under
all Environmental Laws and are in material compliance with all such
Environmental Permits; (ii) the Contributed Subsidiaries have not performed
or suffered any act which could give rise to, or have otherwise incurred,
liability to any Person (governmental or not) under CERCLA, or any other
Environmental Laws, nor have the Contributed Subsidiaries received notice of
any such liability or any claim therefor or submitted notice pursuant to
Section 103 of CERCLA to any governmental agency with respect to any of their
assets; (iii) no hazardous substance, hazardous waste, contaminant, pollutant
or toxic substance (as such terms are defined in any applicable Environmental
Law) has been released, placed, dumped or otherwise come to be located on,
at, beneath or near any of the assets or properties owned or leased by the
Contributed Subsidiaries or any surface waters or groundwaters thereon or
thereunder in violation of any Environmental Laws or that could subject the
Contributed Subsidiaries to liability under any Environmental Laws (provided,
however, that as to actions of Persons other than the Contributed
Subsidiaries or their predecessors, this item (iii) is only to the best
knowledge of the Contributed Subsidiaries); (iv) the Contributed Subsidiaries
do not own or operate, and have never owned or operated, aboveground or
underground storage tanks used for storing petroleum products and which are
subject to underground storage tank removal or clean-up requirements in
effect on the date hereof; (v) with respect to any or all of the real
properties leased by the Contributed Subsidiaries, to the best knowledge of
the Contributed Subsidiary (A) there are no asbestos-containing materials,
urea formaldehyde insulation, polychlorinated biphenyls or lead-based paints
present at any such properties, and (B) there are no wetlands as defined
under any Environmental Law located on any such properties; (vi) to the best
knowledge of the Contributed Subsidiaries none of the real properties leased
by the Contributed Subsidiaries (A) has been used or is now used for the
generation, transportation, storage,
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handling, treatment or disposal of any Hazardous Materials (other than de
minimis quantities of Hazardous Materials used in the normal course of the
Contributed Subsidiaries' business in material compliance with all applicable
Environmental Laws), or (B) is identified on a federal, state or local
listing of sites which require or might require environmental cleanup; (vii)
to the best of ZGNA's and Contributed Subsidiaries' knowledge, no condition
exists on any of the real properties leased by the Contributed Subsidiaries
that upon the failure to act, the passage of time or the giving of notice
would give rise to liability under any Environmental Law; (viii) to the best
of ZGNA's and Contributed Subsidiaries' knowledge, there are no ongoing
investigations or negotiations, pending or threatened administrative,
judicial or regulatory proceedings, or consent decrees or other agreements in
effect that relate to environmental conditions in, on, under, about or
related to the Contributed Subsidiaries, their respective operations or the
real properties leased by the Contributed Subsidiaries; and (ix) none of the
Contributed Subsidiaries or their respective operations is subject to
reporting requirements under the federal Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001 ET SEQ., or analogous state
statutes and related regulations.
5.7. LITIGATION.
There is no Proceeding (whether federal, state, local or foreign)
pending or, to the best of ZGNA's and the Contributed Subsidiaries'
knowledge, threatened against or affecting (i) any Contributed Subsidiary or
any of their respective properties, assets or businesses, except for
Proceedings that could not reasonably be expected to have a Subsidiary
Material Adverse Effect; or (ii) the transactions contemplated hereby. To
the best knowledge of ZGNA and the Contributed Subsidiaries, none of ZGNA or
Contributed Subsidiaries is aware of any fact which might result in or form
the basis for any such Proceeding. None of the Contributed Subsidiaries is
subject to any order, writ, judgment, injunction, decree, determination or
award of any court or of any governmental agency or instrumentality (whether
federal, state, local or foreign) which could reasonably be expected to have
a Subsidiary Material Adverse Effect.
5.8. CHANGE IN OWNERSHIP.
The consummation of the transactions contemplated by this
Agreement will not result in (i) to the knowledge of ZGNA
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and the Contributed Subsidiaries, any material adverse change in the business
operations of a Contributed Subsidiary, (ii) the acceleration of the vesting
of any outstanding option, warrant, call, commitment, agreement, conversion
right, preemptive right or other right to subscribe for, purchase or
otherwise acquire any of the shares of the capital stock of the Contributed
Subsidiaries, or debt securities of the Contributed Subsidiaries, (iii) any
obligation of the Contributed Subsidiaries to grant, extend or enter into any
Commitment, or (iv) any right in favor of any Person to terminate or cancel
any Subsidiary Key Agreement or Instrument.
5.9. ABSENCE OF DEFAULTS, CONFLICTS, ETC.
(a) The execution and delivery of the Transaction Documents
do not, and the fulfillment of the terms hereof and thereof by ZGNA, ZBI or
any Contributed Subsidiary will not, result in a breach of any of the terms,
conditions or provisions of, or constitute a default under, or result in the
modification of, or permit the acceleration of rights under or termination of
any agreement, contract, commitment, understanding, arrangement, restriction,
indenture, mortgage, deed of trust, credit agreement, note or other evidence
of indebtedness, of ZGNA, ZBI or any of the Contributed Subsidiaries (i)
involving $100,000 or more, (ii) the termination of which is reasonably
likely to have a Subsidiary Material Adverse Effect or (iii) which is
required to be filed as an exhibit to periodic reports if ZGNA, ZBI or a
Contributed Subsidiary were required to file such reports pursuant to the
Exchange Act ("SUBSIDIARY KEY AGREEMENTS AND INSTRUMENTS") or the
organizational documents of ZGNA, ZBI or any Contributed Subsidiaries, or any
arbitration award applicable to ZGNA, ZBI or a Contributed Subsidiary, or any
law, ordinance, code, standard, judgment, rule or regulation of any court or
local, federal, state or foreign regulatory board or body or administrative
agency having jurisdiction over ZGNA, ZBI or any of the Contributed
Subsidiaries or over their respective properties or businesses.
(b) None of the Contributed Subsidiaries is in default under
or in violation of (and no event has occurred and no condition exists which,
upon notice or the passage of time (or both), would constitute a default
under) (i) the organizational documents of any Contributed Subsidiaries, (ii)
any Subsidiary Key Agreement and Instrument of any Contributed Subsidiaries,
or (iii) any order, writ, injunction or decree of any court or any
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Federal, state, local or other domestic or foreign governmental department,
commission, board, bureau, agency or instrumentality, or arbitration award,
except, in the case of clause (ii), for defaults or violations which would
not have a Subsidiary Material Adverse Effect.
5.10. REPORTS AND FINANCIAL STATEMENTS.
The financial statements attached as SECTION 5.10 OF ZGNA
DISCLOSURE SCHEDULE (i) have been prepared in accordance with GAAP applied on
a consistent basis (except as may be indicated therein or in the notes
thereto and, in the case of unaudited interim financial statements, the
absence of all GAAP required footnotes and normal year-end audit
adjustments), (ii) present fairly, in all material respects, the financial
position of the Contributed Subsidiaries as at the date thereof and the
results of their operations and cash flow for the period then ended subject
to normal year-end audit adjustments and any other adjustments described
therein, and (iii) are in all material respects in accordance with the books
of account and records of the Contributed Subsidiaries except as indicated
therein. The balance sheets dated October 31, 1998 for each Contributed
Subsidiary are referred to as the "CS BALANCE SHEETS."
5.11. ABSENCE OF CERTAIN DEVELOPMENTS.
Since March 31, 1998, there has been no (i) change or event
which could reasonably be expected to have a Subsidiary Material Adverse
Effect (other than general trends or new laws, rules, or regulations
applicable to similarly situated companies), (ii) declaration, setting aside
or payment of any dividend or other distribution with respect to the capital
stock of the Contributed Subsidiaries, (iii) issuance of capital stock or
options, warrants or rights to acquire capital stock (other than the rights
granted to the Company hereunder), (iv) material loss, destruction or damage
to any property of the Contributed Subsidiaries, whether or not insured, (v)
except as a result of the new bank credit facility referred to in Section
8.7, acceleration or prepayment of any indebtedness for borrowed money or
capital leases or the refunding of any such indebtedness, (vi) labor trouble
involving the Contributed Subsidiaries or any material change in their
personnel or the general terms and conditions of employment of key employees,
(vii) waiver of any valuable right in favor of the Contributed Subsidiaries,
(viii) loan or extension of credit to any officer or employee of ZGNA or
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any Contributed Subsidiary other than advances for travel-related expenses
and similar advances to officers and employees of ZGNA or Contributed
Subsidiaries in the ordinary course of business, (ix) acquisition, material
writedown or write-off for accounting purposes, or disposition of any
material assets (or any contract or arrangement therefor), (x) redemption or
repurchase of any capital stock of any Contributed Subsidiary, or any other
material transaction by the Contributed Subsidiaries otherwise than for fair
value in the ordinary course of business, or (xi) termination of an agreement
or arrangement which would be a Subsidiary Key Agreement or Instrument if in
effect on the date hereof.
5.12. MATERIAL CONTRACTS.
SECTION 5.12 OF ZGNA DISCLOSURE SCHEDULE sets forth a true and
complete list of each Subsidiary Key Agreement and Instrument (oral or
written) to which a Contributed Subsidiary is a party or its assets bound
other than Subsidiary Key Agreements and Instruments under which each
Contributed Subsidiary has no further liabilities (whether accrued, absolute,
contingent, liquidated or otherwise, whether due or to become due, whether or
not known to ZGNA or a Contributed Subsidiary) or obligations as of the date
hereof. Each Subsidiary Key Agreement and Instrument that is currently in
effect, is valid, binding and enforceable against such Contributed Subsidiary
and, to ZGNA's and Contributed Subsidiaries' best knowledge, the other
parties thereto, in accordance with its terms, and in full force and effect
on the date hereof. A true and complete copy of each Subsidiary Key
Agreement has been delivered or made available to the Company. There is no
breach, violation or default by any Contributed Subsidiary and no event
(including, without limitation, the consummation of the transactions
contemplated herein) which, with notice or lapse of time or both, would (i)
constitute a breach, violation or default by any Contributed Subsidiary under
any Subsidiary Key Agreement or Instrument, or (ii) give rise to any lien or
right of termination, modification, cancellation, prepayment, suspension,
limitation, revocation or acceleration against any Contributed Subsidiary
under any Subsidiary Key Agreement or Instrument except for breaches,
violations or defaults that would not have a Subsidiary Material Adverse
Effect. To the best of ZGNA's and the Contributed Subsidiaries' knowledge,
no other party to any Subsidiary Key Agreement or Instrument is in material
breach of any such Subsidiary Key Agreement or Instrument, no waiver or
indulgence
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has been granted by any of the parties thereto and no party to any such
Subsidiary Key Agreement and Instrument has repudiated any provision thereof.
No Contributed Subsidiary is a party to, nor are any of their assets subject
to, an guaranty, "make well" agreement or other arrangement to be responsible
for the obligations of another, including any obligation to maintain the
financial condition of another person.
5.13. ABSENCE OF UNDISCLOSED LIABILITIES.
None of the Contributed Subsidiaries has any debt, obligation
or liability (whether accrued, absolute, contingent, liquidated or otherwise,
whether due or to become due, whether or not known to ZGNA or a Contributed
Subsidiary) arising out of any transaction entered into at or prior to
Closing, or any act or omission at or prior to Closing, or any state of facts
existing at or prior to Closing, including Taxes with respect to or based
upon transactions or events occurring at or prior to Closing, and including,
without limitation, unfunded past service liabilities under any pension,
profit sharing or similar plan, except as disclosed in the CS Balance Sheets,
current liabilities incurred since the date of the CS Balance Sheet, current
obligations (other than as a result of breach or default) under agreements
set forth on SECTION 5.12 OF ZGNA DISCLOSURE SCHEDULE, and obligations under
agreements which are not required to be set forth on such schedule entered
into in the usual and ordinary course of business, none of which
(individually or in the aggregate) could have a Subsidiary Material Adverse
Effect.
5.14. EMPLOYEES.
(a) The Contributed Subsidiaries are in full compliance with
all laws regarding employment, wages, hours, equal opportunity, collective
bargaining and payment of social security and other taxes except to the
extent that noncompliance would not have a Subsidiary Material Adverse
Effect. Since January 1, 1998, no complaint of any unfair labor practice or
discriminatory employment practice against the Contributed Subsidiaries has
been filed or, to the best of ZGNA's and the Contributed Subsidiaries'
knowledge, threatened to be filed with or by the National Labor Relations
Board, the Equal Employment Opportunity Commission or any other
administrative agency, local, foreign, federal or state, that regulates labor
or employment practices, nor is any grievance filed or, to the best of ZGNA's
and the Contributed Subsidiaries' knowledge, threatened to be
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filed, against any Contributed Subsidiary by any employee pursuant to any
collective bargaining or other employment agreement to which any Contributed
Subsidiary is a party or is bound, except as would not reasonably be expected
to have a Subsidiary Material Adverse Effect. The Contributed Subsidiaries
are in compliance with all applicable foreign, federal, state and local laws
and regulations regarding occupational safety and health standards except to
the extent that noncompliance will not have a Subsidiary Material Adverse
Effect, and, since January 1, 1997, have received no complaints from any
foreign, federal, state or local agency or regulatory body alleging
violations of any such laws and regulations. No Contributed Subsidiary is
bound or subject to any arrangement with any labor union, and, to ZGNA's and
Contributed Subsidiaries' best knowledge no union organizing activities are
ongoing or threatened.
(b) All sums due for employee compensation and benefits and
all vacation time owing to any employees of the Contributed Subsidiaries have
been duly and adequately accrued on the accounting records of the Contributed
Subsidiaries.
(c) ZGNA and the Contributed Subsidiaries are not aware that
any of the Contributed Subsidiaries' executive officers or persons whose
principal occupation is the creation of intellectual property is obligated
under any contract (including licenses, covenants or commitments of any
nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of such
executive officer's or person's best efforts to promote the interests of the
Contributed Subsidiaries or that would conflict with the Contributed
Subsidiaries' business as proposed to be conducted.
(d) ZGNA and the Contributed Subsidiaries are not aware that
any officer, key employee, key purchasing personnel anticipated to provide
sourcing of biomass under the Sourcing Agency Agreement or key sales
personnel anticipated to engage in sales under the Agreement Regarding
Employees or that any group of such employees, intends to terminate their
employment with any Contributed Subsidiary, nor does any Contributed
Subsidiary have a present intention to terminate the employment of any of the
foregoing.
(e) Set forth on SECTION 5.14 OF ZGNA DISCLOSURE SCHEDULE is
(i) a list of employees of a Contributed Subsidiary
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with an annual base compensation over $50,000, (ii) a list of all officers of
a Contributed Subsidiary and (iii) a list of all employment agreements to
which a Contributed Subsidiary is a party (copies of which have been
delivered to the Company).
5.15. TAX MATTERS.
There are no Taxes due and payable by the Contributed
Subsidiaries which have not been paid except those being disputed in good
faith by appropriate proceeding with appropriate reserves being made
therefore on the accounting books of the Contributed Subsidiaries. The
provisions for Taxes on the audited and unaudited balance sheets delivered by
ZGNA and the Contributed Subsidiaries to the Company will be sufficient for
the payment in all material respects of all accrued and unpaid Taxes of the
Contributed Subsidiaries, whether or not assessed or disputed in good faith
as of the respective dates of such balance sheets. The Contributed
Subsidiaries have duly filed or received extensions to filing all foreign,
federal, state and local Tax returns required to have been filed by them, and
there are in effect no waivers of applicable statutes of limitations with
respect to taxes for any year except where the failure to file such returns
or the existence of waivers of applicable statutes of limitations is not
reasonably likely to have a Subsidiary Material Adverse Effect. All such
returns (including those delivered by ZGNA to the Company) are true, complete
and correct in all material respects and have been prepared from, and are in
accordance with, the books and records of each. No Contributed Subsidiary is
a party to a Tax sharing agreement or liable for the Taxes of any other
person. No Contributed Subsidiary has filed a consent to the application of
Section 341(f) of the Code. The Contributed Subsidiaries have made all
estimated income tax deposits and all other required Tax payments or deposits
and have complied for all prior periods with the Tax withholding provisions
of all applicable foreign, federal, state and local laws applicable to them.
None of the Contributed Subsidiaries has been subject to a foreign, federal
or state tax audit since April 30, 1996.
5.16. EMPLOYEE BENEFIT PLANS.
Except as set forth on SECTION 5.16 OF ZGNA DISCLOSURE
SCHEDULE, the Contributed Subsidiaries have no employee benefit plans (as
defined in Section 3(3) of ERISA) covering former and current employees of
the Contributed Subsidiaries, or under
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which a Contributed Subsidiary has any obligation or liability. SECTION 5.16
OF ZGNA DISCLOSURE SCHEDULE lists all material plans, contracts, bonuses,
commissions, profit-sharing, savings, stock options, insurance, deferred
compensation, or other similar fringe or employee benefits covering former or
current employees of the Contributed Subsidiaries or under which the
Contributed Subsidiaries have any obligation or liability. True and complete
copies of all Benefit Arrangements have been provided or made available to
the Company prior to the date hereof. The Benefit Arrangements are and have
been administered in substantial compliance with their terms and with the
requirements of applicable law. No "prohibited transaction" within the
meaning of Section 4475 of the Code or Section 406 of ERISA, has occurred
with respect to any Benefit Arrangements. All payments to current or former
employees of the Contributed Subsidiaries pursuant to the Benefit
Arrangements are and have been fully deductible under the Code.
5.17. PATENTS, LICENSES, ETC.
The Contributed Subsidiaries own, free and clear of all
encumbrances, restrictions, liens, security interests and charges, and has
good and marketable title to, or holds adequate licenses or otherwise
possesses all such rights as are necessary to use all Intellectual Property.
To the knowledge of ZGNA and ZBI, one or more of the Contributed Subsidiaries
has the right to use the names "Zuellig Botanicals" (but not "Zuellig
Botanicals Powders"), and "ZetaPharm" as a trade name or mark for the
purposes for which they have been used in the United States. Set forth on
Section 5.17 of ZGNA Disclosure Schedule is a list of the significant marks
and names used by each Contributed Subsidiary.
None of the Contributed Subsidiaries has received notice nor
has knowledge of any conflict or alleged conflict with the rights of others
pertaining to the Intellectual Property described in this Section 5.17 where
the effect of such conflict could have a Subsidiary Material Adverse Effect.
To ZGNA's and the Contributed Subsidiaries' best knowledge, the Contributed
Subsidiaries' business, as presently conducted, and as proposed to be
conducted, does not infringe upon or violate any patent rights, copyrights,
marks, names, trade names or trade secrets of others. To ZGNA's and the
Contributed Subsidiaries' best knowledge, the Contributed Subsidiaries have
the right to use all trade secrets, processes, customer lists
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and other rights incident to their respective businesses as now conducted.
To ZGNA's and the Contributed Subsidiaries' best knowledge, no
employee of the Contributed Subsidiaries has violated any employment
agreement, non-compete agreement, or proprietary information agreement which
he or she had with a previous employer or other person, or any intellectual
property policy of such employer, or is a party to or threatened by any
litigation concerning any patents, marks, trade secrets, service names, trade
names, copyrights, licenses and the like.
5.18. TITLE TO TANGIBLE ASSETS.
The Contributed Subsidiaries have good title to their
properties and assets and good title to all their leasehold estates, in each
case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than or resulting from Taxes which have not yet become delinquent and
minor liens and encumbrances which do not in any case materially detract from
the value of the property subject thereto or materially impair the operations
of the Contributed Subsidiaries and which have not arisen otherwise than in
the ordinary course of business.
5.19. INSURANCE.
The Contributed Subsidiaries and their respective properties
are insured in such amounts, against such losses and with such insurers as
are prudent when considered in light of the nature of the properties and
businesses of the Contributed Subsidiaries and customary in light of such
Contributed Subsidiaries' exposure. No notice of any termination or
threatened termination, or denial of a material claim made since January 1,
1997, of, or under any of such policies has been received and such policies
are in full force and effect. A summary of all such policies, including
whether they are on a "claims made" basis, is attached as SECTION 5.19 OF
ZGNA DISCLOSURE SCHEDULE. None of such policies will be terminated or
reduced in coverage as a result of the transactions described herein. All
such policies are in full force and effect and all premiums with respect
thereto have been paid. No Contributed Subsidiary has failed to give any
notice or present any claim under any such insurance policy in due and timely
fashion or as required by any of such insurance policies or has not
otherwise, through any act, omission or non-disclosure, jeopardized or
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impaired full recovery of any claim under such policies, and there are no
claims by any Contributed Subsidiary under any of such policies to which any
insurance company is denying liability or defending under a reservation of
rights or similar clause.
5.20. TRANSACTIONS WITH RELATED PARTIES.
None of the Contributed Subsidiaries is a party to any
agreement with any of their respective directors, officers or, to their best
knowledge stockholders holding more than 1/2% of its stock, or, to their best
knowledge, any Affiliate or family member of any of the foregoing, including
but not limited to, under which it: (i) leases any real or personal property
(either to or from such Person), (ii) licenses technology (either to or from
such Person), (iii) is obligated to purchase any tangible or intangible asset
from or sell such asset to such Person, (iv) purchases products or services
from such Person or (v) has borrowed money from or lent money to such Person.
None of the Contributed Subsidiaries employs as an employee or engages as a
consultant any family member of any of their respective directors or
officers. There exist no agreements among stockholders of the Contributed
Subsidiaries to act in concert with respect to their voting or holding of
Contributed Subsidiary securities.
5.21. REGISTRATION RIGHTS.
The Contributed Subsidiaries are not under any obligation to
register any of their securities under the Securities Act.
5.22. PRIVATE OFFERING.
None of ZGNA, ZBI, the Contributed Subsidiaries or anyone
acting on their behalf has sold or has offered any of the Subsidiary Shares
for sale to, or solicited offers to buy from, or otherwise approached or
negotiated with respect thereto with, any prospective purchaser of the
Subsidiary Shares, other than the Company. None of ZGNA, ZBI, the Contributed
Subsidiaries or anyone acting on their behalf shall offer the Subsidiary
Shares for issue or sale to, or solicit any offer to acquire any of the same
from, anyone so as to bring the issuance and sale of the Subsidiary Shares,
or any part thereof, within the provisions of Section 5 of the Securities
Act. Based in part upon the representations of the Company set forth in
Section 4, the offer and sale of the Subsidiary Shares are and will be exempt
from the registration and prospectus delivery requirements of the
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Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or
qualification requirements of all applicable state securities laws.
5.23. INVESTMENT.
(a) Each of ZGNA and ZBI is acquiring the Shares for its own
account for investment and not with a view towards the resale, transfer,
pledge or distribution thereof, nor with any present intention of
distributing the Shares, other than a pledge in favor of ZGNA's lender
pursuant to the credit agreement referred to in Section 8.7 and the delivery
of a portion of the Shares to the Escrow Agent under the Escrow Agreement.
(b) Each of ZGNA and ZBI has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of its investment in the Company as contemplated by this Agreement,
and is able to bear the economic risk of such investment for an indefinite
period of time. ZGNA and ZBI have been furnished access to such information
and documents as they have requested and have been afforded an opportunity to
ask questions of and receive answers from representatives of the Company
concerning the terms and conditions of this Agreement and the purchase of the
Shares contemplated hereby.
(c) Each of ZGNA and ZBI is an "accredited investor" as
defined under Regulation D of the Securities Act.
(d) ZGNA and ZBI are located in California and the offer and
sale of the Shares occurred in the States of Colorado and California.
5.24. BROKERAGE.
Except for ZGNA's agreement with The Beacon Group Capital
Services, LLC whose fees and expenses shall be paid by ZGNA, there are no
claims for brokerage commissions or finder's fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement made by or on behalf of ZGNA, ZBI or the Contributed
Subsidiaries, and ZGNA agrees to indemnify and hold the Company harmless
against any costs or damages incurred as a result of any such claim.
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5.25. MATERIAL FACTS.
This Agreement, ZGNA Disclosure Schedules, and the other
agreements, documents, certificates or written statements furnished or to be
furnished to the Company through the Closing Date by or on behalf of ZGNA, ZBI
and the Contributed Subsidiaries in connection with the transactions
contemplated hereby taken as a whole, and the information provided by ZGNA and
ZBI for inclusion in the Company's Proxy Statement, do not contain any untrue
statement by ZGNA, ZBI or the Contributed Subsidiaries of a material fact or
omit to state a material fact necessary to make the statements contained therein
or herein, in light of the circumstances in which they were made, not
misleading. There is no fact which is known to ZGNA, ZBI or the Contributed
Subsidiaries and which has not been disclosed herein or otherwise by ZGNA, ZBI
or the Contributed Subsidiaries to the Company which is reasonably likely to
have a Subsidiary Material Adverse Effect.
5.26. DEBT.
As of the Closing Date, the "Debt" (as defined below) of the
Contributed Subsidiaries will not exceed $22,000,000 in the aggregate. For
purposes of this Section, "Debt" means debt for borrowed money (long term, for
working capital purposes or otherwise), obligations under letters of credit and
capital lease obligations.
5.27. FINANCIAL RECORDS.
The financial records of the Contributed Subsidiaries for the
period from April 1, 1995, up to and through the Closing Date are readily
auditable (including to allocate inter-company accounts and to reflect the
recent formation of Zuellig Botanicals Extracts) to permit compliance with SEC
reporting requirements of the Company. Such financial records are located at
Zuellig Group, N.A., Inc., 2550 El Presidio Street, Long Beach, CA 90810;
Wilcox, 755 George Wilson Road, Boone, N.C. 28697; and ZetaPharm, 70 West 36th
Street, New York, NY 10018 and Datalok Co., 15540 Del Amo Avenue, Tustin, CA
92680.
5.28. Subsidiary Real Property
(a) SECTION 5.28 OF ZGNA DISCLOSURE SCHEDULE lists all real
property owned or leased by each Contributed Subsidiary. Each Contributed
Subsidiary has title to its owned real
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properties and any improvements thereon (collectively, the "SUBSIDIARY OWNED
REAL PROPERTIES") in each case, free and clear of all imperfections of title
and all encumbrances, except for (i) those consisting of zoning or planning
restrictions, easements, permits and other restrictions or limitations on the
use of such property or irregularities in title thereto which, individually
and in the aggregate, do not materially impair the use of such property, (ii)
warehousemen's, mechanics', carriers', landlords', repairmen's or other
similar encumbrances arising in the ordinary course of business and securing
obligations not yet due and payable, (iii) other encumbrances which arise in
the ordinary course of business and which individually and in the aggregate
do not materially impair its use of such property or its ability to obtain
financing by using such assets as collateral, (iv) any state of facts,
including, without limitation, easements, encroachments or encumbrances,
either shown by any survey or other inspection or granted by ZGNA prior to
the date hereof, of such Subsidiary Owned Real Property which do not
materially adversely interfere with the occupancy or use, as presently used
or occupied, of such Subsidiary Owned Real Property, (v) liens for taxes
and/or assessments not yet delinquent or which are being contested in good
faith through appropriate proceedings, (vi) all rights or easements, if any,
of any municipality or other public or private utility company, to maintain
telephone wires, pipes, conduits or other facilities which enter or cross
such Subsidiary Owned Real Property and (vii) any state of facts, including
without limitation, rights, easements, liens, encroachments or encumbrances
that any title report, title commitment or title insurance policy would
disclose (encumbrances referenced in clauses (i)through (vii) collectively
referred to as the "SUBSIDIARY PERMITTED ENCUMBRANCES").
(b) ZGNA has delivered to the Company a true and complete list of
all of the leases and subleases to which the Contributed Subsidiaries are a
party as described on SECTION 5.28 OF ZGNA DISCLOSURE SCHEDULE (collectively,
the "SUBSIDIARY LEASED REAL PROPERTIES," together with Subsidiary Owned Real
Properties, the "SUBSIDIARY REAL PROPERTIES"). The leases and subleases
described on SECTION 5.28 OF ZGNA DISCLOSURE SCHEDULE (i) have not been further
modified or amended and (ii) are in full force and effect. To the knowledge of
ZGNA and the Contributed Subsidiaries, there is no default which remains uncured
and would materially adversely interfere with the occupancy or use, as presently
used or occupied, of any Subsidiary Leased Real Property. No Contributed
Subsidiary is obligated to purchase any
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Subsidiary Leased Real Property and no Subsidiary Leased Real Property is
required to be accounted for under GAAP as a capitalized lease.
5.29. Company Security Holdings
Neither ZGNA nor any Contributed Subsidiary holds or has held at
any time during the 270 days preceding the Closing Date any debt or equity
security of the Company (or derivative securities thereof), except for debt or
equity securities (or derivative securities thereof) purchased pursuant to the
Stock Option Agreement.
5.30. BANK ACCOUNTS; POWERS OF ATTORNEY.
SECTION 5.30 OF ZGNA DISCLOSURE SCHEDULE lists all bank, money
market, brokerage, savings and similar accounts and safe deposit boxes of all
Contributed Subsidiaries and all powers of attorney of any Contributed
Subsidiaries.
5.31. CORPORATE MINUTE BOOKS.
The corporate records of the Contributed Subsidiaries are correct
and complete. True and correct copies of all minutes of meetings or other
actions by the directors, stockholders or incorporators of the Contributed
Subsidiaries for the past five years have been provided and since their
inception have previously been provided or made available to the Company.
5.32. SUFFICIENT ASSETS.
The assets and properties owned by, or leased to, the Contributed
Subsidiaries, and the Subsidiary Key Agreements and Instruments, are sufficient
for the conduct of the business and operation of the Contributed Subsidiaries as
presented conducted and as presently proposed to be conducted.
5.33. GOOD CONDITION.
The buildings, facilities, machinery, equipment, furniture,
leasehold and other improvements, fixtures, vehicles, structures, any related
capitalized items and other tangible property owned by or leased to the
Contributed Subsidiaries (i) are to ZGNA's and the Contributed Subsidiaries'
best knowledge, in all material respects in good operating condition and repair
(normal wear and tear excepted) and, in the case of buildings or
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structures located on the Subsidiary Real Properties, free of any structural
or engineering defects, and (ii) to ZGNA's and the Contributed Subsidiaries'
best knowledge, are suitable in all material respects for their current use.
ZGNA and the Contributed Subsidiaries have not received notice of, and have
no knowledge of, any pending, threatened or contemplated condemnation
proceeding or similar taking affecting the assets of the Contributed
Subsidiaries (including the Subsidiary Real Properties).
5.34. BANK COMMITMENT.
As of the date of this Agreement, ZGNA has a bank commitment
letter from a lender, a copy of which has been delivered to the Company, to
provide the new credit facility to the Company contemplated hereby, and to
ZGNA's knowledge, such commitment has not been modified or terminated.
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES
6.1. RESALE OF SECURITIES.
(a) ZGNA and ZBI will not sell or otherwise transfer the Shares
except pursuant to an effective registration under the Securities Act and any
state securities or blue sky laws or in a transaction which, in the opinion of
counsel reasonably satisfactory to the Company, qualifies as an exempt
transaction under such laws.
(b) The Shares will bear substantially the following legend
reflecting the foregoing restrictions on the transfer of such securities:
"The securities evidenced hereby have not been registered under
the Securities Act of 1933, as amended (the "Act"), or any state
securities law, and may not be sold, transferred or otherwise
disposed of except pursuant to an effective registration under the
Act or in a transaction which, in the opinion of counsel
reasonably acceptable to the Company, is exempt from such
registration."
"The securities evidenced hereby are subject to the terms of that
certain Governance Agreement, dated as of _____________, 1999, by
and among the Company, ZGNA and
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ZBI, as amended from time to time. A copy of such Governance
Agreement has been filed with the Secretary of the Company and
is available upon request."
6.2. PROXY STATEMENT.
(a) The Company shall promptly prepare and file with the
Commission preliminary and final versions of the Proxy Statement relating to
this Agreement and the transactions contemplated hereby, and to increase size of
or adopt a new stock option plan for up to 1,000,000 shares of Common Stock (the
"PROXY STATEMENT"). The Company shall use its best efforts to have the Proxy
Statement cleared by the Commission and mailed to its stockholders at the
earliest practicable date. The Company shall cooperate and consult with ZGNA
with respect to the Proxy Statement and any related Commission comments.
(b) The Company will furnish ZGNA with such information
concerning the Company and its Subsidiaries as is necessary in order to cause
the Proxy Statement, insofar as it relates to the Company and its Subsidiaries,
to comply with applicable law. None of the information relating to the Company
and its Subsidiaries supplied by the Company for inclusion in the Proxy
Statement will be false or misleading with respect to any material fact or will
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Company agrees promptly to advise ZGNA if,
at any time prior to the meeting of the stockholders of the Company referenced
herein, any information provided by it in the Proxy Statement is or becomes
incorrect or incomplete in any material respect and to provide ZGNA with the
information needed to correct such inaccuracy or omission. The Company will
furnish ZGNA and the Company's shareholders with such supplemental information
as may be necessary in order to cause the Proxy Statement, insofar as it relates
to the Company and its Subsidiaries, to comply with applicable law after the
mailing thereof to the stockholders of the Company.
(c) ZGNA will furnish the Company with such information
concerning ZGNA, ZBI and the Contributed Subsidiaries as is necessary in order
to cause the Proxy Statement, insofar as it relates to ZGNA, ZBI and the
Contributed Subsidiaries, to comply with applicable law. None of the
information relating to ZGNA, ZBI and the Contributed Subsidiaries supplied by
ZGNA for
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inclusion in the Proxy Statement will be false or misleading with respect to
any material fact or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. ZGNA agrees
promptly to advise the Company if, at any time prior to the meeting of
stockholders of the Company referenced herein, any information provided by it
in the Proxy Statement is or becomes incorrect or incomplete in any material
respect and to provide the Company with the information needed to correct
such inaccuracy or omission. ZGNA will furnish the Company with such
supplemental information as may be necessary in order to cause the Proxy
Statement, insofar as it relates to ZGNA, ZBI and the Contributed
Subsidiaries, to comply with applicable law after the mailing thereof to the
stockholders of the Company.
6.3. ACCESS TO INFORMATION.
The Company shall (and shall cause each of its Subsidiaries to),
and ZGNA shall and ZGNA shall cause each of ZBI and the Contributed Subsidiaries
to afford to the officers, employees, accountants, counsel and other
representatives of ZGNA or the Company, as the case may be, access, during
normal business hours during the period prior to the Closing Date, to all its
properties, books, contracts, commitments and records and, during such period,
the Company shall (and shall cause each of its Subsidiaries to) and ZGNA shall
cause the Contributed Subsidiaries to furnish promptly to ZGNA and the Company,
as the case may be, (a) a copy of each report, schedule, registration statement
and other document filed or received by it during such period pursuant to the
requirements of Federal securities laws and (b) all other information concerning
its business, properties and personnel as ZGNA or the Company, as the case may
be, may reasonably request.
6.4. STOCKHOLDERS MEETING.
The Company shall call a meeting of its stockholders to be held as
promptly as practicable for the purpose of voting upon this Agreement and the
election of directors as contemplated by Section 7.11 hereof. The Company will,
through its Board of Directors, recommend to its stockholders approval of this
Agreement and the transactions contemplated hereby and shall use its best
efforts to hold such meeting as soon as reasonably practicable after the date
hereof; PROVIDED, HOWEVER, that the
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Board of Directors shall not be so obligated if it receives a written opinion
from outside counsel to the effect that it would be inconsistent with its
fiduciary duties to recommend to its stockholders approval of this Agreement
and the transactions contemplated hereby.
6.5. EXECUTION AND DELIVERY OF AGREEMENTS.
ZGNA or its Subsidiary a party thereto shall execute and deliver
to the Company, and the Company shall execute and deliver to ZGNA, (i) the
Governance Agreement, (ii) the Sourcing Agency Agreement, (iii) the Escrow
Agreement, (iv) the Powders Option Agreement, (v) the Agreement Regarding
Employees and (vi) their respective tax affidavits in the form attached hereto
as Exhibit K, at or prior to the Closing.
6.6. ORDINARY COURSE.
(a) Except as expressly contemplated by this Agreement or as set
forth on Schedule 6.6(a) and except for the possible sale of the Company's
paclitaxel business and assets, during the period from the date of this
Agreement to the Closing Date, (i) the Company shall conduct, and it shall cause
its Subsidiaries to conduct, its or their businesses in the ordinary course and
consistent with past practice, and the Company shall, and it shall cause its
Subsidiaries to, use its or their reasonable commercial efforts to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with all persons with
whom it does business and (ii) without limiting the generality of the foregoing,
neither the Company nor any of its Subsidiaries will:
(A) amend or propose to amend its Organizational Documents in
any material respect;
(B) authorize for issuance, issue, grant, sell, pledge, dispose
of or propose to issue, grant, sell, pledge or dispose of any shares of,
or any options, warrants, commitments, subscriptions or rights of any
kind to acquire or sell any shares of, the capital stock or other
securities of the Company or any of its Subsidiaries including, but not
limited to, any securities convertible into or exchangeable for shares of
stock of any class of the Company or any of its Subsidiaries, except for
(a) the issuance of shares pursuant to the exercise of either incentive
or non-
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qualified stock options, including management stock options outstanding
the date of this Agreement in accordance with their present terms and
(b) grants of options pursuant to the 1999 Incentive Plan or the
Company's stock option plan for directors in effect as of the date
hereof for attendance at meetings of the Board, on terms and in amounts
consistent with past practice;
(C) split, combine or reclassify any shares of its capital
stock or declare, pay or set aside any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock, other than dividends or distributions to
the Company or a Subsidiary of the Company, or directly or indirectly
redeem, purchase or otherwise acquire or offer to acquire any shares of
its capital stock or other securities;
(D) other than in the ordinary course of business consistent
with past practice, (a) create, incur or assume any debt, except
refinancings of existing obligations on terms that are no less favorable
to the Company or its Subsidiaries than the existing terms; (b) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, indirectly, contingently or otherwise) for the obligations of
any Person; (c) make any capital expenditures or make any loans, advances
or capital contributions to, or investments in, any other Person (other
than to a Company Subsidiary and customary travel, relocation or business
advances to employees); (d) acquire the stock or assets of, or merge or
consolidate with, any other Person; (e) voluntarily incur any material
liability or obligation (absolute, accrued, contingent or otherwise); or
(f) sell, transfer, mortgage, pledge or otherwise dispose of, or
encumber, or agree to sell, transfer, mortgage, pledge or otherwise
dispose of or encumber, any assets or properties, real, personal or
mixed, material to the Company and its Subsidiaries taken as a whole
other than to secure debt permitted under (a) of this clause (D); and
(E) maintain in full force and effect the insurance described
in Section 4.19 or comparable insurance.
(b) Except as expressly contemplated by this Agreement, during the
period from the date of this Agreement to the Closing Date, (i) ZGNA shall cause
the Contributed Subsidiaries to
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conduct their businesses in the ordinary course and consistent with past
practice, and ZGNA shall cause the Contributed Subsidiaries to use their
reasonable commercial efforts to preserve intact their business organization,
to keep available the services of their officers and employees and to
maintain satisfactory relationships with all persons with whom they do
business, (ii) ZGNA will use its reasonable commercial efforts to maintain in
place the sales force of ZBI whom will be subject to the Agreement Regarding
Employees and (iii) without limiting the generality of the foregoing, none of
the Contributed Subsidiaries will:
(A) amend or propose to amend its Organizational Documents in
any material respect;
(B) authorize for issuance, issue, grant, sell, pledge, dispose
of or propose to issue, grant, sell, pledge or dispose of any shares of,
or any options, warrants, commitments, subscriptions or rights of any
kind to acquire or sell any shares of, the capital stock or other
securities of the Contributed Subsidiaries including, but not limited to,
any securities convertible into or exchangeable for shares of stock of
any class of the Contributed Subsidiaries;
(C) split, combine or reclassify any shares of its capital
stock or declare, pay or set aside any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock, other than dividends or distributions to
the other Contributed Subsidiaries, or directly or indirectly redeem,
purchase or otherwise acquire or offer to acquire any shares of its
capital stock or other securities;
(D) other than in the ordinary course of business consistent
with past practice, (a) create, incur or assume any debt, except
refinancings of existing obligations on terms that are no less favorable
to the Contributed Subsidiaries than the existing terms; (b) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, indirectly, contingently or otherwise) for the obligations of
any Person; (c) make any capital expenditures or make any loans, advances
or capital contributions to, or investments in, any other Person (other
than customary travel, relocation or business advances to employees);
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(d) acquire the stock or assets of, or merge or consolidate with, any
other Person; (e) voluntarily incur any material liability or obligation
(absolute, accrued, contingent or otherwise); or (f) sell, transfer,
mortgage, pledge or otherwise dispose of, or encumber, or agree to sell,
transfer, mortgage, pledge or otherwise dispose of or encumber, any
assets or properties, real, personal or mixed, material to the
Contributed Subsidiaries taken as a whole other than to secure debt
permitted under (a) of this clause (D); and
(E) maintain in full force and effect the insurance described
in Section 5.19 or comparable insurance.
(c) Absent the prior written consent of ZGNA, during the two year
period following consummation of the Mergers, the Company agrees (i) that it
will not (x) liquidate Zuellig Botanical Extracts or (y) other than in the
ordinary course of business, transfer more than an insubstantial portion of the
assets of Zuellig Botanical Extracts to the Company or an Affiliate of the
Company; (ii) the Company shall take no action, and shall cause the Contributed
Subsidiaries to take no action, if such action would jeopardize the
characterization of the Mergers as reorganizations within the meaning of Section
368(a) of the Code.
6.7. FURTHER ASSURANCES.
Upon the request of a party hereto at any time after the Closing
Date, the other party will forthwith execute and deliver such further
instruments of assignment, transfer, conveyance, endorsement, direction or
authorization and other documents as the requesting party or its counsel may
request in order to perfect title of ZGNA and the Company and their successors
and assigns to the Shares and the Subsidiary Shares, respectively, or otherwise
to effectuate the purposes of this Agreement.
6.8. CONFIDENTIALITY.
Except as may be required by law, (i) prior to the Closing, the
Company and ZGNA shall not, directly or indirectly, disclose to any person or
entity or use any information not in the public domain or generally known in the
industry, in any form, whether acquired prior to or after the Closing Date,
received from the Company or ZGNA, as the case may be, relating
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to the business and operations of the Company and its Subsidiaries or ZGNA
and its Subsidiaries, as the case may be, and (ii) after the Closing, ZGNA
and ZBI shall not so disclose or use such information relating to the
business of the Company or the Contributed Subsidiaries except as permitted
by other agreements between ZGNA or its affiliates and the Company.
6.9. STANDSTILL.
(a) From the date hereof through the Closing Date (or, if this
Agreement is terminated in accordance with its terms, for a period of 18 months
from the date hereof), neither ZGNA or ZBI will, without the prior consent of
the Board:
(i) acquire any of the Voting Stock or direct or
indirect rights to acquire or sell Voting Stock of the Company other than the
Option or the shares of Common Stock issuable upon exercise of the Option;
(ii) make, or in any way participate, directly or
indirectly, in any "solicitation" of "proxies" to vote (as such terms are used
in the rules under the Exchange Act), enter into any agreement to vote, or seek
to agree with, advise or influence any person or entity with respect to the
voting of any Voting Stock of the Company (except to the extent necessary to
have its three representatives on the Board);
(iii) make any public announcement with respect to any
transaction or proposed or contemplated transaction between the Company or any
of its security holders and ZGNA or any of its Affiliates, including, without
limitation, any tender or exchange offer, merger or other business combination
or acquisition of a material portion of the assets of the Company;
(iv) disclose any intention, plan or arrangement
regarding any of the matters referred to in clauses (i), (ii) or (iii); or
(v) sell or otherwise transfer shares of Common Stock
except pursuant to a transaction approved by the Board of Directors of the
Company.
(b) For a period of five years from the Closing Date, neither
ZGNA or ZBI will, without the prior consent of the Board:
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(i) acquire more than 49% of the Voting Stock or direct
or indirect rights to acquire more than 49% of the Voting Stock of the Company;
(ii) make, or in any way participate, directly or
indirectly, in any "solicitation" of "proxies" to vote (as such terms are used
in the rules under the Exchange Act), enter into any agreement to vote, or seek
to agree with, advise or influence any person or entity with respect to the
voting of any Voting Stock of the Company (except to the extent necessary to
have its three representatives on the Board);
(iii) make any public announcement with respect to any
transaction or proposed or contemplated transaction between the Company or any
of its security holders and ZGNA or any of its Affiliates, including, without
limitation, any tender or exchange offer, merger or other business combination
or acquisition of a material portion of the assets of the Company;
(iv) disclose any intention, plan or arrangement
regarding any of the matters referred to in clauses (i), (ii) or (iii); or
(v) except in an underwritten transaction, sell or
otherwise transfer such number of shares of Common Stock to the public which is
greater than 1% of the outstanding shares of Common Stock in any two week period
or 20% of weekly volume of the Common Stock.
(c) For a period of 18 months from the Closing Date, neither
ZGNA or ZBI will, without the prior consent of the Board, sell or otherwise
dispose of its shares of Common Stock, other than a pledge in favor of ZGNA's
lender pursuant to the credit agreement referred to in Section 8.7 and other
than transfers by ZBI to ZGNA or an entity wholly owned by ZGNA.
6.10. OWNERSHIP OF SHARES.
(a) In order to meet its obligations under Section 9 hereof, ZGNA
and ZBI agree to continue to own its portion of the Shares or other Liquid
Assets of approximately equivalent value to its portion of the Shares until the
later of (i) the second anniversary of the Closing Date, or (ii) in the event
the Company asserts any claims pursuant to Section 9.4(b)(i), until the final
resolution of such claims. For purposes hereof, the term "Liquid Assets" shall
mean cash, money market funds, commercial paper of
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a U.S. based entity, or securities that are publicly traded on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market.
(b) Notwithstanding the foregoing subsection (a), after the first
anniversary of the Closing Date, ZGNA's and ZBI's obligation to hold its portion
of the Shares or other Liquid Assets of approximately equivalent value to its
portion of the Shares shall be reduced to 60% of the initial value of its
portion of the Shares plus an amount equal to the value of the claims made,
asserted or pending under Section 9 as of such date.
(c) In the event the Company, ZBI or ZGNA shall be required to
make an indemnification payment pursuant to Section 9, they may elect to make
such payment with the shares of Common Stock in lieu of cash. The market price
of the shares of Common Stock shall be determined by the average closing price
of a share of Common Stock for the 15 consecutive trading days preceding the
date of such payment on the principal national securities exchange on which the
shares of Common Stock are listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, the average of the
reported bid and asked prices during such 15 consecutive trading days on the
Nasdaq National Market or, if the shares are not listed on the Nasdaq National
Market, in the over-the-counter market or, if the shares of Common Stock are not
publicly traded, the market price for such day shall be the fair market value
thereof determined jointly by the Company and ZGNA; PROVIDED, HOWEVER, that if
such parties are unable to reach agreement within a reasonable period of time,
the market price shall be determined in good faith by an independent investment
banking firm selected jointly by the Company and ZGNA or, if that selection
cannot be made within 15 days, by an independent investment banking firm
selected by the American Arbitration Association in accordance with its rules.
All costs and expenses incurred in connection with the determination of market
price shall be borne by the party seeking to make payment in stock.
6.11. NONCOMPETITION.
(a) ZGNA shall not, and shall cause its parent corporation and
its Affiliates, for a period of five (5) years following the Closing Date, for
any reason whatsoever, directly or indirectly, or on behalf of or in conjunction
with any other person:
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(i) engage in any business selling any products or
services in direct competition with the Company, including, but not limited to,
the Contributed Subsidiaries, in North America as conducted as of the Closing
Date;
(ii) engage in the business of acquiring biomass also
used by the Company for the purpose of retail or wholesale sales in North
America (including after processing) for use as a human nutraceutical; or
(iii) solicit any person who is an employee of the
Company, including, but not limited to the Contributed Subsidiaries, in a
managerial, sales or purchasing capacity for the purpose or with the intent of
enticing such employee away from or out of employ of the Company or its
Subsidiaries.
(b) Notwithstanding the above, the foregoing covenant shall not
prohibit ZGNA from acquiring as an investment not more than five percent (5%) or
continuing to own no more than the percentage ZGNA owns on the date of this
Agreement of the capital stock of a competing business, provided that ZGNA shall
not control such competing business.
(c) If any provision of this Section 6.11 relating to a time
period or geographic area shall be declared by a court of competent jurisdiction
unenforceable as unreasonable, the maximum time period or geographic area, as
applicable, that such court deems reasonable and enforceable shall thereafter be
deemed applicable and this Agreement shall automatically be considered to have
been amended and revised to reflect such determination. This Section 6.11 may
be enforced by specific performance.
6.12. RESIGNATION OF DIRECTORS.
Effective as of the Closing Date, all directors of each
Contributed Subsidiary shall cease to be directors. ZGNA will use its good
faith effort to obtain the resignation of all directors of each Contributed
Subsidiary.
6.13. SUBSCRIPTION RIGHT.
(a) If at any time after the date hereof, the Company proposes
to issue equity securities of any kind (the term "equity securities" shall
include for these purposes any warrants, options or other rights to acquire
equity securities and debt securities convertible into equity securities) of the
Company
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(other than the issuance of securities (i) to the public in a firm commitment
underwriting pursuant to a registration statement filed under the Securities
Act, (ii) pursuant to the acquisition of another entity by the Company by
merger, purchase of substantially all of the assets or stock or other form of
acquisition, (iii) pursuant to an employee, consultant or director stock
option plan, stock bonus plan, stock purchase plan or other management equity
program, or (iv) as an "equity kicker" for a debt or leasing financing with
an institutional lender), then the Company shall:
(i) give written notice setting forth in reasonable detail (1)
the designation and all of the terms and provisions of the securities
proposed to be issued (the "PROPOSED SECURITIES"), including, where
applicable, the voting powers, preferences and relative participating,
optional or other special rights, and the qualification, limitations or
restrictions thereof and interest rate and maturity; (2) the price and
other terms of the proposed sale of such securities; (3) the amount of
such securities proposed to be issued; and (4) such other information as
ZGNA may reasonably request in order to evaluate the proposed issuance;
and
(ii) offer to issue to ZGNA upon the terms described in
subparagraph (i) above a portion of the Proposed Securities (the
"SUBSCRIPTION SECURITIES") equal to a percentage determined by dividing
(x) the number of shares of Common Stock beneficially owned (within the
meaning of Rule 13d-3 under the Exchange Act) by ZGNA, by (y) the total
number of shares of Common Stock beneficially owned (within the meaning
of Rule 13d-3 under the Exchange Act) by all holders of Common Stock, in
each case, immediately preceding the issuance of the Proposed Securities.
(b) ZGNA must exercise its right to purchase all or any portion
of the Subscription Securities hereunder within ten (10) days after receipt of
such notice from the Company. To the extent that the Company offers two or more
securities in units, ZGNA must purchase such units as a whole and will not be
given the opportunity to purchase only one of the securities making up such
unit.
(c) Upon the expiration of the offering periods described
above, the Company will be free to sell such
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Subscription Securities that ZGNA has not elected to purchase during the
ninety (90) days following such expiration on terms and conditions no more
favorable to the purchasers thereof than those offered to ZGNA. Any
Subscription Securities offered or sold by the Company after such 90 day
period must be reoffered to ZGNA pursuant to this Section 6.13.
(d) The election by ZGNA not to exercise its subscription
rights under this Section 6.13 in any one instance shall not affect its right
(other than in respect of a reduction in its percentage holdings) as to any
subsequent proposed issuance.
(e) Notwithstanding the foregoing, the rights set forth in this
Section 6.13 shall terminate (i) if this Agreement is terminated in accordance
with its terms, seven months after the date hereof or (ii) upon the Closing
Date.
(f) The exercise by ZGNA of its rights under this Section 6.13
shall be subject to compliance with applicable laws, rules and regulations,
including HSR.
6.14. LETTERS OF ACCOUNTANTS.
(a) The Company shall use its reasonable best efforts to cause to
be delivered to ZGNA "comfort" letters regarding the Company of Arthur Andersen,
LLP, the Company's independent public accountants, dated and delivered the date
of the proxy statement and addressed to ZGNA, in form and substance reasonably
satisfactory to ZGNA and reasonably customary in scope and substance for letters
delivered by independent public accountants in connection with transactions such
as those contemplated by this Agreement consistent with procedures set forth in
Exhibit 6.14 hereto.
(b) ZGNA shall use its reasonable best efforts to cause to be
delivered to the Company "comfort" letters regarding the Contributed
Subsidiaries of Deloitte & Touche LLP, ZGNA's independent public accountants,
dated and delivered the date of the proxy statement and addressed to the
Company, in form and substance reasonably satisfactory to the Company and
reasonably customary in scope and substance for letters delivered by independent
public accountants in connection with transactions such as those contemplated by
this Agreement consistent with procedures set forth in Exhibit 6.14 hereto.
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6.15. EFFORTS TO SATISFY CONDITIONS; NOTICE OF INABILITY TO MEET
CONDITIONS.
Between the date hereof and the Closing, each party shall make a
good faith effort to obtain all third party consents required for Closing and
otherwise act to cause all closing conditions to be satisfied. If a party
believes that a condition to its obligation to close will not be satisfied by
Closing, or becomes aware of an event that causes a Company Material Adverse
Effect or a Subsidiary Material Adverse Effect, it shall promptly notify the
other party including informing it of the nature of such company's Material
Adverse Effect and steps which are being done to attempt to correct or respond
to the failure of such condition or material adverse event.
6.16. HSR.
As soon as practical after the date hereof, each of the Company,
ZGNA and, if necessary, the controlling persons of ZGNA shall make all filings
required pursuant to the HSR in connection with this Agreement. The parties
will cooperate in the preparation of all filings and responses to all reasonable
requests for additional information.
6.17. PUBLIC ANNOUNCEMENT.
Prior to the Closing and for three months thereafter, the timing
and content of all public announcements regarding any aspect of this Agreement
or the transactions contemplated hereby shall be mutually agreed upon in advance
by the Company and ZGNA, except to the extent that legal counsel advises a party
that such announcement or other disclosure is required to be made pursuant to
applicable law or the rules of the National Association of Securities Dealers.
A party shall promptly notify the other if it has received such advise and
intends to make a public announcement that has not been mutually agreed upon.
6.18. COOPERATION IN DEFENSE.
If prior to or within two years after the Closing, any claim,
action, investigation or governmental action is brought which questions the
validity or legality of the transactions contemplated hereunder or seeks damages
in connection therewith, the parties agree to cooperate and use reasonable
efforts to defend against such claim, action, investigation or governmental
action, and seek the removal of any injunction preventing or
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restraining any transactions contemplated hereby. This provision is not a
limitation on any other obligations of the parties in this Agreement or the
Transaction Documents.
6.19. VOLKER WYPYSZYK.
Both before and after the Closing, ZGNA and its Affiliates shall
use their reasonable best efforts to cause Volker Wypyszyk, for the first 12
months after the Closing, to devote a significant amount of his time, and after
12 months after the Closing, to devote substantially all of his time, to the
business of the Company. For the purposes of this Section, "reasonable best
efforts" shall mean that ZGNA and its Affiliates shall not require Volker
Wypyszyk to devote his time to the business of ZGNA or its Affiliates that would
be inconsistent with this Section.
6.20. REPAYMENT OF DEBT.
On the Closing Date, the Company shall use a portion of the
proceeds of the credit facility referred to in Section 7.9 to cause the
Contributed Subsidiaries to repay the Debt for borrowed money of the Contributed
Subsidiaries referred to in Section 5.26.
SECTION 7. ZGNA'S CLOSING CONDITIONS
The obligation of ZGNA to consummate the Mergers on the Closing
Date, as provided in Sections 2 and 3 hereof, shall be subject to the
performance in all material respects by the Company of its agreements
theretofore to be performed hereunder and to the satisfaction, prior thereto or
concurrently therewith, of the following further conditions:
7.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date as though such warranties and representations were made at and
as of such date, except as otherwise specifically permitted herein.
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7.2. COMPLIANCE WITH AGREEMENT.
The Company shall have performed and complied in all material
respects with all agreements, covenants and conditions contained in this
Agreement which are required to be performed or complied with by the Company
prior to or on the Closing Date.
7.3. INJUNCTION.
There shall be no effective injunction, writ, preliminary
restraining order or any order of any nature issued by a court of competent
jurisdiction or governmental body or agency of competent jurisdiction directing
that the transactions provided for herein or any of them not be consummated as
herein provided.
7.4. STOCKHOLDER APPROVAL.
At the stockholders meeting called by the Company pursuant to
Section 6.4 hereof, this Agreement and the transactions contemplated hereby
shall have been approved and adopted by a majority of a quorum of the Company's
stockholders pursuant to the rules of the NASDAQ market, by the number of votes
required under the Colorado Business Corporation Act.
7.5. CONSENTS AND APPROVALS.
All material consents, waivers, authorizations and approvals of
any governmental or regulatory authority, domestic or foreign shall have been
duly obtained and shall be in full force and effect on the Closing Date.
7.6. NASDAQ LISTING.
The Shares shall have been approved for listing on the NASDAQ
market or any other exchange the shares of Common Stock then trade.
7.7. ADVERSE DEVELOPMENT.
There shall have been no developments in the business of the
Company or any of its Subsidiaries which in the reasonable opinion of ZGNA would
have a Company Material Adverse Effect.
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7.8. TRANSACTION DOCUMENTS.
The Company and each of the other parties thereto shall have
executed and delivered (i) the Escrow Agreement, (ii) the Powders Option
Agreement, (iii) the Governance Agreement, (iv) the Sourcing Agency Agreement,
(v) the Registration Rights Agreement, (vi) the Agreement Regarding Employees,
(vii) the Letter Agreement and (viii) the License Agreement.
7.9. CREDIT AGREEMENTS.
The Company and ZGNA shall have entered into definitive credit
agreements with their respective lenders on terms reasonably satisfactory to
ZGNA and such credit agreements shall be in full force and effect.
7.10. HSR ACT.
All required waiting periods applicable to this Agreement and the
transactions contemplated hereby under the HSR shall have been expired or
terminated.
7.11. ELECTION OF OFFICER AND DIRECTORS.
Mr. Volker Wypyszyk shall have been appointed as the President and
Co-Chief Executive Officer of the Company and shall have been elected to the
Board, effective upon the Closing. Mr. Dean Stull shall have been elected as
the Chairman of the Board and Co-Chief Executive Officer. The Board shall have
been constituted as of the Closing Date as provided in Section 2 of the
Governance Agreement.
7.12. OFFICER'S CERTIFICATE.
ZGNA shall have received a certificate, dated the Closing Date,
signed by the Chairman of the Board of the Company, certifying that the
conditions specified in Sections 7.1 and 7.2 of this Agreement have been
fulfilled.
7.13. COUNSEL'S OPINION.
ZGNA shall have received from the Company's counsel, Chrisman,
Bynum & Johnson, P.C., an opinion, dated the Closing Date, substantially as set
forth in Exhibit A hereto.
7.14. COMPLETION OF MERGERS. The Certificates of Merger shall
have been filed with the Secretary of State of the
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respective jurisdiction of incorporation and the Mergers shall have become
effective in accordance with the laws of the respective jurisdiction of
incorporation.
7.15. APPROVAL OF PROCEEDINGS.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
reasonably satisfactory in form and substance to ZGNA and its counsel, Willkie
Farr & Gallagher; and ZGNA shall have received copies of all documents or other
evidence which it and Willkie Farr & Gallagher may request in connection with
such transactions and of all records of corporate proceedings in connection
therewith in form and substance satisfactory to ZGNA and Willkie Farr &
Gallagher.
7.16. ACCOUNTANT'S LETTER.
ZGNA shall have received the accountant's letter referred to in
Section 6.14(a).
SECTION 8. COMPANY CLOSING CONDITIONS
The obligation of the Company to issue and deliver the Shares and
to consummate the Mergers on the Closing Date, as provided in Sections 2 and 3
hereof, shall be subject to the performance in all material respects by ZGNA and
the Contributed Subsidiaries of their agreements theretofore to be performed
hereunder and to the satisfaction, prior thereto or concurrently therewith, of
the following further conditions:
8.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of ZGNA, ZBI and the
Contributed Subsidiaries contained in this Agreement shall be true and correct
and in all material respects on and as of the Closing Date as though such
warranties and representations were made at and as of such date, except as
otherwise specifically permitted herein.
8.2. COMPLIANCE WITH AGREEMENT.
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ZGNA and ZBI shall have performed and complied in all material
respects with, and shall have caused the Contributed Subsidiaries to perform and
comply in all material respects with, all agreements, covenants and conditions
contained in this Agreement which are required to be performed or complied with
by it prior to or on the Closing Date.
8.3. INJUNCTION.
There shall be no effective injunction, writ, preliminary
restraining order or any order of any nature issued by a court of competent
jurisdiction or governmental body or agency of competent jurisdiction directing
that the transactions provided for herein or any of them not be consummated as
herein provided.
8.4. STOCKHOLDER APPROVAL.
This Agreement shall have been approved by the affirmative vote of
the holders of a majority of the outstanding shares of the Common Stock.
8.5. ELECTION OF OFFICER AND DIRECTORS.
Mr. Volker Wypyszyk shall have been appointed as the President and
Co-Chief Executive Officer of the Company and shall have been elected to the
Board, effective upon the Closing. Mr. Dean Stull shall have been elected as
the Chairman of the Board and Co-Chief Executive Officer. The Board shall have
been constituted as of the Closing Date as provided in Section 2 of the
Governance Agreement.
8.6. ADVERSE DEVELOPMENT.
There shall have been no developments in the business of the
Contributed Subsidiaries which in the reasonable opinion of the Company would
have a Subsidiary Material Adverse Effect.
8.7. CREDIT AGREEMENTS.
The Company and ZGNA shall have entered into definitive credit
agreements with their respective lenders on terms reasonably satisfactory to the
Company and such credit agreements shall be full force and effect.
8.8. CONSENTS AND APPROVALS.
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All material consents, waivers, authorizations and approvals of
any governmental or regulatory authority, domestic or foreign shall have been
duly obtained and shall be in full force and effect on the Closing Date.
8.9. HSR ACT.
All required waiting periods applicable to this Agreement and the
transactions contemplated hereby under the HSR shall have been expired or
terminated.
8.10. TRANSACTION DOCUMENTS.
ZGNA or its Subsidiary and each of the other parties thereto shall
have executed and delivered (i) the Escrow Agreement, (ii) the Powders Option
Agreement, (iii) the Governance Agreement, (iv) the Sourcing Agency Agreement,
(v) the Registration Rights Agreement, (vi) the Agreement Regarding Employees,
(vii) the Letter Agreement and (viii) the License Agreement.
8.11. ZGNA'S CERTIFICATES.
The Company shall have received a certificate from an executive
officer of ZGNA, dated the Closing Date, certifying that the conditions
specified in Sections 8.1 and 8.2 of this Agreement have been fulfilled.
8.12. COUNSEL'S OPINION.
The Company shall have received from ZGNA's counsel, Willkie Farr
& Gallagher, an opinion, dated the Closing Date, substantially as set forth in
Exhibit B hereto.
8.13. COMPLETION OF MERGERS.
The Certificates of Merger shall have been filed with the
Secretary of State of the respective jurisdiction of incorporation and the
Mergers shall have become effective in accordance with the laws of the
respective jurisdiction of incorporation.
8.14 APPROVAL OF PROCEEDINGS.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
reasonably satisfactory in form and
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substance to the Company and its counsel, Chrisman, Bynum & Johnson, P.C.;
and the Company shall have received copies of all documents or other evidence
which it and Chrisman, Bynum & Johnson, P.C. may request in connection with
such transactions and of all records of corporate proceedings in connection
therewith in form and substance satisfactory to the Company and Chrisman,
Bynum & Johnson, P.C.
8.15. ACCOUNTANT'S LETTER.
The Company shall have received the accountant's letter referred
to in Section 6.14(b).
8.16. EMPLOYEES.
(a) Individuals responsible for at least 75% of all sales of
products of the Contributed Subsidiaries in the 90 days prior to the date of
this Agreement shall be available to work in connection with the Agreement
Regarding Employees in substantially the same role as before the execution of
this Agreement, and not more than 25% of such individuals shall have stated in
writing to ZGNA that they intend to stop working for the Surviving Corporation
in such role.
(b) Employees responsible for at least 75% of all purchases of
biomass material of the Contributed Subsidiaries in the 90 days prior to the
date of this Agreement shall be available to work for the Contributed
Subsidiaries in substantially the same role as before the execution of this
Agreement, and not more than 25% of such individuals shall have stated in
writing to ZGNA that they intend to stop working for a Contributed Subsidiary in
such role (including after the Closing) if the Contributed Subsidiary offers
them a salary and compensation arrangement comparable to that currently in place
as of the date hereof and Benefit Arrangements as contemplated by this
Agreement.
8.17. Exclusive Distributorship Agreement.
The agreement listed under the heading "Exclusive Distributorship
Agreement" in SECTION 5.12 OF ZGNA DISCLOSURE SCHEDULE shall have been
terminated without further liability to ZBI or the Contributed Subsidiaries,
including, without limitation, any restrictions on their ability to engage in
business contained therein.
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SECTION 9. TERMINATION AND INDEMNIFICATION
9.1. TERMINATION.
This Agreement may be terminated at any time prior to the Closing:
(a) by mutual consent of ZGNA and the Company;
(b) by ZGNA or the Company if the Closing shall not have occurred
on or before May 31, 1999, except that ZGNA and the Company shall have the
right, in their mutual discretion, to extend the time period in this Section
9.1(b) an additional 45 days; provided that the right to terminate this
Agreement pursuant to this Section 9.1(b) shall not be available to any party
whose failure to perform any of its obligations under this Agreement results in
the failure of the Closing to be consummated by such date;
(c) by ZGNA if the Board shall have withdrawn, modified or
amended (or resolved to withdraw, modify or amend) in any respect its
recommendation that this Agreement be approved by the Company's stockholders; or
(d) by ZGNA or the Company, if any governmental entity shall
have threatened to, or issued, an order, decree or ruling or taken any other
action restraining, enjoining or otherwise prohibiting any of the material
transactions contemplated hereby.
9.2. PROCEDURE AND EFFECT OF TERMINATION.
In the event of termination of this Agreement pursuant to Section
9.1 hereof, by one party, written notice thereof shall forthwith be given to the
other party, and, except as set forth below, this Agreement shall terminate and
be void and have no effect except for the provisions of Section 9.4 which shall
survive such termination and the transactions contemplated hereby shall be
abandoned except for the provisions of Section 9.4 which shall survive such
termination. If this Agreement is terminated as provided herein:
(a) ZGNA and the Company will destroy or redeliver, and will
cause its respective agents (including, without limitation, attorneys and
accountants) to destroy or redeliver all documents, electronic files or other
media containing confidential information with respect to the Company or the
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Contributed Subsidiaries, as the case may be, delivered in connection with this
Agreement, unless ZGNA or the Company believes in its reasonable judgment that
such destruction could give rise to any liability under applicable law or
prevent it from reasonably asserting a known claim hereunder;
(b) all information received by ZGNA or the Company with
respect to the business, operations, assets or financial condition of the
Company or the Contributed Subsidiaries, as the case may be, shall remain
subject to the confidentiality provision of Section 6.8; and
(c) except as otherwise expressly set forth herein, no party to
this Agreement shall have any liability hereunder to any other party, except (i)
for any intentional breach or misrepresentation by such party of the terms and
provisions of this Agreement and (ii) as stated in paragraphs (a) and (b) of
this Section 9.2.
9.3. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations and warranties contained in Sections 4.6(c),
4.15, 5.6(c), 5.15 and third party claims arising out of misrepresentation of
any of the representations or warranties herein shall survive the Closing and
remain in full force and effect for a period of 24 months following the Closing
Date. All representations and warranties contained in Section 4.31 shall
terminate as of the Closing. All other representations and warranties herein or
in any other Transaction Documents shall survive the Closing and remain in full
force and effect for a period of 18 months following the Closing Date. All
covenants and agreements contained herein shall survive the Closing and remain
in full force and effect until sixty (60) days after the expiration of the
applicable statute of limitations (including any extensions thereof).
9.4. INDEMNIFICATION.
(a) From and after the Closing, the Company shall indemnify and
hold harmless ZGNA, ZBI and their respective officers, directors and Affiliates
(collectively, the "ZGNA INDEMNIFIED PARTIES") from and against any liabilities,
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages and amounts paid in settlement (collectively, "DAMAGES")
arising from or in connection with (i)
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any inaccuracy in any representation or the breach of any warranty of the
Company under a Transaction Document or (ii) the failure of the Company to
duly perform or observe any term, provision, covenant or agreement to be
performed or observed by the Company pursuant to a Transaction Document.
(b) From and after the Closing, ZGNA and ZBI shall indemnify and
hold harmless the Company and its officers, directors and Affiliates
(collectively, the "COMPANY INDEMNIFIED PARTIES") from and against any Damages
to the extent they are the result of (i) any inaccuracy in any representation or
the breach of any warranty of ZGNA, ZBI or a Contributed Subsidiary under a
Transaction Document or (ii) the failure of ZGNA, ZBI or a Contributed
Subsidiary to duly perform or observe any term, provision, covenant or agreement
to be performed or observed by ZGNA, ZBI or a Contributed Subsidiary pursuant to
a Transaction Document.
(c) Notwithstanding anything herein to the contrary, no
indemnification shall be available to ZGNA Indemnified Parties under Section
9.4(a)(i) hereof or to the Company Indemnified Parties under Section 9.4(b)(i)
hereof unless and until the aggregate amount of Damages that would otherwise be
subject to indemnification, exceeds $750,000 (in each case, the "BASKET
AMOUNT"), in which case the party entitled to such indemnification shall be
entitled to receive only the amounts in excess of the Basket Amount. For
purposes of clause (i) of Section 9.4(a) and 9.4(b), in determining whether
there has been a breach of any representation or warranty contained herein or in
the other Transaction Documents or the amount of any Damages resulting from such
breach, such representations and warranties shall be read without regard to any
"Company Material Adverse Effect", "Subsidiary Material Adverse Effect" or
"material" qualifier contained therein except to the extent that the term
"material" is used to define "Company Key Agreements and Instruments" and
"Subsidiary Key Agreements and Instruments."
(d) Notwithstanding anything herein to the contrary, the maximum
aggregate liability of (i) the Company to ZGNA Indemnified Parties and (ii) ZGNA
and ZBI to the Company Indemnified Parties under this Section 9.4 hereof shall
not exceed $15 million.
(e) Notwithstanding anything herein to the contrary, none of ZGNA
Indemnified Parties shall be entitled to
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indemnification by the Company for any Damages arising from any matter of
which ZGNA had knowledge at or prior to Closing by reason of the Company
having delivered written notice thereto, either in a supplemented disclosure
schedule or an officer's certificate, at or prior to Closing, if (i) the
conditions to ZGNA's obligation set forth in Section 7 fail to be satisfied
at Closing by reason of the matters disclosed in such supplemented disclosure
schedule or officer's certificate and ZGNA waives its right not to Close
unless (ii) the Company made a knowing misrepresentation with respect to such
matter on the date of this Agreement; PROVIDED that clause (i) above shall
not apply in respect of any matter as to which the Company has the explicit
right set forth in Section 4 to notify ZGNA thereof at or prior to Closing
and modify the corresponding disclosures.
(f) Notwithstanding anything herein to the contrary, none of the
Company Indemnified Parties shall be entitled to indemnification by ZGNA for any
Damages arising from any matter of which the Company had knowledge at or prior
to Closing by reason of ZGNA having delivered written notice thereto, either in
a supplemented disclosure schedule or an officer's certificate, at or prior to
Closing, if (i) the conditions to the Company's obligation set forth in Section
8 fail to be satisfied at Closing by reason of the matters disclosed in such
supplemented disclosure schedule or officer's certificate and the Company waives
its right not to Close unless (ii) ZGNA made a knowing misrepresentation with
respect to such matter on the date of this Agreement; PROVIDED that clause (i)
above shall not apply in respect of any matter as to which ZGNA has the explicit
right set forth in Section 5 to notify the Company thereof at or prior to
Closing and modify the corresponding disclosures.
(g) Any calculation of Damages for purposes of this Section 9.4
shall be (i) net of any insurance recovery made by the Indemnified Party
(whether paid directly to such Indemnified Party or assigned by the Indemnifying
Party to such Indemnified Party) and (ii) reduced to take account of any net Tax
benefit realized by the Indemnified Party arising from the deductibility of any
such Damages or Tax. Any indemnification payment hereunder shall initially be
made without regard to this paragraph and shall be reduced to reflect any such
net Tax benefit only after the Indemnified Party has actually realized such
benefit. For purposes of this Agreement, an Indemnified Party shall be deemed
to have "actually realized" a net Tax benefit to the extent that, and at such
time as, the amount of
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Taxes payable by such Indemnified Party is reduced below the amount of Taxes
that such Indemnified Party would have been required to pay but for
deductibility of such Damages. The amount of any reduction hereunder shall
be adjusted to reflect any final determination (which shall include the
execution of Form 870-AD or successor form) with respect to the Indemnified
Party's liability for Taxes and, if necessary, the Company or ZGNA and ZBI,
as the case may be, shall make payments to the other to reflect such
adjustment. Any indemnity payment under this Agreement shall be treated as an
adjustment to the consideration for Tax purposes, unless a final
determination (which shall include the execution of a Form 870-AD or
successor form) with respect to the Indemnified Party or any of its
Affiliates causes any such payment not to be treated as an adjustment to the
consideration for U.S. Federal income Tax purposes.
(h) No action, claim or setoff for Damages subject to
indemnification under this Section 9.4 shall be brought or made:
(i) with respect to claims for Damages resulting from a breach
of any covenant contained in this Agreement after the date on which such
covenant shall terminate pursuant to Section 9.3 hereof; and
(ii) with respect to claims for Damages resulting from a breach
of any representation or warranty, after the date on which such representation
or warranty shall terminate pursuant to Section 9.3 hereof;
PROVIDED, HOWEVER, that any claim made with reasonable specificity by the party
seeking indemnification (the "INDEMNIFIED PARTY") to the party from which
indemnification is sought (the "INDEMNIFYING PARTY") within the time periods set
forth above shall survive (and be subject to indemnification) until it is
finally and fully resolved.
(i) Upon receipt by the Indemnified Party of notice of any
action, suit, proceedings, claim, demand or assessment against such Indemnified
Party which might give rise to a claim for Damages, the Indemnified Party shall
give written notice thereof to the Indemnifying Party indicating the nature of
such claim and the basis therefor; PROVIDED, HOWEVER, that failure to give such
notice shall not affect the indemnification provided hereunder except to the
extent the Indemnifying Party shall have
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been actually prejudiced as a result of such failure. A claim to indemnity
hereunder may, at the option of the Indemnified Party, be asserted as soon as
Damages have been threatened by a third party orally or in writing,
regardless of whether actual harm has been suffered or out-of-pocket expenses
incurred, PROVIDED the Indemnified Party shall reasonably determine that it
may be liable or otherwise incur such Damages. The Indemnifying Party shall
have the right, at its option, to assume the defense of, at its own expense
and by its own counsel, any such matter involving the asserted liability of
the Indemnified Party as to which the Indemnifying Party shall have
acknowledged its obligation to indemnify the Indemnified Party. If any
Indemnifying Party shall undertake to compromise or defend any such asserted
liability, it shall promptly notify the Indemnified Party of its intention to
do so, and the Indemnified Party agrees to cooperate fully with the
Indemnifying Party and its counsel in the compromise of, or defense against,
any such asserted liability; PROVIDED, HOWEVER, that the Indemnifying Party
shall not settle any such asserted liability without the written consent of
the Indemnified Party (which consent will not be unreasonably withheld);
PROVIDED, FURTHER, however that the immediately preceding clause shall not
apply in the case of relief consisting solely of money damages at least 80%
of which shall be borne by the Indemnifying Party after taking into account
any limitation thereon. Notwithstanding an election to assume the defense of
such action or proceeding, such Indemnified Party shall have the right to
employ separate counsel and to participate in the defense of such action or
proceeding, and the Indemnifying Party shall bear the reasonable fees, costs
and expenses of such separate counsel (and shall pay such fees, costs and
expenses at least quarterly), if (A) the use of counsel chosen by the
Indemnifying Party to represent such Indemnified Party would present such
counsel with a conflict of interest; (B) the defendants in, or targets of,
any such action or proceeding include both an Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have reasonably
concluded that there may be legal defenses available to it or to other
Indemnified Parties which are different from or additional to those available
to the Indemnifying Party (in which case the Indemnifying Party shall not
have the right to direct the defense of such action or proceeding on behalf
of the Indemnified Party); (C) the Indemnifying Party shall not have employed
counsel reasonably satisfactory to such Indemnified Party to represent such
Indemnified Party within a reasonable time after notice of the institution of
such action or proceeding; or (D) the Indemnifying Party shall authorize such
Indemnified Party to employ separate
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counsel at the Indemnifying Party's expense. In any event, the Indemnified
Party and its counsel shall cooperate with the Indemnifying Party and its
counsel and shall not assert any position in any proceeding inconsistent with
that asserted by the Indemnifying Party. All costs and expenses incurred in
connection with an Indemnified Party's cooperation shall be borne by the
Indemnifying Party. In any event, the Indemnified Party shall have the right
at its own expense to participate in the defense of such asserted liability.
(j) The sole and exclusive remedy for any breach of any
representation, warranty, covenant or agreement shall be pursuant to this
Section 9.4, except in the case of fraud. Absent fraud, under no circumstances
shall either party be liable to other for consequential or punitive damages.
(k) Each party hereby acknowledges and agrees that the other
party is not making any representation or warranty whatsoever, express or
implied, including, without limitation, in respect of their respective assets,
liabilities and businesses, except those representations and warranties
explicitly set forth in the Transaction Document or in any certificate
contemplated hereby and delivered in connection herewith.
9.5. BREAK-UP FEE.
(a) In the event that (i) upon a vote at a duly held meeting of
the stockholders of the Company or any adjournment thereof, any stockholder
approval contemplated by this Agreement shall not have been approved or (ii) the
Board shall have withdrawn, modified or amended (or resolved to withdraw, modify
or amend) in any respect its recommendation to its stockholders that this
Agreement be approved by the Company's stockholders, the Company shall pay ZGNA
all of ZGNA's reasonable out-of-pocket expenses incurred in connection with the
transactions contemplated hereby, including fees and expenses of its counsel and
financial advisors; provided, that the Company shall not be liable for
out-of-pocket expenses in excess of $500,000.
(b) If within twelve (12) months of the termination date of this
Agreement for either of the reasons set forth in 9.5(a) the Company shall sell
such number of shares of Common Stock equal to or greater than 49% of the issued
and outstanding shares of the Common Stock (calculated by using the number of
issued and outstanding shares of Common Stock as of the date
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hereof) by way of sale of securities, merger, reorganization, or shall sell
all or substantially all of its assets, the Company shall pay $1,500,000 (the
"TERMINATION FEE") to ZGNA in immediately available funds no later than two
(2) Business Days after entry into such agreement. The Company agrees that
it will not structure any transaction or agreement for the purpose of
avoiding payment of Termination Fee. The Company acknowledges that the
agreements contained in this Section 9.5 are an integral part of the
transactions contemplated in this Agreement, and that, without these
agreements, ZGNA would not enter into this Agreement; accordingly, if the
Company fails to promptly pay the amount due pursuant to this Section 9.5,
and, in order to obtain such payment, ZGNA commences a suit which results in
a judgment against the Company for the Termination Fee, the Company shall pay
to ZGNA its costs and expenses (including attorneys' fees) in connection with
such suit, together with interest on the amount of the fee at the prime rate
of Citibank, N.A. on the date such payment was required to be made.
Notwithstanding the foregoing, no Termination Fee or payment under Section
9.5(a) shall be payable if the transactions contemplated hereunder are not
consummated because (i) the Company's Board of Directors withdraws its
recommendation of this Agreement as a result of a material breach or
misrepresentation by ZGNA, (ii) the Company or ZGNA failed to enter into a
definitive credit agreement with their respective lenders, (iii) the Company
terminates this Agreement because of a material breach (including a material
breach of Section 6.9 herein) or a material misrepresentation by ZGNA, (iv)
approval under the HSR is not obtained (assuming the Company and ZGNA have
made appropriate HSR filings) or (v) the Company terminates this Agreement as
a result of failure to satisfy Sections 8.3 (Injunction), 8.6 (Adverse
Development), 8.10 (Transaction Documents), 8.11 (ZGNA's Certificates), 8.12
(Counsel's Opinion), 8.13 (Completion of Mergers) or 8.16 (Sales Force).
(c) Notwithstanding, in the event ZGNA shall have exercised the
Option and shall thereafter sell the shares of Common Stock received by it upon
exercise of the Option, ZGNA shall pay to the Company any fees and expenses
(including Termination Fee) received by it pursuant to this Section to the
extent the net proceeds received by it in connection with such sale exceed the
exercise price for the Option.
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SECTION 10. MISCELLANEOUS
10.1. GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF COLORADO APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE, EXCEPT THAT ALL ISSUES RELATING TO THE
DELAWARE MERGERS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF DELAWARE AND ALL ISSUES RELATING TO THE NEW YORK MERGER SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
10.2. PARAGRAPH AND SECTION HEADINGS.
The headings of the sections and subsections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
thereof.
10.3. NOTICES.
(a) All communications under this Agreement shall be in writing
and shall be delivered by hand, by facsimile or mailed by overnight courier or
by registered mail or certified mail, postage prepaid:
(1) if to ZGNA or ZBI, at 2550 El Presidio Street, Long Beach,
California 90810-1193 (facsimile: (310) 637-3644), marked for
attention of President, or at such other address as ZGNA may have
furnished the Company in writing (with a copy to Willkie Farr &
Gallagher, 787 Seventh Avenue, New York, NY 10019-6099, Attention:
Harvey L. Sperry, Esq. (facsimile: 212-728-8111), or at such other
address it may have furnished the Company in writing), or
(2) if to the Company, at 5555 Airport Boulevard, Boulder,
Colorado 80301 (facsimile: (303) 441-5802) marked for attention of
Dean Stull, or at such other address as the Company may have
furnished ZGNA in writing (with a copy to Laurie Glasscock,
Chrisman, Bynum & Johnson, P.C., 1900 Fifteenth Street, Boulder,
Colorado 80302 (facsimile: (303) 449-5426) or at such other
address as it may have furnished in writing to ZGNA).
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(b) Any notice so addressed shall be deemed to be given: if
delivered by hand or by facsimile, on the date of such delivery; if delivered by
courier, on the first Business Day following the date of the delivery to the
courier; and if mailed by registered or certified mail, on the third Business
Day after the date of such mailing.
10.4. EXPENSES AND TAXES.
Subject to Section 9.5, whether or not the Closing shall have
occurred, each party shall pay its own fees and expenses incurred in connection
with the transactions contemplated hereby.
10.5. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of each of the parties.
10.6. ENTIRE AGREEMENT; AMENDMENT AND WAIVER.
(a) This Agreement and the agreements attached as Exhibits hereto
constitute the entire understandings of the parties hereto and supersede all
prior agreements or understandings with respect to the subject matter hereof
among such parties. This Agreement may be amended, and the observance of any
term of this Agreement may be waived, with (and only with) the written consent
of the Company and ZGNA. No course of dealing between the Company and ZGNA nor
any delay in exercising any rights hereunder shall operate as a waiver of any
rights of either party hereto.
(b) Subject to applicable law, by agreement of the parties, this
Agreement, the Transaction Documents and other documents entered into in
connection herewith, may be terminated, amended, or the observance of any terms
waived, after the Company's stockholder approval.
10.7. SEVERABILITY.
In the event that any part or parts of this Agreement shall be
held illegal or unenforceable by any court or administrative body of competent
jurisdiction, such determination shall not effect the remaining provisions of
this Agreement which shall remain in full force and effect.
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10.8. THIRD PARTIES.
Nothing contained in this Agreement or in any instrument or
document executed by any party in connection with the transactions contemplated
hereby shall create any rights in, or be deemed to have been executed for the
benefit of, any person that is not a party hereto or thereto or a successor or
permitted assign of such a party.
10.9. ARBITRATION.
(a) The parties shall initially attempt to resolve by direct negotiation any
dispute, controversy or claim arising out of or relating to (i) this Agreement
or the other Transaction Documents, (ii) its or their breach, interpretation,
termination or validity, or (iii) the transactions contemplated hereby or
thereby (each, a "DISPUTE").
(b) If the parties are not able to settle the Dispute by direct
negotiations within thirty (30) days after written notice by one party to the
other of the Dispute, any party may initiate an arbitration to resolve the
Dispute; the parties hereto agree that arbitration pursuant to this Section
shall be the sole means of resolving Disputes, and that no party shall commence
any proceeding in any court or tribunal with respect to a Dispute. All such
Disputes shall be arbitrated in Denver, Colorado pursuant to the Commercial
Arbitration Rules of the American Arbitration Association except that the
parties expressly do not constitute the American Arbitration Association as
administrator of the arbitration as provided in Rule 3 of such Rules and the
arbitration shall be administered by the Chair of the Panel. Each of the
Company, on the one hand, and ZGNA and ZBI, on the other hand, shall select an
arbitrator, and the two arbitrators shall select a third arbitrator. The third
arbitrator shall act as Chair of the panel. The arbitrators shall be certified
public accountants, attorneys or other persons, in each case, who are
experienced in the buying and selling of businesses. If the two arbitrators
fail to agree upon the appointment of a third arbitrator within 30 days, the
American Arbitration Association shall appoint the third arbitrator.
(c) Judgment upon any award rendered by the arbitrator(s),
which may include specific performance of the
-81-
<PAGE>
obligations of the parties under this Agreement, shall be binding and may be
entered in any court having jurisdiction. Nothing in this Section shall
preclude any party from seeking temporary or preliminary injunctive equitable
relief from a court of competent jurisdiction and Section 10.9(a) and (b)
shall not apply in that situation. No such court order shall stay or
otherwise impede the arbitration proceeding. The statute of limitations,
estoppel, waiver, laches, and similar doctrines, which would otherwise be
applicable in any action brought by a party shall be applicable in any
arbitration proceeding and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for those purposes. The Federal
Arbitration Act shall apply to the construction, interpretation and
enforcement of this arbitration provision.
(d) Nothing in this Agreement shall preclude the arbitrator(s)
from rendering an interim award (which may include equitable relief) which may
be enforced by the parties hereto as though a final award.
(e) The Company, on the one hand, and ZGNA and ZBI, on the
other hand, shall jointly and equally bear all arbitration expenses, provided,
however, that any legal fees or expenses incurred by any party in connection
with such arbitration shall be borne by the party incurring such expenses.
-82-
<PAGE>
10.10. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original and all of which together shall be
considered one and the same agreement.
HAUSER, INC. ZUELLIG GROUP N.A., INC.
By: /s/ Dean P. Stull By: /s/ Volker Wypyszyk
--------------------------- --------------------------------
Name: Dean P. Stull Name: Volker Wypyszyk
Title: CEO Title: President
QQB HOLDINGS I, INC. ZUELLIG BOTANICAL EXTRACTS,
INC.
By: /s/ Dean P. Stull By: /s/ Ralph L. Heinmann
--------------------------- --------------------------------
Name: Dean P. Stull Name: Ralph L. Heinmann
Title: President Title: Secretary and Treasurer
QQB HOLDINGS II, INC. ZETAPHARM, INC.
By: /s/ Dean P. Stull By: /s/ Ralph L. Heinmann
--------------------------- --------------------------------
Name: Dean P. Stull Name: Ralph L. Heinmann
Title: President Title: Secretary and Treasurer
QQB HOLDINGS III, INC. WILCOX DRUG COMPANY, INC.
By: /s/ Dean P. Stull By: /s/ Ralph L. Heinmann
--------------------------- --------------------------------
Name: Dean P. Stull Name: Ralph L. Heinmann
Title: President Title: Secretary and Treasurer
ZUELLIG BOTANICALS, INC.
By: /s/ Ralph L. Heinmann
--------------------------------
Name: Ralph L. Heinmann
Title: Secretary and Treasurer
-83-
<PAGE>
APPENDIX C
GOVERNANCE AGREEMENT
This GOVERNANCE AGREEMENT (this "AGREEMENT"), dated as of
_________, 1999, is by and between Hauser, Inc., a Colorado corporation (the
"COMPANY"), Zuellig Group N.A., Inc. a Delaware corporation ("ZGNA") and
Zuellig Botanicals, Inc., a Delaware corporation ("ZBI").
R E C I T A L S :
WHEREAS, pursuant to the terms of an Agreement and Plan of Merger,
dated as of December 8, 1998, between ZGNA and the Company (the "MERGER
AGREEMENT"), ZGNA and ZBI have simultaneously herewith acquired from the
Company, and the Company has issued to ZGNA and ZBI, shares of its Common
Stock, par value $.001 per share (the "COMMON STOCK"); and
WHEREAS, the parties wish to set forth certain arrangements
regarding ZGNA's and ZBI's ownership in the Company.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants and agreements herein
contained, ZGNA, ZBI and the Company hereby agree as follows:
SECTION 1. DEFINITIONS.
The terms defined in this Section 1, whenever used herein, shall
have the following meanings for all purposes of this Agreement.
"AFFILIATE" means any Person or entity, directly or indirectly,
controlling, controlled by or under common control with such Person or entity.
"AGREEMENT" shall have the meaning set forth in the preamble hereto.
"BOARD" shall mean the board of directors of the Company.
"COMMON STOCK" shall have the meaning set forth in the recitals
hereto.
Appendix C - Page 1
<PAGE>
"COMPANY" shall have the meaning set forth in the preamble hereto.
"CONTINUING DIRECTORS" shall mean at any date a member of the Board
(i) who was a member of the Board on the day preceding the Closing Date of
the Mergers or (ii) who was nominated or elected by at least a majority of
the directors who were Continuing Directors at the time of such nomination or
election or whose election to the Board was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time
of such nomination or election.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, an
amended.
"INDEPENDENT DIRECTOR" shall mean at any date a member of the Board
(i) who at any time in the preceding five (5) years has not been an Affiliate
of or employed by, or retained as a consultant to, the Company or ZGNA or any
Affiliate of the Company or ZGNA (except to the extent such member is deemed
to be an Affiliate solely in his or her capacity as a director of the
Company) and (ii) who was nominated or elected by at least a majority of the
directors who were Independent Directors at the time of such nomination or
election or whose election to the Board was recommended or endorsed by at
least a majority of the directors who were Independent Directors at the time
of such nomination or election.
"MERGERS" shall mean the mergers pursuant to the Merger Agreement.
"MERGER AGREEMENT" shall have the meaning set forth in the recitals
hereto.
"PERSON" shall mean an individual, partnership, joint-stock
company, corporation, limited liability company, trust or unincorporated
organization, or a government, agency, regulatory authority or political
subdivision thereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, an amended.
"SUBSTITUTE DIRECTOR" shall have the meaning set forth in Section
2(b).
Appendix C - Page 2
<PAGE>
"WITHDRAWING DIRECTOR" shall have the meaning set forth in Section
2(b).
"ZBI" shall have the meaning set forth in the preamble hereto.
"ZGNA" shall have the meaning set forth in the preamble hereto.
"ZGNA DIRECTOR" shall have the meaning set forth in Section 2(a).
SECTION 2. BOARD OF DIRECTORS.
(a) ELECTION OF DIRECTORS. As of the date hereof, the Board
consists of the following nine directors: Dean P. Stull, William E. Coleman,
Robert F. Saydah, Volker Wypyszyk, Peter Zuellig, Harvey L. Sperry, Rodolfo
C. Bryce, Herbert Elish, and Roger W. Norian, all of whom were elected to
serve as directors pursuant to the Merger Agreement and the approval thereof
at the Special Meeting of the Company's shareholders held on _________, 1999.
From and after the effective date of the Mergers, ZGNA, ZBI and the Company
shall take all action within their respective power, including in the case of
ZGNA and ZBI, the voting of all shares of capital stock of the Company owned
by them, required to cause the Board to consist of nine (9) members, and at
all times throughout the term of this Agreement to include (i) as long as
ZGNA and ZBI together own beneficially (within the meaning of Rule 13d-3
under the Exchange Act) at least twenty percent (20%) of the Common Stock,
three (3) representatives designated by ZGNA (each, a "ZGNA DIRECTOR"), (ii)
three (3) representatives designated by the Continuing Directors and (iii)
three (3) Independent Directors. The parties acknowledge that Messrs. Volker
Wypyszyk, Peter Zuellig and Harvey L. Sperry are the initial ZGNA Directors,
Messrs. Dean P. Stull, William E. Coleman and Robert F. Saydah are the
initial Continuing Directors and Messrs. Rodolfo C. Bryce, Herbert Elish, and
Roger W. Norian are the initial Independent Directors.
(b) REPLACEMENT DIRECTORS.
(i) In the event that any ZGNA Director, Continuing
Director or Independent Director (a "WITHDRAWING DIRECTOR") designated in the
manner set forth in Section 2(a)
Appendix C - Page 3
<PAGE>
hereof is unable to serve, or once having commenced to serve, is removed or
withdraws from the Board, such Withdrawing Director's replacement (the
"SUBSTITUTE DIRECTOR") will be designated by ZGNA, if the Withdrawing
Director is a ZGNA Director, by a vote of the remaining Continuing Directors,
if the Withdrawing Director is a Continuing Director, or by a vote of the
remaining Independent Directors, if the Withdrawing Director is an
Independent Director, as the case may be. ZGNA, ZBI and the Company agree to
take all action within their respective power, including in the case of ZGNA
and ZBI, the voting of capital stock of the Company owned by them to cause
the election of such Substitute Director promptly following his or her
nomination pursuant to this Section 2(b).
(ii) In the event there are no Continuing Directors
remaining to appoint Substitute Directors pursuant to Section 2(b)(i), then
ZGNA, ZBI and the Company shall take all action within their respective
power, including in the case of ZGNA and ZBI, the voting of all shares of
capital stock of the Company owned by them, required to cause the Board to
consist of three (3) ZGNA Directors and six (6) Independent Directors.
(iii) In the event there are no Independent Directors
remaining to appoint Substitute Directors pursuant to Section 2(b)(i) or
(ii), then ZGNA, ZBI and the Company shall take all action within their
respective power, including in the case of ZGNA and ZBI, the voting of all
shares of capital stock of the Company owned by them, to appoint three or
six, as the case may be, additional Independent Directors to the Board.
SECTION 3. NOTICE OF MEETINGS; QUORUM.
(a) Notice of any regular or special meeting of the Board shall be
mailed to each director addressed to him at his residence or usual place of
business at least three days before the day on which the meeting is to be
held, or if sent to him at such place by telecopy, telegraph or cable, or
delivered personally or by telephone, not later than the day before the day
on which the meeting is to be held. No notice of the annual meeting of the
Board of Directors shall be required if it is held immediately after the
annual meeting of the stockholders and if a quorum is present. Members of
the Board, or any committee designated by the Board, shall, except as
otherwise provided by law or the Articles of Incorporation of the Company,
have the
Appendix C - Page 4
<PAGE>
power to participate in a meeting of the Board, or any committee, by means of
a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation shall constitute presence in person at the meeting.
(b) A majority of the Board at any time in office shall constitute
a quorum. At any meeting at which a quorum is present, the vote of a
majority of the members present shall be the act of the Board unless the act
of a greater number is specifically required by law or by the Articles of
Incorporation or the By-laws of the Company; provided, however, that any
proposed change to the Articles of Incorporation or By-laws of the Company,
shall require the approval of a majority of the entire Board, and any
transaction with the person entitled to appoint ZGNA Directors or an
Affiliate of such person shall require the approval of a majority of the
Continuing Directors and Independent Directors. The members of the Board
shall act only as the Board and the individual members thereof shall not have
any powers as such.
SECTION 4. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado applicable to
contracts made and to be performed entirely within such State.
(b) PARAGRAPH AND SECTION HEADINGS. The headings of the sections
and subsections of this Agreement are inserted for convenience only and shall
not be deemed to constitute a part thereof.
(c) NOTICES.
(i) All communications under this Agreement shall be in writing
and shall be delivered by hand, by facsimile or mailed by overnight courier
or by registered mail or certified mail, postage prepaid:
(1) if to ZGNA or ZBI, at 2550 El Presidio Street, Long Beach,
California 90810-1193 (facsimile: (310) 637-3644), marked for
attention of President, or at such other address as ZGNA or ZBI may
have furnished the Company in writing (with a copy to Willkie Farr &
Appendix C - Page 5
<PAGE>
Gallagher, 787 Seventh Avenue, New York, NY 10019-6099, Attention:
Harvey L. Sperry, Esq. (facsimile: 212-728-8111), or at such other
address it may have furnished the Company in writing), or
(2) if to the Company, at 5555 Airport Boulevard, Boulder, Colorado
80301 (facsimile: (303) 441-5802), marked for the attention of Dean
Stull, or at such other address as the Company may have furnished
Investor in writing (with a copy to Chrisman, Bynum & Johnson, P.C.,
1900 Fifteenth Street, Boulder, Colorado 80302, Attention: Laurie
Glasscock, Esq. (facsimile: 303-449-5426) or at such other address as
it may have furnished in writing to ZGNA).
(ii) Any notice so addressed shall be deemed to be given: if
delivered by hand or by facsimile, on the date of such delivery; if delivered
by courier, on the first Business Day following the date of the delivery to
the courier; and if mailed by registered or certified mail, on the third
Business Day after the date of such mailing.
(d) EXPENSES AND TAXES. Whether or not the Closing shall have
occurred, each party shall pay its own fees and expenses incurred in
connection with the transactions contemplated hereby.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties; provided, however, that ZGNA may only assign its rights hereunder to
a transferee of a majority of the Common Stock acquired by ZGNA and ZBI
pursuant to the Mergers and securities issued in respect thereof.
(f) ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement and
the agreements attached as Exhibits hereto constitute the entire
understandings of the parties hereto and supersede all prior agreements or
understandings with respect to the subject matter hereof among such parties.
This Agreement may be amended, and the observance of any term of this
Agreement may be waived, with (and only with) the written consent of the
Company and ZGNA. No course of dealing between the Company and ZGNA nor any
delay in exercising any rights hereunder shall operate as a waiver of any
rights of either party hereto.
Appendix C - Page 6
<PAGE>
(g) SEVERABILITY. In the event that any part or parts of this
Agreement shall be held illegal or unenforceable by any court or
administrative body of competent jurisdiction, such determination shall not
effect the remaining provisions of this Agreement which shall remain in full
force and effect.
(h) TERMINATION. This Agreement shall terminate and shall be of
no further force or effect on or after the earlier of (i) the fifth
anniversary of the date hereof or (ii) the date on which ZGNA and ZBI
together own less than twenty percent (20%) of the outstanding shares of
Common Stock.
(i) LOSS OF ZGNA DIRECTORSHIPS. If a court of competent
jurisdiction shall determine that ZGNA or ZBI has breached Section 6.9 of the
Merger Agreement (Standstill), ZGNA and ZBI shall automatically lose their
right to designate three (3) representatives as set forth in Section 2(a)
hereof. In such event, ZGNA and ZBI shall cause ZGNA Directors to
immediately resign as directors of the Board and shall take all action within
their power to elect three (3) nominees of the Continuing Directors to the
Board. If such court's determination shall be reversed on appeal, ZGNA's and
ZBI's right to designate three (3) representatives as set forth in Section
2(a) hereof shall be immediately restored and the Company shall cause three
(3) Continuing Directors to immediately resign as directors of the Board and
shall take all action within its power to elect three (3) nominees of ZGNA
and ZBI to the Board.
Appendix C - Page 7
<PAGE>
(j) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
HAUSER, INC.
By:____________________________________
Name:
Title:
ZUELLIG GROUP N.A., INC.
By:____________________________________
Name:
Title:
ZUELLIG BOTANICALS, INC.
By:____________________________________
Name:
Title:
Appendix C - Page 8
<PAGE>
APPENDIX D
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hauser, Inc.:
We have audited the accompanying consolidated balance sheets of Hauser, Inc. (a
Colorado Corporation) and its subsidiaries as of April 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' 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 Hauser, Inc. and its
subsidiaries as of April 30, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
June 19, 1998. (except with
respect to the matters in
Note 9 as to which the date
is February 11, 1999)
Appendix D - Page 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Hauser, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Hauser, Inc. (formerly Hauser Chemical
Research, Inc.) and its subsidiaries for the year ended April 30, 1996. 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 consolidated results of operations and cash flows of
Hauser, Inc. (formerly Hauser Chemical Research, Inc.) and its subsidiaries for
the year ended April 30, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Denver, Colorado,
July 15, 1996.
Appendix D - Page 2
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended April 30,
------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
REVENUES:
Natural product processing $ 17,530,104 $ 16,190,979 $ 8,123,760
Technical services 14,507,424 9,034,787 9,315,672
------------------ ----------------- -----------------
Total revenues 32,037,528 25,225,766 17,439,432
------------------ ----------------- -----------------
COST OF REVENUES:
Natural product processing 15,091,082 13,543,487 11,446,880
Technical services 10,102,016 7,766,976 7,012,290
------------------ ----------------- -----------------
Total cost of revenues 25,193,098 21,310,463 18,459,170
------------------ ----------------- -----------------
GROSS PROFIT (LOSS) 6,844,430 3,915,303 (1,019,738)
------------------ ----------------- -----------------
OPERATING EXPENSES:
Research and development 2,229,843 2,240,992 2,157,708
Sales and marketing 2,390,602 1,619,937 1,167,447
General and administrative 5,369,527 6,095,770 6,237,159
Product warranty 1,500,000 - -
------------------ ----------------- -----------------
Total operating expenses 11,489,972 9,956,699 9,562,314
------------------ ----------------- -----------------
LOSS FROM OPERATIONS (4,645,542) (6,041,396) (10,582,052)
------------------ ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 315,280 528,424 1,047,734
Interest expense (44,931) (18,947) (40,738)
Gain (loss) from investments 361,461 - (1,000,000)
------------------ ----------------- -----------------
Total other income 631,810 509,477 6,996
------------------ ----------------- -----------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (4,013,732) (5,531,919) (10,575,056)
INCOME TAX BENEFIT 879,723 1,628,993 4,134,812
------------------ ----------------- -----------------
NET LOSS FROM CONTINUING OPERATIONS (3,134,009) (3,902,926) (6,440,244)
------------------ ----------------- -----------------
DISCONTINUED OPERATION:
Loss from discontinued operation, net of applicable income
tax benefit of $0, $321,568, and $832,126 respectively - (528,464) (1,296,092)
Loss on disposal of discontinued operation, net of applicable
income tax benefit of $0, $1,283,386,and $0, respectively - (2,100,146) -
------------------ ----------------- -----------------
LOSS FROM DISCONTINUED OPERATION - (2,628,610) (1,296,092)
------------------ ----------------- -----------------
NET LOSS $ (3,134,009) $ (6,531,536) $ (7,736,336)
------------------ ----------------- -----------------
------------------ ----------------- -----------------
LOSS PER SHARE BASIC AND DILUTED:
Continuing operations $ (0.30) $ (0.38) $ (0.62)
Discontinued operations - (0.25) (0.13)
------------------ ----------------- -----------------
Loss per share $ (0.30) $ (0.63) $ (0.75)
------------------ ----------------- -----------------
------------------ ----------------- -----------------
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 10,439,800 10,389,111 10,344,169
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>
See notes to consolidated financial statements.
Appendix D - Page 3
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30,
-----------------------------------------
ASSETS 1998 1997
------------------ ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,081,796 $ 8,379,551
Restricted cash 139,346 -
Held-to-maturity investments - 196,751
Accounts receivable, less allowance for doubtful accounts:
1998, $430,518; 1997, $359,632 9,090,005 4,961,132
Income taxes receivable - 1,445,046
Inventories, current 10,111,688 7,073,295
Prepaid expenses and other 349,570 406,325
Net deferred income tax asset 1,946,339 1,684,961
------------------ ------------------
Total current assets 23,718,744 24,147,061
------------------ ------------------
PROPERTY AND EQUIPMENT:
Land and buildings 7,635,216 7,418,526
Lab and processing equipment 31,883,787 29,513,011
Furniture and fixtures 4,671,647 4,459,006
------------------ ------------------
Total property and equipment 44,190,650 41,390,543
Accumulated depreciation (21,846,032) (18,204,486)
------------------ ------------------
Net property and equipment 22,344,618 23,186,057
------------------ ------------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
1998, $936,670; 1997, $651,772 1,961,462 2,182,791
Inventories, non-current 14,787,837 14,710,409
Deposits 4,013,992 1,414,373
Net deferred income tax asset 1,010,154 351,862
Other 456,774 805,325
------------------ ------------------
$ 68,293,581 $ 66,797,878
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,764,294 $ 1,486,499
Current portion of long-term debt 1,911,498 171,916
Accrued salaries and benefits 1,201,201 960,698
Deposits 670,155 200,000
Product warranty 1,500,000 -
Other accrued current liabilities - 165,447
------------------ ------------------
Total current liabilities 7,047,148 2,984,560
------------------ ------------------
LONG-TERM DEBT 692,733 121,764
------------------ ------------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued and outstanding: 1998, 10,464,458; 1997, 10,419,028 10,464 10,419
Additional paid-in capital 58,864,295 58,622,066
Unrealized gain on available-for-sale investment, net of income taxes - 246,119
Retained earnings 1,678,941 4,812,950
------------------ ------------------
Total stockholders' equity 60,553,700 63,691,554
------------------ ------------------
$ 68,293,581 $ 66,797,878
------------------ ------------------
------------------ ------------------
</TABLE>
See notes to consolidated financial statements.
Appendix D - Page 4
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended April 30,
--------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,134,009) $ (6,531,536) $ (7,736,336)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,022,965 4,171,790 3,592,872
Provision for bad debt 235,574 105,000 322,673
Provision for excess inventories 41,829 562,057 -
Provision for product warranty 1,500,000 - -
Loss on disposal of discontinued operation - 3,383,532 -
Loss on disposal of assets 92,319 344,255 176,004
Gain on sales of investment (361,461) - -
Writedown of investment - - 1,000,000
Deferred income tax benefit (879,723) (2,412,827) (2,169,804)
Change in deposits and other (2,535,737) (1,139,985) 125,569
Change in assets and liabilities, net of effects from
the purchase of Shuster and Ironwood:
Accounts receivable (4,364,447) 910,073 (613,343)
Income taxes receivable 1,445,046 1,220,418 (366,518)
Inventories (3,304,476) (5,305,498) (4,562,562)
Prepaid expenses and other 56,755 (111,692) (173,511)
Accounts payable 277,795 1,036,684 (670,272)
Customer deposits 470,155 25,628 -
Other accrued liabilities 75,056 (185,331) 167,517
----------------- ----------------- -----------------
Net cash used in operating activities (6,362,359) (3,927,432) (10,907,711)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,058,167) (2,729,671) (2,165,810)
Proceeds from sale of investments 458,479 - -
Purchase of Shuster's common stock, net of cash acquired (63,569) - (3,317,919)
Sale of Ironwood net assets - 250,000 -
Collection on Note Receivable 108,411 - -
Issuance of Notes Receivable (60,000) - -
Purchase of investments (194,922) (293,865) -
Maturity of investments 391,673 7,900,000 19,587,413
Net change in restricted cash (139,346) - -
----------------- ----------------- -----------------
Net cash (used in) provided by investing activities (1,557,441) 5,126,464 14,103,684
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank lines of credit 1,500,000 - -
Proceeds from issuance of long-term debt - 274,833 -
Repayments of long-term debt (120,229) (781,518) (45,791)
Proceeds from issuance of common stock and warrants 242,274 258,452 122,446
Purchase of treasury stock - - (88,750)
----------------- ----------------- -----------------
Net cash provided by (used in) financing activities 1,622,045 (248,233) (12,095)
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents (6,297,755) 950,799 3,183,878
Cash and cash equivalents, beginning of year 8,379,551 7,428,752 4,244,874
----------------- ----------------- -----------------
Cash and cash equivalents, end of year $ 2,081,796 $ 8,379,551 $ 7,428,752
----------------- ----------------- -----------------
----------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 44,931 $ 18,947 $ 37,722
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Cash received during the year for income taxes refunded $ 1,625,855 $ 2,052,637 $ 2,415,450
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Non-cash investing and financing activity:
Capital lease obligations incurred through lease of lab
and processing equipment $ 930,780 $ 64,538 $ -
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
See notes to consolidated financial statements.
Appendix D - Page 5
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
-------------------------- Paid-in -----------------------------
Shares Amount Capital Shares Amount
-------------------------- ----------------- -----------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1995 10,526,079 $ 10,526 $ 59,266,173 (181,100) $ (966,062)
Exercise of stock options 37,200 38 120,407 - -
Tax benefit from employee
exercise of stock options - - 29,700 - -
Exercise of warrants 1,334 1 2,000 - -
Purchase of treasury stock - - - (20,000) (88,750)
Change in unrealized gain on
available-for-sale investment - - - - -
Net loss - - - - -
-------------------------- ----------------- -----------------------------
BALANCE, APRIL 30, 1996 10,564,613 10,565 59,418,280 (201,100) (1,054,812)
Exercise of stock options 55,515 55 210,111 - -
Tax benefit from employee
exercise of stock options - - 48,286 - -
Retirement of treasury stock (201,100) (201) (1,054,611) 201,100 1,054,812
Change in unrealized gain on
available-for-sale investment - - - - -
Net loss - - - - -
-------------------------- ----------------- -----------------------------
BALANCE, APRIL 30, 1997 10,419,028 10,419 58,622,066 - -
Exercise of stock options 45,430 45 223,881 - -
Tax benefit from employee
exercise of stock options - - 18,348 - -
Change in unrealized gain on
available-for-sale investment - - - - -
Net loss - - - - -
-------------------------- ----------------- -----------------------------
BALANCE, April 30, 1998 10,464,458 $ 10,464 $ 58,864,295 - $ -
-------------------------- ----------------- -----------------------------
-------------------------- ----------------- -----------------------------
<CAPTION>
Unrealized Gain On Total
Available-For-Sale Retained Stockholders'
Investments Earnings Equity
---------------------- ---------------- ------------------
<S> <C> <C> <C>
BALANCE, APRIL 30, 1995 - $19,080,822 $ 77,391,459
Exercise of stock options - - 120,445
Tax benefit from employee
exercise of stock options - - 29,700
Exercise of warrants - - 2,001
Purchase of treasury stock - - (88,750)
Change in unrealized gain on
available-for-sale investment $ 465,100 - 465,100
Net loss - (7,736,336) (7,736,336)
---------------------- ---------------- ------------------
BALANCE, APRIL 30, 1996 465,100 11,344,486 70,183,619
Exercise of stock options - - 210,166
Tax benefit from employee
exercise of stock options - - 48,286
Retirement of treasury stock - - -
Change in unrealized gain on
available-for-sale investment (218,981) - (218,981)
Net loss - (6,531,536) (6,531,536)
---------------------- ---------------- ------------------
BALANCE, APRIL 30, 1997 246,119 4,812,950 63,691,554
Exercise of stock options - - 223,926
Tax benefit from employee
exercise of stock options - - 18,348
Change in unrealized gain on
available-for-sale investment (246,119) - (246,119)
Net loss - (3,134,009) (3,134,009)
---------------------- ---------------- ------------------
BALANCE, April 30, 1998 $ - $ 1,678,941 $ 60,553,700
---------------------- ---------------- ------------------
---------------------- ---------------- ------------------
</TABLE>
See notes to consolidated financial statements.
Apendix D - Page 6
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION
Hauser, Inc. (the "Company"), a Colorado corporation, and its wholly owned
subsidiaries, Shuster Laboratories, Inc. and Hauser Northwest, Inc., is a
manufacturer of special products from natural sources, using its
proprietary technologies in extraction and purification. The Company also
provides interdisciplinary laboratory testing services, chemical
engineering services, and contract research and development. The Company's
existing products are principally marketed to the pharmaceutical, dietary
supplements and food ingredients industries.
RISKS AND UNCERTAINTIES - A significant portion of the Company's resources
are concentrated in the production of bulk paclitaxel. Because of a
relatively long production cycle for paclitaxel, the Company has purchased
and committed to purchase significant raw materials (see note 7), and has
committed significant resources to process such raw materials in
anticipation of delivering paclitaxel to customers in the future. At April
30, 1998, the Company had paclitaxel related assets of: $14,321,020 of both
in-process and finished inventory; $3,847,862 as deposits on future raw
materials; and approximately $4,437,748 net book value of related equipment
used in the manufacturing process for paclitaxel.
Under the Waxman-Hatch Act, Bristol-Myers Squibb Company ("Bristol") had an
exclusive right to sell Taxol-Registered Trademark- in the United States,
which expired on December 27, 1997. Bristol has also obtained certain usage
patents which have barred access to the United States market. The validity
of these patents is currently in litigation. If Bristol's usage patents are
upheld in the courts, entry into the United States market would be
significantly delayed, and thus the recovery of the Company's investment in
paclitaxel related assets would also be significantly delayed, or could
result in revaluation in the amounts recoverable from such assets.
The Company markets paclitaxel through an exclusive relationship with one
company in North America and a non-exclusive relationship with one company
in Europe. The Company's North American partner has approval to sell
generic paclitaxel in Canada. In Europe, the Company's partner has been
approved to sell paclitaxel in the Netherlands as an equivalent product,
not a generic product.
Further, the Company's customers wishing to enter the market for paclitaxel
based therapies must obtain proper regulatory approval before they can
formulate and sell the paclitaxel in final form. Any delays in obtaining
such approval will similarly delay the Company's recovery of its investment
in its paclitaxel related assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
those of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
ACQUISITIONS - On July 21, 1995, the Company acquired all of the stock of
Herbert V. Shuster, Inc. ("Shuster") for approximately $3,959,515 in cash
and $621,953 in notes plus a performance-based
Appendix D - Page 7
<PAGE>
earnout for meeting certain milestones over the next five years. The
earnout will adjust the cost of the acquisition once any portion of the
payment becomes probable. Shuster is a consumer research and development
firm and contract laboratory. Subsequent adjustments have increased the
purchase price by $209,577.
The following pro-forma unaudited consolidated results of operations for
the year ended April 30, 1996, have been prepared assuming the Shuster
acquisition occurred at the beginning of the fiscal year. These pro-forma
results have been prepared for comparative purposes only and do not purport
to be indicative of results of operations which actually would have
resulted had the acquisition taken effect at the beginning of the year.
<TABLE>
<CAPTION>
Year ended
April 30, 1996
-----------------
<S> <C>
Revenues $ 18,429,018
Net loss from continuing operations $ (6,481,761)
Net loss per share from continuing operations $ (0.63)
</TABLE>
DISCONTINUED OPERATIONS - On October 11, 1996, the Company sold
substantially all of the net assets of Ironwood for $250,000 in cash, notes
receivable of $150,000 and certain performance-based earnouts. Revenues of
Ironwood were $2,670,389 and $8,225,582 in fiscal years 1997 and 1996,
respectively.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of these
financial statements. Actual results could differ from those estimates.
PRODUCT WARRANTY - During the fourth quarter of fiscal 1998, the Company
took a charge to earnings and reserved $1,500,000 in anticipation of
product returns, rework costs, legal and professional fees, and process
development costs related to the discovery of a common fungicide,
quintozene, in its bulk Panax ginseng. Sales of Panax ginseng accounted for
less than 5% of total revenues in fiscal 1998.
ADVERTISING - The Company expenses advertising costs as they are incurred.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include investments
in highly liquid instruments with original maturities of 90 days or less.
INVENTORIES - Raw material, work in process, and finished goods
inventories, which include costs of materials, direct labor and
manufacturing overhead, are priced at the lower of average cost or market.
Writedowns for excess and obsolete inventories are charged to expense in
the period when conditions giving rise to the writedowns are first
recognized.
Non-current inventories represent raw materials and work in process in
various stages of completion in excess of shipments expected to occur in
the next fiscal year.
Appendix D - Page 8
<PAGE>
Inventories as of April 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 5,224,750 $ 3,373,554
Work in process 11,763,470 13,019,432
Finished goods 8,515,134 5,952,775
------------------ -----------------
Total before valuation allowance 25,503,354 22,345,761
Less: valuation allowance (603,829) (562,057)
------------------ -----------------
Total inventories 24,899,525 21,783,704
Less non-current inventories 14,787,837 14,710,409
------------------ -----------------
Current portion of inventories $ 10,111,688 $ 7,073,295
------------------ -----------------
------------------ -----------------
</TABLE>
INVESTMENTS - The Company accounts for debt securities for which it has the
positive intent and ability to hold to maturity at amortized cost. Below is
a table of held-to-maturity investments as of April 30, 1997. The Company
had no held-to-maturity investments as of April 30, 1998.
<TABLE>
<CAPTION>
April 30, 1997
-----------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issues
Maturities less than 1 year:
U.S. Treasury Securities $ 196,751 $ 2,827 $ - $199 ,578
</TABLE>
The Company accounts for equity securities that have a readily determinable
value and debt securities that are available-for-sale at quoted fair
values. At April 30, 1997, the Company had an equity investment with a cost
of $100,000 and a fair value of $502,966. Unrealized gains are recorded in
stockholders' equity net of the income tax effect. This investment was sold
during fiscal 1998 for a gain of $361.461.
The Company also invests short-term excess cash in a bond mutual fund which
is considered to be a cash equivalent. At April 30, 1998 and 1997, the fund
had a quoted market value of $1,120,513 and $4,005,191, respectively.
Other investments consist of 20% or less investments in non-publicly traded
companies and are accounted for at the lower of cost or market. During
fiscal 1996, the Company wrote down its investment in a development stage
company resulting in a loss of $1,000,000. The investment was liquidated in
the first quarter of fiscal 1997.
PROPERTY AND EQUIPMENT - Significant additions and improvements are
capitalized at cost, while maintenance and repairs which do not improve or
extend the life of the respective assets are charged to expense as
incurred.
Depreciation is recognized on a straight-line basis over the following
estimated useful lives:
<TABLE>
<S> <C>
Equipment, furniture and fixtures 2 - 15 years
Buildings 39 years
Leasehold improvements 5 - 10 years
</TABLE>
Appendix D - Page 9
<PAGE>
Depreciation was $3,738,158, $3,888,336, and $3,356,396 for fiscal years
1998, 1997 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable from future
undiscounted cash flows. Impairment losses are recorded for the difference
between the carrying value and fair value of the long-lived asset.
GOODWILL - Goodwill resulting from acquisitions is stated at cost, net of
accumulated amortization, and is being amortized using the straight-line
method over an estimated useful life of 10 years.
REVENUE RECOGNITION - Natural product processing revenues are recognized
when title and risk of ownership passes to the customer which generally is
upon delivery of processed product. Technical services revenues are
recognized upon completion of specified contract requirements.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
expense as incurred.
STOCK BASED COMPENSATION -The Company accounts for its stock based
compensation plans for employees under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25").
EARNINGS (LOSS) PER SHARE - During fiscal 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), which was required to be adopted on December 15, 1997. This
statement establishes standards for computing and presenting basic and
diluted earnings per share. Under this statement, basic earnings or loss
per share is computed by dividing the net earnings or loss by the weighted
average number of shares of common stock outstanding. Diluted earnings or
loss per share is determined by dividing the net earnings or loss by the
sum of (1) the weighted average number of common shares outstanding and (2)
if not anti-dilutive, the effect of outstanding warrants and stock options
determined utilizing the treasury stock method. The adoption of SFAS 128
had no effect on previously reported earnings (loss) per share.
In fiscal 1998, 1997 and 1996, stock options and warrants totaling 709,256,
548,362, and 443,687 respectively were excluded from the calculation of
diluted earnings (loss) per share since the result would have been anti-
dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Due to the short-term nature of the
Company's debt, accounts receivable and other financial instruments, the
fair value of such financial instruments approximates their carrying
amount.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Comprehensive (loss) would have been approximately
Appendix D - Page 10
<PAGE>
($3,380,000), ($6,750,000) and ($7,270,000) for the years ended
April 30, 1998, 1997, and 1996, respectively.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"). SFAS 131 requires that public companies report
information about their operating segments based on the financial
information used by the chief operating decision maker in their annual
financial statements and requires those companies to report selected
information in their interim statements. SFAS 131 is effective for fiscal
years beginning after December 15, 1997.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the statement
of financial position and measures those instruments at fair value. SFAS
133 is effective for fiscal quarters and fiscal years beginning after June
15, 1999. Management believes that the adoption of SFAS 133 will not have a
significant impact on the Company's financial condition and results of
operations.
3. LONG-TERM DEBT
Future minimum payments for the years ending April 30 are as follows:
<TABLE>
<CAPTION>
Capital lease
Notes payable obligations Line Of Credit
(5.5% to 15.4%) (11.2% to 15%) (variable)
----------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 36,105 $ 473,327 $ 1,500,000
2000 1,000 443,246 -
2001 - 299,293 -
2002 - 13,296 -
2003 - 12,188 -
----------------- ----------------- -----------------
Total 37,105 1,241,350 1,500,000
----------------- ----------------- -----------------
Less: interest - (174,224) -
----------------- ----------------- -----------------
April 30, 1998 $ 37,105 $ 1,067,126 $ 1,500,000
----------------- ----------------- -----------------
----------------- ----------------- -----------------
April 30, 1997 $ 157,335 $ 136,345 $ -
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
At April 30, 1998 and 1997, property and equipment includes items under
capital leases with book values of $1,032,293 and $138,396, respectively,
and accumulated depreciation of $247,570 and $85,208, respectively.
LINES OF CREDIT - The Company has an $8,850,000 bank line of credit which
allows the Company to obtain advances or letters of credit against a
borrowing base of eligible accounts receivable, inventory and fixed assets.
As of April 30, 1998, $1,500,000 had been borrowed against the line. The
line of credit has an annual fee of 0.50% of the unused portion of the line
and interest is payable monthly at the bank's prime rate plus 0.75% (9.25%
at April 30, 1998). The line of credit expires June 30, 2000 and is secured
by all assets of the Company, with the exception of intangibles.
Appendix D - Page 11
<PAGE>
Under the terms of the lending agreement, the Company cannot pay any
dividends without the consent of the bank and is required to maintain
certain financial ratios and minimum working capital and equity amounts. As
of April 30, 1998, the Company was not in compliance with a financial
covenant for the line of credit which required the Company to report
profitability in the fourth quarter of fiscal 1998. The Company has
obtained a waiver from the bank for this covenant as of April 30, 1998.
Restricted cash is equal to interest due over one year based on the amount
borrowed and is required to be maintained on deposit at a financial
institution as security for the Company's line of credit. Cash on deposit
at April 30, 1998 was $139,346.
In addition, the Company has a lease line of credit for $564,000, of which
$346,083 was available for use at April 30, 1998. The interest rate on the
lease line is the bank's cost of funds plus 2.5% (8.54% at April 30, 1998)
and the line expires on April 8, 2000.
4. STOCKHOLDERS' EQUITY
NON-QUALIFIED STOCK OPTIONS - The Company's 1987 Stock Option Plan (the
"1987 Plan") authorizes the granting of non-qualified stock options for up
to 1,218,720 shares of the Company's common stock by directors, employees,
and consultants. As of April 30, 1998, there were 813,237 shares of common
stock committed under this plan. Exercise terms, ranging from one to ten
years for options granted under the 1987 Plan, are determined by the Board
of Directors at the time of grant. A summary of the status of the Company's
1987 Non-Qualified Stock Option Plan follows.
<TABLE>
<CAPTION>
FY 1998 FY 1997 FY 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance outstanding at beginning of fiscal year: 164,671 196,310 159,141
Granted 154,849 20,023 83,655
Exercised (16,594) (44,012) (32,566)
Canceled (26,856) (7,650) (13,920)
--------------- --------------- ---------------
Outstanding at April 30 276,070 164,671 196,310
--------------- --------------- ---------------
--------------- --------------- ---------------
Exercisable at April 30 242,752 163,171 189,849
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average exercise prices:
At beginning of period $ 5.45 $ 4.92 $ 4.57
At end of period $ 5.78 $ 5.45 $ 4.92
Exercisable at end of period $ 5.76 $ 5.45 $ 4.91
Options granted $ 5.99 $ 6.44 $ 4.61
Options exercised $ 4.60 $ 3.70 $ 2.83
Options canceled $ 5.75 $ 4.39 $ 4.41
Weighted average, fair value of options granted $ 3.91 $ 3.36 $ 2.85
during period
</TABLE>
Appendix D - Page 12
<PAGE>
<TABLE>
<CAPTION>
April 30, 1998
------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------ -------------------------------
Remaining
Range of Exercise Weighted Average Contractual Weighted Average
Prices Shares Exercise Price Life (Years) Shares Exercise Price
------ ------ -------------- ------------ ----- --------------
<S> <C> <C> <C> <C> <C>
$3.71 - $4.80 29,603 $4.38 2.18 29,603 $4.38
$4.81 - $5.60 33,029 $5.25 2.66 33,029 $5.25
$5.61 - $6.00 188,238 $5.95 6.86 154,920 $5.95
$6.13 - $8.28 25,200 $6.89 5.75 25,200 $6.89
----------- ------------
276,070 242,752
----------- ------------
----------- ------------
</TABLE>
INCENTIVE STOCK OPTIONS -The Company's 1992 Stock Option Plan ("1992 Plan")
authorizes the granting of 700,000 shares of common stock to employees at
fair market value on the date of grant. As of April 30, 1998, there were
439,162 shares committed under this plan. Exercise terms, ranging from one
month to ten years for options granted under the 1992 Plan, are determined
by the Board of Directors at the time of grant. A summary of the status of
the Company's 1992 Plan follows:
<TABLE>
<CAPTION>
FY 1998 FY 1997 FY 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance outstanding at beginning of fiscal year: 335,214 247,377 233,780
Granted 130,300 146,500 145,600
Exercised (28,836) (11,503) (4,634)
Canceled (52,169) (47,160) (127,369)
--------------- --------------- ---------------
Outstanding at April 30 384,509 335,214 247,377
--------------- --------------- ---------------
--------------- --------------- ---------------
Exercisable at April 30 208,309 225,414 181,360
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average exercise prices:
At beginning of period $ 6.04 $ 5.87 $ 5.99
At end of period $ 5.93 $ 6.04 $ 5.87
Exercisable at end of period $ 6.02 $ 6.04 $ 5.99
Options granted $ 5.91 $ 6.27 $ 5.28
Options exercised $ 5.94 $ 5.98 $ 5.85
Options canceled $ 6.53 $ 5.86 $ 5.43
Weighted average, fair value of options granted $ 3.86 $ 2.83 $ 2.71
during period
</TABLE>
Appendix D - Page 13
<PAGE>
<TABLE>
April 30, 1998
------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------ Remaining ------------------------------
Range of Exercise Weighted Average Contractual Weighted Average
Prices Shares Exercise Price Life (Years) Shares Exercise Price
------- ------ -------------- ------------ ------ ---------------
<S> <C> <C> <C> <C> <C>
$4.38 - $5.22 11,400 $5.17 5.62 3,400 $5.07
$5.34 - $5.44 4,400 $5.36 4.91 1,700 $5.39
$5.63 - $6.00 331,109 $5.88 5.18 177,609 $5.96
$6.06 - $7.56 37,600 $6.67 7.84 25,600 $6.62
----------- -----------
384,509 208,309
----------- -----------
----------- -----------
</TABLE>
WARRANTS - The Company has issued to consultants and stockholders warrants
for the purchase of common stock. Exercise terms were determined by the
Board of Directors at the time of grant. During fiscal 1996 and 1998, no
warrants were issued. During fiscal 1997, 48,477 warrants were issued at a
weighted average exercise price of $6.03 and a grant date fair value of
$147,306. During fiscal 1996, 1,334 warrants were exercised at $1.50. At
April 30, 1998, 48,477 warrants remained outstanding at exercise prices
ranging from $5.67 to $6.22 per warrant.
VALUATION - The weighted average fair value of each option grant or warrant
has been estimated as of the date of grant using the Black-Scholes option-
pricing model using the following assumptions.
<TABLE>
<CAPTION>
FY 1998 FY 1997 FY 1996
------------ ------------- ------------
<S> <C> <C> <C>
Dividend rate 0.00% 0.00% 0.00%
Expected volatility 40.00% 50.00% 55.00%
Risk-free interest rate 5.79% 6.37% 5.98%
Expected life (in years) 5.6 5.0 5.0
</TABLE>
Using these assumptions, the fair value of the stock options granted in
fiscal years 1998, 1997, and 1996 was estimated to be approximately
$1,107,242, $480,271, and $632,440, respectively. Had compensation cost
been recorded based on the fair value of the option or warrant grants, the
Company's pro-forma net loss and net loss per share would have been as
follows for the years ended April 30:
<TABLE>
<CAPTION>
FY 1998 FY 1997 FY 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss from continuing operations:
As reported $ (3,134,009) $ (3,902,926) $ (6,440,244)
Pro-forma $ (3,455,707) $ (4,109,299) $ (6,620,823)
Net loss from continuing operations per
share basic and diluted
As reported $ (0.30) $ (0.38) $ (0.62)
Pro-forma $ (0.33) $ (0.40) $ (0.64)
</TABLE>
Appendix D - Page 14
<PAGE>
5. INCOME TAXES
Income tax benefit from continuing operations for the years ended April 30,
1996, 1997 and 1998 is comprised of the following components:
<TABLE>
<CAPTION>
Federal State Total
----------- ----------- -----------
<S> <C> <C> <C>
1996
Current $(1,965,008) $ -- $(1,965,008)
Deferred (1,905,993) (343,711) (2,249,704)
Valuation Allowance 71,489 8,411 79,900
----------- ----------- -----------
Total $(3,799,512) $ (335,300) $(4,134,812)
----------- ----------- -----------
----------- ----------- -----------
1997
Current $ 60,780 $ -- $ 60,780
Deferred (1,614,745) (200,128) (1,814,873)
Valuation Allowance 111,932 13,168 125,100
----------- ----------- -----------
Total $(1,442,033) $ (186,960) $(1,628,993)
----------- ----------- -----------
----------- ----------- -----------
1998
Current $ -- $ -- $ --
Deferred (1,199,285) (98,719) (1,298,004)
Valuation Allowance 374,251 44,030 418,281
----------- ----------- -----------
Total $ (825,034) $ (54,689) $ (879,723)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
As of April 30, 1998 and 1997, temporary differences which result in
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current:
Inventories capitalized for income tax purposes $ 1,008,199 $ 1,296,734
Bad debt reserves 201,597 136,660
Inventory reserves 229,477 213,560
Accrued vacation 119,716 104,872
Prepaid expenses -- (9,943)
Product warranty reserve 570,000 --
Less: Valuation allowance (182,650) (56,922)
----------- -----------
Net Current Deferred Tax Asset $ 1,946,339 $ 1,684,961
----------- -----------
----------- -----------
Noncurrent
Federal NOL carryforward $ 1,469,501 $ 949,961
State NOL carryforward 977,479 922,790
AMT credit carryforward 1,484,151 1,552,491
R&D credit carryforward 510,265 357,120
Capital loss carryforward 243,616 380,000
Excess of tax over book depreciation (3,648,241) (3,903,032)
Income for tax purposes, not book 304,000 361,000
Other 110,013 (120,390)
Less: Valuation allowance (440,630) (148,078)
----------- -----------
Net Noncurrent Deferred tax Asset $ 1,010,154 $ 351,862
----------- -----------
----------- -----------
</TABLE>
The Company has approximately $4.3 million of federal and $24.4 million of
state net operating loss carry forwards that expire in varying amounts
through the year 2013 and approximately $641,000 of capital loss carry
forwards expiring in 2001. The Company also has available income
Appendix D- Page 15
<PAGE>
tax credits of $510,265, expiring on varying dates through 2013 and
alternative minimum tax credits of $1,484,151, which do not expire.
Realization is dependent on generating sufficient taxable income or
realization of future taxable temporary differences prior to expiration
of the carryforwards. Although realization is not assured, management
believes it is more likely than not that the recorded net deferred tax
assets will be realized.
During fiscal 1998, the Company increased its valuation allowance by
approximately $418,000, due mainly to the one-time product warranty charge.
The amount of the net deferred tax asset considered realizable could be
reduced in the near term if estimates of future taxable income do not
materialize.
The Company recognized a reduction of income taxes payable of $18,348,
$48,286, and $29,700 as a result of the exercise of stock options by
employees and others during the years ended April 30, 1998, 1997, and 1996,
respectively. The benefit was credited directly to additional paid-in
capital.
Appendix D - Page 16
<PAGE>
A reconciliation of the expected income tax benefit from continuing
operations at the federal statutory income tax rate to the Company's actual
income tax expense at its effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- ----------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
Computed "expected" income tax benefit ($1,364,669) ($1,880,852) ($3,595,519)
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit (160,549) (186,960) (226,655)
General business credit carryforward (75,000) - (502,600)
Non-deductible expenses 116,735 103,375 100,064
Change in valuation allowance 418,281 125,100 79,900
Other 185,479 210,344 9,998
------------------ ----------------- ----------------
Actual income tax benefit ($879,723) ($1,628,993) ($4,134,812)
------------------ ----------------- ----------------
------------------ ----------------- ----------------
Effective income tax rate 21.9% 29.4% 39.1%
------------------ ----------------- ----------------
------------------ ----------------- ----------------
</TABLE>
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan (the "Plan") for all employees who have
completed one year of service. Participants may contribute up to 15% of
their annual compensation subject to dollar limitations of Section 402(g)
of the Internal Revenue Code. At the discretion of the Board of Directors,
the Company matches, with a cash contribution, 20% of the first 6% of the
participant's contribution and the remaining 80% of the participant's
contribution with common stock. The Company has reserved 200,000 shares of
common stock for issuance under the Plan. The Company's matching portion
vests 20% per year over 5 years. The Plan is subject to the provisions of
the Employee Retirement Income Security Act of 1974. The Company did not
make a contribution to the Plan for the years ended April 30, 1998, 1997
and 1996.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases its office and operating facilities
and various equipment under non-cancelable agreements. Under the terms of
the lease agreement covering the Company's primary production facility, the
Company has the option to purchase the building through February 29, 2000.
The purchase price of the building is adjusted on an annual basis and
ranges between $3,500,000 and $3,700,000. The lease also provides for
renewal options.
Rent expense from continuing operations was $1,204,226, $1,150,977 and
$1,068,777, for the years ended April 30, 1998, 1997, and 1996,
respectively.
Appendix D - Page 17
<PAGE>
Future minimum lease payments under operating leases for the years ending
April 30 are as follows:
<TABLE>
<S> <C>
1999 $ 1,110,933
2000 1,073,698
2001 614,952
2002 13,237
--------------
Total $ 2,812,820
--------------
--------------
</TABLE>
PURCHASE COMMITMENTS - The Company has entered into growing contracts with
numerous nurseries for the future purchases of natural raw materials to be
used in the Company's manufacturing processes. In some cases, the Company
may, at its option, decide at any time to discontinue the payments on these
contracts for nutraceuticals and pharmaceutical products. If such decisions
are made in the future, the Company would not be able to recover deposits
made on the growing contracts. As of April 30, 1998, the Company has
$3,847,862 in deposits for such contracts. The future commitments for
purchases under these contracts at April 30 are as follows:
<TABLE>
<S> <C>
1999 $ 4,217,732
2000 2,352,841
2001 3,187,825
2002 3,440,106
2003 3,216,738
2004 123,148
--------------
Total $ 16,538,390
--------------
--------------
</TABLE>
LOAN GUARANTEE - During the year ended April 30, 1998, the Company
guaranteed a bank loan in the amount of $650,000 for another company and
has pledged 100,000 shares of stock as collateral against the loan. The
Company provided this guarantee to obtain exclusive sales and marketing
rights for a unique dietary supplement and functional food product.
Appendix D - Page 18
<PAGE>
8. INDUSTRY SEGMENTS
SEGMENTS:
Selected financial information from the Company's two business segments are
as follows:
<TABLE>
<CAPTION>
Year Ended April 30, 1998
------------------------------------------------------------------------
Natural Product Technical Corporate and
Processing Services Other Total
--------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Income (Loss) from operations $(1,073,967) $ 2,405,254 $ (5,976,829) $ (4,645,542)
Capital expenditures $ 1,545,582 $ 267,232 $ 245,353 $ 2,058,167
Depreciation and amortization $ 2,634,458 $ 953,820 $ 434,687 $ 4,022,965
Identifiable assets $49,429,962 $ 7,876,394 $ 10,987,225 $ 68,293,581
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30, 1997
------------------------------------------------------------------------
Natural Product Technical Corporate and
Processing Services Other Total
--------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Loss from operations $ (1,428,081) $ (325,932) $ (4,287,383) $ (6,041,396)
Capital expenditures $ 2,352,343 $ 272,335 $ 104,993 $ 2,729,671
Depreciation and amortization $ 2,524,794 $ 944,894 $ 702,102 $ 4,171,790
Identifiable assets $ 43,064,754 $ 6,011,785 $ 17,721,339 $ 66,797,878
</TABLE>
MAJOR CUSTOMERS:
The Company's revenue is concentrated among customers primarily in the
pharmaceutical industry. The following represents customers comprising more
than 10% of the Company's revenues from continuing operations:
<TABLE>
<CAPTION>
Year ended April 30,
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Revenues:
Customer A $ 4,783,683 $ 52,945 $ -
Customer B $ 999,651 $ 3,575,062 $ 3,880,297
Customer C $ 681,000 $ 2,550,000 $ -
Percent of Total Revenues:
Customer A 14.9% 0.2% -
Customer B 3.1% 14.2% 22.3%
Customer C 2.1% 10.1% -
</TABLE>
As of April 30, 1998 and 1997, amounts owed the Company from these
customers were $2,100,918 and $277,682, respectively.
FOREIGN SALES
Export sales were $2,226,875, $4,189,256, and $71,490 in fiscal 1998, 1997,
and 1996, respectively.
9. SUBSEQUENT EVENT
On December 9, 1998, the Company entered into an agreement to merge with
three subsidiaries of privately held Zuellig Group N.A. Inc. ("ZGNA"). The
agreement calls for the Company to
Appendix D - Page 19
<PAGE>
exchange approximately 10.1 million shares of common stock for the
acquired subsidiaries, subject to adjustment as described in the Escrow
Agreement. The acquired subsidiaries are already aligned with the
Company's Natural Ingredients and Technical Services business unit, but
are unrelated to the Company's Pharmaceutical business unit. As part of
the merger agreement, the Company agreed to exit the business of
producing bulk paclitaxel. The Company will incur a one-time charge of
approximately $25-$30 million in its third fiscal quarter ended January
31,1999. This charge includes non-cash charges of approximately
$9.5-$11.0 million to write down paclitaxel and related inventory to its
estimated net realizable value of approximately $9.8 million to be
disposed in the last half of fiscal 1999, a charge of a approximately
$4.5-$5.5 million to write off the Company's deposits on growing
contracts for Yew trees, a charge of approximately $5.0-$6.0 million to
write off paclitaxel processing equipment and a charge of approximately
$1.0-$1.5 million to write off patents, goodwill and other assets. The
charge will also include the accrual of approximately $5.0-$6.0 million
for the estimated additional costs of exiting the paclitaxel business.
All inventory related charges will be included in cost of revenues on
the Company's statement of operations, and all non-inventory charges
will be included in operating expenses.
Appendix D - Page 20
<PAGE>
APPENDIX E
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<TABLE>
Three months ended Six months ended
October 31, October 31,
------------------------------ -------------------------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Natural product processing $ 5,255,016 $ 3,083,406 $ 8,337,968 $ 7,865,704
Technical services 4,344,013 3,015,024 8,312,479 5,778,243
------------ ------------ ------------ ------------
Total revenues 9,599,029 6,098,430 16,650,447 13,643,947
COST OF REVENUES:
Natural product processing 3,516,297 3,094,597 6,001,826 6,694,571
Technical services 3,034,502 2,225,266 5,937,920 4,237,711
------------ ------------ ------------ ------------
Total cost of revenues 6,550,799 5,319,863 11,939,746 10,932,282
GROSS PROFIT 3,048,230 778,567 4,710,701 2,711,665
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development 496,942 800,450 817,898 1,257,762
Sales and marketing 796,997 545,223 1,496,197 1,071,706
General and administrative 1,616,977 1,355,554 3,301,886 2,856,204
------------ ------------ ------------ ------------
Total operating expenses 2,910,916 2,701,227 5,615,981 5,185,672
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 137,314 (1,922,660) (905,280) (2,474,007)
OTHER INCOME (EXPENSE):
Interest income 22,754 89,757 49,808 199,877
Interest expense (133,094) (4,281) (179,478) (6,663)
Other 42,037 173,822 42,037 361,461
------------ ------------ ------------ ------------
Other income (expense) - net (68,303) 259,298 (87,633) 554,675
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 69,011 (1,663,362) (992,913) (1,919,332)
INCOME TAX BENEFIT -- 597,367 -- 671,600
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 69,011 $ (1,065,995) $ (992,913) $ (1,247,732)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
INCOME (LOSS) PER SHARE BASIC $ 0.01 $ (0.10) $ (0.09) $ (0.12)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
INCOME (LOSS) PER SHARE DILUTED $ 0.01 $ (0.10) $ (0.09) $ (0.12)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 10,464,458 10,424,872 10,467,519 10,429,458
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED 10,465,320 10,424,872 10,467,519 10,429,458
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<TABLE>
October 31, April 30,
ASSETS 1998 1998
- - - - - - - - - - - - - ------ ------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,502,432 $ 2,081,796
Restricted Cash 558,896 139,346
Accounts receivable, less allowance for doubtful accounts:
October 31, 1998, $252,263; April 30, 1998, $430,518 7,705,689 9,090,005
Inventories, current 10,440,734 10,111,688
Prepaid expenses and other 258,286 349,570
Net deferred income tax assets 1,956,229 1,946,339
------------ ------------
Total current assets 23,422,266 23,718,744
------------ ------------
PROPERTY AND EQUIPMENT
Land and buildings 7,650,010 7,635,216
Lab and processing equipment 33,149,081 31,883,787
Furniture and fixtures 4,911,360 4,671,647
------------ ------------
Total property and equipment 45,710,451 44,190,650
Accumulated depreciation and amortization (24,057,454) (21,846,032)
------------ ------------
Net property and equipment 21,652,997 22,344,618
------------ ------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
October 31, 1998, $1,082,729; April 30, 1998, $936,670 1,815,403 1,961,462
Inventories, non-current 18,398,250 14,787,837
Deposits 5,226,782 4,013,992
Net deferred income tax asset 1,010,154 1,010,154
Other 858,594 456,774
------------ ------------
Total other assets 27,309,183 22,230,219
------------ ------------
TOTAL $ 72,384,446 $ 68,293,581
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,425,053 $ 1,764,294
Current portion of long term debt 6,464,099 1,911,498
Accrued salaries and wages 1,176,766 1,201,201
Deposits 516,070 670,155
Product warranty 108,616 1,500,000
Other accrued current liabilities 488,036 --
------------ ------------
Total current liabilities 12,178,640 7,047,148
------------ ------------
LONG TERM LIABILITIES 629,262 692,733
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued: October 31, 1998, 10,467,519; April 30, 1998, 10,464,458 10,468 10,464
Additional paid-in capital 58,880,048 58,864,295
Retained earnings 686,028 1,678,941
------------ ------------
Net stockholders' equity 59,576,544 60,553,700
------------ ------------
TOTAL $ 72,384,446 $ 68,293,581
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
- - - - - - - - - - - - - -------------------------------------------------------------------------------
<TABLE>
Six months ended October 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (992,913) $(1,247,732)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,357,481 1,915,081
Provision for bad debt 57,002 14,437
Provision for excess inventories 168,000 165,000
Expenditure for product warranty (1,391,384) --
Gain on sales of investment -- (358,479)
Deferred income tax benefit -- (591,445)
Change in deposits and other (1,323,807) (1,229,476)
Change in assets and liabilities:
Accounts receivable 1,327,314 (940,107)
Income tax receivable -- 1,445,046
Inventories (4,107,459) (873,126)
Prepaid expenses and other (209,409) (54,683)
Accounts payable 1,660,759 (380,256)
Customer deposits (154,085) 1,150,000
Other accrued liabilities 463,601 324,306
----------- -----------
Net cash used in operating activities (2,144,900) (661,434)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,466,111) (984,659)
Proceeds from sale of investments -- 458,479
Purchase of investments -- (194,922)
Maturity of investments -- 196,751
Net change in restricted cash (419,550) --
----------- -----------
Net cash used in investing activities (1,885,661) (524,351)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank line of credit 4,500,000 --
Repayments of long-term debt (64,560) (15,658)
Proceeds from issuance of common stock and warrants 15,757 45,068
----------- -----------
Net cash provided by financing activities 4,451,197 29,410
----------- -----------
----------- -----------
Net increase (decrease) in cash and cash equivalents 420,636 (1,156,375)
Cash and cash equivalents, beginning of year 2,081,796 8,379,551
----------- -----------
Cash and cash equivalents, end of period $ 2,502,432 $ 7,223,176
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF OCTOBER 31, 1998 AND APRIL
30, 1998 AND FOR THE THREE AND SIX MONTH PERIODS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's financial position as of October 31,
1998, and results of its operations and cash flows for the periods ended October
31, 1998 and 1997. The year-end balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. Certain fiscal 1998 amounts have been
reclassified to conform to the fiscal 1999 presentation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of these financial statements.
Actual results could differ from those estimates.
(2) INVENTORIES
Raw material, work in process, and finished goods inventories, which include
costs of materials, direct labor and manufacturing overhead, are priced at the
lower of average cost or market. Write-downs for excess and obsolete inventories
are charged to expense in the period when conditions giving rise to the
write-downs are first recognized. The Company purchases raw material inventory
during harvest seasons, generally in the spring and fall. These purchases may
take place well in advance of scheduled production of finished product.
Non-current inventories represent raw materials, work in process, and finished
goods in various stages of completion in excess of shipments expected to occur
in the next fiscal year.
Inventories are classified as follows:
<TABLE>
October 31, April 30,
1998 1998
--------------- ---------------
<S> <C> <C>
Raw materials and supplies $ 5,334,703 $ 5,224,750
Work in process 14,495,515 11,763,470
Finished goods 9,805,733 8,515,134
--------------- ---------------
Total before valuation allowance 29,635,951 25,503,354
Less valuation allowance (796,967) (603,829)
--------------- ---------------
Total inventories 28,838,984 24,899,525
Less non-current inventories 18,398,250 14,787,837
--------------- ---------------
Current portion of inventories $ 10,440,734 $ 10,111,688
--------------- ---------------
--------------- ---------------
</TABLE>
Appendix E - Page 3
<PAGE>
(3) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
<TABLE>
October 31, 1998 April 30, 1998
--------------- ---------------
<S> <C> <C>
Line of Credit $6,000,000 $1,500,000
Capital Leases 1,086,361 1,067,125
Other 7,000 37,106
---------- ----------
Total 7,093,361 2,604,231
Less current portion 6,464,099 1,911,498
---------- ----------
---------- ----------
Long Term debt $ 629,262 $ 692,733
---------- ----------
---------- ----------
</TABLE>
BANK LINE OF CREDIT - The Company has an $8,850,000 bank line of credit at
the bank's prime interest rate plus 0.75% which matures on June 30, 2000.
(4) PRODUCT WARRANTY
During the fourth quarter of fiscal 1998, the Company took a charge to
earnings and reserved $1,500,000 in anticipation of product returns, rework
costs, legal and professional fees, and process development costs related to
the discovery of a contaminant in its bulk Panax ginseng. In the first half
of fiscal 1999, the Company charged $1,391,384 against the reserve for
expenses associated with this issue.
(5) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130"). SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Comprehensive income (loss) would have been approximately $69,011 and
($979,977) for the quarters ended October 31, 1998, and 1997, respectively,
and ($992,913) and ($1,001,613) for the six months ended October 31, 1998,
and 1997, respectively.
(6) SUBSEQUENT EVENT
On December 9, 1998, the Company entered into an agreement to merge with
three subsidiaries of privately held Zuellig Group N.A. Inc. ("ZGNA"). The
agreement calls for the Company to exchange approximately 10.1 million shares
of common stock for the acquired subsidiaries, subject to adjustment as
described in the Escrow Agreement. The acquired subsidiaries are already
aligned with the Company's Natural Ingredients and Technical Services
business unit, but are unrelated to the Company's Pharmaceuticals business
unit. As part of the merger agreement, the Company agreed to exit the
business of producing bulk paclitaxel. The Company will incur a one-time
charge of approximately $25-$30 million in its third fiscal quarter ended
January 31,1999. This charge includes non-cash charges of approximately
$9.5-$11.0 million to write down paclitaxel and related inventory to its
estimated net realizable value of approximately $9.8 million to be disposed
in the last half of fiscal 1999, a charge of a approximately $4.5-$5.5
million to write off the Company's deposits on growing contracts for Yew
trees, a charge of approximately $5.0-$6.0 million to write off paclitaxel
processing equipment and a charge of approximately $1.0-$1.5 million to write
off patents, goodwill and other assets. The charge will also include the
accrual of approximately $5.0 - $6.0 million for the estimated additional
costs of
Appendix E - Page 4
<PAGE>
exiting the paclitaxel business. All inventory related charges will
be included in cost of revenues on the Company's statement of operations, and
all non-inventory charges will be included in operating expenses.
Appendix E - Page 5
<PAGE>
APPENDIX F
HAUSER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company has focused its efforts during the last four years through
growth in the natural ingredients markets, and in expanding its strength
providing technical services to clients. Sales of NaturEnhance-TM- natural
ingredients, which include nutraceuticals, flavors and food ingredients,
increased 117% in the year ended April 30, 1998, compared the prior fiscal year,
and this growth has continued into fiscal year 1999. Revenues from technical
services increased almost 61% in the year ended April 30, 1998, compared to the
prior fiscal year. Technical Services revenues in the six months ended October
31, 1998, increased 44% over the same period in 1997.Offsetting these
improvements has been a decline in pharmaceutical revenues.
On December 9, 1998, the Company announced it had entered into an agreement
to merge with three subsidiaries of privately-held Zuellig Group N. A., Inc.,
("ZGNA") in a transaction valued at approximately $70 million. The Company will
acquire Zuellig Botanical Extracts, Inc., Wilcox Drug Company, Inc., and
ZetaPharm, Inc., thereby creating a leading U.S. supplier of herbal extracts,
botanical raw materials and related products to the fast-growing nutritional
industry. Sales for the three acquired companies for the four quarters ended
September 30, 1998, exceeded $100 million.
The agreement calls for the Company to exchange approximately 10.1 million
of the Company's common shares for the common stock of the acquired subsidiaries
subject to adjusting under certain circumstances. The Company also will assume
approximately $21.0 million of the acquired subsidiaries' bank debt. Upon
closing, the Company's shareholders will own 51.0% of the combined company,
while ZGNA will own 49.0%, subject to adjustment based on the sale of the
Company's paclitaxel business. Wells Fargo Bank, NA will provide a $35 million
line of credit and a $10 million fixed asset line in support of the merged
companies. The agreement is subject to approval by the Company's shareholders
and customary closing conditions. Management expects the transaction to close
during the Company's fiscal 1999 fourth quarter and, aside from transaction
related charges, to be accretive to earnings in fiscal year 2000.
Concurrent with the merger, the Company will discontinue its paclitaxel
activities. During the fiscal quarter ended January 31, 1999, the Company will
incur a one-time charge ranging between $25 million and $30 million. Management
is pursuing several alternatives to restructure or divest the business and
expects to have such a restructuring or divestiture completed during the last
half of fiscal year 1999.
On May 21, 1998, the Company announced the discovery of small amounts of a
common fungicide called quintozene in its bulk Panax ginseng that had been
shipped to customers. The Company had used Environmental Protection Agency
guidelines to screen for herbicides and pesticides, but this particular
fungicide was not included in the general guidelines. The Company immediately
stopped all Panax ginseng processing and shipments, pending further testing and
discussions with regulatory authorities. Based upon test results and analytical
reviews of the substance, the Company believes that the levels of quintozene
present in the bulk extract are well below any reasonable risk levels.
Appendix F - Page 1
<PAGE>
However, management expected that the existence of this fungicide in the
Panax ginseng would create additional cost to the Company. As such, a charge to
earnings of $1,500,000 was taken in the fourth quarter of fiscal 1998 in
anticipation of product returns, re-work costs, development work required to
provide methodology to remove the substance from the bulk extracts, and legal
and professional fees. Sales of Panax ginseng generated less than 5% of total
revenues in fiscal 1998, and management believes that the temporary hold on
shipments of this product will not have a material impact on the future
operations of the Company. As of October 31, 1998, approximately $1,391,000 had
been charged against this reserve.
On September 13, 1996, the Company adopted plans to sell substantially all
of the net assets of its secondary forest products subsidiary, Hauser Northwest,
Inc., d/b/a Ironwood Evergreens (Ironwood). On October 11, 1996, this sale was
completed. Revenues for Ironwood were $2,670,389 and $8,225,582 in the fiscal
years ended April 30, 1997, and 1996, respectively.
The following is a discussion of the Company's activities in its continuing
operations.
NATURAL INGREDIENTS
NUTRACEUTICALS - The term nutraceuticals is used to identify the broad
range of natural, healthful products that are used to supplement the diet by
increasing the total dietary intake of important nutrients. The United States
market for herbal and botanical supplements is estimated to be $2.3 billion,
and is growing at over 20% per year, according to industry sources. The
Company's products include liquid and dry herbal extracts of Echinacea,
Valerian, St. John's wort, Siberian ginseng, Panax ginseng, Ginger,
Goldenseal, Kava Kava, Black Cohash, Saw Palmetto and Rosemary
(RoseOx-Registered Trademark-). Management believes that the Company's
expertise in the production of special products from natural sources and its
extensive regulatory experience position it well in this market area.
On December 3, 1997, the Company announced that the value of signed
agreements with PharmaPrint, Inc. ("PharmaPrint") was expected to be $20 million
over the next three years. The Company continues to manufacture botanical
products and provides research and development services to PharmaPrint to
support its herbal-based pharmaceuticals. Sales of products and services to
PharmaPrint in the year ended April 30, 1998, were 14.9% of total revenues and
were 10% of total revenues in the six months ended October 31, 1998. Management
expects the level of sales to PharmaPrint to decline in fiscal 1999 due to
growth in other areas and delays in sales of Panax ginseng.
On November 14, 1996, the Company signed a three-year contract to supply
RoseOx-Registered Trademark-, an antioxidant nutraceutical product, to D&F
Industries ("D&F"), a manufacturer of vitamin and food supplement products.
Under that agreement, D&F had exclusive marketing rights to the Company's
antioxidant nutraceutical products, RoseOx-Registered Trademark- and
RoseOx660-Registered Trademark-, in the multi-level dietary supplement and
cosmetic markets. The Company began shipping product under this contract
during the third quarter of fiscal year 1997, and delivered contractual
quantities through the second quarter of fiscal 1998. Sales to D&F comprised
11% of total revenues in the six-month period ended October 31, 1997.
On November 6, 1997, the Company announced it had mutually agreed with
D&F, to cancel the exclusivity agreement between the companies. This change
in exclusivity allows the Company to market RoseOx-Registered Trademark-
products directly through its sales force. The Company is currently working
on a
Appendix F - Page 2
<PAGE>
revised sales plan to market the RoseOx-Registered Trademark- product. Sales
volume of this product are not yet at previous levels and no assurance can be
given as to when sales volume will return to previous levels.
NATURAL FLAVOR EXTRACTS AND NATURAL FOOD INGREDIENTS - The Company
manufactures, markets and sells natural flavor extracts. The extracts are
marketed under the Company's brand name NATURENHANCE-TM- Flavor Extracts.
Competition for products in the flavor extract market is based on flavor quality
and concentration, availability, customer service, and price. Some of these
factors are beyond the direct control of the Company.
Natural food ingredients are products that perform a function in foods,
such as preservatives, stabilizers, colorants, antioxidants, and nutritional
additives. The Company's objective is to build a quality line of products
generating revenues and profits as a leader in the development, manufacture and
sale of natural food ingredients.
Minimal revenue from natural food ingredients products was recognized in
fiscal year 1998, but shipments are expected to increase because of expanded
marketing efforts generating interest from potential customers. The Company
announced on November 3, 1997, its signing of a three year agreement with RFI
Ingredients ("RFI"), whereby RFI will serve as exclusive distributors for the
Company's NATURENHANCE-TM- product lines to the foods and beverages industries.
To improve the success of these products, the Company has reduced the number of
products offered to allow for improved marketing focus and technical support of
the remaining products. However, management is unable to predict the timing and
amount of future revenues from natural food ingredients products.
TECHNICAL SERVICES
The Technical Services business unit, comprised of Hauser Laboratories and
Shuster Laboratories, Inc., (the Company's wholly-owned subsidiary), operates as
a single entity in the research and development, formulation, analysis and
project delivery to fee-for-service clients. During the year ended April 30,
1998, Technical Services revenues increased almost 61% over the previous year,
and in the six months ended October 31, 1998, these revenues increased 44% over
the six month period in 1997. These increases reflect the Company's concentrated
efforts to increase the number of projects related to custom synthesis and
natural products isolation in the pharmaceuticals industry. Additionally,
research and development services from both Hauser and Shuster Laboratories were
sold to PharmaPrint during the year as part of the expanded relationship
mentioned earlier. Finally, Shuster's Technically Advanced Quality Assurance
("TAQA-TM-") and Foods 2000 initiatives have contributed additional revenues.
The Company announced on November 6, 1997, a collaborative agreement with
The National Institute on Drug Abuse ("NIDA"), for custom synthesis of drug
compounds that are under development as potential treatment agents for various
drug addictions. Under the agreement, the Company will receive $2.3 million over
a three-year period.
Management believes that demand for technical services will continue to
increase and expects this business unit to grow. On-going marketing efforts in
the Company's Technical Services business unit will be centered on projects that
provide opportunity to employ the collective capabilities of the Hauser
Laboratories' and Shuster Laboratories' team.
Appendix F - Page 3
<PAGE>
PHARMACEUTICALS
The Company has been a supplier of bulk paclitaxel for approximately the
last seven years. The Company's customers wishing to enter the market for
paclitaxel-based therapies must obtain proper regulatory approval before they
can formulate and sell paclitaxel in final form. The U.S. market, which
comprises approximately 65% of the world market, has been severely restricted
because of administration patents held by Bristol-Myers Squibb, Company
("Bristol"). Additionally, the Company learned in November 1998, that its
European customer, Yew Tree Pharmaceuticals ("Yew Tree"), had concluded an
agreement with Bristol whereby Yew Tree will cease selling its paclitaxel
product by the end of December 1998.
The pending merger with ZGNA will focus corporate resources on extract
products for the dietary supplement market and Technical Services. As a result,
management has decided to discontinue its paclitaxel supply activities. During
the fiscal quarter ended January 31, 1999, the Company will incur a one-time
charge ranging between approximately $25-$30 million. This charge includes
non-cash charges of approximately $9.5-$11.0 million to write down paclitaxel
and related inventory to its estimated net realizable value of approximately
$9.8 million to be disposed in last half of fiscal 1999, a charge of
approximately $4.5-$5.5 million to write off the Company's deposits on growing
contracts for Yew trees, a charge of approximately $5.0-$6.0 million to write
off paclitaxel processing equipment and a charge of approximately $1.0-$1.5
million to write off patents, goodwill and other assets. The charge will also
include the accrual of approximately $5.0 -$6.0 million for the estimated
additional costs of exiting the paclitaxel business. All inventory related
charges will be included in cost of revenues on the Company's statement of
operations, and all non-inventory charges will be included in operating
expenses.
DISCONTINUED OPERATIONS
On October 11, 1996, the Company sold substantially all of the net assets
of its secondary forest products subsidiary, Hauser Northwest, Inc., d/b/a
Ironwood Evergreens ("Ironwood"). Revenues for Ironwood were $2,670,389 and
$8,225,582 in the years ended April 30, 1997 and 1996, respectively. The results
for fiscal 1997 include a non-recurring charge for the divestiture of Ironwood.
The Company received cash of $250,000, a promissory note of $150,000 and a
basic earnout of no more than $550,000. The earnout is based upon 75% of the
buyer's net cash flow, if any, derived from the business for the four-year
period ending December 31, 2000. An additional earnout of 5% of the excess (if
any) of net cash flow over the projected net cash flow in the buyer's five-year
plan is available to the Company. The maximum additional earnout is $400,000.
The Company has not earned any amounts available under either the basic or
additional earnout.
Appendix F - Page 4
<PAGE>
RESULTS OF CONTINUING OPERATIONS FOR THE FISCAL YEARS ENDED APRIL 30, 1998,
1997, AND 1996:
The table below shows the percentage of total revenues for each major
category on the Statement of Operations (on the left), and the percentage change
from the prior fiscal year (on the right).
<TABLE>
<CAPTION>
Percent change
Percent of Revenues ----------------------------
Year ended April 30, Year ended April 30,
- - - - - - - - - - - - - ------------------------------------------- ----------------------------
1998 1997 1996 1998 1997
- - - - - - - - - - - - - ------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
54.7% 64.2% 46.6% Natural product processing 8.3% 99.3%
45.3% 35.8% 53.4% Technical services 60.6% -3.0%
100.0% 100.0% 100.0% Total revenues 27.0% 44.6%
21.4% 15.5% -5.8% Gross profit (loss) 74.8% 484.0%
7.0% 8.9% 12.4% Research and development -0.5% 3.9%
7.5% 6.4% 6.7% Sales and marketing 47.6% 38.8%
16.8% 24.2% 35.8% General and administrative -11.9% -2.3%
4.7% -- -- Product warranty N/A
-14.5% -23.9% -60.7% Loss from operations -23.1% -42.9%
-12.5% -21.9% -60.6% Loss from continuing operations before taxes -27.4% -47.7%
-9.8% -15.5% -36.9% Loss from continuing operations -19.7% -39.4%
-- -10.4% -7.4% Loss from discontinuing operations N/A 102.8%
-9.8% -25.9% -44.4% Net loss -52.0% -15.6%
</TABLE>
REVENUES. A breakout of the Company's revenues by product and service groupings
for its continuing operations is as follows:
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Natural ingredients products (includes nutraceuticals,
natural flavor extracts and food ingredients) $ 13,674,835 $ 6,308,055 $ 2,642,481
Technical services (includes Hauser and Shuster
Laboratories) 14,507,424 9,034,787 9,315,672
Pharmaceuticals 3,855,269 9,882,924 5,481,279
----------------- ----------------- -----------------
$ 32,037,528 $ 25,225,766 $ 17,439,432
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
Total revenues in fiscal 1998 increased 27% to $32,037,528 from $25,225,766 in
fiscal 1997. This increase was the result of increases in natural ingredients
product sales and increases in technical service revenues, offset by a decline
in the sales of bulk paclitaxel to pharmaceutical customers. Revenues increased
almost 45% in fiscal 1997 as compared to fiscal 1996 due to increased revenues
from the sales of pharmaceutical and nutraceutical products.
Natural ingredients:
Natural ingredients product revenues increased almost 117% in fiscal 1998 to
$13,674,835 from $6,308,055 in fiscal 1997. The increase is primarily
attributable to success in selling nutraceutical products as revenues were
$12,531,190 in fiscal 1998, an increase of $7,997,840 from revenues of
$4,533,350 in fiscal 1997. Revenues from the sales of natural flavor extracts in
fiscal 1998 were $960,267, a 44% decrease from revenues of $1,700,945 in fiscal
1997. This decrease was primarily due to low sales activities until November,
1997 at which time a distributor was hired to market the products. In addition,
the Company sold food ingredients products of $183,378 in fiscal 1998 compared
to revenues of $73,760 in fiscal 1997.
Appendix F - Page 5
<PAGE>
Natural ingredients product revenues increased almost 139% in fiscal 1997 to
$6,308,055 from $2,642,481 in fiscal 1996. The increase is primarily
attributable to success in selling nutraceutical products as revenues were
$4,533,350 in fiscal 1997, an increase of $3,730,665 from revenues of $802,685
in fiscal 1996. Revenues from the sales of natural flavor extracts in fiscal
1997 were $1,700,945, a 6% decrease from revenues of $1,815,796 in fiscal 1996.
This small decrease was primarily due to the shift in marketing activities from
the Company's reliance on Tastemaker in fiscal 1996 to its own internal sales
efforts. In addition, the Company sold food ingredients products of $73,760 in
fiscal 1997 compared to revenues of $24,000 in fiscal 1996.
Technical Services:
Technical services revenues were $14,507,424 in fiscal 1998 compared to
$9,034,787 in fiscal 1997, an increase of almost 61%. This increase was due
primarily to the Company's concentrated efforts to increase the number of
projects related to custom synthesis and natural products isolation in the
pharmaceuticals industry. Additionally, research and development services from
both Hauser and Shuster laboratories were sold to PharmaPrint during the year as
part of the expanded relationship mentioned earlier.
Technical services revenues were $9,034,787 in fiscal 1997 compared to
$9,315,672 in fiscal 1996, a decrease of about 3%. This decrease was due
primarily to the loss of a major customer of Shuster in fiscal 1997.
Pharmaceuticals:
Revenues from pharmaceuticals products in fiscal 1998 decreased 61% compared to
fiscal 1997. This was due to decreased sales of bulk paclitaxel because of
regulatory issues and on-going litigation which have created some uncertainty in
the market. Pharmaceutical sales are largely dependent upon the Company's
strategic customers, and legal and regulatory issues that are out of the
Company's control create unpredictability quarter-to-quarter. Total revenues
from bulk paclitaxel and taxanes were $3,855,269 in fiscal 1998 compared to
revenues of $9,142,913 in fiscal 1997.
Revenues from pharmaceutical products in fiscal 1997 increased more than 80%
compared to fiscal 1996. This was due to increased sales of paclitaxel to two
customers. The Company signed an agreement with Yew Tree in November, 1996 to
supply bulk paclitaxel over a three-year period and made a significant shipment
to this customer during the third quarter ended January 31, 1997. In addition,
the Company shipped bulk paclitaxel to another customer during fiscal 1997 for
use in its development efforts. The Company does not have a long-term supply
agreement with this customer. Total revenues from bulk paclitaxel and taxanes
were $9,142,913 in fiscal 1997, an approximately 101% increase over revenues of
$4,547,819 in fiscal 1996 from the same products.
The Company recognized revenues of $740,011 for the shipment of sanguinaria
extract to Colgate during fiscal 1997 as compared to revenues of $933,460 in
fiscal 1996. No revenues from sanguinaria extract were recognized in fiscal
1998. Fiscal 1997 shipments of sanguinaria extract completed the requirements
of the Company's contractual obligations with Colgate, and the Company does
not expect additional orders in the foreseeable future. The expiration of
this contract did not and will not have a material impact on the operations
of the Company.
GROSS PROFIT (LOSS). Gross margin for the natural products industry segment in
fiscal 1998 was 13.9% of total revenues as compared to 16.5% in fiscal 1997 and
negative 40.9% in fiscal 1996. The decline in fiscal 1998 is primarily due to
lower sales of paclitaxel offset by
Appendix F - Page 6
<PAGE>
significantly higher sales of natural ingredients products. The improvement
in fiscal 1997 was the result of two large sales of paclitaxel. The Company
recognized improved gross margins from the sales of nutraceuticals products
in fiscal 1998 due to changes in pricing and increased manufacturing
efficiencies. However, margins from these sales vary because of product mix.
In addition, the Company is still incurring high overhead costs in relation
to its current sales levels, the result of excess plant capacity.
Gross margin for technical services increased in fiscal 1998 to 30% of revenue
as compared to 14% in fiscal 1997 and 24% of revenues in fiscal 1996. The
increase in fiscal 1998 was the result of more projects related to drug
development and natural ingredients formulations that generated higher margins.
The decline in fiscal 1997 was the result of the mix of services provided,
including more analytical and testing services which generate lower margins.
OPERATING EXPENSES. Research and development expenses were $2,229,843 in fiscal
1998 compared to $2,240,992 in fiscal 1997 and $2,157,708 in fiscal 1996. While
research and development expenses have remained approximately flat, the Company
intends to actively continue research and development efforts and expenses in
this area could increase over the next year to support the growing needs of the
Company.
Sales and marketing expenses in fiscal years ending April 30, 1998, 1997, and
1996 were $2,390,602, $1,619,937, and $1,167,447, respectively. The increase
represents the Company's accelerated efforts to market new products,
particularly in the areas of nutraceuticals and natural food ingredients. Fiscal
1998 and 1997 sales expenses include payments of commissions to internal
salespeople and external distributors, and these costs have increased as sales
have increased.
General and administrative expenses were $5,369,527 in fiscal 1998, a 12%
decrease from $6,095,770 in fiscal 1997. Fiscal 1997 general and administrative
expenses declined 2% as compared to fiscal 1996. The decrease in fiscal 1998 was
the result of lower insurance, legal and consulting fees. In addition, the
fiscal 1997 expense includes a charge of $345,000 for the disposition of certain
production facility assets. These decreases are the result of management's
continued efforts to reduce general and administrative costs where appropriate.
Product warranty expense in fiscal 1998 of $1,500,000 was an estimate of
anticipated costs related to a fungicide found in a product sold by the Company.
This estimate was recorded in the fourth quarter of the fiscal year, since the
discovery of the substance was made in May 1998. The reserve related to
potential product returns, re-work costs, development work required to provide
methodology to remove the substance from the bulk extracts and legal and
professional fees. This reserve has been fully utilized, and was adequate to
cover substantially all costs related to this situation.
INTEREST INCOME. Interest income was $315,280 in fiscal 1998, $528,424 in fiscal
1997 and $1,047,734 in fiscal 1996. The decreases are due to less capital
available for investment.
OTHER INVESTMENTS. The Company sold its investment in a public company and
realized a gain of $361,461 in fiscal 1998.
WRITEDOWN OF OTHER INVESTMENT. In April 1996, the Company's investment in a
development stage company was written down resulting in a loss of $1,000,000.
The investment was liquidated in the first quarter of fiscal 1997.
Appendix F - Page 7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents were $2,081,796 at April 30, 1998
compared to $8,379,551 at April 30, 1997. The decrease is due primarily to
capital expenditures, raw material purchases for new product areas, advances on
growing contracts, and other general working capital requirements. The Company
has a revolving line of credit totaling $8,850,000 which expires on June 30,
2000. As of April 30, 1998, $7,350,000 was available for use under this line of
credit. Under the terms of the loan agreement, all assets of the Company, with
the exception of intangibles, are secured by the bank. Under the terms of the
lending agreement, the Company cannot pay any dividends without the consent of
the bank and is required to maintain certain financial ratios and minimum
working capital and equity amounts. As of April 30, 1998, the Company was not in
compliance with a financial covenant for the line of credit which required the
Company to report profitability in the fourth quarter of fiscal 1998. The
Company has obtained a waiver from the bank for this covenant as of April 30,
1998.
In addition, the Company has a lease credit line with a bank of $564,000; as of
April 30, 1998, $346,083 was available for use under this line.
The merger agreement entered into on December 8, 1998, includes a commitment
from Wells Fargo Bank, N.A. to provide two credit facilities for an aggregate
amount of $45,000,000 to be guaranteed by each of its subsidiaries: a revolving
line of credit up to $35,000,000 for general working capital purposes maturing
two years after the loan closing, and a $10,000,000 non-revolving term
commitment for financing the acquisition of fixed assets with a draw down period
of two years and a maturity date of five years following the loan closing. The
interest rate on the revolving credit facility is the Bank's prime rate minus
0.75% per annum or the Bank's quoted LIBOR rate plus 1.5 % per annum. For the
term loan fixed asset facility, the interest rate is the Bank's prime rate minus
0.5% per annum or the Bank's quoted LIBOR plus 1.75 % per annum or on a specific
fixed rate basis. A commitment fee will be charged of 0.25% per annum on the
unused portion of the term loan fixed asset commitment. Management believes that
current cash reserves and the credit facility commitments described above are
sufficient to meet the Company's future liquidity needs and sufficient to fund
anticipated merger and integration cost. Further, management believes that funds
generated from business opportunities discussed earlier, will be sufficient to
meet the liquidity needs of the Company on a long-term basis.
In the process of exiting the paclitaxel business, management intends to
negotiate early settlements with its growers of cultivated yew trees.
Management estimates these settlement costs to be approximately $5.0-$6.0
million and will be included in the one-time charge to earnings noted before.
The cost to negotiate out of these contracts is expected to be funded from
the sale of paclitaxel assets.
WORKING CAPITAL. Working capital as of April 30, 1998 was $16,671,596 compared
to $21,162,501 as of April 30, 1997. This decrease is primarily attributable to
the use of cash to fund deposits on growing contracts of $2,599,619 and capital
expenditures of $1,994,285. Further, current borrowings increased $1,739,582
primarily due to a $1,500,000 increase in the line of credit and a one time
product warranty reserve of $1,500,000.
PROPERTY AND EQUIPMENT. Purchases of property and equipment in fiscal 1998
totaled $2,058,167. This was primarily the result of improvements to
manufacturing equipment for the production of nutraceuticals and food
ingredients products.
Appendix F - Page 8
<PAGE>
The Company expects capital expenditures to be approximately $3,000,000 in
fiscal 1999 for additional manufacturing equipment improvements. The Company
expects capital expenditures to increase significantly in fiscal 2000 pending
the merger with ZGNA and expects to fund these capital expenditures through the
$10,000,000 non-revolving term commitment described above.
INCOME TAXES. The Company has a net deferred tax asset of $3,579,773 that has
been reduced by a valuation allowance of $623,280 to $2,956,493 as of April 30,
1998. The Company believes the $2,956,493 recorded is more likely than not to be
recovered because of: (1) absent the one-time product warranty charge, the
Company returned to profitability in the fourth quarter of fiscal 1998 and (2)
the Company has significant appreciated assets on its balance sheet at April 30,
1998, including investments in its land and buildings. Although the Company
believes the $2,956,493 will be realized, the amount of the deferred tax asset
considered realizable could be reduced in the near term if estimates of future
taxable income do not materialize.
The proposed merger has been structured as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). Management believes that substantially all of the excess purchase price
will be allocated to non-deductible goodwill. In addition, the Company's use of
its current net operating loss carryforward may be limited in the future if
ZGNA's ownership exceeds 50%, as defined in Section 382 of the Code, within
three years of the merger. Thus, management believes that the proposed merger
will not have a significant impact on the company's recorded deferred tax
assets. Further, because of the substantial uncertainties included with
integrating the operations of Hauser and ZGNA, management believes that the
merger will have no immediate effect on the combined Company's ability to
realize its deferred tax assets.
BACKLOG. Backlog of unfilled purchase orders was $2,974,817 of as April 30,
1998, compared to $4,370,876 as of April 30, 1997. Backlog consists of unfilled
purchase orders for nutraceuticals and flavors products.
RESULTS OF CONTINUING OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31,
1998, AND 1997:
Below is a table that summarizes the Company's results of operations as a
percentage of total revenues.
<TABLE>
<CAPTION>
Three months ended Six months ended
October 31, October 31,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 31.8 % 12.7 % 28.3 % 19.9 %
Research & development 5.2 % 13.1 % 4.9 % 9.2 %
Sales and marketing 8.3 % 8.9 % 9.0 % 7.9 %
General and administrative 16.9 % 22.2 % 19.8 % 20.9 %
Income (loss) from operations 1.4 % (31.5) % (5.4) % (18.1) %
Other income (expense), net (0.7) % 4.3 % (0.5) % 4.0 %
Income (loss) from operations before taxes 0.7 % (27.2) % (5.9) % (14.1) %
Net income (loss) 0.7 % (17.5) % (5.9) % (9.1) %
</TABLE>
Appendix F - Page 9
<PAGE>
REVENUES. A breakout of the Company's revenues by product and service groupings
for its continuing operations is as follows:
<TABLE>
<CAPTION>
Three months ended October 31, Six months ended October 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Natural ingredients products (includes nutraceuticals, $ 3,849,658 $ 2,518,077 $ 6,341,893 $ 5,340,232
natural flavor extracts and food ingredients)
Technical services (includes Hauser Laboratories 4,344,013 3,015,024 8,312,479 5,778,243
and Shuster Laboratories, Inc.)
Pharmaceuticals 1,405,358 565,329 1,996,075 2,525,472
---------------- ---------------- ---------------- ---------------
$ 9,599,029 $ 6,098,430 $16,650,447 $ 13,643,947
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
</TABLE>
Total revenues increased 57% to $9,599,029 in the second quarter of fiscal 1999,
from $6,098,430 in the second quarter of fiscal 1998, the result of higher
revenues in each of the Company's business units. For the six months ended
October 31, 1998, total revenues increased 22% over the same period last year,
with increased revenues in Natural Ingredients and Technical Services offset by
a decrease in Pharmaceuticals revenues.
Natural Ingredients:
Natural ingredients product revenues increased 53% and 19% in the three and six
months ended October 31, 1998, respectively, as compared to the same periods in
the prior fiscal year.
The increases are primarily attributable to success in selling nutraceutical
products. In the quarter ended October 31, 1998, nutraceuticals revenues were
$3,582,589, an increase of $1,240,209, or 53%, over revenues of $2,342,380 in
the same quarter last year. In the six months ended October 31, 1998,
nutraceuticals revenues were $5,762,615, an increase of 20% over revenues of
$4,797,758 in same period last year.
Sales of natural flavor extracts and food ingredients were $267,069 in the
quarter ended October 31, 1998, an increase of 52% over revenues of $175,697 in
the quarter ended October 31, 1997. For the six months ended October 31, 1998,
revenues from these products were $579,278, a 7% increase over revenues of
$542,474 in the six months ended October 31, 1997. These increases were the
result of higher sales of rosemary extract products sold into the beverage
industry.
Technical Services:
Technical Services revenues were $4,344,013 in the quarter ended October 31,
1998, compared to $3,015,024 in the quarter ended October 31, 1997, an increase
of 44%. In the six months ended October 31, 1998, Technical Services revenues
were $8,312,479, a 44% increase over revenues of $5,778,243 for the same period
last year. These increases were because of ongoing natural products, custom
synthesis and drug development projects at Hauser Laboratories, as well as
increasing revenues from Shuster Laboratories attributable to the TAQA-TM-
program and the Foods 2000 initiative.
Pharmaceuticals:
Revenues from pharmaceutical products in the quarter ended October 31, 1998,
increased 149% to $1,405,358, compared to $565,329 in the same quarter one year
ago. This is the result of contractual royalty revenues associated with the
August 13, 1998 signing of a supply contract with Immunex to provide them and
their collaborative partner IVAX, with bulk paclitaxel. In the quarter ended
October 31, 1998, these high-margin revenues were $697,000. For the six months
ended October 31, 1998, revenues declined 21% from the same period one year ago
because of lower sales of paclitaxel.
Appendix F - Page 10
<PAGE>
GROSS PROFIT. Total gross profit for the Company was 31.8% and 12.7% of total
revenues in the quarters ended October 31, 1998, and 1997, respectively, and
28.3% and 19.9% of total revenues in the six month periods ended October 31,
1998, and 1997, respectively. The increases are the result of higher product and
service revenues. In the three and six month periods ended October 31, 1998,
gross profit for the natural products industry segment was 33.5% and 28.3% of
total natural product revenues, respectively. In the three and six month periods
ended October 31, 1997, gross profit for the natural products industry segment
was (.06)% and 10.6% of total natural product revenues, respectively. The
increases were the result of higher sales volume of nutraceutical product sales.
Gross profit for technical services in the three months and six months ended
October 31, 1998, and 1997, was 30.1% and 28.6%, respectively, as compared to
26.2% and 26.7% in the three and six months ended October 31, 1997,
respectively. These increases are the result of higher revenues and a change in
the mix of technical service projects, which can alter gross profit
quarter-to-quarter.
OPERATING EXPENSES. Research and development expenses were $496,942 in the
quarter ended October 31, 1998, compared to $800,450 in the quarter ended
October 31, 1997, a decrease of almost 38%. Research and development expenses in
the six months ended October 31, 1998, were $817,898, a decrease of 35% compared
to the same period last year. These decreases in research and development costs
were because some R&D employees were deployed to work on billable projects in
the Technical Services business unit, the result of increasing customer
projects. As new staff is hired in Technical Services, the R&D personnel will go
back to their research assignments. The Company intends to actively continue
research and development efforts, and expects research and development expenses
to return to their historical levels.
Sales and marketing expenses in the quarter ended October 31, 1998, were
$796,997, an increase of $251,774, or 46% over the same three-month period last
year. Sales and marketing expenses in the six months ended October 31, 1998,
were $1,496,197, an increase of $424,491, or 40% over the same six-month period
last year. The increases represent the Company's accelerated efforts to market
new products, particularly in the areas of nutraceuticals and natural food
ingredients. The Company added new staff and increased spending on advertising
and marketing materials for launches of new products, such as TT550-TM-, a
ginger-based product for motion sickness. Further, higher commission costs were
incurred as a result of higher revenues.
General and administrative expenses were $1,616,977 in the second quarter of
fiscal 1999, a 19% increase compared to general and administrative expenses in
the same quarter of fiscal 1998. For the six months ended October 31, 1998,
general and administrative costs were $3,301,886, a 16% increase over the same
period last year. These increases are the result of staff additions and
additional depreciation expense on certain new leasehold improvements.
INTEREST INCOME/EXPENSE. Interest income was $22,754 and $49,808 in the three
and six months ended October 31, 1998, respectively, compared to $89,757 and
$199,877 in the three and six months ended October 31, 1997, respectively. The
decrease is the result of less capital available for investment. Interest
expense in the three and six-month periods ended October 31, 1998, was $133,094
and $179,478 respectively, compared to $4,281 and $6,663 in the three and
six-month periods ended October 31, 1997, respectively. The increases reflect
the Company's use of its line of credit during fiscal 1999.
Appendix F - Page 11
<PAGE>
OTHER INCOME. Other income was $42,037 and $173,822 for the three months ended
October 31, 1998, and 1997, respectively, and $42,037 and $361,461 for the six
months ended October 31, 1998, and 1997, respectively. The decrease in other
income is due to the sale of certain investments held by the Company in fiscal
1998 and the associated gains from these sales.
INCOME TAXES. The Company is continuing to evaluate on a quarterly basis the
realizability of the deferred assets on the balance sheet. Management believes
it is more likely than not that these assets will be realized by return to
profitability, although there can be no assurance of when profitability will be
attained. Management's estimate of the deferred tax assets may change in the
future.
The proposed merger has been structured as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). Management believes that substantially all of the excess purchase price
will be allocated to non-deductible goodwill. In addition, the Company's use of
its current net operating loss carryforward may be limited in the future if
ZGNA's ownership exceeds 50%, as defined in Section 382 of the Code, within
three years of the merger. Thus, management believes that the proposed merger
will not have a significant impact on the company's recorded deferred tax
assets. Further, because of the substantial uncertainties included with
integrating the operations of Hauser and ZGNA, management believes that the
merger will have no immediate effect on the combined Company's ability to
realize its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents were $2,502,432 at October 31, 1998,
compared to $2,081,796 at April 30, 1998. The increase is primarily the result
of increased borrowings against the bank line of credit offset by purchases of
inventory and the acquisition of capital equipment.
The Company has a revolving line of credit totaling $8,850,000 which expires on
June 30, 2000. As of October 31, 1998, the Company had borrowed $6,000,000 under
this line and $784,675 had been applied against letters of credit for the
purchase of raw materials. Therefore, $2,065,325 was available for use under
this line of credit. Under the terms of the loan agreement, all assets of the
Company, with the exception of intangibles, are secured by the bank.
Additionally, the Company has a lease credit line with a bank of $500,000; as of
October 31, 1998, $350,861 was available for use under this line. The Company
does not use derivatives to manage its interest rate risk.
The merger agreement entered into on December 8, 1998, includes a commitment
from Wells Fargo Bank, N.A. to provide two credit facilities for an aggregate
amount of $45,000,000 to be guaranteed by each of its subsidiaries: a revolving
line of credit up to $35,000,000 for general working capital purposes maturing
two years after the loan closing, and a $10,000,000 non-revolving term
commitment for financing the acquisition of fixed assets with a draw down period
of two years and a maturity date of five years following the loan closing. The
interest rate on the revolving credit facility is the Bank's prime rate minus
0.75% per annum or the Bank's quoted LIBOR rate plus 1.5 % per annum. For the
term loan fixed asset facility, the interest rate is the Bank's prime rate minus
0.5% per annum or the Bank's quoted LIBOR plus 1.75 % per annum or on a specific
fixed rate basis. A commitment fee will be charged of 0.25% per annum on the
unused portion of the term loan fixed asset commitment. Management believes that
current cash reserves and the credit facility commitments described above are
sufficient to meet the Company's future liquidity needs and sufficient to fund
anticipated merger and integration cost.
Appendix F - Page 12
<PAGE>
Further, management believes that funds generated from business opportunities
discussed earlier, will be sufficient to meet the liquidity needs of the
Company on a long-term basis.
In the process of exiting the paclitaxel business, management intends to
negotiate early settlements with its growers of cultivated yew trees. Management
estimates these settlement costs to be approximately $5.0-$6.0 million and will
be included in the one-time charge to earnings noted before. The cost to
negotiate out of these contracts is expected to be funded from the sale of
paclitaxel assets.
WORKING CAPITAL. Working capital as of October 31, 1998, was $11,243,626
compared to $16,671,596 as of April 30, 1998. This decrease is primarily
attributable to increased use of the bank line of credit.
PROPERTY AND EQUIPMENT. Purchases of property and equipment in the first six
months of fiscal 1999, totaled $1,500,565. This was the result of new
construction and improvements to manufacturing equipment for the production of
nutraceuticals and food ingredients products. The Company also entered into new
capital leases totaling $53,690 during the three months ended October 31, 1998,
primarily for laboratory equipment used in technical services. The Company
expects future capital expenditures to be similar for the remainder of fiscal
1999. However, the Company expects expenditures to increase significantly in
fiscal 2000 pending the merger with ZGNA and expects to fund these capital
expenditures through the $10,000,000 non-revolving term commitment described
above.
SEASONALITY
The Company has experienced seasonality in its natural flavor extracts product
line primarily in advance of the demand for summer beverages, in which most of
its products are used.
YEAR 2000
The Year 2000 problem is the result of computer systems and programs recognizing
a date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculations or system failures. The term "Year 2000 compliant" means that
all computers, computer systems, and software, including all firmware,
microcode, and embedded software, will accurately and consistently process date
data for all dates in the twentieth and twenty-first centuries (including leap
year considerations and data) without any loss of functionality or performance.
This processing includes calculating, comparing, sequencing, storing,
retrieving, transmitting, receiving, sorting, and displaying date data when
computers, computer systems, or software are used as stand-alone systems, or in
combination with other software or hardware. These computer systems will
function without interruption before, during, and after January 1, 2000, without
any change in operation or performance associated with the advent of the new
century. Additionally, these computer systems will respond to date data input in
a way that resolves any ambiguity as to century in a defined and predetermined
manner; and store and provide output of date data in ways that are unambiguous
as to century. The term "software" includes, but is not limited to, firmware,
embedded software, and microcode.
The Company has undertaken a thorough review of its current information
technology ("IT") and non-IT systems. This review is expected to be a continuing
process. Initial results of the testing and identification phase of the
Company's core systems indicate that approximately one third of its desktop
computer systems (approximately 100 machines) and less than one fourth of its
other microprocessor or microcontroller-based equipment (approximately 20
machines) are in need of
Appendix F - Page 13
<PAGE>
replacement for Year 2000 compliance. The replacement of these machines is
expected to be completed by October 1999. Cost of replacement is not expected
to exceed $200,000. As the review progresses, this estimate could be revised.
Through second quarter of fiscal 1999, the Company had expensed a total of
$75,000 directly related to Year 2000 remediation efforts.
As another part of its Year 2000-compliance review, the Company has also
undertaken a logical process of updating or deleting software systems known to
have problems handling two-digit date information properly. The Company has
completed the testing and identification phase of the review of its core
applications supporting accounting, human resources and manufacturing processes.
Upgrade or replacement of these applications is expected to be completed in the
spring of 1999. The net cost of these upgrades is not expected to exceed
$50,000. The review of other software applications is underway at this time.
The Company has also implemented a Year 2000 compliance inquiry program with its
current and potential major vendors and suppliers as to both the status of their
equipment and systems and any delays they anticipate in supplying goods and
services to the Company. Management expects that this inquiry program will be
completed by April 1, 1999. If a third party's systems are not Year 2000
compliant, that problem will be addressed directly with that third party.
Management recognizes that failure to meet all Year 2000 issues could result in
significant degradation of the Company's ability to provide laboratory testing,
to manufacture products, and to invoice customers and pay vendors. Management is
addressing these issues directly, aggressively pursuing upgrading all
mission-critical systems.
Management foresees the likely internal "worst case scenario" to be limited in
scope, and could include a very small number of machines which may not handle
date data correctly. In this event, processing of data will be shifted to other
machines until replacement can be accomplished. No significant degradation of
data collection or processing is anticipated.
The other major risk to normal operations could result from the inability of our
suppliers to provide materials, products and services. The Company has begun
identifying alternative sources or suppliers to alleviate such circumstances.
If, because of unforeseen circumstances, installed hardware and software systems
cease to function on January 1, 2000, a disaster recovery contingency plan
(currently being drafted) will be activated to handle the emergency situation.
The disaster recovery plan is expected to include a disaster recovery computer
center with sufficient equipment to allow the Company to continue data
processing operations that will operate on a 24-hour-a-day basis until normal
operations can be resumed. The Company has established relationships with
several computer system vendors who will be contracted to provide the necessary
hardware and software to support the contingency plan.
The Company plans to devote the necessary resources to resolve all significant
Year 2000 issues in a timely manner. As part of the proposed merger, the Company
plans to review ZGNA's Year 2000 compliance as well, and will devote the
necessary resources to resolve any Year 2000 issues identified.
Appendix F - Page 14
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain oral and written statements of management of the Company included herein
and elsewhere may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of management
for future operations. The forward-looking statements included herein and
elsewhere are based on current expectations that involve judgments which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Appendix F - Page 15
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND
AFFILIATED COMPANIES
COMBINED FINANCIAL STATEMENTS AS OF MARCH 31,
1998 AND 1997 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED MARCH 31, 1998 AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
COMBINED FINANCIAL STATEMENTS AS OF MARCH 31, 1998 AND 1997 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED MARCH 31, 1998:
Combined Balance Sheets 2
Combined Statements of Income 3
Combined Statements of Stockholders' Equity 4
Combined Statements of Cash Flows 5
Notes to the Combined Financial Statements 6-12
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Zuellig Botanical Extracts, Inc. and Affiliates:
We have audited the accompanying combined balance sheets of Zuellig Botanical
Extracts, Inc., ZetaPharm, Inc. and Wilcox Drug Company, Inc. (the
"Companies"), all of which are under common ownership and common management,
as of March 31, 1998 and 1997, and the related combined statements of income,
stockholders' equity, and cash flows and for each of the three years in the
period ended March 31, 1998. These financial statements are the
responsibility of the Companies' 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, such financial statements present fairly, in all material
respects, the combined financial position of the Companies as of March 31,
1998 and 1997, and the combined results of their operations and their
combined cash flows for each of the three years in the period ended March 31,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 12, 1999
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,866,735 $ 838,754
Receivables:
Customers, less allowance for doubtful accounts of $215,410 in
1998 and $139,062 in 1997 14,668,147 12,195,885
Other receivables 113,755 81,786
Inventories 13,071,303 11,922,572
Prepaid expenses and other current assets 1,325,241 738,358
Deferred income taxes 440,543 246,997
Due from affiliates 1,528,868 5,345,622
------------ ------------
Total current assets 33,014,592 31,369,974
------------ ------------
PROPERTY:
Land 312,101 312,101
Machinery and equipment 950,610 861,418
Furniture and fixtures 337,526 288,710
Vehicles 289,583 296,723
Leasehold improvements 132,529 140,539
Construction in progress 39,136 12,469
------------ ------------
2,061,485 1,911,960
Accumulated depreciation and amortization (1,434,545) (1,241,441)
------------ ------------
Property, net 626,940 670,519
------------ ------------
OTHER ASSETS 275,468 211,520
------------ ------------
TOTAL $ 33,917,000 $ 32,252,013
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings $ 10,305,683 $ 19,106,429
Accounts payable 8,244,654 3,332,941
Accrued liabilities 3,228,115 1,895,295
Due to affiliates 1,492,480 392,552
Current portion of long-term debt 55,000
Bank overdraft 163,388
------------ ------------
Total current liabilities 23,270,932 24,945,605
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Cumulative preferred stock 2,000,000 2,000,000
Common stock 1,060 1,060
Additional paid-in capital 1,003,400 1,003,400
Retained earnings 6,079,223 4,760,621
Divisional equity 1,962,385 (58,673)
Treasury stock (400,000) (400,000)
------------ ------------
Total stockholders' equity 10,646,068 7,306,408
------------ ------------
TOTAL $ 33,917,000 $ 32,252,013
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the combined financial statements.
-2-
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET SALES TO THIRD PARTIES $ 94,333,310 $ 68,111,118 $ 55,483,409
NET SALES TO AFFILIATES 6,793,310 5,029,129 5,958,205
------------ ------------ ------------
NET SALES 101,126,620 73,140,247 61,441,614
COST OF SALES 84,318,709 62,285,139 49,861,090
------------ ------------ ------------
GROSS PROFIT 16,807,911 10,855,108 11,580,524
COMMISSION AND OTHER INCOME 282,939 1,389,012 5,515
------------ ------------ ------------
17,090,850 12,244,120 11,586,039
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 8,570,143 6,855,444 5,897,511
MANAGEMENT FEE EXPENSE 1,601,163 429,007 255,643
INTEREST EXPENSE 1,190,689 1,127,371 997,422
------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 5,728,855 3,832,298 4,435,463
PROVISION FOR INCOME TAXES 2,389,195 1,214,928 1,036,714
------------ ------------ ------------
NET INCOME $ 3,339,660 $ 2,617,370 $ 3,398,749
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to the combined financial statements.
-3-
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1995 10 $2,000,000 1,060 $ 1,060 $1,003,400
Net income
Dividends paid
---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1996 10 2,000,000 1,060 1,060 1,003,400
Net income (loss)
---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1997 10 2,000,000 1,060 1,060 1,003,400
Net income
---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1998 10 $2,000,000 1,060 $ 1,060 $1,003,400
========== ========== ========== ========== ==========
<CAPTION>
RETAINED DIVISIONAL TREASURY
EARNINGS EQUITY STOCK TOTAL
<S> <C> <C> <C> <C>
BALANCE, APRIL 1, 1995 $(1,114,171) $ (400,000) $ 1,490,289
Net income 3,376,504 $ 22,245 3,398,749
Dividends paid (200,000) (200,000)
----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1996 2,062,333 22,245 (400,000) 4,689,038
Net income (loss) 2,698,288 (80,918) 2,617,370
----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1997 4,760,621 (58,673) (400,000) 7,306,408
Net income 1,318,602 2,021,058 3,339,660
----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1998 $ 6,079,223 $ 1,962,385 $ (400,000) $10,646,068
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the combined financial statements.
-4-
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,339,660 $ 2,617,370 $ 3,398,749
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 240,329 228,379 212,024
Gain on sale of property (5,914) (4,000) (17,290)
Deferred income taxes (193,546) 67,610 (26,158)
Reversal of accrued environmental cleanup costs (805,282)
Changes in operating assets and liabilities:
Receivables (2,504,231) (2,886,954) (4,360,119)
Inventories (1,148,731) (3,026,220) (3,236,603)
Prepaid expenses and other assets (586,883) (500,844) (58,328)
Deposits on cultivation projects (63,948) (67,467) (107,384)
Accounts payable 4,911,713 (31,710) 1,595,363
Accrued liabilities 1,332,820 138,377 686,614
Due to/from affiliates 4,910,682 (3,630,314) (1,134,810)
------------ ------------ ------------
Net cash provided by (used in) operating activities 10,231,951 (7,901,055) (3,047,942)
------------ ------------ ------------
INVESTING ACTIVITIES:
Increase in other assets (1,885)
Purchase of property (192,836) (171,909) (357,304)
Proceeds from sale of property 8,000 16,252 21,840
------------ ------------ ------------
Net cash used in investing activities (184,836) (155,657) (337,349)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net (repayments) borrowings under line-of-credit
agreements (8,800,746) 2,310,117 3,815,056
Principal payments on long-term debt (55,000) (55,000) (55,000)
(Decrease) increase in bank overdraft (163,388) 79,821 75,850
Proceeds from bank borrowings 6,200,000
Dividends paid (200,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities (9,019,134) 8,534,938 3,635,906
------------ ------------ ------------
NET INCREASE IN CASH 1,027,981 478,226 250,615
CASH, BEGINNING OF YEAR 838,754 360,528 109,913
------------ ------------ ------------
CASH, END OF YEAR $ 1,866,735 $ 838,754 $ 360,528
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the year for:
Interest $ 1,172,781 $ 1,113,066 $ 1,015,854
Income taxes $ 1,430,130 $ 732,763 $ 751,484
</TABLE>
See accompanying notes to the combined financial statements.
-5-
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- - - - - - - - - - - - - --------------------------------------------------------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION - The combined financial statements include the
accounts of Zuellig Botanical Extracts, Inc. ("ZBE"), ZetaPharm, Inc.
("ZetaPharm") and Wilcox Drug Company, Inc. ("Wilcox," together with ZBE
and ZetaPharm, the "Companies"), which are affiliated through common
ownership and common management. ZBE is a wholly owned subsidiary of
Zuellig Botanicals, Inc. ("ZBI"). ZBI, ZetaPharm and Wilcox are wholly
owned subsidiaries of Zuellig Group N.A., Inc. ("ZGNA"). All significant
intercompany balances and transactions have been eliminated in combination.
ZBE is a distributor of bulk standardized and non-standardized
nutraceutical extracts to manufacturers of dietary supplements. ZetaPharm
is a distributor of bulk fine chemicals, excipients and active ingredients
used in the manufacture of generic pharmaceuticals. Wilcox is a supplier
of wild gathered and cultivated botanical raw materials. The botanical raw
materials sold by Wilcox are used in the manufacture of nutraceutical
extracts or the production of botanical powders, both of which are sold to
manufacturers of dietary supplements.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management 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 the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATION OF CREDIT RISK - Financial instruments that subject the
Companies to credit risk consist primarily of cash and accounts receivable.
The Companies place cash with high quality financial institutions and have
not experienced losses with respect to these items. Concentration of
credit risk with respect to accounts receivable is generally diversified
due to the large number of entities composing the Companies' customer base
and their geographic dispersion. The Companies perform ongoing credit
evaluations of their customers and maintain allowances for potential credit
losses.
In 1997, sales to one customer accounted for 11% of net sales.
INVENTORIES - Inventories consist of botanical and herbal products held for
resale and are stated at the lower of cost or market, with cost determined
primarily by specific identification.
PROPERTY - Property is stated at cost less accumulated depreciation and
amortization. Depreciation is provided for primarily using the
straight-line method over estimated useful lives ranging from 2 to 15
years. Leasehold improvements are amortized over the shorter of the terms
of the leases or the assets' estimated useful lives.
-6-
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS - The Companies review the recoverability
of long-lived and intangible assets to determine whether there has been any
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This assessment is
performed based on the estimated future cash flows compared with the
asset's carrying value. If the future cash flows (undiscounted and without
interest charges) are less than the carrying value, a write-down would be
recorded to reduce the related asset to its estimated fair value.
INCOME TAXES - The Companies are included in ZGNA's consolidated federal
income tax return and combined California franchise tax return. California
franchise taxes are allocated to the Companies based on factors used to
apportion taxable income to ZGNA's subsidiaries. Other state income taxes
are recorded based on the Companies' separate income tax returns. The
benefits of state tax credits are utilized to the extent available to the
combined group. Federal income taxes are computed as if the Companies
filed separate income tax returns.
Deferred income tax assets and liabilities are computed for differences
between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are
based on enacted tax laws and rates applicable to years in which the
differences are expected to reverse. A valuation allowance is established,
when necessary, to reduce deferred income tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for
the year plus or minus the change during the year in deferred income tax
assets and liabilities.
ALLOCATION OF EXPENSES - ZBE was incorporated on August 27, 1998. Prior to
that time, the accounts of ZBE were not maintained on a stand-alone basis.
Revenues and, when practicable, expenses have been allocated between ZBI
and ZBE on a specific identification basis. Certain selling, general and
administrative expenses have been incurred by ZBI during the ordinary
course of business and are not specifically allocable to ZBI or ZBE. In
these instances, management has allocated expenses based on sales mix or a
percentage of time spent on extract-related administrative duties. The
Companies' management believes that these methods of allocation are
reasonable.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $ 3,819,730 $ 4,133,813
Finished goods 9,251,573 7,788,759
----------- -----------
Total $13,071,303 $11,922,572
----------- -----------
----------- -----------
</TABLE>
3. BANK BORROWINGS
During 1998, the Companies, ZGNA and certain affiliates entered into
various credit agreements with a bank whereby they may borrow up to
$35,000,000 under a revolving credit agreement, with an additional
$3,000,000 available upon approval by the bank, and up to $750,000 under a
non-revolving line of credit with a term repayment option through December
1, 1998 (the "1998 Credit Agreements"). Under the terms of the 1998 Credit
Agreements, $3,000,000 is available for the issuance of letters of credit
with a maximum term of 150 days. Advances bear interest at either the
bank's reference rate at the time of each borrowing or LIBOR plus 1.75%
(rates at March 31, 1998 range from 7.51% to 8.5%).
-7-
<PAGE>
The amount outstanding under the Companies' 1998 Credit Agreements was
$10,305,683 at March 31, 1998. The aggregate amount outstanding under the
1998 Credit Agreements for ZGNA and its subsidiaries was $17,601,879 at
March 31, 1998. All borrowings are collateralized by receivables and
inventories, and all borrowings are cross-guaranteed by the Companies, ZGNA
and affiliates participating in the 1998 Credit Agreements.
The 1998 Credit Agreements require the Companies, ZGNA and affiliates to
maintain certain specified operating ratios, minimum tangible net worth and
certain other requirements. The agreements also require the bank's
approval to incur additional indebtedness. These 1998 Credit Agreements
were superceded and replaced by the 1999 Credit Agreements, as discussed
below.
During December 1998, the 1998 Credit Agreements were extended for eight
days. On December 8, 1998 the Companies, ZGNA and its affiliates entered
into various new credit agreements (the "1999 Credit Agreements") with a
bank whereby they may borrow up to $38,000,000 under a revolving credit
agreement, with an additional $6,500,000 available under a non-revolving
loan commitment. The 1999 Credit Agreements have a term repayment option
through April 30, 1999. Under the terms of the 1999 Credit Agreements,
$1,500,000 is available for the issuance of letters of credit with a
maximum term of 150 days. Advances under the revolving line of credit bear
interest at either prime minus .75% or LIBOR plus 1.5%. Advances under the
non-revolving loan commitment bear interest at either prime minus .5% or
LIBOR plus 1.75%. All borrowings are collateralized by receivables and
inventories, and all borrowings are cross-guaranteed by the Companies, ZGNA
and affiliates participating in the 1999 Credit Agreements.
During 1997, the Companies, ZGNA and certain affiliates entered into
various credit agreements (the "1997 Credit Agreements"). Advances accrue
interest at either the bank's reference rate at the time of borrowing or
LIBOR plus 1.85%. The amount outstanding under the Companies' 1997 Credit
Agreement was $19,106,429 at March 31, 1997. These 1997 Credit Agreements
were superceded and replaced by the 1998 Credit Agreements, discussed
above.
During 1996, the Companies, ZGNA and certain affiliates entered into
various credit agreements (the "1996 Credit Agreements"). Advances bear
interest at the bank's prime lending rate or LIBOR plus 2.5%, and
acceptances bear interest at the bank's prevailing acceptance rate at the
time of each borrowing. The 1996 Credit Agreements were superceded and
replaced by the 1997 Credit Agreements, discussed above.
4. LONG-TERM DEBT
Long-term debt at March 31, 1997 consisted of a note payable to a former
Wilcox stockholder of $55,000. The entire balance was repaid in 1998.
-8-
<PAGE>
5. LEASE COMMITMENTS
The Companies lease their facilities and certain equipment. At March 31,
1998, future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
FUTURE
MINIMUM
YEAR ENDING LEASE
MARCH 31, PAYMENTS
<S> <C>
1999 $ 274,834
2000 197,175
2001 176,775
2002 74,400
2003 74,400
--------
Total $797,584
--------
--------
</TABLE>
The facilities leases generally include provisions for rent escalation to
reflect increased operating costs or require the Company to pay property
taxes, maintenance and utility costs. One lease includes a renewal option
for an additional five-year term.
Rent expense for the years ended March 31, 1998, 1997 and 1996 was
$261,802, $256,654 and $255,872, respectively.
6. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 2,022,113 $ 967,684 $ 790,124
State 560,628 179,634 272,748
----------- ----------- -----------
2,582,741 1,147,318 1,062,872
----------- ----------- -----------
Deferred:
Federal (255,720) 362,146 627,372
State (24,285) 24,177 19,978
Adjustment to valuation allowance:
Federal 75,647 (290,907) (647,032)
State 10,812 (27,806) (26,476)
----------- ----------- -----------
(193,546) 67,610 (26,158)
----------- ----------- -----------
Total $ 2,389,195 $ 1,214,928 $ 1,036,714
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
-9-
<PAGE>
The actual income tax provisions on earnings from operations subject to
income taxes differ from the statutory federal income tax rate due to the
following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal income taxes at the statutory rate $ 1,947,811 $ 1,302,982 $ 1,508,057
State income taxes, net of federal benefit 323,069 221,233 205,158
Adjustment to valuation allowance 86,459 (318,713) (673,508)
Other 31,856 9,426 (2,993)
----------- ----------- -----------
Total $ 2,389,195 $ 1,214,928 $ 1,036,714
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Deferred income tax assets and liabilities at March 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred income tax assets:
Accrued environmental cleanup costs $ 15,070 $ 19,325
Allowance for doubtful accounts 123,400 67,270
Reserve for inventory obsolescence 206,270 112,623
Inventory capitalization 287,706 275,929
State income taxes 88,976
Other 7,351 27,763
--------- ---------
Total deferred income tax assets 728,773 502,910
--------- ---------
Deferred income tax liabilities:
Prepaid expenses 33,111 83,438
State income taxes 18,261
Other 16,457 2,011
--------- ---------
Total deferred income tax liabilities 49,568 103,710
--------- ---------
Valuation allowance (238,662) (152,203)
--------- ---------
Total $ 440,543 $ 246,997
--------- ---------
--------- ---------
</TABLE>
7. RELATED PARTY TRANSACTIONS
Amounts due to/from affiliates consist primarily of management fees,
intercompany tax allocations and balances arising from product sales to
ZBI.
The Companies sold products to ZBI totaling $6,793,310, $5,029,129 and
$5,958,205 during 1998, 1997 and 1996, respectively.
The Companies incurred management fee expense with affiliates of
approximately $1,601,163, $429,007 and $255,643 during 1998, 1997 and 1996,
respectively.
-10-
<PAGE>
8. EMPLOYEE BENEFITS
ZetaPharm has an employment contract with its president that provides for
incentive compensation based on defined earnings. Compensation expense
recorded under this plan in 1998, 1997 and 1996 was approximately $306,000,
$252,300 and $180,066, respectively. The employment contract may be
terminated by either party upon six months' notice.
Wilcox has an executive bonus plan and incentive compensation arrangements
for key employees based on an earnings formula. Compensation expense of
$32,207 and $367,382 was recorded under these plans in 1997 and 1996,
respectively. There was no compensation expense recorded in 1998.
During 1998, the Companies established a 401(k) plan under which the
Companies make matching contributions, as defined. Additionally, the
Companies make a 2% contribution based on the qualified employee's
compensation to the individual's 401(k) account. During 1998, the
Companies recorded contribution expense of $140,879.
During 1997 and 1996, the Companies provided a simplified employee pension
plan under which the Companies made contributions based on a percentage of
the qualified employee's compensation to the individual's retirement
account under Internal Revenue Code Sec. 408(k). Such percentage was 4%
during 1997 and 1996 and amounted to $121,246 and $59,706, respectively.
This plan was terminated in 1998.
9. ACCRUED ENVIRONMENTAL CLEANUP COSTS
On March 15, 1994, Wilcox and 78 other potentially responsible parties
executed a consent decree with the Environmental Protection Agency ("EPA"),
in accordance with the Comprehensive Environmental Response, Compensation
and Liability Act for the cleanup of a designated Superfund Site. Wilcox
accrued a liability for the environmental cleanup costs of $1.5 million in
fiscal 1994. During 1997, Wilcox was informed that the EPA had
substantially reduced its estimate with respect to the cleanup costs and
counsel advised that it believed that Wilcox would not be required to make
additional payments with respect to the cleanup. Accordingly, management
reversed substantially all of the remaining accrued environmental cleanup
costs.
-11-
<PAGE>
10. CAPITAL STRUCTURE
The capital structures of the Companies are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ZETAPHARM:
Cumulative preferred stock, $200,000 par value: authorized,
issued and outstanding, 10 shares $ 2,000,000 $ 2,000,000
Common stock, $1 par value; authorized, 1,000 shares;
issued and outstanding, 960 shares 960 960
Additional paid-in capital 1,000,000 1,000,000
Retained earnings 3,744,815 1,785,685
WILCOX:
Common stock, $1 par value; authorized, 1,000 shares; issued,
100 shares; outstanding, 80 shares 100 100
Additional paid-in capital 3,400 3,400
Treasury stock (400,000) (400,000)
Retained earnings 2,334,408 2,974,936
ZBE:
Divisional equity 1,962,385 (58,673)
</TABLE>
11. SUBSEQUENT EVENTS
On December 9, 1998, ZGNA and ZBI announced that ZBE, ZetaPharm and Wilcox
will merge with Hauser Inc. ("Hauser"), a non-affiliated manufacturer of
natural products headquartered in Boulder, Colorado. Hauser will also have
an option to acquire the powders business of ZBI. Upon closing, ZGNA and
ZBI will own collectively up to 10.05 million shares, representing
approximately 49% of Hauser's outstanding common stock. The agreement is
subject to approval by Hauser's shareholders and customary closing
conditions.
During 1999, ZetaPharm's principal generic ingredient supplier elected to
sell its products directly, rather than utilize ZetaPharm as its
distributor. ZetaPharm's sales of generic ingredients represented 33%, 31%
and 21% of the Companies' combined net sales for the years ended March 31,
1998, 1997 and 1996, respectively. Management expects that the revenue
from the sale of generic ingredients will significantly decline in fiscal
year 1999, and will be insignificant in fiscal year 2000.
******
-12-
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, March 31,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 21,707 $ 1,866,735
Receivables:
Customers, less allowance for doubtful accounts of
$394,935 at October 31, 1998; $215,410 at March 31, 1998 9,771,229 14,668,147
Other receivables 62,442 113,755
Inventories 27,660,177 13,071,303
Prepaid expenses and other current assets 3,184,936 1,325,241
Deferred income taxes 440,543 440,543
Due from affiliates 741,722 1,528,868
------------ ------------
Total current assets 41,882,756 33,014,592
------------ ------------
PROPERTY
Land 312,101 312,101
Machinery and equipment 989,087 950,610
Furniture and fixtures 337,526 337,526
Vehicles 294,158 289,583
Leasehold improvements 132,529 132,529
Construction in progress 9,534 39,136
------------ ------------
2,074,935 2,061,485
Accumulated depreciation and amortization (1,538,765) (1,434,545)
------------ ------------
Property, net 536,170 626,940
------------ ------------
OTHER ASSETS 338,634 275,468
------------ ------------
TOTAL $ 42,757,560 $ 33,917,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings $ 21,003,903 $ 10,305,683
Accounts payable 7,912,408 8,244,654
Accrued liabilities 1,459,299 3,228,115
Due to affiliates 684,884 1,492,480
------------ ------------
Total current liabilities 31,060,494 23,270,932
------------ ------------
STOCKHOLDERS' EQUITY:
Cumulative preferred stock 2,000,000 2,000,000
Common stock 1,061 1,060
Additional paid-in capital 1,003,499 1,003,400
Retained earnings 9,092,506 6,079,223
Divisional equity 1,962,385
Less treasury stock (400,000) (400,000)
------------ ------------
Total stockholders' equity 11,697,066 10,646,068
------------ ------------
TOTAL $ 42,757,560 $ 33,917,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the condensed combined financial statements.
1
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
Seven months ended
October 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET SALES TO THIRD PARTIES $42,938,990 $49,031,891
NET SALES TO AFFILIATES 7,203,882 2,750,385
----------- -----------
NET SALES 50,142,872 51,782,276
COST OF SALES 42,579,756 43,293,466
----------- -----------
GROSS PROFIT 7,563,116 8,488,810
COMMISSION AND OTHER INCOME 114,261 84,664
----------- -----------
7,677,377 8,573,474
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,578,887 4,986,286
MANAGEMENT FEE EXPENSE 568,000 682,000
INTEREST EXPENSE 694,249 673,491
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,836,241 2,231,697
PROVISION FOR INCOME TAXES 785,343 953,045
----------- -----------
NET INCOME $ 1,050,898 $ 1,278,652
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the condensed combined financial statements.
2
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED STOCK COMMON STOCK
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
BALANCE, APRIL 1, 1998 10 $2,000,000 1,060 $ 1,060
Net income
Reclassification of divisional equity
Issuance of common stock 1 1
---------- ---------- ---------- ----------
BALANCE, OCTOBER 31, 1998 10 $2,000,000 1,061 $ 1,061
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<CAPTION>
ADDITIONAL
PAID-IN RETAINED DIVISIONAL TREASURY
CAPITAL EARNINGS EQUITY STOCK TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1998 $1,003,400 $6,079,223 $ 1,962,385 $(400,000) $ 10,646,068
Net income 1,050,898 1,050,898
Reclassification of divisional equity 1,962,385 (1,962,385) -
Issuance of common stock 99 100
-----------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 1998 $1,003,499 $9,092,506 $ - $(400,000) $ 11,697,066
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed combined financial statements.
3
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Seven months ended October 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,050,898 $ 1,278,652
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 125,624 140,165
Gain on sale of property (2,355) (5,000)
Changes in operating assets and liabilities:
Receivables 4,896,918 (2,365,122)
Inventories (14,588,874) (3,325,483)
Prepaid expenses and other assets (1,808,382) (1,391,383)
Deposits on cultivation projects (76,691) (99,946)
Accounts payable (332,246) 4,062,781
Accrued liabilities (1,768,816) 874,884
Due to/from affiliates (20,350) 4,654,744
------------ ------------
Net cash (used in) provided by operating activities (12,524,274) 3,824,292
------------ ------------
INVESTING ACTIVITIES:
Decrease in other assets 13,525 10,000
Purchase of property (38,379) (121,561)
Proceeds from sale of property 5,880 8,000
------------ ------------
Net cash used in investing activities (18,974) (103,561)
------------ ------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line-of-credit agreements 10,698,220 (3,643,793)
Principal payments on long term debt (27,500)
------------ ------------
Net cash provided by (used in) financing activities 10,698,220 (3,671,293)
------------ ------------
NET CHANGE IN CASH (1,845,028) 49,438
CASH, BEGINNING OF PERIOD 1,866,735 838,754
------------ ------------
CASH, END OF PERIOD $ 21,707 $ 888,192
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the condensed combined financial statements.
4
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS AS OF OCTOBER 31, 1998 AND
MARCH 31, 1998 AND FOR THE SEVEN MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
PRINCIPLES OF COMBINATION - The combined financial statements include the
accounts of Zuellig Botanical Extracts, Inc. ("ZBE"), ZetaPharm, Inc.
("ZetaPharm") and Wilcox Drug Company, Inc. ("Wilcox", together with ZBE
and ZetaPharm, the "Companies"), which are affiliated through common
ownership and common management. ZBE is a wholly owned subsidiary of
Zuellig Botanicals, Inc. ("ZBI"). ZBI, ZetaPharm and Wilcox are wholly
owned subsidiaries of Zuellig Group N.A., Inc. ("ZGNA"). All significant
intercompany balances and transactions have been eliminated in
combination.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Companies' financial position
as of October 31, 1998, and results of their operations and their cash
flows for the periods ended October 31, 1998 and 1997.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management 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 the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
ALLOCATION OF EXPENSES - ZBE was incorporated on August 27, 1998. Prior to
that time, the accounts of ZBE were not maintained on a stand-alone basis.
Revenues and, when practicable, expenses have been allocated between ZBI
and ZBE on a specific identification basis. Certain selling, general and
administrative expenses have been incurred by ZBI during the ordinary
course of business, and are not specifically allocable to ZBI or ZBE. In
these instances, management has allocated expenses based on sales mix or a
percentage of time spent on extract-related administrative duties. The
Companies' management believes that these methods of allocation are
reasonable.
- 5 -
<PAGE>
2. INVENTORIES
Inventories consist of botanical and herbal products held for resale and
are stated at the lower of cost or market, with cost determined primarily
by specific identification.
Inventories are classified as follows:
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31,
1998 1998
----------- -----------
<S> <C> <C>
Raw materials $ 9,347,822 $ 3,819,730
Finished goods 18,312,355 9,251,573
----------- -----------
Total $27,660,177 $13,071,303
----------- -----------
----------- -----------
</TABLE>
3. BANK BORROWINGS
Short-term bank borrowings consist of a line of credit. During 1998, the
Companies, ZGNA and certain affiliates entered into various credit
agreements with a bank whereby they may borrow up to $35,000,000 under a
revolving credit agreement with an additional $3,000,000 available upon
approval by the bank, and up to $750,000 under a non-revolving line of
credit with a term repayment option through December 1, 1998 (the "1998
Credit Agreements"). Under the terms of the 1998 Credit Agreements,
$3,000,000 is available for the issuance of letters of credit with a
maximum term of 150 days. Advances bear interest at either the bank's
reference rate at the time of each borrowing or LIBOR plus 1.75% (rates at
October 31, 1998 range from 7.28% to 8.25%). The amount outstanding under
the Companies' 1998 Credit Agreements was $21,003,903 and $10,305,683 at
October 31, 1998 and March 31, 1998, respectively. The aggregate amount
outstanding under the 1998 Credit Agreements for ZGNA and its subsidiaries
was $35,743,888 at October 31, 1998. All borrowings are collateralized by
receivables and inventories, and all borrowings are cross-guaranteed by
the Companies, ZGNA and affiliates participating in the credit agreements.
During December 1998, the 1998 Credit Agreements were extended for eight
days. On December 8, 1998 the Companies, ZGNA and its affiliates entered
into various new credit agreements (the "1999 Credit Agreements") with a
bank whereby they may borrow up to $38,000,000 under a revolving credit
agreement with an additional $6,500,000 available under a non-revolving
loan commitment. The 1999 Credit Agreements have a term repayment option
through April 30, 1999. Under the terms of the 1999 Credit Agreements,
$1,500,000 is available for the issuance of letters of credit with a
maximum term of 150 days. Advances under the revolving line of credit
bear interest at either prime minus .75% or LIBOR plus 1.5%. Advances
under the non-revolving loan commitment bear interest at either prime
minus .5% or LIBOR plus 1.75%.
4. RELATED PARTY TRANSACTIONS
Amounts due to/from affiliates consist primarily of management fees,
intercompany tax allocations and balances arising from product sales to
ZBI.
- 6 -
<PAGE>
The Companies sold products to ZBI totaling $7,203,882 and $2,750,385
during the seven months ended October 31, 1998 and 1997, respectively.
Historically, products were sold to ZBI at margins comparable to margins
generated from sales to third parties. During the seven months ended
October 31, 1998, the Companies sold products to ZBI at cost.
The Companies incurred management fee expense with affiliates of
approximately $568,000 and $682,000 during the seven months ended October
31, 1998 and 1997, respectively.
5. SUBSEQUENT EVENTS
On December 9, 1998, ZGNA and ZBI announced that ZBE, ZetaPharm and Wilcox
will merge with Hauser Inc. ("Hauser"), a non-affiliated manufacturer of
natural products headquartered in Boulder, Colorado. Hauser will also have
an option to acquire the powders business of ZBI. Upon closing, ZGNA and
ZBI will own collectively up to 10.05 million shares, representing
approximately 49% of Hauser's outstanding common stock. The agreement is
subject to approval by Hauser's shareholders and customary closing
conditions.
During 1999, ZetaPharms's principal generic ingredient supplier elected to
sell its products directly, rather than utilize ZetaPharm as its
distributor. ZetaPharm's sales of generic ingredients represented 23% and
33% of the Companies' combined sales for the seven months ended October
31, 1998 and 1997, respectively. Management expects that the revenue from
the sale of generic ingredients will be insignificant in fiscal year 2000.
- 7 -
<PAGE>
APPENDIX I
HAUSER, INC.
1999 STOCK INCENTIVE PLAN
1. PURPOSE
The purpose of the Plan is to provide a means through which the Company
may attract able persons to enter and remain in the employ of the Company and
its Subsidiaries and to provide a means whereby they can acquire and maintain
Common Stock ownership, thereby strengthening their commitment to the welfare
of the Company and promoting an identity of interest between stockholders of
the Company and these employees and consultants.
So that the appropriate incentive can be provided, the Plan allows for
granting Incentive Stock Options and Nonqualified Stock Options, or any
combination of thereof to employees, directors and consultants, and stock
grants to directors who are not employees of the Company or a Subsidiary.
2. DEFINITIONS
The following definitions shall be applicable throughout the Plan.
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means the Company or a Subsidiary (as the case may be)
having cause to terminate an Optionee's employment or service in accordance
with the provisions of any existing employment, consulting or any other
agreement between the Optionee and the Company or a Subsidiary (as the case
may be) or, in the absence of such an employment, consulting or other
agreement, upon (i) the determination by the Company or a Subsidiary (as the
case may be) that the Optionee (A) has committed an act of personal
dishonesty, embezzlement, gross negligence or gross misconduct in the course
of employment or service with the Company or a Subsidiary (as the case may
be), (B) has ceased to perform his duties to the Company or a Subsidiary (as
the case may be)(other than as a result of his incapacity due to physical or
mental illness or injury), which failure amounts to intentional and extended
neglect of his duties, (C) has engaged in or is about to engage in conduct
materially injurious to the Company or a Subsidiary (unless when informed
that proposed conduct would be so injurious he immediately ceases and
corrects such proposed conduct), or (D) has willfully failed to follow the
lawful directions of the Board or a superior officer of the Company or a
Subsidiary (as the case may be) (without the same being corrected upon five
(5) days notice); or (ii) the Optionee having pled no contest or guilty to a
criminal charge or having been convicted of a crime (other than a minor
traffic violation) which could reasonably be expected to have a material
adverse impact on the reputation and standing of the Company or a Subsidiary
in the community or in its business relationships. For purposes of the Plan,
the Committee shall
<PAGE>
determine whether Cause exists. No Option may be exercised during any cure
period provided above unless the cure has been accomplished.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any section of the Code shall be deemed to include
any amendments or successor provisions to such section and any regulations
under such section.
(d) "Committee" means a committee of at least two members appointed by
the Board to administer the Plan, each of whom shall be both a Non-Employee
Director and an Outside Director.
(e) "Common Stock" means the common stock, par value $0.001 per share,
of the Company.
(f) "Company" means Hauser, Inc., a corporation organized under the
laws of the State of Colorado.
(g) "Disability" means an Optionee's disability within the meaning of
Section 22(e)(3) of the Code.
(h) "Eligible Person" means any (i) person regularly employed by the
Company or a Subsidiary; PROVIDED, HOWEVER, that no such employee covered by
a collective bargaining agreement shall be an Eligible Person unless and to
the extent that such eligibility is set forth in such collective bargaining
agreement or in an agreement or instrument relating thereto; (ii) consultant
to the Company or a Subsidiary; or (iii) member of the Board or the board of
directors of a Subsidiary.
(i) "Exchange Act" means the Securities Exchange Act of 1934.
(j) "Fair Market Value" on a given date means (i) if the Common Stock
is listed on a national securities exchange, the closing sales prices of the
Stock reported as having occurred on the primary exchange with which the
Stock is listed and traded on the date prior to such date, or, if there is no
such sale on that date, then on the last preceding date on which such a sale
was reported; or (ii) if the Common Stock is not listed on any national
securities exchange but is quoted in the National Market System of the
National Association of Securities Dealers Automated Quotation System the
average between the high and low sales price of the Common Stock on the date
prior to such date, or, if there is no such sale on that date, then on the
last preceding date on which a sale was reported; or (iii) if the Common
Stock is not listed on a national securities exchange nor quoted in the
National Market System of the National Association of Securities Dealers
Automated Quotation System on a last sale basis, the amount determined by the
Committee to be the fair market value based upon a good faith attempt to
value the Stock accurately.
(k) "Incentive Stock Option" means an Option granted by the Committee
to an Optionee under the Plan which is designated by the Committee as an
"incentive stock option" within the meaning of Section 422 of the Code.
(l) "Non-Employee Director" means a "non-employee director" within the
meaning of Rule 16b-3 of the Exchange Act or any successor rule or regulation.
-2-
<PAGE>
(m) "Nonqualified Stock Option" means an Option granted under the Plan
which is not designated as an Incentive Stock Option.
(n) "Normal Termination" means termination of employment or service
with the Company or a Subsidiary:
(i) Upon retirement pursuant to the retirement plan of the Company
or a Subsidiary (as the case may be), as may be applicable at
the time to the Optionee in question;
(ii) On account of Disability;
(iii) By the Company or a Subsidiary (as the case may be) without
Cause; or
(iv) With the specific written consent of the Committee.
(o) "Option" means the right and option granted hereunder to purchase
any one share of Stock from the Company, at the per share Option Price.
(p) "Optionee" means the holder of an Option.
(q) "Option Agreement" means the agreement between the Company and an
Optionee who has been granted an Option which defines the rights and
obligations of the parties with respect to such Option.
(r) "Option Period" means the period of time set by the Committee after
which time an Option will expire.
(s) "Option Price" means the exercise price set for an Option.
(t) "Outside Director" means an "outside director" within the meaning
of Section 162(m) of the Code.
(u) "Plan" means the Company's 1999 Stock Incentive Plan.
(v) "Stock" means the Common Stock or such other authorized shares of
stock of the Company as from time to time may be authorized for use under the
Plan.
(w) "Subsidiary" means a corporation which is a "subsidiary
corporation" of the Company as defined in Section 424 of the Code.
3. EFFECTIVE DATE, DURATION
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The Plan is effective as of ___, 1999, being after approval of the Plan
by the shareholders and immediately after effectiveness of the merger among
certain subsidiaries of the Company and Zuellig Botanical Extracts, Inc.,
ZetaPharm, Inc., and Wilcox Drug Company, Inc.
The expiration date of the Plan, after which no Options may be granted
hereunder, shall be February 1, 2009; PROVIDED, HOWEVER, that the
administration of the Plan shall continue in effect until all matters
relating to the settlement of Options previously granted have been settled.
4. ADMINISTRATION
The Board or the Committee shall administer the Plan. The Company shall
take into account that under current law Options will not be exempt from the
application of Section 162(m) of the Code unless granted by the Committee
serving as a Compensation Committee as provided in Section 162(m)(4)(C) of
the Code. All references in the Plan to the "Committee" shall be deemed to
refer to the Board whenever the Board is discharging the powers and
responsibilities of administering the Plan. The majority of the members of
the Committee shall constitute a quorum. The acts of a majority of the
members present at any meeting at which a quorum is present or acts approved
in writing by a majority of the Committee shall be deemed the acts of the
Committee.
Subject to the provisions of the Plan, the Committee shall have
exclusive power to:
(a) Select the Eligible Persons to participate in the Plan;
(b) Determine the nature and extent of the Options to be granted to
each Optionee;
(c) Determine the time or times when Options will be granted to
Optionees;
(d) Determine the duration of each Option Period;
(e) Determine the Option Price for each Option and reprice any
outstanding Option;
(f) Determine the vesting schedule, if any, for each Option and
accelerate the vesting for any outstanding Option;
(g) Determine all conditions to which Options may be subject;
(h) Prescribe the form of Option Agreement;
(i) Make stock grants pursuant to Section 9 to members of the Board who
are not employees of the Company or a Subsidiary, determine the amount and
terms of such grants, and modify such terms;
(j) Provide for the transferability of Nonqualified Stock Options, (but
not Incentive Stock Options except as provided in Section 7(d)(ii));
(k) Cause records to be established in which there shall be entered, from
time to time as Options are granted to Optionees, the date of each Option grant,
the number of Incentive Stock Options or Nonqualified Stock Options granted by
the Committee to each Optionee, the expiration
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date and the duration of each Option Period and the number of shares of Stock
underlying each Option; and
(l) At any time prior to, after, or in connection with, any
termination of employment or service of an Optionee with the Company or its
Subsidiaries, provide for a longer post-termination exercise or survival
period with respect to any Option (not to exceed three years) or modify any
forfeiture provisions with respect to any Option; except to the extent that
the ability to so modify an Option shall cause an Option intended to qualify
as "performance-based" under Section 162(m) of the Code to not so qualify.
The Committee shall have the authority, subject to the provisions of the
Plan, to establish, adopt, and revise such rules and regulations and to make
all such determinations relating to the Plan as it may deem necessary or
advisable for the administration of the Plan. The Committee's interpretation
of the Plan or any documents evidencing Options granted pursuant thereto and
all decisions and determinations by the Committee with respect to the Plan
shall be final, binding, and conclusive on all parties unless otherwise
determined by the Board.
5. GRANT OF OPTIONS; SHARES SUBJECT TO THE PLAN
The Committee may, from time to time, grant one or more Options to any
one or more Eligible Persons; PROVIDED, HOWEVER, that:
(a) Subject to Section 11, the aggregate number of shares of Stock
made subject to all awards (including Options and grants of Stock) may not
exceed One Million (1,000,000);
(b) In the event any unexercised Option shall be surrendered,
terminate, expire, or be forfeited, the share of Stock no longer subject
thereto shall thereupon be released and shall thereafter be available for
new Options under the Plan;
(c) Stock delivered by the Company in settlement of Options under
the Plan may be authorized and unissued Stock or Stock held in the treasury
of the Company or may be purchased on the open market or by private
purchase;
(d) No Eligible Person may receive Options under the Plan with
respect to more than Two hundred fifty thousand (250,000) shares of Stock
in any one year; and
(e) The Committee may, in its sole discretion, require an Optionee
to pay consideration for an Option in an amount and in a manner as the
Committee deems appropriate.
6. FRACTIONAL SHARES
No fractional shares will be issued upon exercise of any Option and any
fractional shares will be rounded down to the nearest whole share.
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7. OPTION TERMS
The Committee is authorized to grant one or more Incentive Stock Options
or Nonqualified Stock Options to any Eligible Person; PROVIDED, HOWEVER, that
no Incentive Stock Options shall be granted to any Eligible Person who is not
an employee of the Company or a Subsidiary. Each Option so granted shall be
subject to the following conditions, or to such other conditions as may be
reflected in the applicable Option Agreement.
(a) OPTION PRICE. The Option Price per share of Stock for each Option
shall be set by the Committee at the time of grant but, shall not be less
than the Fair Market Value of a share of Stock at the date of grant.
(b) MANNER OF EXERCISE AND FORM OF PAYMENT. Options which have become
exercisable may be exercised by delivery of written notice of exercise to the
Committee accompanied by payment of the Option Price. The Option Price shall
be payable in cash or by certified check or, in the discretion of the
Committee, (i) in shares of Stock, valued at the Fair Market Value at the
time the Option is exercised, in sufficient amount to cover the aggregate
exercise price (provided that such Stock must have been held by the Optionee
for at least six months prior to exercise of the Option), (ii) by withholding
shares of Stock, valued at the Fair Market Value at the time the Option is
exercised, otherwise deliverable upon exercise of the Options, in sufficient
amount to cover the aggregate exercise price; (iii) in other property having
a fair market value on the date of exercise equal to the Option Price, or
(iv) by delivering to the Committee a copy of irrevocable instructions to a
stockbroker acceptable to the Company to deliver promptly to the Company an
amount of sale or loan proceeds sufficient to pay the aggregate exercise
price or (v) by delivery of a promissory note if in accordance with
applicable state and federal law.
(c) OPTION PERIOD AND VESTING. Options shall vest and become
exercisable in such manner and on such date or dates as shall be determined
by the Committee. The Committee shall also establish an Option Period which
shall not exceed ten years. If an Option is exercisable in installments,
exercise of one installment shall not affect the Optionee's ability to
exercise unexercised installments in accordance with the terms of the Plan
and the applicable Option Agreement. Unless otherwise stated in the
applicable Option Agreement, the Option shall expire upon an Optionee's
termination of employment with the Company or a Subsidiary at such times as
are set forth in Section 8.
(d) OTHER TERMS AND CONDITIONS. Options granted under the Plan shall
be evidenced by an Option Agreement, which shall contain such provisions as
may be determined by the Committee and, except as may be specifically stated
otherwise in such Option Agreement, be subject to the following terms and
conditions:
(i) Each share of Stock purchased through the exercise of an Option
shall be paid for in full at the time of the exercise. Each
Option shall cease to be exercisable when the Optionee
purchases the underlying share of Stock or when the Option
expires.
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(ii) Options shall not be transferable by the Optionee except by
will or the laws of descent and distribution and shall be
exercisable during the Optionee's lifetime only by the
Optionee.
(iii) Subject to any accelerated vesting, each Option shall vest and
become exercisable by the Optionee in accordance with the
vesting schedule established by the Committee and set forth in
the Option Agreement.
(iv) Each Option Agreement covering Incentive Stock Options shall
contain a provision requiring the Optionee to notify the
Company in writing immediately after the Optionee makes a
disqualifying disposition of any Stock acquired pursuant to the
exercise of any such Incentive Stock Option. A disqualifying
disposition is any disposition (including any sale) of such
Stock before the later of (a) two years after the date of grant
of the Incentive Stock Option or (b) one year after the date
the Optionee acquired the Stock by exercising the Incentive
Stock Option.
(v) Each Option Agreement may contain such other provisions
(whether or not applicable to an Option granted to any other
Optionee) as the Committee determines appropriate including,
without limitation, provisions to assist the Optionee in
financing the purchase of Stock upon the exercise of Options
which are consistent with applicable state and federal law,
provisions for the forfeiture of shares of Stock or
restrictions on resale or other disposition of shares of Stock
acquired under any Option, provisions giving the Company the
right to repurchase shares of Stock acquired under any Option
in the event the Optionee elects to dispose of such shares or
terminates employment with the Company and its Subsidiaries,
and provisions to comply with Federal and state securities laws
and Federal and state tax withholding requirements. Any such
provisions shall be reflected in the applicable Option
Agreement.
(e) INCENTIVE STOCK OPTION GRANTS TO 10% STOCKHOLDERS. Notwithstanding
anything to the contrary in this Section 7, if an Incentive Stock Option is
granted to an Optionee who owns stock representing more than ten percent of
the voting power of all classes of stock of the Company, its parent or a
subsidiary (as provided in Section 422(b) of the Code), the Option Period
shall not exceed five years from the date of grant of such Option and the
Option Price shall be at least 110 percent of the Fair Market Value (on the
Date of Grant) of the Stock subject to the Option.
(f) $100,000 PER YEAR LIMITATION FOR INCENTIVE STOCK OPTIONS. To the
extent the aggregate Fair Market Value (determined as of the date of grant)
of Stock for which Incentive Stock Options are exercisable for the first time
by any Optionee during any calendar year (under all plans of the Company and
its Subsidiaries) exceeds $100,000, the portion of the Options with respect
to which such excess arises shall be treated as a Nonqualified Stock Options.
(g) VOLUNTARY SURRENDER. The Committee may permit the voluntary
surrender of any Nonqualified Stock Option to be conditioned upon the
granting to the Optionee of a new Option for
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the same or a different number of shares as the Option surrendered or require
such voluntary surrender as a condition precedent to a grant of a new Option
to such Optionee. Such new Option shall be exercisable at an Option Price,
during an Option Period, and in accordance with any other terms or conditions
specified by the Committee at the time the new Option is granted, all
determined in accordance with the provisions of the Plan without regard to
the Option Price, Option Period, or any other terms and conditions of the
Nonqualified Stock Option surrendered.
8. EXPIRATION OF OPTION UPON TERMINATION OF EMPLOYMENT
Except as otherwise determined by the Committee and set forth in an
Option Agreement, the following provisions will apply to all Options upon an
Optionee's termination of employment with the Company or a Subsidiary:
(a) If prior to the end of the Option Period the Optionee shall undergo
a Normal Termination, all unvested Options then held by such Optionee shall
expire on the date of Normal Termination and all vested Options then held by
such Optionee shall expire on the earlier of the last day of the respective
Option Period or the date that is three months after the date of such Normal
Termination. All vesting with respect to Options shall cease on the date of
Normal Termination and all Options which are vested as of such date shall
remain exercisable by the Optionee until their expiration as provided above.
(b) If the Optionee dies prior to the end of the Option Period and
while still in the employ or service of the Company or a Subsidiary or within
three months of Normal Termination, all unvested Options then held by such
Optionee shall expire on the date of death and all other Options then held by
such Optionee shall expire on the earlier of the last day of the respective
Option Period or the date that is one year after the date of death of the
Optionee. All vesting with respect to Options shall cease on the earlier of
the date of Normal Termination or the date of death and all such Options
which are vested as of such date shall remain exercisable by the beneficiary
chosen by the Optionee pursuant to Section 9(e) or, if none has been chosen,
by the person or persons to whom the Optionee's rights under the Options pass
by will or the applicable laws of descent and distribution until their
expiration as provided above.
(c) If an Optionee voluntarily ceases employment or service with the
Company or a Subsidiary under circumstances where the Company or the
Subsidiary could terminate the Optionee's employment or service for Cause or
the Company or a Subsidiary terminates Optionee's employment or service for
Cause, all Options then held by such Optionee, whether vested or unvested,
shall expire immediately upon such cessation of employment or service. If an
Optionee voluntarily ceases employment or service with the Company or a
Subsidiary other than as provided in other provisions of Section 8, all
unvested Options then held by such Optionee shall expire on the date of
cessation of employment or service and all vested Options then held by such
Optionee shall expire on the earlier of the last day of the respective Option
Period or the date that is three months after the date of such cessation.
9. STOCK GRANTS TO DIRECTORS. The Committee may, in its sole discretion,
make grants of Stock to members of the Board who are not also employees of
the Company or a Subsidiary in lieu of cash compensation for their services
as members of the Board. Grants of Stock under this Section 9 shall be in
such amounts and have such terms as the Committee deems appropriate at the
time of grant.
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<PAGE>
10. GENERAL
(a) PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise specifically
provided in the Plan, no person shall be entitled to the privileges of stock
ownership in respect of shares of Stock which are subject to Options
hereunder until such shares have been issued to that person.
(b) GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to
deliver shares of Stock upon the exercise of Options shall be subject to all
applicable laws, rules, and regulations, and to such approvals by
governmental agencies as may be required. Notwithstanding any terms or
conditions of any Option to the contrary, the Company shall be under no
obligation to offer to sell or to sell and shall be prohibited from offering
to sell or selling any shares of Stock pursuant to an Option unless such
shares have been properly registered for sale pursuant to the Securities Act
with the Securities and Exchange Commission or unless the Company has
received an opinion of counsel, satisfactory to the Company, that such shares
may be offered or sold without such registration pursuant to an available
exemption therefrom and the terms and conditions of such exemption have been
fully complied with. The Company shall be under no obligation to register
for sale under the Securities Act any of the shares of Stock to be offered or
sold under the Plan. If the shares of Stock offered for sale or sold under
the Plan are offered or sold pursuant to an exemption from registration under
the Securities Act, the Company may restrict the transfer of such shares and
may legend the Stock certificates representing such shares in such manner as
it deems advisable to ensure the availability of any such exemption.
(c) TAX WITHHOLDING. Notwithstanding any other provision of the Plan,
the Company or a Subsidiary, as appropriate, shall have the right to deduct
from the number of shares of Stock issued upon the exercise of an Option such
number of shares of Stock, valued at Fair Market Value on the date of
payment, in an amount necessary to satisfy all Federal, state or local taxes
as required by law to be withheld with respect to such Options. In the
alternative, at the sole discretion of the Committee, an Optionee or other
person receiving Stock upon exercise of an Option may be required to pay to
the Company or a Subsidiary, as appropriate, prior to delivery of such Stock,
the amount of any such taxes which the Company or a Subsidiary, as
appropriate, is required to withhold, if any, with respect to such Stock.
Subject in particular cases to the disapproval of the Committee, the Company
may accept shares of Stock of equivalent Fair Market Value in payment of such
withholding tax obligations if the Optionee elects to make payment in such
manner. In furtherance of the foregoing, the Company may require that (i)
shares of Stock surrendered have been owned by the Optionee for at least six
months prior to the exercise or (ii) the Optionee, attesting in writing to
the Company ownership of shares of Stock having a Fair Market Value at the
time of attestation equal to such additional withholding obligations and
allowing the Company to withhold from the shares such Optionee would
otherwise receive an equal number of shares of Stock.
(d) CLAIM TO OPTIONS, AND EMPLOYMENT RIGHTS. No employee or other
person shall have any claim or right to be granted an Option under the Plan
or, having been selected for the grant of an Option, to be selected for a
grant of any other Option. Neither the Plan nor any action taken hereunder
shall be construed as giving any Optionee any right to be retained in the
employ or service of the Company or any Subsidiary. The grant of an Option
does not imply that the Company
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<PAGE>
or any Subsidiary does not anticipate either a general reduction in force or
the termination of the employment, directorship or consulting position of an
Optionee.
The grant of a Stock Option does not create a fiduciary relationship
between the Optionee and the Company or any other person or entitle the
Optionee to require the Company or any other person to provide any
information except as required by applicable securities or employee benefits
statutes and rules and regulations issued thereunder. An Optionee shall have
no rights as a shareholder with respect to any shares of Common Stock subject
to an Option.
(e) DESIGNATION AND CHANGE OF BENEFICIARY. Each Optionee may file with
the Committee a written designation of one or more persons as the beneficiary
who shall be entitled to exercise the rights with respect to an Option
granted under the Plan upon the Optionee's death. An Optionee may, from time
to time, revoke or change his beneficiary designation without the consent of
any prior beneficiary by filing a new designation with the Committee. The
last such designation received by the Committee shall be controlling;
PROVIDED, HOWEVER, that no designation, or change or revocation thereof,
shall be effective unless received by the Committee prior to the Optionee's
death, and in no event shall it be effective as of a date prior to such
receipt.
(f) PAYMENTS TO PERSONS OTHER THAN OPTIONEES. If the Committee shall
find that any person entitled to exercise an Option granted under the Plan is
unable to care for his affairs because of illness or accident, or is a minor,
then the delivery of shares of Stock due to such person or his estate upon
such exercise (unless a prior claim therefor has been made by a duly
appointed legal representative) may, if the Committee so directs the Company,
be made to his spouse, child, relative, an institution maintaining or having
custody of such person, or any other person deemed by the Committee to be a
proper recipient on behalf of such person otherwise entitled to delivery.
Any such delivery shall be a complete discharge of the liability of the
Committee and the Company therefor.
(g) TIME OF EXERCISE. Unless an earlier time is determined by the
Committee, all exercises of Options during or within ten (10) days after the
end of employment or service, may be processed by the Company five (5) days
after notice of exercise is given by the Optionee. If prior to the
processing of any Option exercise the Company determines that it had as of
the time of the end of employment or service or has as of the time of
processing grounds to terminate the Option under Section 8(c), the Option may
be canceled without exercise.
(h) NO LIABILITY OF COMPANY OR COMMITTEE MEMBERS. No member of the
Committee shall be personally liable by reason of any contract or other
instrument executed by such member or on his behalf in his capacity as a
member of the Committee nor for any mistake of judgment made in good faith,
and the Company shall indemnify and hold harmless each member of the
Committee and each other employee, officer or director of the Company to whom
any duty or power relating to the administration or interpretation of the
Plan may be allocated or delegated, against any cost or expense (including
counsel fees) or liability (including any sum paid in settlement of a claim)
arising out of any act or omission to act in connection with the Plan unless
arising out of such person's own fraud or willful bad faith; PROVIDED,
HOWEVER, that approval of the Board shall be required for the payment of any
amount in settlement of a claim against any such person. The foregoing right
of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or
any power that the Company may have to indemnify them or hold
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them harmless. The Company, Subsidiaries, the Board and the Committee shall
have no liability to the Optionee, or the Optionee's estate or transferee if:
(i) an Option intended to be an Incentive Stock Option does not at any time
qualify as an incentive stock option under the Code; (ii) an Option grant or
exercise, or the subsequent sale of securities received on such exercise,
does not qualify as exempt from the application of Section 16(b) of the
Exchange Act; or (iii) an Option grant or exercise, or the subsequent sale of
securities received on such exercise, is subject to Section 162(m) or 280G of
the Code; in each case even if the Optionee, estate to transferee was
informed it would qualify or not be so subject.
(i) GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the internal laws of the State of Colorado applicable to
contracts made and performed within such state, without regard to the
principles of conflicts of law thereof, except as such laws may be supplanted
by the federal laws of the United States of America, which laws shall then
govern its effect and its construction to the extent they supplant Colorado
law.
(j) RELIANCE ON REPORTS. Each member of the Committee and each member
of the Board shall be fully justified in relying, acting or failing to act,
and shall not be liable for having so relied, acted or failed to act in good
faith, upon any report made by the independent public accountant of the
Company and its Subsidiaries and upon any other information furnished in
connection with the Plan by any person or persons other than himself.
(k) RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
profit sharing, group insurance or other benefit plan of the Company except
as otherwise specifically provided in such other plan.
(l) EXPENSES. The expenses of administering the Plan shall be borne by
the Company.
(m) PRONOUNS. Masculine pronouns and other words of masculine gender
shall refer to both men and women.
(n) TITLES AND HEADINGS. The titles and headings of the sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings shall
control.
11. CHANGES IN CAPITAL STRUCTURE
Options granted under the Plan and any agreements evidencing such
Options shall be subject to equitable adjustment or substitution, as
determined by the Committee in its sole discretion, as to the number of
shares, the exercise price, the price or kind of a share of Stock or other
consideration subject to such Options (i) in the event of changes in the
outstanding Common Stock or in the capital structure of the Company by reason
of stock dividends, stock splits, reverse stock splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges, spinoffs,
split-ups or other relevant changes in capitalization occurring after the
date of grant of any such Option, (ii) in the event of any change in
applicable laws or any change in circumstances which results in or would
result in any substantial dilution or enlargement of the rights granted to,
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or available for, Optionees in the Plan, or (iii) upon the occurrence of any
other event which otherwise warrants equitable adjustment because it
interferes with the intended operation of the Plan. In addition, upon any
such event, the aggregate number of shares of Stock available under the Plan
and the maximum number of shares of Stock with respect to which any one
person may be granted in connection with Options during any year, if
applicable, shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. With respect to Options intended to
qualify as "performance-based compensation" under Section 162(m) of the Code,
such adjustments or substitutions shall be made only to the extent that the
Committee determines that such adjustments or substitutions may be made
without a loss of deductibility for such Options under Section 162(m) of the
Code. The Company shall give each Optionee notice of an adjustment hereunder
and, upon notice, such adjustment shall be conclusive and binding for all
purposes.
Notwithstanding the above, in the event of any of the following:
(a) The Company is merged or consolidated with another corporation
or entity and, in connection therewith, consideration is received by
shareholders of the Company in a form other than stock or other equity
interests of the surviving entity;
(b) All or substantially all of the assets of the Company are
acquired by another person; or
(c) The reorganization or liquidation of the Company;
then the Committee may, in its sole discretion and upon at least 10 days
advance notice to the affected persons, immediately prior to and subject to
the consummation of such event cancel any particular or all outstanding
Options (vested or unvested) and pay to the Optionees thereof, in cash, the
value of such Options vested as of such cancellation (taking into account any
acceleration of vesting as a result of such event) based upon the price per
share of Stock received or to be received by other shareholders of the
Company in the event. The terms of this Section 10 may be varied by the
Committee in any particular Option Agreement.
12. CHANGE IN CONTROL
(a) Except to the extent reflected in a particular Option Agreement, in
the event of a "Change in Control" (as defined below), notwithstanding any
vesting schedule with respect to any Options, all then unexercised and
unexpired Options which would otherwise be vested and exercisable within 12
months after the Change in Control assuming a continuation of employment or
service had occurred shall become immediately vested and exercisable.
(b) For purposes of the Plan, Change in Control shall, unless the Board
otherwise directs by resolution adopted prior thereto or, in the case of a
particular Option, the particular Option Agreement states otherwise, be
deemed to occur if:
(i) Any person, entity or group (within the meaning of Section
13(d)(3) of the Exchange Act, other than Zuellig Group,
N.A. ("ZGNA") and/or its affiliates, becomes, directly or
indirectly, by way of merger, consolidation or other business
combination, or otherwise, the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act) of the capital stock of
the Company
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entitled to more than 50% of the aggregate votes represented
by the capital stock of all classes of common stock of the
Company entitled to vote generally in the election of
directors ("Outstanding Voting Securities"); PROVIDED, HOWEVER,
that the following acquisitions will not constitute a Change in
Control: (i) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any
Subsidiary (ii) any acquisition by any corporation pursuant to
a reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, the conditions
described in clauses (A) and (B) of clause (iii) of this
definition are satisfied or (iii) ZGNA and/or its affiliates
becomes directly or indirectly, by way of merger, consolidation
or other business combination, or otherwise, the beneficial
owner of more than 50% of the Outstanding Voting Securities
otherwise than solely because of the issuance of Outstanding
Voting Securities of the Company pursuant to the Agreement for
Option to Acquire Powders Business from Zuellig Botanicals,
Inc. between the Company and Zuellig Botanicals, Inc., ("ZBI")
dated _____, 1999, as amended or superseded from time to time.
(ii) individuals who, as of the effective date of the Plan,
constitute the Board of Directors of the Company (the
"Incumbent Board") cease for any reason to constitute at least
a majority of the Company's Board of Directors; provided,
however, that any individual becoming a director subsequent to
the effective date of the Plan whose election, or nomination
for election by the Company's shareholders was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board or pursuant to the Governance Agreement
between the Company, ZGNA and ZBI, dated _________, 1999, will
be considered as though such individual were a member of the
Incumbent Board; or
(iii) The occurrence of a reorganization, merger or consolidation, in
each case, UNLESS, following such reorganization, merger or
consolidation, (A) more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting
from such reorganization, merger or consolidation and the
combined voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the
same proportions as their ownership, immediately prior to such
reorganization, merger or consolidation, of the Outstanding
Voting Securities, and (B) at least a majority of the members
of the board of directors of the corporation resulting from
such reorganization, merger or consolidation were members of
the Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation; or
(iv) Approval by the shareholders of the Company of (A) a complete
liquidation or dissolution of the Company, as applicable, or
(B) the sale or other disposition of
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all or substantially all of the assets of the Company,
OTHER THAN to a corporation, with respect to which
following such sale or other disposition, (1) more than
50% of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power
of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively of the Outstanding Voting
Securities immediately prior to such sale or other disposition,
in substantially the same proportion as their ownership
immediately prior to such sale or other disposition, of the
Outstanding Voting Securities, and (2) at least a majority of
the members of the board of directors of such corporation were
members of the Board at the time of the execution of the
initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company; provided,
however, that no transaction resulting in the disposition of
one or more subsidiaries or other business units of the Company
will be treated as substantially all of the assets of the
Company unless the assets so disposed of comprise more than 70%
of all corporate assets.
13. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of this Plan by the Board nor the submission of
this Plan to the stockholders of the Company for approval shall be construed
as creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under this Plan, and
such arrangements may be either applicable generally or only in specific
cases.
14. AMENDMENTS AND TERMINATION
The Board may at any time terminate the Plan. With the express written
consent of an individual Optionee, the Board or the Committee may cancel or
reduce or otherwise alter outstanding Options. The Board or the Committee
may, at any time, or from time to time, amend or suspend and, if suspended,
reinstate, the Plan in whole or in part; provided, however, that no amendment
which requires stockholder approval in order for Options granted pursuant to
the Plan to be exempt from the application of Section 162(m) of the Code or
for Options which are Incentive Stock Options to continue to meet the
requirements of Section 422 of the Code, shall be effective unless the same
shall be approved by the requisite vote of the stockholders of the Company.
15. EFFECT OF SECTION 162(m) OF THE CODE
The Plan, and all Options issued thereunder, are intended to be exempt
from the application of Section 162(m) of the Code, which restricts under
certain circumstances the Federal income tax deduction for compensation paid
by a publicly held corporation to named executives in excess of $1 million
per year. One of the requirements for such exemption is that the Plan be
approved by the stockholders of the Company. To the extent that the
Committee determines as of the date of grant of an Option that (i) the Option
is intended to comply with Section 162(m) of the Code and (ii) the exemption
described above is not available with respect to such Option because the
stockholders have not approved the Plan, such Option shall not be effective
until such stockholder approval required under Section 162(m) of the Code has
been obtained.
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<PAGE>
Options may be granted prior to the date of such stockholder approval made
subject to stockholder approval. In such event and prior to such grant, the
Committee shall consult with the Company's accountants as to the accounting
implications thereof and, if Incentive Stock Options are to be granted, the
Company's legal counsel as to the requirements for such grants.
* * *
As adopted by the Board of Directors of
Hauser, Inc. as of
______________, 1999
By: ________________________________
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<PAGE>
HAUSER, INC.
SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF SHAREHOLDERS TO BE HELD ON __________________, 1999
The undersigned hereby constitutes, appoints and authorizes Dean P. Stull or
David I. Rosenthal, as true and lawful attorney and proxy of the undersigned
with full power of substitution and appointment, for and in the name, place and
stead of the undersigned to act for and vote as designated below, all of the
undersigned's shares of the $.001 par value common stock of Hauser, Inc., a
Colorado corporation, at the Special Meeting of Shareholders to be held at
___________________________________________________, Colorado, at _____ a.m.
Mountain Time, on _____________, 1999 and at any and all adjournments thereof,
for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of December 8, 1998 (the "Merger Agreement"), among
Hauser, Zuellig Group N.A., Inc. ("ZGNA"), Zuellig Botanicals, Inc. ("ZBI"),
a subsidiary of ZGNA, and certain other parties. Pursuant to the terms of
the Merger Agreement, (1) three newly formed subsidiaries of Hauser will
merge with and into three subsidiaries of ZGNA and, as a result, the three
ZGNA subsidiaries will become wholly owned subsidiaries of Hauser (the
"Merger") and (2) Hauser will issue shares of Common Stock of Hauser
representing 49% of the issued and outstanding shares after giving effect to
such issuance, subject to adjustment under certain circumstances.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve the Hauser 1999 Stock Incentive Plan, contingent upon
approval of the Merger.
/ / FOR / / AGAINST / / ABSTAIN
3. To transact such other business as may properly come before the
meeting, or any adjournment thereof.
/ / FOR / / AGAINST / / ABSTAIN
The undersigned hereby revokes any Proxies as to said shares heretofore given by
the undersigned, and ratifies and confirms all that said attorneys and proxies
may lawfully do by virtue hereof.
ALL PROPOSALS ARE PROPOSED BY THE BOARD OF DIRECTORS OF HAUSER, INC. THIS PROXY
WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
ALL PROPOSALS. THIS PROXY CONFERS DISCRETIONARY AUTHORITY WITH RESPECT TO
MATTERS NOT KNOWN OR DETERMINED AT THE TIME OF THE MAILING OF THE NOTICE OF THE
SPECIAL MEETING OF SHAREHOLDERS TO THE UNDERSIGNED.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement furnished therewith.
DATED: ____________________________, 1999
------------------------------
Signature(s) of Shareholder(s)
------------------------------
Signature(s) of Shareholder(s)
Signature(s) should agree with the name(s) shown hereon. Executors,
administrators, trustees, guardians and attorneys should indicate their capacity
when signing. Attorneys should submit powers of attorney.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF HAUSER, INC.
PLEASE SIGN AND RETURN THIS PROXY TO AMERICAN SECURITIES TRANSFER & TRUST,
INCORPORATED, 938 QUAIL STREET, SUITE 101, LAKEWOOD, CO 80215. THE GIVING OF
THIS PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE
MEETING.
