<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:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ 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):
/X/ No fee required.
/ / 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
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/X/ 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:
$7,542.75
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(2) Form, Schedule or Registration Statement No.:
Schedule 14A
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(3) Filing Party:
Hauser, Inc.
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(4) Date Filed:
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HAUSER, INC.
5555 AIRPORT BOULEVARD
BOULDER, CO 80301
MAY 11, 1999
Dear Hauser Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders (the
"SPECIAL MEETING") of Hauser, Inc. ("HAUSER") on June 11, 1999, at 10:00 a.m.
Mountain Time at the offices of Chrisman, Bynum & Johnson, P.C., 1900 15th
Street, Boulder, CO 80302.
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 approve a resolution of
the Board to effect a reverse stock split of the outstanding shares of Common
Stock, with an exchange ratio of between two (2) and five (5) shares (the
"REVERSE STOCK SPLIT"). The resolution authorizing the Board to effect the
Reverse Stock Split will be effective if (1) the Merger is approved and (2) the
Reverse Stock Split is necessary to meet the NASDAQ minimum bid price on the
Closing Date of the Merger. NASDAQ, where the Hauser Common Stock is traded, has
advised Hauser that under NASDAQ National Market Place Rule 4330(f), the Merger
constitutes a change in control. If Hauser Common Stock is to continue to be
listed on the NASDAQ National Market, Hauser must satisfy the requirements for
initial listing, including the minimum bid price of $5.00 per share for trading.
The Reverse Split is recommended to permit Hauser to comply with the NASDAQ
National Market minimum bid price. After the Reverse Split is accomplished,
management believes that Hauser will continue to be listed on the NASDAQ
National Market. ZGNA and ZBI are not obligated to cause the Merger to occur if
Hauser's Common Stock is not listed on the NASDAQ National Market or on another
stock exchange.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE REVERSE STOCK SPLIT
CONTINGENT UPON THE APPROVAL OF THE MERGER AGREEMENT. THE APPROVAL OF THE MERGER
AGREEMENT IS NOT CONTINGENT UPON APPROVAL OF THE REVERSE STOCK SPLIT; HOWEVER,
ZGNA AND ZBI ARE NOT OBLIGATED TO CAUSE THE MERGER TO OCCUR IF HAUSER'S COMMON
STOCK IS NOT LISTED ON THE NASDAQ NATIONAL MARKET, OR ON SOME OTHER STOCK
EXCHANGE. ADOPTION OF THE REVERSE STOCK SPLIT IS CONTINGENT UPON APPROVAL OF THE
MERGER AGREEMENT.
<PAGE>
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.
[SIGCUT]
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 June 11, 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 June 11, 1999, at the
offices of Chrisman, Bynum & Johnson, P.C., 1900 15th Street, Boulder, CO,
80302, 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 consider and vote upon the resolution of the Board of Directors,
contingent upon approval of the Merger Agreement and the issuance of shares
to ZGNA and ZBI, that would effect a reverse stock split of the outstanding
shares of common stock, whereby between two (2) and five (5) shares of
outstanding common stock would be exchanged for one (1) share of common
stock. The exact amount of the reverse stock split, if any, will be
determined by Hauser's Board of Directors;
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 May 10, 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
[SIGCUT]
Dean P. Stull, Ph.D.
President and Chief Executive Officer
May 11, 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. YOUR
PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED.
<PAGE>
HAUSER, INC.
5555 AIRPORT BOULEVARD
BOULDER, CO 80301
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 11, 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 June 11, 1999 at the offices of Chrisman, Bynum &
Johnson, P.C., 1900 15th Street, Boulder, Colorado, 80302 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, the shareholders of
Hauser are requested to 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. The NASDAQ National Market has advised Hauser
that under NASDAQ National Market rules, the Merger constitutes a change in
control which will require Hauser to meet the requirements for initial listing,
including a minimum bid price of $5 per share, in order for Hauser's Common
Stock to continue to be listed on the NASDAQ National Market. Consummation of
the Merger Agreement is subject to various conditions, including the approval of
the Hauser shareholders and the listing of the Common Stock on the NASDAQ
National Market or on another stock exchange.
At the Special Meeting, Hauser shareholders will also be asked to approve
the resolution of the Board to effect a reverse stock split of the outstanding
shares of Common Stock, with an exchange ratio of between two (2) and five (5)
shares (the "REVERSE STOCK SPLIT"). The resolution authorizing the Board to
effect the Reverse Stock Split will be effective if (1) the Merger is approved
and (2) the Reverse Stock Split is necessary to meet the NASDAQ minimum bid
price on the Closing Date of the Merger.
THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE ISSUANCE OF
COMMON STOCK TO ZGNA AND ZBI AND THE REVERSE STOCK SPLIT. 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 REVERSE STOCK SPLIT. THE
APPROVAL OF THE MERGER AGREEMENT AND ISSUANCE OF SHARES OF COMMON STOCK TO ZGNA
AND ZBI ARE NOT CONTINGENT ON THE APPROVAL OF THE REVERSE STOCK SPLIT, BUT
ADOPTION OF THE REVERSE STOCK SPLIT 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 May 10, 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 May 11, 1999.
The date of this Proxy Statement is May 11, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................................................................ 1
RISK FACTORS........................................................................... 4
THE SPECIAL MEETING.................................................................... 6
THE MERGER............................................................................. 7
THE MERGER AGREEMENT................................................................... 16
CERTAIN ANCILLARY AGREEMENTS........................................................... 21
MANAGEMENT AFTER THE MERGER............................................................ 27
EMPLOYMENT AGREEMENTS.................................................................. 28
DESCRIPTION OF HAUSER.................................................................. 29
DESCRIPTION OF THE CONTRIBUTED SUBSIDIARIES............................................ 30
SELECTED HISTORICAL FINANCIAL DATA OF HAUSER, INC...................................... 32
SELECTED FINANCIAL DATA OF THE CONTRIBUTED SUBSIDIARIES................................ 34
CONTRIBUTED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................ 35
UNAUDITED PRO FORMA FINANCIAL STATEMENTS............................................... 39
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS......................... 48
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS FOLLOWING THE MERGER.... 49
ARRANGEMENTS AFFECTING CONTROL OF THE COMPANY.......................................... 51
APPROVAL OF REVERSE STOCK SPLIT........................................................ 51
INDEPENDENT AUDITORS................................................................... 55
OTHER MATTERS.......................................................................... 55
SHAREHOLDER PROPOSALS.................................................................. 55
FORWARD LOOKING STATEMENTS............................................................. 55
AVAILABLE INFORMATION.................................................................. 55
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...................................... 56
</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 January 31, 1999
and April 30, 1998 and for the three and nine month periods ended January 31,
1999 and 1998
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 nine month periods ended January 31, 1999
and 1998
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
Appendix H--Unaudited Financial Statements--Contributed Subsidiaries--as of
January 31, 1999 and March 31, 1998 and for the ten months ended January 31,
1999 and 1998
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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 and powders, 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. Nutraceutical powders are produced through a
milling process and are sold to manufacturers of dietary supplements. 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 June 11,
1999, at the offices of Chrisman, Bynum & Johnson, P.C., 1900 15th Street,
Boulder, CO 80302.
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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 Reverse Stock Split. 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 are requested to 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. The purpose of
the Reverse Stock Split is to maintain continued listing of Hauser's Common
Stock on the NASDAQ National Market System. NASDAQ has advised Hauser that under
NASDAQ National Market Place Rules, the Merger constitutes a change in control
which will require Hauser to meet the requirements for initial listing,
including a minimum bid price of $5 per share, if Hauser's Common Stock is to
continue to be listed on the NASDAQ National Market. See "Approval of Reverse
Stock Split."
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 or the Reverse Stock Split. 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 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, including the listing of Hauser Common Stock on the
NASDAQ National Market or on another stock exchange. 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. If (1) Hauser shareholders do not approve the Merger Agreement, or (2)
the Board withdraws, modifies or amends its recommendation that
2
<PAGE>
the Merger Agreement be approved by Hauser shareholders, Hauser will be
obligated upon termination of the Merger Agreement to pay all of the reasonable
out-of-pocket expenses ZGNA incurred in connection with the transaction, 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. 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".
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 THE ISSUANCE OF
COMMON STOCK TO ZGNA AND ZBI AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
MERGER AGREEMENT AND THE ISSUANCE OF COMMON STOCK TO ZGNA AND ZBI. SEE "THE
SPECIAL MEETING--PURPOSE OF THE SPECIAL MEETING".
THE BOARD HAS UNANIMOUSLY APPROVED THE REVERSE STOCK SPLIT AND RECOMMENDS
THAT SHAREHOLDERS VOTE FOR THE REVERSE STOCK SPLIT.
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".
3
<PAGE>
RISK FACTORS
Holders of Common Stock should consider carefully all of the information
contained in this Proxy Statement, including the following risk factors:
INTEGRATION OF COMPANIES MAY NOT BE SUCCESSFUL
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.
DILUTION OF OWNERSHIP INTEREST
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.
THIRD PARTIES MAY BE LESS LIKELY TO ATTEMPT TO GAIN CONTROL OF HAUSER
Following the Merger, ZGNA and ZBI will hold shares of Common Stock
aggregating 49% of the issued and outstanding shares of Common Stock, subject to
downward adjustment under certain circumstances. Members of Hauser's management
will hold approximately 3% of the issued and outstanding shares of Common Stock.
Therefore, the management and affiliates of Hauser will hold an aggregate of
approximately 52% of the Common Stock, as compared to the approximately 8%
currently owned by management. Thus, members of Hauser's management and its
affiliates will be able to largely determine the outcome of corporate actions
requiring shareholder approval and otherwise to control the business of Hauser.
Such control could preclude any unsolicited acquisition of Hauser and
consequently adversely affect the market price of the Common Stock or make it
less likely that shareholders will be able to participate in a transaction in
which they might be offered a premium over the market price for their shares.
In addition, ZGNA and ZBI have agreed, for a period of 18 months from the
Closing Date and with certain limited exceptions, not to sell or otherwise
dispose of any shares of Common Stock without the prior written consent of the
Board. See "THE MERGER AGREEMENT--Certain Covenants and Agreements--Standstill
Agreement." This may also make it less likely during such period that a third
party would attempt to gain control of Hauser, and could have the results
described above.
NUTRACEUTICAL EXTRACTS--SUPPLIERS AND CUSTOMERS
For the past eight years, ZBE has purchased approximately 80% 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. Thus far, such termination has not had an
impact on ZBE's results of operations, and Martin Bauer continues to sell
nutraceutical extracts to ZBE. Hauser intends and believes
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that it has the capability to manufacture most of the extracts previously
supplied to ZBE pursuant to the distribution agreement or to acquire such
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 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 Martin Bauer and to other potential
customers.
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 political conditions 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".
NASDAQ NATIONAL MARKET
NASDAQ has advised Hauser that it must file an initial listing application
to satisfy the qualitative and quantitative listing requirements for listing on
the National Market, including the minimum bid price of $5.00 per share,
because, under NASDAQ National Market Place Rules, the Merger constitutes a
change in control. It is a condition of the Merger that Hauser's Common Stock be
listed on the National Market or on another stock exchange. Hauser has filed an
initial listing application for the Common Stock, including the shares to be
issued in connection with the Merger. There can be no assurance, however, that
Hauser will satisfy the initial listing requirements even if the Reverse Split
is approved or that Hauser will
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continue to satisfy the NASDAQ National Market requirements in the future. If
Hauser's application for listing is not approved, there can be no assurance that
Hauser will meet the requirements for listing on any other established trading
market, including AMEX or the NASDAQ Small Cap Market.
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 Reverse
Stock Split. 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, Hauser's
shareholders are requested to 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. In addition, to permit Hauser Common
Stock to continue to be listed on the NASDAQ National Market, Hauser is
requesting its shareholders approve the Reverse Stock Split if the Common Stock
does not meet the minimum bid price of $5.00 per share on the Closing Date of
the Merger. See "Approval of the Reverse Stock Split".
The Board has unanimously approved the Merger Agreement and issuance of
Common Stock to ZGNA and ZBI and the Reverse Stock Split. 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 Reverse Stock Split. THE
APPROVAL OF THE MERGER AGREEMENT IS NOT CONTINGENT UPON APPROVAL OF THE REVERSE
STOCK SPLIT; HOWEVER, ZGNA AND ZBI ARE NOT OBLIGATED TO CAUSE THE MERGER TO
OCCUR IF HAUSER COMMON STOCK IS NOT LISTED ON THE NASDAQ NATIONAL MARKET, OR ON
SOME OTHER STOCK EXCHANGE. ADOPTION OF THE REVERSE STOCK SPLIT IS CONTINGENT
UPON APPROVAL OF THE MERGER AGREEMENT.
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. Broker
non-votes and abstentions, 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 Reverse Stock Split.
The Board has fixed May 10, 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 10,472,063 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.
If the enclosed proxy card is properly executed and received by Hauser in
time to be voted at the Special Meeting, the shares represented thereby will be
voted in accordance with the instructions marked thereon. PROPERLY EXECUTED
PROXIES WITH NO INSTRUCTIONS INDICATED THEREON BE VOTED FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE ISSUANCE OF COMMON STOCK TO ZGNA AND
ZBI AND FOR APPROVAL OF THE REVERSE STOCK SPLIT.
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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 has retained Georgeson & Company, Inc., Wall Street Plaza, New York, New
York, to assist with the solicitation of proxies. It is estimated that the fees
for such firm's services will be $25,000 plus its reasonable out-of-pocket
expenses. 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.
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 in 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.
During August 1998, management of ZGNA and Hauser discussed a possible
business combination in general terms. Hauser's advisors and management
discussed with the Board the business, accounting and legal issues regarding a
proposed transaction.
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On September 11, 1998, ZGNA and Hauser met to discuss the capital needs of
Hauser and a transaction structure including a proposed combination of the
nutruceutical extract businesses of Hauser and ZGNA. At the meeting, ZGNA and
Hauser management also discussed (a) a potential purchase by ZGNA of $3 to $5
million of Hauser's raw material inventory to provide additional cash to Hauser
and (b) the terms of a contemplated post-merger credit facility for Hauser.
On September 24, 1998, ZGNA made a proposal to Hauser that included (a) a
$6,000,000 investment by ZGNA in Hauser preferred stock representing 19.9% of
the issued and outstanding Common Stock on a pre-issuance "as-converted" basis,
(b) ZGNA providing raw material sourcing to Hauser and (c) ZGNA becoming the
exclusive distributor of Hauser's products.
On October 2, 1998, management of ZGNA and Hauser and their respective
investment advisors met at the New York City offices of The Beacon Group Capital
Services, LLC, investment advisors to ZGNA, to discuss the proposed business
combination. The discussion resulted in a proposal that the Contributed
Subsidiaries be merged with Hauser subsidiaries and that Hauser Common Stock be
issued to ZGNA.
On October 16, 1998, management, legal counsel and representatives of AHH
held a telephone conference call with ZGNA's management, legal counsel and
investment advisors, to discuss the valuation, legal issues, transaction terms,
status of due diligence and bank credit facility. Extensive discussions were
held on the possible purchase by ZGNA of $6,000,000 of Hauser preferred stock.
On November 16, 1998, Hauser's management, legal counsel and investment
advisor and ZGNA's management, legal counsel and investment advisors, held a
conference call to resolve the valuation issues, inventory purchase, Option
Agreement terms, option to purchase the powders business of ZBI, limitations on
ZGNA reselling Hauser stock, break-up fees, and the adjustment which would occur
if Hauser was successful in selling the paclitaxel assets. Prior to that call,
Hauser presented ZGNA and its advisors with a written summary of its positions.
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 proposals were presented to Hauser after any such inquiries from, or
discussions with, third parties.
On December 8, 1998, Hauser, ZGNA and ZBI entered into the Merger Agreement
with the approval of the Board following a meeting in which Hauser
representatives described the final 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. The final
transaction terms approved at the December 8 Board meeting included merger of
three newly formed subsidiaries of Hauser with and into the Contributed
Subsidiaries, issuance to ZGNA and ZBI of shares of Common Stock of Hauser
representing 49% of the issued and outstanding shares of Common Stock, subject
to adjustment under certain circumstances, and agreements as to inventory
purchase, registration rights, an option for Hauser to purchase the powders
business of ZBI, an option for ZGNA to acquire Common Stock under certain
circumstances if the Merger does not occur, and certain other matters. See "THE
MERGER AGREEMENT", "CERTAIN ANCILLARY AGREEMENTS" and "MANAGEMENT AFTER THE
MERGER" for a detailed description of the final transaction terms. 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 in order to conform to a lower quorum requirement as
permitted by Colorado law, (ii) provide for settlement of disputes by
arbitration, and (iii) make changes to the Escrow Agreement to (a) clarify the
definition of paclitaxel business, (b) clarify the procedures by which shares
held in escrow will be delivered from escrow and (c) clarify the minimum number
of shares to which ZGNA and ZBI are entitled, (iv) make changes to the
Governance Agreement to clarify provisions relating to the replacement of
directors and quorums, (v) provide that ZBI license the trade name "Zuellig
Botanical Extracts" and mark "Botanicals International" to ZBE and (vi) provide
that the goodwill associated with the use of the licensed trade name and
licensed mark will not be considered an asset of, or increase the value of, ZBI
for purposes of determining purchase price under the Powders Option Agreement
(as hereinafter defined).
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,
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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.
(5) The Merger will provide financing to Hauser through the credit
agreement with Wells Fargo Bank, National Association (the "Bank").
The credit agreement will provide a $35.0 million line of credit and
a $10.0 million fixed asset line in support of the merged companies.
As Hauser will also assume approximately $19.0 million of the
Contributed Subsidiaries' bank debt, Hauser may borrow up to $20.0
million from the Bank, and expects to apply approximately $10.0
million to capital expenditures and $10.0 million to working capital.
Additionally, Hauser will repay its $6.0 million indebtedness to
First National Bank of Boston.
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, 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, the dilution of
ownership interest of current Hauser shareholders, that as a result of the
Merger Agreement Hauser shareholders may be less likely to participate in a
transaction in which a third party would offer a premium over market price for
their shares, competition for customers and raw materials, the breakup fee,
accounting and tax issues and increased business concentration of Hauser
following the sale of its paclitaxel assets.
The above discussion includes all material factors, including negative
factors, considered by the Board in approving the Merger Agreement.
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
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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.
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
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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 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
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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 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
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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 its fairness opinion, AHH did
not independently verify any information received from Hauser, ZGNA or
Contributed Subsidiaries, but 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. 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 did not make
a market in the Common Stock as of the date of the AHH Opinion. AHH currently
makes a market in the Common Stock and intends to 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 will pay $150,000 for
rendering the AHH Opinion. At the Closing, Hauser will pay 1.5% of the total
consideration paid in the transaction upon consummation of the Merger. Hauser
estimates that the total fee payable to AHH at Closing will be approximately
$750,000, based upon the fair market value of Hauser's Common Stock as of March
31, 1999. 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.
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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
NASDAQ has advised Hauser that the continued listing of Hauser's Common
Stock on the NASDAQ National Market requires Hauser to file an initial listing
application and to satisfy the requirements of such listing, including the
minimum bid of $5.00 per share, because, under NASDAQ National Market Place
Rules, the Merger constitutes a change in control. Hauser has filed the initial
listing application which includes the Common Stock to be issued in the Merger,
and believes, upon completion of the Reverse Split, that the Hauser Common Stock
will continue to be listed on the NASDAQ National Market. It is a condition of
the obligation of ZGNA and ZBI to consummate the Merger that Hauser's Common
Stock be listed on the NASDAQ National Market or on another stock exchange.
Hauser believes that it will be able to fulfill such condition if the Reverse
Split is approved.
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 $33,470,000 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 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 acquired 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 an ownership
change could occur after the merger, since for a period of three years it will
require a relatively small increase by either ZGNA or another 5% shareholder to
trigger such a change within three years of the Merger, resulting in an
ownership change at that time.
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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.
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 10,472,063 shares of Common Stock outstanding on the Record Date,
ZGNA and ZBI would receive 10,061,393 shares of Common Stock. If the Reverse
Split occurs, the number of such shares will be reduced on a pro rata basis.
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
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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 net proceeds received by Hauser in excess of $3,000,000
divided by $3.50. Net proceeds means the cash proceeds received from the sale of
the paclitaxel assets realized by October 31, 1999 less (1) all cash costs
incurred to complete production of the inventory into finished goods; (2)
estimated costs to terminate cultivar contracts and (3) other cash costs
incurred to exit the paclitaxel business. 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. See Note 4 of HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET.
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 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, without the consent of the other party: (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
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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
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
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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 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 employees 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
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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 July 15, 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 July 15, 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 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
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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.
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. If the Merger Agreement is amended to materially change the
terms of the transaction after the shareholder vote has been taken, Hauser will
solicit shareholders to vote on the amended agreement.
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
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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 which is
intended to provide interim financing for Hauser and gives Hauser the right, at
its election, to sell its inventory to ZGNA in order to obtain cash. Under the
agreement, 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 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.
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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.
ZGNA is not willing to sell the powders business of ZBI at this time because
it expects that, within the next 12 months, modifications will be made in the
manufacturing process of the powders business, which, at least in the short
term, ZGNA believes will provide a competitive advantage. ZGNA will not agree to
establish a value for the powders business until the earlier of the
modifications being completed or the exercise date for the Powders Option.
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
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ZBI as in the Merger Agreement, and substantially similar indemnification
provisions of ZBI as of ZGNA under the Merger Agreement.
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
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<PAGE>
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.
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
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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.
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)
and 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.
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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>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- ------------------------------------------------ --- ----------------------------------------------- ---------
<S> <C> <C> <C>
Rodolfo C. Bryce................................ 55 Chairman, Schering-Plough Health Care Products
and Executive Vice President, Schering-Plough
Corporation until December 31, 1998; Trustee,
St. Mary's University, San Antonio, Texas NA
William E. Coleman, Ph.D........................ 65 Chairman, Colorado Venture Management, 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. 1988
Herbert Elish................................... 65 Director, The Carnegie Library of Pittsburgh;
Chairman, Chief Executive Officer and
President of Weirton Steel Corporation until
December 31, 1995; Director, Hampshire Group,
Limited NA
James R. Mellor................................. 68 Retired as Chairman and Chief Executive Officer
of General Dynamics Corporation in May 1997;
Director, Bergen Brunswig Corporation;
Computer Sciences Corporation; General
Dynamics Corporation and Howmet International
Corporation; Director and Chairman, USEC Inc. NA
Robert F. Saydah................................ 71 Partner, Director, Heidrick & Struggles 1994
Harvey L. Sperry................................ 68 Lawyer; Partner, Willkie Farr & Gallagher;
Director, Hampshire Group Limited; Director,
ZGNA NA
Dean P. Stull, Ph.D............................. 49 Chairman, Co-Chief Executive Officer, Hauser 1983
Volker Wypyszyk................................. 53 President, Co-Chief Executive Officer, Hauser;
Chief Executive Officer and Director of ZGNA NA
Peter Zuellig................................... 48 Chief Executive Officer, Interpacific Holding,
Limited which is the Holding Company for
Zuellig Companies other than ZGNA which is
owned by Zatpack Inc.; Director, Zatpack
Inc.; Chairman and Director of ZGNA NA
</TABLE>
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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 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
Mellor 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>
<CAPTION>
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>
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,
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<PAGE>
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.
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-Registered Trademark- 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
$25.6 million was 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. Net proceeds (as defined below) from this agreement are
expected to be approximately $2.5 million. 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 $25.6 million write off taken in the quarter
ended January 31, 1999.
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.
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<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 80% 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 Martin
Bauer. See "RISK FACTORS--Nutraceutical Extracts--Suppliers and Customers." 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
eleven employees, nine in California, one in Maryland and one in Florida. Four
of the eleven sales employees also provide customer support.
ZBE sells standardized nutraceutical extracts to more than 180 customers and
no customer accounts for more than 17% 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
non-standardized 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 40% of ZetaPharm total sales in the fiscal year ended March
31, 1998 and the ten months ended January 31, 1999,
30
<PAGE>
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 one employees. Ten are engaged in sales and six are
engaged in customer service. ZetaPharm's principal office is located in New
York, and it has offices in Florida, Missouri, California, New Jersey, 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 twenty seven 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.
31
<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. In the fiscal year ended April 30, 1994, 88% of
Hauser's revenues were derived from the sale of bulk paclitaxel to Bristol-Myers
Squibb Company ("Bristol"). Hauser had a three year supply contract that
commenced in 1991. During the fiscal year ended April 30, 1994, Bristol decided
not to extend the supply agreement, and so Hauser's revenues and profits
declined significantly beginning in fiscal 1995. Since then, Hauser has been
rebuilding its revenue and earnings base through growth in its Natural
Ingredients and Technical Services business units.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
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>
<TABLE>
<CAPTION>
AS OF APRIL 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
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 --
Shareholders' equity........................................ 60,553,700 63,691,554 70,183,619 77,391,459 80,770,038
</TABLE>
32
<PAGE>
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 January 31, 1999 and 1998 and for
the nine 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 January 31, 1999 and April 30, 1998 and for the three and
nine month periods ended January 31, 1999 and 1998, including the notes thereto,
appearing elsewhere in this Proxy Statement. See "Available Information" and
Appendix D and E.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
---------------------------
1999 1998
(UNAUDITED) (UNAUDITED)
------------ -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural product processing................................ $ 10,257,581 $ 7,512,677
Technical services........................................ 12,784,147 10,062,162
Paclitaxel................................................ 2,893,845 3,187,277
------------ -------------
Total revenues.......................................... 25,935,573 20,762,116
Cost of revenues:
Natural product processing................................ 8,374,690 6,958,168
Technical services........................................ 9,287,157 7,214,803
Paclitaxel................................................ 1,572,734 2,337,864
Write-off of inventory.................................... 19,700,000 --
------------ -------------
Total cost of revenues.................................. 38,934,581 16,510,835
Gross profit................................................ (12,999,008) 4,251,281
------------ -------------
Operating expenses.......................................... 8,105,114 7,799,469
Write-off of assets......................................... 5,900,000 --
------------ -------------
Total operating expenses................................ 14,005,114 7,799,469
------------ -------------
Loss from operations........................................ (27,004,122) (3,548,188)
Other income (expense):
Interest income........................................... 79,521 281,240
Interest expense.......................................... (370,131) (10,043)
Gain from investments..................................... 42,037 361,461
------------ -------------
Other income (expense)--net............................... (248,573) 632,658
------------ -------------
Loss before income taxes.................................... (27,252,695) (2,915,530)
Benefit for income taxes.................................... -- 1,020,435
------------ -------------
Net loss.................................................... $(27,252,695) $ (1,895,095)
------------ -------------
------------ -------------
Basic and diluted net loss per share........................ $ (2.60) $ (0.18)
------------ -------------
------------ -------------
Weighted average basic and diluted shares outstanding....... 10,467,531 10,420,632
------------ -------------
------------ -------------
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 12,922,743 $17,050,242
Property and equipment, net................................. 16,692,975 22,543,893
Total assets................................................ 53,444,617 66,805,776
Long-term debt.............................................. 522,668 473,116
Shareholders' equity........................................ 33,319,263 61,599,204
</TABLE>
33
<PAGE>
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 January 31, 1999 and
1998 and for the ten months ended January 31, 1999 and 1998 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 January 31, 1999 and 1998 and for the ten 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>
TEN MONTHS ENDED JANUARY
31, YEAR ENDED MARCH 31,
--------------------------- ---------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales..................... $ 71,881,579 $ 82,063,968 $ 101,126,620 $ 73,140,247 $ 61,441,614 $ 30,271,701 $ 27,851,403
Cost of Sales................. 61,587,642 68,178,332 84,318,709 62,285,139 49,861,090 25,526,459 24,594,796
------------- ------------- ------------- ------------- ------------- ------------- -------------
Gross Profit.................. 10,293,937 13,885,636 16,807,911 10,855,108 11,580,524 4,745,242 3,256,607
Commissions and Other
Income....................... 397,784 177,415 282,939 1,389,012 5,515 -- --
------------- ------------- ------------- ------------- ------------- ------------- -------------
10,691,721 14,063,051 17,090,850 12,244,120 11,586,039 4,745,242 3,256,607
Selling, General and Admin
Expense...................... 7,231,397 8,149,938 10,171,306 7,284,451 6,153,154 3,775,643 4,277,677
Net Income (loss)............. 1,359,663 2,897,349 3,339,660 2,617,370 3,398,749 81,703 (2,989,796)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31,
--------------------------- ---------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Current Assets.......... $ 42,371,079 $ 37,781,478 $ 33,014,592 $ 31,369,974 $ 20,781,049 $ 11,568,005 $ 8,660,184
Total Assets.................. 43,120,166 38,728,651 33,917,000 32,252,013 21,654,343 12,191,300 9,671,980
Current Liabilities........... 31,114,335 28,524,894 23,270,932 24,945,605 16,910,305 10,591,011 7,798,091
Long Term Debt................ -- -- -- -- 55,000 110,000 65,303
Shareholders' Equity.......... 12,005,831 10,203,757 10,646,068 7,306,408 4,689,038 1,490,289 1,808,586
</TABLE>
34
<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.
In 1998, ZetaPharm was advised that its principal supplier of generic active
ingredients had elected to sell its products directly. 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.
Sales of generic active ingredients will be insignificant in the year ending
March 31, 2000.
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. During 1997, the market softened on one particular
product and the resulting sales of such product generated 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.
OPERATING EXPENSES. Selling, general and administrative expenses ("SG&A"
expenses) rose from $6,855,444 in 1997 to $8,570,143 in 1998, a 25% increase,
and increased by 16% in 1997 from a level of $5,897,511 in 1996. As a percentage
of sales, SG&A expenses were 8%, 9% and 10% in 1998, 1997 and 1996,
respectively. 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.
Management fee expenses rose from $429,007 in 1997 to $1,601,163 in 1998, a
273% increase, and increased by 68% in 1997 from a level of $255,643 in 1996.
Historically, these expenses have been based on a structured fee. Beginning in
1998, management fees were charged based on a net funds employed formula,
derived from key balance sheet accounts.
INTEREST EXPENSE. Interest expense (net) rose from $1,127,371 in 1997 to
$1,190,689 in 1998, a 6% increase, and increased by 13% in 1997 from a level of
$997,422 in 1996. The increase from 1997 to 1998 is due to reduced interest
income attributable to amounts due from affiliates. The increase from 1996 to
1997 is due to higher debt levels in 1997 as compared to the prior year.
INCOME TAXES. The effective income tax rate during the years ended 1998,
1997 and 1996 were 42%, 32% and 23%, respectively. The effective rates differ
from the federal statutory rate due primarily to state income taxes and
adjustments to the valuation allowance on deferred tax assets.
35
<PAGE>
RESULTS OF CONTINUING OPERATIONS FOR THE TEN MONTHS ENDED JANUARY 31, 1999 AND
1998
NET SALES. Net sales decreased 12% from $82,063,968 in 1998 to $71,881,579
in 1999. 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 18% and 34% of sales
generated during the ten months ended January 31, 1999 and 1998, respectively.
GROSS PROFIT. Gross profit decreased 26% from $13,885,636 for the ten
months ended January 1998 to $10,293,937 for the ten months ended January 1999.
As a percentage of net sales, gross profit decreased from 17% in 1998 to 14% in
1999.
The decrease in gross profit from the prior year is due primarily to a
reduction in sales of bulk generic active ingredients. Additionally, margins
achieved on extract sales declined from 1998 to 1999. The reduction in extract
margins is due primarily to a reduction in margins generated on one product,
which achieved favorable margins in 1998 and significantly less favorable
margins in 1999. Sales of this product represented 9% and 16% of total sales
generated during the ten months ended January 1999 and 1998, respectively.
Finally, sales to affiliates have historically been made at margins comparable
to margins generated on sales to third parties. During 1999, it was contemplated
that Wilcox Drug Company, Inc. ("Wilcox") would be merged into Zuellig
Botanicals, Inc. ("ZBI"), and accordingly, all sales to ZBI during the ten
months ended January 31, 1999 were made at cost. If such sales had been made at
margins comparable to historical margins, sales and gross profit would have been
increased by approximately $956,000.
OPERATING EXPENSES. SG&A expenses decreased 13% from $7,317,222 for the ten
months ended January 1998 to $6,361,221 for the ten months ended January 1999.
As a percentage of sales, SG&A expenses remained consistent at 9% of sales for
the ten months ended January 1998 and 1999.
Management fee expenses rose from $832,716 for the ten months ended January
1998 to $870,176 for the ten months ended January 1999, an increase of 5%. This
increase is due to increased net funds employed during the ten months ended
January 1999 as compared to the same period in the prior year.
INTEREST EXPENSE. Interest expense (net) rose from $987,838 for the ten
months ended January 1998 to $1,122,798 for the ten months ended January 1999, a
14% increase. This increase is due to higher inventory levels being financed
through the line of credit in 1999.
INCOME TAXES. The effective income tax rates during the ten months ended
January 31, 1999 and 1998 were 42% and 41%, respectively. The effective rates
differ from the federal statutory rate due primarily to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Contributed Subsidiaries' cash position at March 31, 1998 was $1,866,735
compared to $838,754 at March 31, 1997, an increase of $1,027,981. At January
31, 1999, the cash position decreased to $11,886, a decrease of $1,854,849 from
March 31, 1998.
Net cash provided by operating activities was $10,231,951 for the year ended
March 31, 1998. Net income of $3,339,660, depreciation and amortization of
$240,329, increases in accounts payable and accrued liabilities of $6,244,533
and a decrease in net amounts receivable from affiliates of $4,910,682, were
partially offset by an increase in receivables of $2,504,231, increase in
inventories of $1,148,731, increase in prepaids, deposits on cultivation and
other current assets of $650,831, increase in deferred income taxes of $193,546
and gain on sale of property of $5,914. Accounts payable during the year ended
March 31, 1998 increased significantly over the prior year primarily due to
increased inventory purchases in connection with the growth of the Contributed
Subsidiaries' extract business. Additionally, during 1998 Wilcox collected
significant accounts receivable from ZBI thereby reducing amounts due from
affiliates.
36
<PAGE>
Finally, the increase in receivables and inventories from March 31, 1997 to 1998
is due to the significant growth in revenues during 1998 and the resulting
required investment in working capital. Net cash used in operating activities
was $12,131,907 for the ten months ended January 31, 1999. Net income of
$1,359,663, depreciation and amortization of $175,058, an increase in amounts
due to affiliates of $1,258,599, and decreases in receivables of $2,200,514 and
deposits on cultivation projects of $31,460, were offset by increases in
inventories of $13,263,434 and prepaids and other current assets of $1,677,284,
decreases in accounts payable and accrued liabilities of $2,214,128 and gain on
sale of property of $2,355. At January 31, 1998, extract inventory was unusually
low due to the high demand for extracts during 1998. Additionally, increased
inventory purchasing during the ten months ended January 31, 1999 has allowed
the Contributed Subsidiaries to maintain adequate levels of extract inventory at
all times.
Operating cash flows for the years ended March 31, 1998, 1997 and 1996 have
been significantly impacted by the amount and timing of sales to affiliates and
the related collection of amounts due.
Investing activities of $184,836 for the year ended March 31, 1998 and
$50,842 for the ten months ended January 31, 1999 consist primarily of capital
expenditures of $192,836 and $70,247, respectively.
The Contributed Subsidiaries have historically maintained low cash balances
and have funded operating activities and working capital requirements through
the use of their revolving lines of credit. Net cash used in financing
activities of $9,019,134 for the year ended March 31, 1998 consist of net
repayments under line of credit agreements of $8,800,746, principal payments on
long term debt of $55,000 and a decrease in bank overdraft of $163,388. Net cash
provided by financing activities of $10,327,900 for the ten months ended January
31, 1999 consists of net borrowings under line of credit agreements.
The decrease in borrowings under line of credit agreements in 1998 and the
increases in borrowings under line of credit agreements in 1997 and 1996 were
directly correlated to cash provided by (used in) operating activities in the
corresponding year. Specifically, fluctuations in collections of amounts due
from affiliates will contribute to additional borrowings or allow for repayment
of debt.
Short-term bank borrowings consist of a line of credit. During 1998, the
Contributed Subsidiaries, ZGNA and certain affiliates entered into various
credit agreements with a bank under which 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"). The amount outstanding under the Contributed Subsidiaries' 1998
Credit Agreements was $10,305,683 at March 31, 1998. All borrowings are
collateralized by receivables and inventories, and all borrowings are
cross-guaranteed by the Contributed Subsidiaries, 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 Contributed Subsidiaries, ZGNA and its affiliates
entered into various new credit agreements (the "1999 Credit Agreements") with a
bank under which 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, with an option to extend the maturity date to July 31, 1999 at
the bank's discretion. 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.
The amount outstanding under the Contributed Subsidiaries' 1999 Credit
Agreements was $20,633,583 at January 31, 1999. The aggregate amount outstanding
under the 1999 Credit Agreements for ZGNA and its subsidiaries was $38,859,315
at January 31, 1999.
No significant capital expenditures are planned for the upcoming fiscal
year. Management believes that the Contributed Subsidiaries' current cash
position, the working capital generated from future operations and the ability
to borrow should be adequate to meet its financing requirements for current
operations and the foreseeable future.
37
<PAGE>
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.
Management foresees the likely internal "worst case scenario" to be limited
in scope, and could include a very small number of machines that 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.
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.
38
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial data as of January 31,
1999 and for the twelve months ended April 30, 1998 and the nine months ended
January 31, 1999 gives 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 January 31, 1999, 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 nine months ended January 31, 1999 have been combined with the
unaudited historical financial statements of the Contributed Subsidiaries for
the nine months ended January 31, 1999.
For the purposes of presenting the unaudited pro forma condensed combined
balance sheet data, the tangible assets and liabilities of the Contributed
Subsidiaries have been adjusted to their estimated fair market values and the
excess purchase price has preliminarily 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 and may
change from those estimates due to changes in the fair value of tangible assets
and liabilities at the date of the closing, the results of management's
valuation of intangible assets other than goodwill acquired as part of the
merger, and the impact of the Escrow Agreement (see "THE MERGER AGREEMENT--The
Escrow Agreement"). Upon completion of the merger, management will perform a
valuation of the fair value of the assets and liabilities and make an assessment
of the impact of the escrow agreement in order to finalize the purchase
accounting. The effect of the valuation and assessment is not expected to have a
material effect on the pro forma combined financial statements included in this
proxy. The unaudited pro forma condensed combined statements of operations data
exclude any benefit that may result due to synergies that may be derived and
elimination of duplicative efforts resulting from the acquisition of the
Contributed Subsidiaries.
The pro forma adjustments included herein are based on the available
information and certain assumptions that management believes are reasonable and
factually supportable. The adjustments for the costs related to the exit of the
paclitaxel business have been included herein as the decision to exit the
paclitaxel business is a direct result of Hauser's decision to enter into the
Merger Agreement. These adjustments are described in more detail in the
accompanying notes. Although approval of the Merger Agreement is not contingent
upon approval of the Reverse Stock Split, the pro forma condensed combined
financial statement data will be affected by any stock split that occurs if the
Reverse Stock Split is approved. See "APPROVAL OF REVERSE STOCK SPLIT". 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.
39
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999
---------------------------------------------------------------
CONTRIBUTED PRO FORMA HAUSER PRO
HAUSER SUBSIDIARIES ADJUSTMENTS FORMA
-------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 4,687,571 $ 11,886 $ -- $ 4,699,457
Accounts receivable, net....................... 7,074,413 12,618,636 -- 19,693,049
Inventories, current........................... 10,816,207 26,334,737 -- 37,150,944
Inventory, at net realizable value............. 7,741,313 -- -- 7,741,313
Prepaid expenses and other..................... 256,773 2,965,277 -- 3,222,050
Net deferred income tax assets................. 1,949,152 440,543 -- 2,389,695
-------------- ------------- ---------------- --------------
Total current assets......................... 32,525,429 42,371,079 -- 74,896,508
-------------- ------------- ---------------- --------------
PROPERTY AND EQUIPMENT:
Land and buildings............................. 7,695,394 444,630 -- 8,140,024
Lab and processing equipment................... 23,390,778 1,307,101 -- 24,697,879
Furniture and fixtures......................... 3,879,635 337,526 -- 4,217,161
-------------- ------------- ---------------- --------------
Total property and equipment................. 34,965,807 2,089,257 -- 37,055,064
Accumulated depreciation....................... (18,272,832) (1,570,653) -- (19,843,485)
-------------- ------------- ---------------- --------------
Net property & equipment..................... 16,692,975 518,604 -- 17,211,579
-------------- ------------- ---------------- --------------
OTHER ASSETS:
Goodwill, net.................................. 1,428,988 -- 33,469,699(1) 34,898,687
Deposits....................................... 1,719,972 -- -- 1,719,972
Net deferred income tax asset.................. 1,010,154 -- -- 1,010,154
Other.......................................... 67,099 230,483 -- 297,582
-------------- ------------- ---------------- --------------
Total other assets........................... 4,226,213 230,483 33,469,699 37,926,395
-------------- ------------- ---------------- --------------
$ 53,444,617 $ 43,120,166 $ 33,469,699 $ 130,034,482
-------------- ------------- ---------------- --------------
-------------- ------------- ---------------- --------------
</TABLE>
See accompanying notes to unaudited proforma condensed combined balance sheet.
40
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999
---------------------------------------------------------------
CONTRIBUTED PRO FORMA HAUSER PRO
HAUSER SUBSIDIARIES ADJUSTMENTS FORMA
------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 2,587,654 $ 7,895,173 $ -- $ 10,482,827
Current portion long-term debt.................... 6,634,784 20,633,583 (22,633,583)(2) 4,634,784
Accrued salaries and benefits..................... 1,127,122 372,233 -- 1,499,355
Deposits.......................................... 3,710,321(5) -- -- 3,710,321
Accrued exit costs................................ 4,990,926 -- -- 4,990,926
Other accrued current liabilities................. 551,879 2,213,346 1,000,000(3) 3,765,225
------------ ------------ ----------------- ------------
Total current liabilities....................... 19,602,686 31,114,335 (21,633,583) 29,083,438
------------ ------------ ----------------- ------------
LONG TERM DEBT 522,668 -- 22,633,583(2) 23,156,251
------------ ------------ ----------------- ------------
SHAREHOLDERS' EQUITY:
Common stock...................................... 10,673 1,061 8,996(4) 20,730
Preferred stock................................... -- 2,000,000 (2,000,000)(4) --
Additional paid-in capital........................ 58,882,344 1,003,499 43,461,974(4) 103,347,817
Treasury stock.................................... -- (400,000) 400,000(4) --
(Accumulated deficit) retained earnings........... (25,573,754) 9,401,271 (9,401,271)(4) (25,573,754)
------------ ------------ ----------------- ------------
Total shareholders' equity...................... 33,319,263 12,005,831 32,469,699 77,794,793
------------ ------------ ----------------- ------------
$ 53,444,617 $ 43,120,166 $ 33,469,699 $130,034,482
------------ ------------ ----------------- ------------
------------ ------------ ----------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined balance sheet.
41
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JANUARY 31, 1999
(1) Reflects the estimated goodwill associated with the Merger computed as
follows:
<TABLE>
<S> <C>
Fair value of common stock to be issued........................ $44,475,530
Costs associated with the transaction.......................... 1,000,000
-----------
Total consideration............................................ 45,475,530
Fair value of the excess of identifiable assets acquired over
liabilities assumed by Hauser................................ (12,005,831)
-----------
Goodwill....................................................... $33,469,699
</TABLE>
The total value of the common stock to be issued to ZGNA and ZBI of
approximately $44,475,530 was determined 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 the sale of the paclitaxel
business in excess of $3,000,000. Net proceeds has been defined to mean the
cash proceeds from the sale of paclitaxel related assets realized by October
31, 1999, less (1) all cash costs incurred to complete production of the
inventory into finished goods; (2) estimated costs to terminate cultivar
contracts and (3) other cash costs incurred to exit the paclitaxel business.
Hauser has entered into a bulk sales agreement for substantially all of its
paclitaxel inventory under which gross proceeds would be approximately $9.5
million. Net proceeds as of the date of the agreement, after estimated costs
to complete in-process paclitaxel inventory ($2 million) and estimated costs
to terminate its cultivar contracts ($5 million) would be approximately $2.5
million resulting in no shares being released from escrow. The shares are to
be released from escrow and subsequently retired at a rate of $3.50 per
share (see "The Escrow Agreement"). The amount of shares are to be released
from escrow will depend on the cash proceeds received from the sale of
paclitaxel related intellectual property, the cost of terminating the
cultivar contracts and the cost of processing the remaining paclitaxel
inventory. The ultimate amount of goodwill will depend on the shares
released from escrow (if any) and the fair value of the Contributed
Subsidiaries assets and liabilities on the Effective Date of the Merger.
(2) 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. The commitment fee for the credit
facility arranged in connection with this transaction is 0.25% per annum on
the unused portion of the $10.0 million fixed asset line. The commitment fee
is paid quarterly in arrears. No adjustment is presented in the pro forma
financial statements as the amount expected to be drawn on the line and the
resulting commitment fee is not factually supportable.
42
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JANUARY 31, 1999
(3) Reflects the estimated merger related costs consisting principally of
transaction costs for financial advisory fees, attorneys, accountants and
financial printing related to the Merger.
(4) 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"). The shares are to be
released from escrow and subsequently retired based upon the net proceeds
realized from the sale of the paclitaxel business in excess of $3,000,000.
Net proceeds has been defined to mean the cash proceeds from the sale of
paclitaxel related assets realized by October 31, 1999, less (1) all cash
costs incurred to complete production of the inventory into finished goods;
(2) estimated costs to terminate cultivar contracts and (3) other cash costs
incurred to exit the paclitaxel business. Hauser has entered into a bulk
sales agreement for substantially all of its paclitaxel inventory under
which gross proceeds would be approximately $9.5 million. Net proceeds as of
the date of the agreement, after estimated costs to complete in-process
paclitaxel inventory ($2 million) and estimated costs to terminate its
cultivar contracts ($5 million) would be approximately $2.5 million
resulting in no shares being released from escrow. 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
$10,807,000.
(5) In connection with the Merger Agreement, Hauser executed an inventory
purchase agreement with ZGNA which is intended to provide interim financing
for Hauser. Included in Deposits as of January 31, 1999, is $3 million
received pursuant to this agreement. The purchase price for the inventory is
the lower of cost or market. At any time, Hauser may require ZGNA to resell
to Hauser all or any portion of the inventory purchased by ZGNA at the same
price at which ZGNA purchased the inventory and require ZGNA to purchase
substantially similar raw material and finished product having a value
substantially equivalent to the repurchased inventory. Hauser will recognize
revenue from the transaction upon the sale of the inventory to an unrelated
party.
43
<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 PRO
HAUSER SUBSIDIARIES BUSINESS(1) ADJUSTMENTS 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) 1,673,485(2) 1,673,485
Product warranty...................... 1,500,000 -- -- -- 1,500,000
------------- ------------- ------------- ------------- -------------
Total operating expenses............ 11,489,972 10,171,306 (1,143,267) 1,673,485 22,191,496
------------- ------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS:.......... (4,645,542) 6,636,605 49,984 (1,673,485) 367,562
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income....................... 315,280 -- -- -- 315,280
Interest expense...................... (44,931) (1,190,689) -- --(3) (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 (1,673,485) 91,622
INCOME TAX (EXPENSE) BENEFIT............ 879,723 (2,389,195) -- 809,472(4) (700,000)
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)....................... $ (3,134,009) $ 3,339,660 $ 49,984 $ (864,013) $ (608,378)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
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.
44
<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 a result of the Merger, Hauser will exit the business of
producing bulk paclitaxel. All approvals necessary to exit the paclitaxel
business have been obtained.
(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 $1,673,485 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 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 $1,133,000. See "The Escrow Agreement".
(3) No adjustment has been made to interest expense to account for changes in
the amount of interest and commitment fees that would be paid relating to
the new credit facility obtained by Hauser as part of the Merger because any
estimate of utilization of credit facilities is not factually supportable.
(4) 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.
45
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 31, 1999
---------------------------------------------------------------------------
COSTS RELATED
CONTRIBUTED TO PACLITAXEL PRO FORMA HAUSER PRO
HAUSER SUBSIDIARIES BUSINESS(1) ADJUSTMENTS FORMA
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural product processing............ $ 10,257,581 $ 61,750,633 $ -- $ 955,982(2) $ 72,964,196
Technical services.................... 12,784,147 -- -- -- 12,784,147
Paclitaxel............................ 2,893,845 -- (2,893,845) -- --
------------- ------------- ------------- ------------- -------------
Total revenues...................... 25,935,573 61,750,633 (2,893,845) 955,982 85,748,343
------------- ------------- ------------- ------------- -------------
COST OF REVENUES:
Natural product processing............ 8,374,690 53,237,557 -- -- 61,612,247
Technical services.................... 9,287,157 -- -- -- 9,287,157
Paclitaxel............................ 1,572,734 -- (1,572,734) -- --
Write-off of inventory................ 19,700,000 -- (19,700,000) -- --
------------- ------------- ------------- ------------- -------------
Total cost of revenues.............. 38,934,581 53,237,557 (21,272,734) -- 70,899,404
------------- ------------- ------------- ------------- -------------
GROSS PROFIT (LOSS)..................... (12,999,008) 8,513,076 18,378,889 955,982 14,848,939
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Research and development.............. 1,136,479 -- (190,489) -- 945,990
Selling, general and admin............ 6,933,625 6,526,166 (91,328) -- 13,368,463
Write-off of assets................... 5,900,000 -- (5,900,000) -- --
Goodwill.............................. 35,010 -- (35,010) 1,255,114(3) 1,255,114
------------- ------------- ------------- ------------- -------------
Total operating expenses............ 14,005,114 6,526,166 (6,216,827) 1,255,114 15,569,567
------------- ------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS........... (27,004,122) 1,986,910 24,595,716 (299,132) (720,628)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income....................... 79,521 -- -- -- 79,521
Interest expense...................... (370,131) (1,044,593) -- --(4) (1,414,724)
Other income.......................... 42,037 394,496 -- -- 436,533
------------- ------------- ------------- ------------- -------------
Total other income (expense)........ (248,573) (650,097) -- -- (898,670)
------------- ------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX......... (27,252,695) 1,336,813 24,595,716 (299,132) (1,619,298)
INCOME TAX (EXPENSE) BENEFIT............ -- (576,854) -- 576,854(5) --
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)....................... $ (27,252,695) $ 759,959 $ 24,595,716 $ 277,722 $ (1,619,298)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
LOSS PER SHARE BASIC AND DILUTED........ $ (2.60) N/A N/A N/A $ (0.08)
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED..................... 10,467,531 N/A N/A 10,057,028 20,524,559
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined statement of
operations.
46
<PAGE>
HAUSER, INC. AND CONTRIBUTED SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS
OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 1999
(1) Reflects the removal of revenues and expenses related to the paclitaxel
business. As a result of the Merger, Hauser will exit the business of
producing bulk paclitaxel. All approvals necessary to exit the paclitaxel
business have been obtained.
(2) Reflects the estimated additional revenue to be realized from the sale of
product from Wilcox (a Contributed Subsidiary) to ZBI during the nine months
ended January 31, 1999. 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 $1,255,000 during the nine months
ended January 31, 1999. 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 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 $850,000. See "THE MERGER AGREEMENT--The Escrow
Agreement".
(4) No adjustment has been made to interest expense to account for changes in
the amount of interest and commitment fees that would be paid relating to
the new credit facility obtained by Hauser as part of the Merger because any
estimate of utilization of credit facilities is not factually supportable.
(5) Reflects estimated pro forma income tax which includes the effect of
goodwill amortization, which will be non-deductible for tax purposes.
47
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth as of March 31, 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 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 Executive Officers and Directors as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- -------------------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
DIRECTORS:
Dean P. Stull(2).................................................. 320,294 3.0%
Randall J. Daughenbaugh(2)........................................ 175,252 1.6%
William E. Coleman(3)............................................. 57,855 (*)
Stanley J. Cristol(4)............................................. 121,843 1.2%
Bert M. Tolbert(5)................................................ 96,077 (*)
Beverly J. Haddon(6).............................................. 6,500 (*)
Robert F. Saydah(7)............................................... 31,200 (*)
NAMED EXECUTIVE OFFICERS:
Philip H. Katz(8)................................................. 4,017 (*)
Kenneth P. Gordon(8).............................................. 350 (*)
Eugene W. Damon(8)................................................ 1,017 (*)
Martin C. Wehr(2)................................................. 57,000 (*)
ALL OFFICERS AND DIRECTORS AS A GROUP: (13 persons)................. 904,320 8.3%
5% SHAREHOLDERS:
Fidelity Management & Research Company(9)......................... 1,368,300 13.1%
T. Rowe Price Associates(10)...................................... 1,226,000 11.4%
</TABLE>
- ------------------------
* Indicates less than 1%.
(1) Includes the following number of shares which could be acquired within 60
days through the exercise of stock options: Dr. Stull, 130,320 shares; Dr.
Daughenbaugh, 68,234 shares; Dr. Cristol, 20,850 shares; Ms. Haddon, 4,500
shares; Mr. Saydah, 23,700 shares; Dr. Tolbert, 21,900 shares; and all
directors and officers as a group, 380,903 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 28,800 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, 2493 Biltmore Dr., Alamo, CA
94507.
(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>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS FOLLOWING THE MERGER
The following table sets forth as of March 31, 1999, and giving effect to
the Merger, 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 Hauser's voting
securities, by all individual Directors, by the Company's Co-Chief Executive
Officers and the four most highly paid executives with annual base salaries of
$100,000 or more (the "NAMED EXECUTIVE OFFICERS"), and by all Executive Officers
and Directors as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- -------------------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
DIRECTORS:
Dean P. Stull(2).................................................. 423,032 2.0%
William E. Coleman(3)............................................. 57,855 (*)
Robert F. Saydah(4)............................................... 31,200 (*)
Rudolfo C. Bryce(5)............................................... 0 (*)
Herbert Elish(6).................................................. 0 (*)
James R. Mellor(7)................................................ 0 (*)
Harvey L. Sperry(8)............................................... 0 (*)
Volker Wypyszyk(9)................................................ 0 (*)
Peter Zuellig(10)................................................. 0 (*)
NAMED EXECUTIVE OFFICERS:
Philip H. Katz(11)................................................ 12,710 (*)
Kenneth P. Gordon(11)............................................. 4,158 (*)
Eugene W. Damon(11)............................................... 5,016 (*)
Martin C. Wehr(2)................................................. 107,000 (*)
ALL OFFICERS AND DIRECTORS AS A GROUP: (15 persons)................. 705,327 3.4%
5% SHAREHOLDERS:
Fidelity Management & Research Company(12)........................ 1,368,300 6.7%
T. Rowe Price Associates(13)...................................... 1,226,000 6.0%
ZBI(14)........................................................... 5,531,365 26.9%
ZGNA(15).......................................................... 4,525,663 22.0%
</TABLE>
- ------------------------
* Indicates less than 1%.
(1) Includes the following number of shares which could be acquired within 60
days through the exercise of stock options (including options which
accelerate as a result of the Merger): Dr. Stull, 233,058 shares; Mr.
Saydah, 23,700 shares and all directors and officers as a group, 559,732
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 28,800 shares held by CVM, Inc. Dr.
Coleman's address is Colorado Venture Management, Inc., 4845 Pearl East
Circle, Suite 300, Boulder, CO 80301.
(4) Mr. Saydah's address is Heidrick & Struggles, 2493 Biltmore Dr., Alamo, CA
94507.
(5) Mr. Bryce's address is One Charlotte Hill Drive, Bernardsville, NJ 07924.
(6) Mr. Elish's address is 4400 Forbes Avenue, Pittsburgh, PA 15231.
(7) Mr. Mellor's address is 32161 South Coast Highway, Laguna Beach, CA 92651.
49
<PAGE>
(8) Mr. Sperry's address is Willkie Farr & Gallagher, 787 Seventh Ave., New
York, NY 10019.
(9) Mr. Wypyszyk's address is 2550 El Presidio St., Long Beach, CA 90810.
(10) Mr. Zuellig's address is 18-F, The Hong Kong Club Building, 3A Charter
Road, Central, Hong Kong.
(11) The business address for Messrs. Katz, Gordon and Damon is Shuster, Inc.,
Quincy Research Park, 5 Hayward St., Quincy, MA 02171.
(12) The business address for Fidelity Management & Research Company is 82
Devonshire Street, Boston, MA 02109.
(13) The business address for T. Rowe Price Associates, Inc., is 100 E. Pratt
Street, Baltimore, MD 21202.
(14) ZBI is a wholly-owned subsidiary of ZGNA.
(15) ZGNA is a wholly-owned subsidiary of Zatpack Inc. an international
business company organized under the laws of the British Virgin Islands
("Zatpack"). Zatpack has 100 shares of common stock issued and
outstanding, which is divided into three classes. 49 shares of Zatpack
Class A common stock are held by the Stephen Zuellig Issue Trust for the
benefit of Stephen Zuellig's descendants. 49 shares of Zatpack Class B
common stock are held by the Gilbert Zuellig Issue Trust for the benefit
of Gilbert Zuellig's descendants. 2 shares of Zatpack Class C common stock
are held by the Peter Zuellig and Thomas Zuellig Trust for the benefit of
Peter Zuellig, the eldest son of Stephen Zuellig, and Thomas Zuellig, the
eldest son of Gilbert Zuellig. The trustee for each trust is the Bermuda
Trust Company.
50
<PAGE>
ARRANGEMENTS AFFECTING CONTROL OF THE COMPANY
As of March 31, 1999, the Officers and Directors of Hauser beneficially
owned 904,320 shares of Common Stock or approximately 8.3% of the total shares
issued and outstanding (assuming exercise of all warrants and options deemed to
be beneficially owned by these persons). After the Merger, and assuming the
acceleration of certain options, officers and directors of Hauser will own
705,327 shares of 3.4% 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.
APPROVAL OF REVERSE STOCK SPLIT
The Board of Directors has approved, and recommends that the shareholders
approve, a resolution to effect a reverse split (the "REVERSE STOCK SPLIT") of
the outstanding shares of Common Stock, whereby Hauser would issue one (1) new
share of Common Stock in exchange for between two (2) and five (5) shares of
presently outstanding Common Stock (the "RESOLUTION"). The Board believes that
shareholder approval of an exchange ratio range (as opposed to approval of a
specified exchange ratio) in which the Reverse Stock Split may be effected will
provide the Board with maximum flexibility to achieve the purposes of the
Reverse Stock Split and is in the best interests of Hauser and its shareholders.
The Reverse Stock Split will be made if (1) the Merger is approved and (2) the
Reverse Stock Split is necessary to meet the NASDAQ minimum bid price of $5.00
per share on the Closing Date of the Merger. See "APPROVAL OF REVERSE STOCK
SPLIT--Reasons For and the Effect of the Proposed Reverse Stock Split".
The Board of Directors will determine the effective date of the Reverse
Stock Split, if any.
REASONS FOR AND THE EFFECT OF THE PROPOSED REVERSE STOCK SPLIT
In March 1999, Hauser was advised by NASDAQ that the proposed Merger was
deemed a "change of control" by NASDAQ that would require Hauser to submit a new
Application for Initial Listing as a NASDAQ National Market company. One of the
requirements for initial listing as a NASDAQ National Market company is that the
minimum trading price of the stock be at least $5.00 per share.
Based on the closing price for the Common Stock on March 31, 1999 ($2.75),
Hauser does not satisfy the minimum bid price for the Common Stock of $5.00 per
share. The primary purpose of the Reverse Stock Split is to increase the market
value per share of the Common Stock in order to meet the National Market's
minimum bid price. The reduction in the number of shares of Common Stock
outstanding caused by the Reverse Stock Split is intended to increase the per
share market price of the Common Stock,
51
<PAGE>
thereby allowing the Common Stock to qualify for continued listing on the
National Market. If the shareholders approve this proposal, the Board of
Directors will authorize the Reverse Stock Split if necessary to meet the
minimum bid price. The Board of Directors will select a level within the
exchange ratio range for the Reverse Stock Split which the Board believes will
allow the Common Stock to qualify for listing on the National Market. The
Reverse Stock Split will affect all shareholders equally and each shareholder's
percentage equity interest in Hauser will remain unchanged.
THE BOARD OF DIRECTORS STRONGLY URGES SHAREHOLDERS TO VOTE FOR THE REVERSE
STOCK SPLIT. IF SHAREHOLDERS FAIL TO APPROVE THE REVERSE STOCK SPLIT, THE COMMON
STOCK WILL LIKELY BE DELISTED FROM THE NASDAQ NATIONAL MARKET. IT IS A CONDITION
TO THE OBLIGATION OF ZGNA AND ZBI TO CONSUMMATE THE MERGER THAT HAUSER COMMON
STOCK BE LISTED ON THE NASDAQ NATIONAL MARKET, OR ON SOME OTHER STOCK EXCHANGE.
In the event this Resolution is not adopted by Hauser's shareholders, and
the Common Stock minimum bid price does not exceed $5.00 on or before the
Closing Date of the Merger, Hauser has been advised that the Common Stock will
be delisted by NASDAQ. No assurance can be given that the Common Stock will meet
the requirements for listing on any other established trading market, including
the Nasdaq Small Cap Market, in the event the Resolution is not approved by
Hauser's shareholders. In addition, the listing of the Common Stock on the
National Market is conditioned on Hauser being able to satisfy all of the
National Market's qualitative and quantitative requirements for initial listing.
Although there can be no assurance that Hauser will be able to satisfy all of
these requirements or continue to satisfy these requirements in the future,
Hauser believes it will satisfy such requirements on the Closing of Merger.
The Reverse Stock Split also may enhance the acceptability of the Common
Stock by the financial community and investing public. Theoretically, the bid
price of the shares should not, by itself, affect Hauser's reputation in the
financial community, but in practice this is not necessarily the case, as many
investors look upon a stock trading below $5.00 as unduly speculative in nature
and, as a matter of policy or practice, avoid investments in such stocks. Hauser
also believes the current per share price of the Common Stock has reduced the
effective marketability of the shares because of the reluctance of many leading
brokerage firms to recommend low-priced securities to their clients. Further,
various brokerage house policies and practices tend to discourage individual
brokers within firms from dealing in low-priced stocks. Some of those policies
and procedures pertain to the payment of brokers' commissions and to time-
consuming procedures that make the handling of low-priced stocks economically
unattractive to brokers. In addition, the structure of trading commissions tends
to have an adverse impact upon holders of low-priced stocks because the
brokerage commission on a sale of a low-price stock generally represents a
higher percentage of the sales price than the commission on higher priced
issues. Hauser also believes that many brokers and other "margin loan" makers
are unwilling to lend against stock trading below $5.00 per share. Hauser
believes that all of the foregoing factors tend to depress the market for the
Common Stock.
Although there can be no assurance that the price of the Common Stock after
the Reverse Stock Split will actually increase in an amount proportionate to the
decrease in the number of outstanding shares, the proposed Reverse Stock Split
is intended to result in a price level for the Common Stock that will mitigate
or eliminate the foregoing factors that impact the market for the Common Stock.
There is also no assurance that the market for the Common Stock will be improved
and Hauser cannot predict what actual effect the Reverse Stock Split will have
on the market price of the Common Stock.
Based on the 20,533,456 shares of Common Stock that are presumed to be
outstanding on the Closing Date of the Merger, the following table reflects the
percentage reduction in the outstanding shares of
52
<PAGE>
Common Stock and the number of shares of Common Stock that would be outstanding
as a result of the Reverse Stock Split:
<TABLE>
<CAPTION>
PROPOSED REVERSE STOCK SPLIT PERCENTAGE REDUCTION SHARES TO BE OUTSTANDING
- --------------------------------------------- --------------------- ---------------------------------------------
<S> <C> <C>
1 for 2 50% 10,266,728
1 for 3 66% 6,844,485
1 for 4 75% 5,133,364
1 for 5 80% 4,106,691
</TABLE>
The Reverse Stock Split would not affect the proportionate equity interest
in Hauser of any holder of Common Stock, except as may result from the
provisions for the treatment of fractional shares as described below. Following
the Reverse Stock Split, each share of Common Stock will entitle the holder
thereof to one vote per share and will otherwise be identical to the Common
Stock prior to such event.
EFFECT ON OUTSTANDING OPTIONS AND WARRANTS
As of March 31, 1999, there were outstanding options to purchase an
aggregate of 962,974 shares of Common Stock pursuant to Hauser employee stock
option plans and warrants to purchase an aggregate of 48,477 shares of Common
Stock. All of the outstanding options and warrants are subject to provisions for
adjustments in the number of shares covered thereby, and the exercise price
thereof, in the event of a reverse stock split. If the proposed Reverse Stock
Split is approved and effected, there will be a proportionate reduction in the
number of shares of Common Stock subject to outstanding options and warrants,
depending on the ratio selected by the Board of Directors, and the exercise
price per share would be proportionately increased. The number of shares
authorized and available for grant under the 1987 Non-Statutory Stock Option
Plan and the 1992 Incentive Stock Option Plan will be proportionately reduced.
EXECUTION AND CONSEQUENCES OF A REVERSE STOCK SPLIT
Each stock certificate representing issued and outstanding shares of Common
Stock prior to the effective date of the Reverse Stock Split will, after such
effective date, represent the appropriate number of shares of Common Stock
reflecting the Reverse Stock Split. It will not be necessary for shareholders to
exchange their existing stock certificates. Shareholders may, however, exchange
their certificates if they so choose.
No scrip or fractional certificates will be issued in the Reverse Stock
Split, and no such fractional share interest would entitle the holder thereof to
vote or to any rights of a shareholder of the Company. In lieu of any such
fractional shares, and solely for the purpose of avoiding the expense and
inconvenience of issuing fractional shares, Hauser's transfer agent, American
Securities Transfer & Trust, Inc. (the "TRANSFER AGENT") will round up to the
next higher whole share any fractional shares that result from the Reverse Stock
Split.
The Reverse Stock Split may leave certain shareholders with "odd lots" of
the Common Stock, i.e., stock in amounts of less than 100 shares. These shares
may be more difficult to sell, or require a greater commission per share to
sell, than shares in even multiples of 100.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following description of federal income tax consequences of the Reverse
Stock Split is based on the Internal Revenue Code, the applicable Treasury
Regulations promulgated thereunder, judicial authority and current
administrative rulings and practices as in effect on the date of this Proxy
Statement. This discussion is for general information only and does not address
all the tax consequences that may be relevant to a particular shareholder (such
as non-resident aliens, broker-dealers or insurance companies).
53
<PAGE>
Furthermore, no foreign, state or local tax consequences are discussed herein.
Accordingly, shareholders are urged to consult their own tax advisors to
determine the specific tax consequences of the Reverse Stock Split to them.
The exchange of shares of stock for shares of post-split stock will not
result in recognition of gain or loss. The holding period of the shares of
post-split stock will include the shareholder's holding period for the shares of
stock exchanged therefor, and the aggregate tax basis of the shares of the
post-split stock will be the same as the aggregate tax basis of the shares of
stock exchanged therefor.
PROPOSED RESOLUTION
The proposed resolution is as follows:
The Board of Directors shall have the authority to split the outstanding
shares of Common Stock by a range of two to one to five to one (the "REVERSE
STOCK SPLIT"); provided, however, that (1) no fractional share shall be issued
pursuant to the Reverse Stock Split and (2) no such fractional share interest
will entitle the holder thereof to vote, or to any rights of a shareholder of
Hauser. In lieu of any such fractional shares, Hauser's transfer agent American
Securities Transfer & Trust, Inc., will round up to the next higher whole share
any fractional shares that result from the Reverse Stock Split. The Reverse
Stock Split will be effective if (1) the Merger is approved and (2) it is
necessary to meet the NASDAQ $5.00 minimum bid price on the Closing Date of the
Merger.
APPRAISAL RIGHTS
Holders of Common Stock have no appraisal rights under Colorado law in
connection with the Reverse Stock Split because the shares of Common Stock are
listed on the Nasdaq National Market System on the Record Date for the meeting.
VOTE REQUIRED AND RESERVATION OF RIGHTS
Approval of the Reverse Stock Split and adoption of the Resolution requires
the affirmative vote of a majority of the quorum present in person or by proxy
at the Special Meeting. Broker non-votes will not be counted. The Board of
Directors reserves the right, notwithstanding shareholder approval and without
further action by the shareholders, to elect not to proceed with the Reverse
Stock Split, if at any time prior to the Closing Date of the Merger, the Board
of Directors, in its sole discretion, determines that the Reverse Stock Split is
no longer in the best interest of the Company and its shareholders.
BOARD RECOMMENDATIONS
The Board of Directors recommends that shareholders vote "FOR" approval of
the Reverse Stock Split. IF SHAREHOLDERS FAIL TO APPROVE THE REVERSE STOCK
SPLIT, THE COMMON STOCK WILL LIKELY BE DELISTED FROM THE NASDAQ NATIONAL MARKET
AND IF THE COMMON STOCK IS NOT LISTED ON ANOTHER STOCK EXCHANGE, ZGNA AND ZBI
WILL HAVE NO OBLIGATION TO CONSUMMATE THE MERGER.
54
<PAGE>
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 statements 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, 1999.
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 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
55
<PAGE>
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. The public may obtain information regarding the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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 under file
#0-17174 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 Shareholders 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, 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.
By Order of the Board of Directors
[SIGCUT]
Dean P. Stull, Chairman
Boulder, Colorado
May 11, 1999
56
<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 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
A-1
<PAGE>
Board of Directors
Hauser, Inc.
December 8, 1998
Page 2
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 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.
<TABLE>
<S> <C> <C>
By: /s/ JAMES A. SIMMS
-------------------------
James A. Simms
GROUP HEAD, MERGERS &
ACQUISITIONS
</TABLE>
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APPENDIX B
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- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
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SECTION 1. DEFINITIONS............................................................................... B-1
SECTION 2. THE MERGER................................................................................ B-4
2.1. The Mergers.................................................................... B-4
2.2. The Closing.................................................................... B-5
2.3. Effective Time................................................................. B-5
2.4. Effect of the Merger........................................................... B-5
SECTION 3. EFFECT OF THE MERGER ON THE CAPITAL STOCK; MERGER CONSIDERATION; EXCHANGE OF
CERTIFICATES.............................................................................. B-5
3.1. Effect on Capital Stock; Merger Consideration.................................. B-5
3.2. Certificate of Incorporation of Surviving Corporations......................... B-6
3.3. By-laws of the Surviving Corporations.......................................... B-6
3.4...... Directors and Officers......................................................... B-6
3.5...... Tax Treatment.................................................................. B-6
3.6...... Accounting Treatment........................................................... B-6
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................. B-6
4.1. Corporate Organization......................................................... B-6
4.2. Subsidiaries................................................................... B-6
4.3. Capitalization................................................................. B-7
4.4. Corporate Proceedings, etc..................................................... B-7
4.5. Consents and Approvals......................................................... B-8
4.6. Compliance with Law............................................................ B-8
4.7. Litigation..................................................................... B-9
4.8. Change in Ownership............................................................ B-9
4.9. Absence of Defaults, Conflicts, etc............................................ B-10
4.10. Reports and Financial Statements............................................... B-10
4.11. Absence of Certain Developments................................................ B-11
4.12. Material Contracts............................................................. B-11
4.13. Absence of undisclosed Liabilities............................................. B-11
4.14. Employees...................................................................... B-12
4.15. Tax Matters.................................................................... B-12
4.16. Employee Benefit Plans......................................................... B-13
4.17. Patents, Licenses, etc......................................................... B-13
4.18. Title to Tangible Assets....................................................... B-13
4.19. Insurance...................................................................... B-14
4.20. Transactions with Related Parties.............................................. B-14
4.21. Registration Rights............................................................ B-14
4.22. Private Offering............................................................... B-14
4.23. Investment..................................................................... B-14
4.24. Brokerage...................................................................... B-15
4.25. Takeover Statute............................................................... B-15
4.26. Material Facts................................................................. B-15
4.27. Debt........................................................................... B-15
4.28. Company Real Property.......................................................... B-15
4.29. Corporate Minute Books......................................................... B-16
4.30. Good Condition................................................................. B-16
4.31. Manufacturing Capacity......................................................... B-16
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SECTION 5. REPRESENTATIONS AND WARRANTIES OF ZGNA.................................................... B-16
5.1. Corporate Organization......................................................... B-16
5.2. Contributed Subsidiaries....................................................... B-17
5.3. Capitalization................................................................. B-17
5.4. Corporate Proceedings, etc..................................................... B-17
5.5. Consents and Approvals......................................................... B-18
5.6. Compliance with Law............................................................ B-18
5.7. Litigation..................................................................... B-19
5.8. Change in Ownership............................................................ B-19
5.9. Absence of Defaults, Conflicts, etc............................................ B-19
5.10. Reports and Financial Statements............................................... B-20
5.11. Absence of Certain Developments................................................ B-20
5.12. Material Contracts............................................................. B-20
5.13. Absence of undisclosed Liabilities............................................. B-21
5.14. Employees...................................................................... B-21
5.15. Tax Matters.................................................................... B-22
5.16. Employee Benefit Plans......................................................... B-22
5.17. Patents, Licenses, etc......................................................... B-23
5.18. Title to Tangible Assets....................................................... B-23
5.19. Insurance...................................................................... B-23
5.20. Transactions with Related Parties.............................................. B-23
5.21. Registration Rights............................................................ B-24
5.22. Private Offering............................................................... B-24
5.23. Investment..................................................................... B-24
5.24. Brokerage...................................................................... B-24
5.25. Material Facts................................................................. B-25
5.26. Debt........................................................................... B-25
5.27. Financial Records.............................................................. B-25
5.28. Subsidiary Real Property....................................................... B-25
5.29. Company Security Holdings...................................................... B-26
5.30. Bank Accounts; Powers of Attorney.............................................. B-26
5.31. Corporate Minute Books......................................................... B-26
5.32. Sufficient Assets.............................................................. B-26
5.33. Good Condition................................................................. B-26
5.34. Bank Commitment................................................................ B-26
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES....................................................... B-26
6.1. Resale of Securities........................................................... B-26
6.2. Proxy Statement................................................................ B-27
6.3. Access to Information.......................................................... B-27
6.4. Stockholders Meeting........................................................... B-28
6.5. Execution and Delivery of Agreements........................................... B-28
6.6. Ordinary Course................................................................ B-28
6.7. Further Assurances............................................................. B-30
6.8. Confidentiality................................................................ B-30
6.9. Standstill..................................................................... B-30
6.10. Ownership of Shares............................................................ B-31
6.11. Noncompetition................................................................. B-31
6.12. Resignation of Directors....................................................... B-32
6.13. Subscription Right............................................................. B-32
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ii
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6.14. Letters of Accountants......................................................... B-33
6.15. Efforts to Satisfy Conditions; Notice of Inability to Meet Conditions.......... B-33
6.16. HSR............................................................................ B-33
6.17. Public Announcement............................................................ B-33
6.18. Cooperation in Defense......................................................... B-33
6.19. Volker Wypyszyk................................................................ B-34
6.20. Repayment of Debt.............................................................. B-34
SECTION 7. ZGNA'S CLOSING CONDITIONS................................................................. B-34
7.1. Representations and Warranties................................................. B-34
7.2. Compliance with Agreement...................................................... B-34
7.3. Injunction..................................................................... B-34
7.5. Consents and Approvals......................................................... B-34
7.6. NASDAQ Listing................................................................. B-34
7.7. Adverse Development............................................................ B-34
7.8. Transaction Documents.......................................................... B-35
7.9. Credit Agreements.............................................................. B-35
7.10. HSR Act........................................................................ B-35
7.11. Election of Officer and Directors.............................................. B-35
7.12. Officer's Certificate.......................................................... B-35
7.13. Counsel's Opinion.............................................................. B-35
7.14. Completion of Mergers.......................................................... B-35
7.15. Approval of Proceedings........................................................ B-35
7.16. Accountant's Letter............................................................ B-35
SECTION 8. COMPANY CLOSING CONDITIONS................................................................ B-35
8.1. Representations and Warranties................................................. B-35
8.2. Compliance with Agreement...................................................... B-35
8.3. Injunction..................................................................... B-36
8.4. Stockholder Approval........................................................... B-36
8.5. Election of Officer and Directors.............................................. B-36
8.6. Adverse Development............................................................ B-36
8.7. Credit Agreements.............................................................. B-36
8.8. Consents and Approvals......................................................... B-36
8.9. HSR Act........................................................................ B-36
8.10. Transaction Documents.......................................................... B-36
8.11. ZGNA's Certificates............................................................ B-36
8.12. Counsel's Opinion.............................................................. B-36
8.13. Completion of Mergers.......................................................... B-36
8.14. Approval of Proceedings........................................................ B-36
8.15. Accountant's Letter............................................................ B-36
8.16. Employees...................................................................... B-37
8.17. Exclusive Distributorship Agreement............................................ B-37
SECTION 9. TERMINATION AND INDEMNIFICATION........................................................... B-37
9.1. Termination.................................................................... B-37
9.2. Procedure and Effect of Termination............................................ B-37
9.3. Survival of Representations, Warranties and Covenants.......................... B-38
9.4. Indemnification................................................................ B-38
9.5. Break-Up Fee................................................................... B-40
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SECTION 10. MISCELLANEOUS............................................................................. B-41
10.1. Governing Law.................................................................. B-41
10.2. Paragraph and Section Headings................................................. B-41
10.3. Notices........................................................................ B-42
10.4. Expenses and Taxes............................................................. B-42
10.5. Successors and Assigns......................................................... B-42
10.6. Entire Agreement; Amendment and Waiver......................................... B-42
10.7. Severability................................................................... B-42
10.8. Third Parties.................................................................. B-42
10.9. Arbitration.................................................................... B-42
10.10. Counterparts................................................................... B-43
</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").
RECITALS:
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 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.
B-1
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"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.
"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.
"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.
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"INDEMNIFIED PARTY" shall have the meaning set forth in Section 9.4(h).
"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.
"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.
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<PAGE>
"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).
"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 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
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<PAGE>
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 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 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.
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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.
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 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
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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.
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.
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.
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(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 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
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
B-8
<PAGE>
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 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 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.
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<PAGE>
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.
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 respects in accordance with the books of account and records of the
Company except as indicated therein.
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<PAGE>
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 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
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Closing, and including, without limitation, unfunded past service liabilities
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 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
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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 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 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
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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.
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.
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.
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(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
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 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
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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, 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 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.
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(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").
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
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
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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, 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 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
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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, 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
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
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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 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 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)
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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 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
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.
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(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 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 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
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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 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 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
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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 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 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
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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 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 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
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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 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 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
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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 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-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
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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 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); (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.
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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 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:
(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;
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(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 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:
(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;
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(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 (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.
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(c) Upon the expiration of the offering periods described above, the Company
will be free to sell such 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.
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
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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 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.
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 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. 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.
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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. 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 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).
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<PAGE>
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.
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 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;
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<PAGE>
(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) 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 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
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<PAGE>
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 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.
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<PAGE>
(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 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
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
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<PAGE>
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 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.
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.
B-41
<PAGE>
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).
(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.
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").
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<PAGE>
(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 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.
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.
<TABLE>
<S> <C> <C> <C>
HAUSER, INC.
*By: /s/ DEAN P. STULL
---------------------------------
Name: Dean P. Stull
Title: CEO
QQB HOLDINGS I, INC.
*By: /s/ DEAN P. STULL
---------------------------------
Name: Dean P. Stull
Title: PRESIDENT
QQB HOLDINGS II, INC.
*By: /s/ DEAN P. STULL
---------------------------------
Name: Dean P. Stull
Title: PRESIDENT
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
QQB HOLDINGS III, INC.
*By: /s/ DEAN P. STULL
---------------------------------
Name: Dean P. Stull
Title: PRESIDENT
ZUELLIG GROUP N.A., INC.
*By: /s/ VOLKER WYPYSZYK
---------------------------------
Name: Volker Wypyszyk
Title: PRESIDENT
ZUELLIG BOTANICAL EXTRACTS, INC.
*By: /s/ RALPH L. HEIMANN
---------------------------------
Name: Ralph L. Heimann
Title: SECRETARY AND TREASURER
ZETAPHARM, INC.
*By: /s/ RALPH L. HEIMANN
---------------------------------
Name: Ralph L. Heimann
Title: SECRETARY AND TREASURER
WILCOX DRUG COMPANY, INC.
*By: /s/ RALPH L. HEIMANN
---------------------------------
Name: Ralph L. Heimann
Title: SECRETARY AND TREASURER
ZUELLIG BOTANICALS, INC.
*By: /s/ RALPH L. HEIMANN
---------------------------------
Name: Ralph L. Heimann
Title: SECRETARY AND TREASURER
</TABLE>
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<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.
"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.
C-1
<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.
"SECURITIES ACT" shall mean the Securities Act of 1933, an amended.
"SUBSTITUTE DIRECTOR" shall have the meaning set forth in Section 2(b).
"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 James R. Mellor, 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 June 11, 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) 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
C-2
<PAGE>
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 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 & 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.
C-3
<PAGE>
(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.
(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.
(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.
<TABLE>
<S> <C>
HAUSER, INC.
By:
-----------------------------------------
Name:
Title:
ZUELLIG GROUP N.A., INC.
By:
-----------------------------------------
Name:
Title:
ZUELLIG BOTANICALS, INC.
By:
-----------------------------------------
Name:
Title:
</TABLE>
C-4
<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)
D-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.
D-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.
D-3
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
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.
D-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.
D-5
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAIN
ON
COMMON STOCK ADDITIONAL TREASURY STOCK AVAILABLE-FOR- TOTAL
------------------- PAID-IN --------------------- SALE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT INVESTMENTS EARNINGS EQUITY
---------- ------- ----------- -------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30,
1995................. 10,526,079 $10,526 $59,266,173 (181,100) $ (966,062) $ -- $19,080,822 $77,391,459
Exercise of stock
options............ 37,200 38 120,407 -- -- -- -- 120,445
Tax benefit from
employee exercise
of stock options... -- -- 29,700 -- -- -- -- 29,700
Exercise of
warrants........... 1,334 1 2,000 -- -- -- -- 2,001
Purchase of treasury
stock.............. -- -- -- (20,000) (88,750) -- -- (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................. 10,564,613 10,565 59,418,280 (201,100) (1,054,812) 465,100 11,344,486 70,183,619
Exercise of stock
options............ 55,515 55 210,111 -- -- -- -- 210,166
Tax benefit from
employee exercise
of stock options... -- -- 48,286 -- -- -- -- 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......... -- -- -- -- -- (218,981) -- (218,981)
Net loss............. -- -- -- -- -- -- (6,531,536) (6,531,536)
---------- ------- ----------- -------- ----------- --------------- ----------- -------------
BALANCE, APRIL 30,
1997................. 10,419,028 10,419 58,622,066 -- -- 246,119 4,812,950 63,691,554
Exercise of stock
options............ 45,430 45 223,881 -- -- -- -- 223,926
Tax benefit from
employee exercise
of stock options... -- -- 18,348 -- -- -- -- 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................. 10,464,458 $10,464 $58,864,295 -- $ -- $ -- $ 1,678,941 $60,553,700
---------- ------- ----------- -------- ----------- --------------- ----------- -------------
---------- ------- ----------- -------- ----------- --------------- ----------- -------------
</TABLE>
See notes to consolidated financial statements
D-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 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
D-7
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
subject the Company to concentrations of credit risk are accounts receivable and
investments in debt securities. The Company generally grants credit to its
customers without collateral. The Company's creditors are concentrated in the
food processing, nutraceutical and pharmaceutical industries. The Company's
principal customers (Note 8) accounted for 23% and 5% of the Company's accounts
receivable as of April 30, 1998 and 1997, respectively. The Company's investment
in debt securities are held entirely in U.S. government treasury securities. The
Company has no significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option contracts or foreign
currency hedging arrangements.
PRODUCT WARRANTY--Product returns are accepted by the Company only under
limited circumstances. Except as described below, the Company has had
insignificant product returns and has not historically provided a reserve for
product returns or remediation.
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.
D-8
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
2 - 15
Equipment, furniture and fixtures.............................. years
Buildings...................................................... 39 years
5 - 10
Leasehold improvements......................................... years
</TABLE>
D-9
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
shipment of processed product. Technical services revenues are recognized upon
completion of specified contract requirements. Unbilled receivables result from
costs incurred on uncompleted contracts and are included in accounts receivable
in the accompanying balance sheet. Unbilled accounts receivable at April 30,
1998 and 1997, were $434,629 and $232,666, respectively. Unanticipated losses
from contracts are provided for in the period the loss is identified. No losses
have been accrued as of April 30, 1998 and 1997.
Royalty revenues are recognized upon completion of the Company's performance
obligations with respect to these revenues and coincident with the billing
requirements defined in the supply contract (generally upon sale of the product
to an end-user).
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.
D-10
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
($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. Management has
not determined what segments, if any, will be reported in connection with the
adoption of SFAS 131.
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 LINE OF
NOTES PAYABLE OBLIGATIONS 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.
D-11
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
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.
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 during period.................... $ 3.91 $ 3.36 $ 2.85
</TABLE>
D-12
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
APRIL 30, 1998
-----------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- --------------------------
WEIGHTED REMAINING WEIGHTED
RANGE OF EXERCISE AVERAGE CONTRACTUAL 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 during period................... $ 3.86 $ 2.83 $ 2.71
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1998
-----------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- --------------------------
WEIGHTED REMAINING WEIGHTED
RANGE OF EXERCISE AVERAGE CONTRACTUAL 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>
D-13
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
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>
D-14
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
D-15
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
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 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. In
assessing the amount of its net deferred tax assets considered realizable,
management has considered the following factors: (1) taxable income projected
within the next twenty-four months; (2) the expiration dates of its net
operating loss and tax credit carryovers; (3) tax planning strategies which
would allow Hauser to generate significant taxable income from existing assets
(including possible sale-leaseback scenarios for its land, property and
equipment held fee simple); and (4) alternative strategies for its paclitaxel
business. 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 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.
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
D-16
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLAN (CONTINUED)
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.
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 purchase 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, but would reduce the future commitment on these contracts to
approximately $5.0 million. 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, 1998 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.
D-17
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 exchange
D-18
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENT (CONTINUED)
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.
D-19
<PAGE>
APPENDIX E
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS--UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------------- -------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Natural product processing................... $ 3,915,688 $ 2,184,845 $ 10,257,581 $ 7,512,677
Technical services........................... 4,471,668 4,283,919 12,784,147 10,062,162
Paclitaxel................................... 897,770 649,405 2,893,845 3,187,277
--------------- -------------- --------------- --------------
Total revenues........................... 9,285,126 7,118,169 25,935,573 20,762,116
--------------- -------------- --------------- --------------
COST OF REVENUES:
Natural product processing................... 3,658,432 2,118,473 8,374,690 6,958,168
Technical services........................... 3,349,237 2,965,616 9,287,157 7,214,803
Paclitaxel................................... 287,166 494,464 1,572,734 2,337,864
Write-off of inventory....................... 19,700,000 -- 19,700,000 --
--------------- -------------- --------------- --------------
Total cost of revenues................... 26,994,835 5,578,553 38,934,581 16,510,835
--------------- -------------- --------------- --------------
GROSS (LOSS) PROFIT............................ (17,709,709) 1,539,616 (12,999,008) 4,251,281
--------------- -------------- --------------- --------------
OPERATING EXPENSES:
Research and development..................... 318,581 536,128 1,136,479 1,793,890
Sales and marketing.......................... 624,314 561,695 2,120,511 1,633,401
General and administrative................... 1,546,238 1,515,974 4,848,124 4,372,178
Write-off of assets.......................... 5,900,000 -- 5,900,000 --
--------------- -------------- --------------- --------------
Total operating expenses................. 8,389,133 2,613,797 14,005,114 7,799,469
--------------- -------------- --------------- --------------
LOSS FROM OPERATIONS........................... (26,098,842) (1,074,181) (27,004,122) (3,548,188)
--------------- -------------- --------------- --------------
OTHER INCOME (EXPENSE):
Interest income.............................. 29,713 81,363 79,521 281,240
Interest expense............................. (190,653) (3,380) (370,131) (10,043)
Other........................................ -- -- 42,037 361,461
--------------- -------------- --------------- --------------
Other income (expense)--net.............. (160,940) 77,983 (248,573) 632,658
--------------- -------------- --------------- --------------
LOSS BEFORE INCOME TAXES....................... (26,259,782) (996,198) (27,252,695) (2,915,530)
INCOME TAX BENEFIT............................. -- 348,835 -- 1,020,435
--------------- -------------- --------------- --------------
NET LOSS....................................... $ (26,259,782) $ (647,363) $ (27,252,695) $ (1,895,095)
--------------- -------------- --------------- --------------
--------------- -------------- --------------- --------------
LOSS PER SHARE BASIC AND DILUTED............... $ (2.51) $ (0.06) $ (2.60) $ (0.18)
--------------- -------------- --------------- --------------
--------------- -------------- --------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND
DILUTED...................................... 10,468,362 10,428,237 10,467,531 10,420,632
--------------- -------------- --------------- --------------
--------------- -------------- --------------- --------------
</TABLE>
See notes to consolidated financial statements.
E-1
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
1998
JANUARY 31, --------------
1999
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 4,124,954 $ 2,081,796
Restricted cash................................................................. 562,617 139,346
Accounts receivable, less allowance for doubtful accounts:
January 31, 1999, $144,623; April 30, 1998, $430,518........................ 7,074,413 9,090,005
Inventory, at cost.............................................................. 10,816,207 10,111,688
Inventory, at net realizable value.............................................. 7,741,313 --
Prepaid expenses and other...................................................... 256,773 349,570
Net deferred income tax assets.................................................. 1,949,152 1,946,339
-------------- --------------
Total current assets........................................................ 32,525,429 23,718,744
-------------- --------------
PROPERTY AND EQUIPMENT
Land and buildings.............................................................. 7,695,394 7,635,216
Lab and processing equipment.................................................... 23,390,778 31,883,787
Furniture and fixtures.......................................................... 3,879,635 4,671,647
-------------- --------------
Total property and equipment................................................ 34,965,807 44,190,650
Accumulated depreciation and amortization....................................... (18,272,832) (21,846,032)
-------------- --------------
Net property and equipment.................................................. 16,692,975 22,344,618
-------------- --------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
January 31, 1999, $791,992; April 30, 1998, $936,670........................ 1,428,988 1,961,462
Inventory, non-current.......................................................... -- 14,787,837
Deposits........................................................................ 1,719,972 4,013,992
Net deferred income tax asset................................................... 1,010,154 1,010,154
Other........................................................................... 67,099 456,774
-------------- --------------
Total other assets.......................................................... 4,226,213 22,230,219
-------------- --------------
TOTAL............................................................................. $ 53,444,617 $ 68,293,581
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 2,587,654 $ 1,764,294
Current portion of long term debt............................................... 6,634,784 1,911,498
Accrued salaries and wages...................................................... 1,127,122 1,201,201
Deposits........................................................................ 3,710,321 670,155
Product warranty................................................................ -- 1,500,000
Accrued exit costs.............................................................. 4,990,926 --
Other accrued liabilities....................................................... 551,879 --
-------------- --------------
Total current liabilities................................................... 19,602,686 7,047,148
-------------- --------------
LONG TERM LIABILITIES............................................................. 522,668 692,733
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized; shares issued:
January 31, 1999, 10,673,163; April 30, 1998, 10,464,458...................... 10,673 10,464
Additional paid-in capital...................................................... 58,882,344 58,864,295
(Accumulated deficit) retained earnings......................................... (25,573,754) 1,678,941
-------------- --------------
Net stockholders' equity.................................................... 33,319,263 60,553,700
-------------- --------------
TOTAL............................................................................. $ 53,444,617 $ 68,293,581
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
E-2
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 31,
-------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (27,252,695) $ (1,895,095)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................. 3,163,604 2,839,584
Provision for bad debt......................................................... 85,850 --
Expenditures for product warranty.............................................. (1,500,000) --
Provision for paclitaxel and other related assets.............................. 25,600,000 --
Change in accrued exit costs................................................... (59,074) --
Gain on sales of investment.................................................... -- (361,461)
Deferred income tax benefit.................................................... -- (1,091,127)
Change in deposits and other................................................... (2,352,837) (2,295,040)
Change in assets and liabilities:
Accounts receivable........................................................ 1,929,742 (1,816,429)
Income tax receivable...................................................... -- 1,445,046
Inventory.................................................................. (3,833,465) (3,006,153)
Prepaid expenses and other................................................. (223,343) (12,241)
Accounts payable........................................................... 823,360 612,619
Customer deposits.......................................................... 3,040,166 471,934
Other accrued liabilities.................................................. 477,800 586,953
--------------- --------------
Net cash used in operating activities............................................ (100,892) (4,521,410)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................................ (1,521,531) (1,529,485)
Proceeds from sale of investments.............................................. -- 458,479
Issuance of notes receivable................................................... -- (60,000)
Purchase of investments........................................................ -- (194,922)
Maturity of investments........................................................ -- 294,187
Net change in restricted cash.................................................. (423,271) --
--------------- --------------
Net cash used in investing activities............................................ (1,944,802) (1,031,741)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank line of credit.............................................. 4,500,000 --
Repayments of long-term debt................................................... (429,406) (90,172)
Proceeds from issuance of common stock and warrants............................ 18,258 48,864
--------------- --------------
Net cash provided by financing activities........................................ 4,088,852 (41,308)
--------------- --------------
Net increase (decrease) in cash and cash equivalents............................. 2,043,158 (5,594,459)
Cash and cash equivalents, beginning of year..................................... 2,081,796 8,379,551
--------------- --------------
Cash and cash equivalents, end of period......................................... $ 4,124,954 $ 2,785,092
--------------- --------------
--------------- --------------
</TABLE>
See notes to consolidated financial statements.
E-3
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1999 AND APRIL 30, 1998 AND
FOR THE THREE AND NINE MONTH PERIODS ENDED
JANUARY 31, 1999 AND 1998
(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
January 31, 1999, and results of its operations and cash flows for the periods
ended January 31, 1999 and 1998. 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.
In connection with the Merger (See Note 7), Hauser executed an inventory
purchase agreement with Zuellig which is intended to provide interim financing
for Hauser. Included in Deposits as of January 31, 1999, is $3 million received
pursuant to this agreement. The purchase price for the inventory is the lower of
cost or market. At any time, Hauser may require Zuellig to resell to Hauser all
or any portion of the inventory purchased by Zuellig at the same price at which
Zuellig purchased the inventory and require Zuellig to purchase substantially
similar raw material and finished product having a value substantially
equivalent to the repurchased inventory. Hauser will recognize revenue from the
transaction upon the sale of the inventory to an unrelated party.
E-4
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JANUARY 31, 1999 AND APRIL 30, 1998 AND
FOR THE THREE AND NINE MONTH PERIODS ENDED
JANUARY 31, 1999 AND 1998
(UNAUDITED)
2. INVENTORIES (CONTINUED)
Inventories, at cost, are classified as follows:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1999 1998
------------- -------------
<S> <C> <C>
Raw materials and supplies..................................... $ 2,660,218 $ 5,224,750
Work in process................................................ 5,216,394 11,763,470
Finished goods................................................. 3,797,793 8,515,134
------------- -------------
Total before valuation allowance............................... 11,674,405 25,503,354
Less valuation allowance....................................... (858,198) (603,829)
------------- -------------
Total inventories.............................................. 10,816,207 24,899,525
Less non-current inventories................................... -- 14,787,837
------------- -------------
Current portion of inventories................................. $ 10,816,207 $ 10,111,688
------------- -------------
------------- -------------
</TABLE>
Bulk paclitaxel held for sale at a net realizable value of $7,741,313, not
included in the table above, includes finished goods of $4,486,946 and
work-in-process of $3,254,367.
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1999 1998
--------------- -------------
<S> <C> <C>
Line of Credit............................................... $ 6,000,000 $ 1,500,000
Capital Leases............................................... 1,153,452 1,067,125
Other........................................................ 4,000 37,106
--------------- -------------
Total........................................................ 7,157,452 2,604,231
Less current portion......................................... 6,634,784 1,911,498
--------------- -------------
Long Term debt............................................... $ 522,668 $ 692,733
--------------- -------------
--------------- -------------
</TABLE>
BANK LINE OF CREDIT--The Company has a $7,000,000 bank line of credit at the
bank's prime interest rate plus 0.75% which matures on May 15, 1999. The Company
expects to pay the balance of this line of credit from the new credit facility
with Wells Fargo Bank, N.A. as a result of the anticipated merger with Zuellig
Group N.A., Inc. ("Zuellig"). As of January 31, 1999, the Company was not in
compliance with the financial covenants for the line of credit. The Company has
obtained a waiver from the bank through January 31, 1999.
4. EARNINGS (LOSS) PER SHARE
The Company calculates basic earnings (loss) per share by dividing the net
earnings or loss by the weighted average number of shares of common stock
outstanding. Diluted earnings (loss) per share is determined by dividing the net
earnings or loss by the sum of (1) the weighted average number of common
E-5
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JANUARY 31, 1999 AND APRIL 30, 1998 AND
FOR THE THREE AND NINE MONTH PERIODS ENDED
JANUARY 31, 1999 AND 1998
(UNAUDITED)
4. EARNINGS (LOSS) PER SHARE (CONTINUED)
shares outstanding and (2) if not antidilutive, the effect of outstanding
warrants and stock options determined utilizing the treasury stock method. For
the three months ended January 31, 1999, and 1998, 471 and 569,316 options were
excluded from the calculation of diluted earnings (loss) per share since the
result would have been antidilutive. For the nine months ended January 31, 1999,
and 1998, 6,010 and 592,991 options were excluded from the calculation of
diluted earnings (loss) per share since the result would have been antidilutive.
5. 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 nine months ended
January 31, 1999, the Company charged $1,500,000 against the reserve for
expenses associated with this issue.
6. 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 $(26,259,782) and ($647,363) for the
quarters ended January 31, 1999, and 1998, respectively, and ($27,252,695) and
($1,648,976) for the nine months ended January 31, 1999, and 1998, 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. Management has
not determined what segments, if any, will be reported in connection with the
adoption of SFAS 131.
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.
E-6
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JANUARY 31, 1999 AND APRIL 30, 1998 AND
FOR THE THREE AND NINE MONTH PERIODS ENDED
JANUARY 31, 1999 AND 1998
(UNAUDITED)
7. MERGER
On December 9, 1998, the Company announced that it had entered into an
agreement to merge with three subsidiaries (the "Contributed Subsidiaries") of
Zuellig. The agreement calls for the Company to exchange approximately 10.05
million common shares of stock for the Contributed Subsidiaries. The Contributed
Subsidiaries are already aligned with the Company's Natural Ingredients and
Technical Services business units, but are unrelated to the Company's
Pharmaceuticals business unit. Therefore, as a direct result of the decision to
acquire these subsidiaries, the Company has decided to discontinue its
paclitaxel supply activities. The Company's original intent was to resume
production of paclitaxel once current legal and regulatory issues were resolved.
In the quarter ended January 31, 1999, the Company incurred a one-time
charge to earnings of $25.6 million. The charge to cost of sales was comprised
of a reduction of bulk paclitaxel inventory ($10.2 million) to its estimated net
realizable value, a write-off of advanced payments made for the purchase of
cultivated yew trees ($4.5 million) and the estimated costs of terminating
cultivar nursery contracts ($5.0 million). The charge to operating expenses
includes the write-off of paclitaxel related equipment ($4.7 million) and
miscellaneous other related assets consisting primarily of intangibles ($1.2
million). The net realizable inventory was determined based upon a contract
signed on February 11, 1999, to sell bulk paclitaxel over the next nine months
for a sales value of $9.5 million. The cost to terminate the cultivar nursery
contracts was based on the current contractual terms. The specialized paclitaxel
equipment and related intangibles have no alternative use and were written down
to zero. The Company does not anticipate any significant reduction in workforce
as a result of the decision to cease production of paclitaxel. The Company
should complete its exit of the paclitaxel business within the next twelve
months.
E-7
<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 nine months ended January
31, 1999, increased 27% over the same period in fiscal year 1998. 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"). The transaction is currently valued at approximately $49 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 10.05 million
of the Company's common shares for the common stock of the acquired
subsidiaries. Upon closing, the Company's shareholders will own 51.0% of the
combined company, while ZGNA will own 49.0%. The number of shares to be issued
to ZGNA are subject to downward adjustment under certain circumstances. The
Company also will assume approximately $20.6 million of the Contributed
Subsidiaries' bank debt. Wells Fargo Bank, N.A. will provide a $35.0 million
line of credit and a $10.0 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.
As a result of the merger, the Company has decided to discontinue its
paclitaxel activities. In the quarter ended January 31, 1999, the Company
incurred a one-time charge to earnings of $25.6 million. The charge to cost of
sales was comprised of a reduction of bulk paclitaxel inventory ($10.2 million)
to its estimated net realizable value, a write-off of advanced payments made for
the purchase of cultivated yew trees ($4.5 million) and the estimated costs of
terminating cultivar nursery contracts ($5.0 million). The charge to operating
expenses includes the write-off of paclitaxel related equipment ($4.7 million)
and miscellaneous other related assets consisting primarily of intangibles ($1.2
million). The net realizable inventory was determined based upon a contract
signed on February 11, 1999 to sell substantially all of its paclitaxel
inventory over the next six to nine months for a sales value of $9.5 million.
The cost to terminate the cultivar nursery contracts was based on the current
contractual terms. The specialized paclitaxel equipment and related intangibles
have no alternative use and were written down to zero. The Company does not
anticipate any significant reduction in workforce as a result of the decision to
cease production of paclitaxel. The Company should complete its exit of the
paclitaxel business within the next twelve months.
The Company's contract for the sale of its paclitaxel inventory may be
affected by the actions of third parties. Bristol Myers-Squibb ("Bristol") has
obtained certain use patents which have essentially barred the sale in the
United States of paclitaxel products which are not sold by Bristol. The validity
of these patents is currently in litigation. If the Company's contract for the
sale of its paclitaxel inventory draws the Company into litigation with Bristol
or others, the Company's performance under the contract may be delayed or
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<PAGE>
enjoined. If Bristol or others are successful, the Company would not be able to
sell the paclitaxel inventory in the United States. This event could materially
and adversely affect the Company's ability to liquidate these assets.
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.
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 January 31, 1999, all costs associated with
this reserve have been incurred and were adequate to cover substantially all
cost related to this situation.
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 11% of total revenues in the nine months ended January 31, 1999. Management
expects the level of sales to PharmaPrint to decline during fiscal 1999 because
of fewer sales of herbal products and technical services as well as growth in
sales to other customers.
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
F-2
<PAGE>
1997, and delivered contractual quantities through the second quarter of fiscal
1998. Sales to D&F comprised 9% of total revenues in the nine-month period ended
January 31, 1998.
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 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 FOOD INGREDIENTS--The Company manufactures, markets and sells
natural food ingredients which include natural flavor extracts and antioxidants.
The extracts are marketed under the Company's brand name NATURENHANCE-REGISTERED
TRADEMARK- Food Ingredients. 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.
The Company also sells products which 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 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 have increased 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 nine months ended January 31, 1999, these revenues increased 27% over
the nine month period ended January 31, 1998. 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.
Also, 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.
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
F-3
<PAGE>
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 will discontinue its paclitaxel supply activities. In the quarter
ended January 31, 1999, the Company incurred a one-time charge to earnings of
$25.6 million. The charge to cost of sales was comprised of a reduction of bulk
paclitaxel inventory ($10.2 million) to its estimated net realizable value, a
write-off of advanced payments made for the purchase of cultivated yew trees
($4.5 million) and the estimated costs of terminating cultivar nursery contracts
($5.0 million). The charge to operating expenses includes the write-off of
paclitaxel related equipment ($4.7 million) and miscellaneous other related
assets consisting primarily of intangibles ($1.2 million). The net realizable
inventory was determined based upon a contract signed on February 11, 1999 to
sell bulk paclitaxel over the next nine months for a sales value of $9.5
million. The cost to terminate the cultivar nursery contracts was based on the
current contractual terms. The specialized paclitaxel equipment and related
intangibles have no alternative use and were written down to zero. The Company
does not anticipate any significant reduction in workforce as a result of the
decision to cease production of paclitaxel. The Company should complete its exit
of the paclitaxel business within the next twelve months.
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.
F-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
YEAR ENDED APRIL 30, 30,
- ------------------------------- -------------------
1998 1997 1996 1998 1997
- ------- ------- ------- ------- -------
<C> <C> <C> <S> <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
F-5
<PAGE>
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.
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 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
that 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 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
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<PAGE>
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.
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
had a revolving line of credit totaling $8,850,000 which expired 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
F-7
<PAGE>
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 Company's
current line of credit requires that a restricted cash balance be maintained
equal to one year's debt service of the outstanding line. This account can only
be used to reduce the line of credit or pay interest. The restricted cash will
be released upon the consummation of the merger and the refinancing of the
Company's existing line of credit pursuant to the refinancing commitment secured
from Wells Fargo.
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 $45.0 million to be guaranteed by each of its subsidiaries: a
revolving line of credit up to $35.0 million for general working capital
purposes maturing two years after the loan closing, and a $10.0 million
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.
The Company was not in compliance with the financial covenants associated
with its line of credit as of April 30, 1998, July 31, 1998, October 31, 1998
and January 31, 1999. The Company has obtained waivers from the bank. Management
believes that the financial covenants will not be met as of April 30, 1999 and
is planning on obtaining a waiver from the bank. However, the Company believes
that the covenants associated with the new credit facility with Wells Fargo Bank
N.A. will be met based on the forecasted operating results once the anticipated
merger is completed.
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 million and have been
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.
The Company expects capital expenditures to be approximately $3.0 million 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
$10.0 million non-revolving term commitment described above.
F-8
<PAGE>
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. In assessing the $2,956,493 considered realizable, management has
considered the following factors: (1) taxable income projected within the next
twenty-four months; (2) the expiration dates of its net operating loss and tax
credit carryovers; (3) tax planning strategies which would allow Hauser to
generate significant taxable income from existing assets (including possible
sale-lease back scenarios for its land, property and equipment held fee simple);
and (4) alternative strategies for its paclitaxel business. 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 NINE MONTHS ENDED JANUARY 31,
1999 AND 1998:
Below is a table that summarizes the Company's results of operations,
including the one-time charge of $25.6 million taken in the quarter ended
January 31, 1999, as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED
JANUARY 31, JANUARY 31,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................... 100.0% 100.0% 100.0% 100.0%
Gross profit...................................... (190.7)% 21.6% (50.1)% 20.5%
Research & development............................ 3.4% 7.5% 4.4% 8.6%
Sales and marketing............................... 6.7% 7.9% 8.2% 7.9%
General and administrative........................ 16.7% 21.3% 18.7% 21.1%
Write-off of paclitaxel and other related assets.. 63.5% -- 22.7% --
Loss from operations.............................. (281.1)% (15.1)% (104.1)% (17.1)%
Other income (expense), net....................... (1.7)% 1.1% (1.0)% 3.0%
Loss from operations before taxes................. (282.8)% (14.0)% (105.1)% (14.0)%
Net loss.......................................... (282.8)% (9.1)% (105.1)% (9.1)%
</TABLE>
F-9
<PAGE>
Below is a table that summarizes the Company's results of operations,
excluding the one-time charge of $25.6 million taken in the quarter ended
January 31, 1999, as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED
JANUARY 31, JANUARY 31,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................... 100.0% 100.0% 100.0% 100.0%
Gross profit...................................... 21.4% 21.6% 25.8% 20.5%
Research & development............................ 3.4% 7.5% 4.4% 8.6%
Sales and marketing............................... 6.7% 7.9% 8.2% 7.9%
General and administrative........................ 16.7% 21.3% 18.7% 21.1%
Loss from operations.............................. (5.4)% (15.1)% (5.4)% (17.1)%
Other income (expense), net....................... (1.7)% 1.1% (1.0)% 3.0%
Loss from operations before taxes................. (7.1)% (14.0)% (6.4)% (14.0)%
Net loss.......................................... (7.1)% (9.1)% (6.4)% (9.1)%
</TABLE>
REVENUES. A breakout of the Company's revenues by product and service is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY NINE MONTHS ENDED JANUARY
31, 31,
-------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Natural ingredients products (includes nutraceuticals,
natural flavor extracts and food ingredients)........ $ 3,915,688 $ 2,184,845 $ 10,257,581 $ 7,512,678
Technical services (includes Hauser Laboratories and
Shuster Laboratories, Inc.).......................... 4,471,668 4,283,919 12,784,147 10,062,162
Pharmaceuticals........................................ 897,770 649,405 2,893,845 3,187,276
------------ ------------ ------------- -------------
$ 9,285,126 $ 7,118,169 $ 25,935,573 $ 20,762,116
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
Total revenues increased 30% to $9,285,126 in the third quarter of fiscal
1999, from $7,118,169 in the third quarter of fiscal 1998, the result of higher
revenues in each of the Company's business units. For the nine months ended
January 31, 1999, total revenues increased 25% 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 79% and 36% in the three and
nine months ended January 31, 1999, 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 January 31, 1999, nutraceuticals revenues were
$3,503,741, an increase of $1,487,263, or 74%, over revenues of $2,016,478 in
the same quarter last year. In the nine months ended January 31, 1999,
nutraceuticals revenues were $9,266,356, an increase of 36% over revenues of
$6,814,235 in same period last year.
Sales of natural food ingredients were $411,947 in the quarter ended January
31, 1999, an increase of 145% over revenues of $168,367 in the quarter ended
January 31, 1998. For the nine months ended January 31, 1999, revenues from
these products were $991,225, a 42% increase over revenues of $698,443 in the
nine months ended January 31, 1998. These increases were the result of higher
sales of rosemary extract products sold into the beverage industry.
F-10
<PAGE>
TECHNICAL SERVICES:
Technical Services revenues were $4,471,668 in the quarter ended January 31,
1999, compared to $4,283,919 in the quarter ended January 31, 1998, an increase
of 4%. This slowdown in growth is the result of manpower limitations that
management is addressing through aggressive recruiting activities. Management
does not believe that this situation will have material negative effects on
future operations. In the nine months ended January 31, 1999, Technical Services
revenues were $12,784,147, a 27% increase over revenues of $10,062,162 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 January 31, 1999,
increased 38% to $897,770, compared to $649,405 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
January 31, 1999, these high-margin revenues were $291,000. For the nine months
ended January 31, 1999, revenues declined 9% from the same period one year ago
because of lower sales of paclitaxel.
GROSS PROFIT. Total gross profit in the three and nine months ended January
31, 1999, includes a one-time charge of $19.7 million for the write-down of
paclitaxel related inventory to its estimated net realizable value, a write-down
of advance payments made for the purchase of cultivated yew trees, and estimated
costs for terminating yew tree cultivar contracts. This is part of the total
charge taken in the third quarter of fiscal 1999 of $25.6 million to reflect the
Company's decision to exit the paclitaxel business.
Excluding the one-time charge, gross profit for the Company was 21.4% and
21.6% of total revenues in the quarters ended January 31, 1999, and 1998,
respectively, and 25.8% and 20.5% of total revenues in the nine month periods
ended January 31, 1999, and 1998, respectively. The increases are the result of
improved efficiencies in the manufacturing process. In the three and nine month
periods ended January 31, 1999, gross profit for the natural products industry
segment was 18.0% and 24.4% of total natural product revenues, respectively. In
the three and nine month periods ended January 31, 1998, gross profit for the
natural products industry segment was 2.6% and 8.6% of total natural product
revenues, respectively. The Company's gross margin percentage has increased in
the three and nine month periods ended January 31, 1999 because of increased
volume resulting in manufacturing efficiencies, better absorption of fixed costs
and lower per unit costs. In the third quarter of fiscal 1999, the Company did
experience higher manufacturing costs related to lack of high quality biomass,
which negatively impacted gross margins from nutraceutical products. The quality
of biomass will always be important to margins because better quality material
will positively impact yield outputs. Management has implemented research
programs to identify methodologies to improve biomass quality. Future results
could be negatively impacted by the quality of biomass, although it is not
possible to predict the exact amount.
Gross profit for technical services in the three months and nine months
ended January 31, 1999, was 25.1% and 27.4%, respectively, as compared to 30.8%
and 28.3% in the three and nine months ended January 31, 1998, respectively.
These changes are the result of a change in the mix of technical service
projects, which can alter gross profit quarter-to-quarter.
OPERATING EXPENSES. Research and development expenses were $318,581 in the
quarter ended January 31, 1999, compared to $536,128 in the quarter ended
January 31, 1998, a decrease of almost 41%. Research and development expenses in
the nine months ended January 31, 1999, were $1,136,479, a decrease of 37%
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
F-11
<PAGE>
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 January 31, 1999, were
$624,314, an increase of $62,619, or 11% over the same three-month period last
year. Sales and marketing expenses in the nine months ended January 31, 1999,
were $2,120,511, an increase of $487,110, or 30% over the same nine-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 $1,546,238 in the third quarter of
fiscal 1999, a 2% increase compared to general and administrative expenses in
the same quarter of fiscal 1998. For the nine months ended January 31, 1999,
general and administrative costs were $4,848,124, an 11% increase over the same
period last year. These increases are the result of staff additions and
additional depreciation expense on certain new leasehold improvements.
In the three and nine months ended January 31, 1999, the Company recognized
a charge to operating expenses of $5.9 million as part of the total write-down
taken in the third quarter of fiscal 1999 of $25.6 million to reflect the
Company's decision to exit the paclitaxel business. This operating expense
charge includes the write-down of paclitaxel related equipment and intangibles.
INTEREST INCOME/EXPENSE. Interest income was $29,713 and $79,521 in the
three and nine months ended January 31, 1999, respectively, compared to $81,363
and $281,240 in the three and nine months ended January 31, 1998, respectively.
The decrease is the result of less capital available for investment. Interest
expense in the three and nine-month periods ended January 31, 1999, was $190,653
and $370,131, respectively, compared to $3,380 and $10,043 in the three and
nine-month periods ended January 31, 1998, respectively. The increases reflect
the Company's use of its line of credit during fiscal 1999.
OTHER INCOME. Other income was $42,037 and $361,461 for the nine months
ended January 31, 1999, and 1998, 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 has not benefited its net loss for the three and
nine months ended January 31, 1999, because of uncertainty regarding its
realization. The Company has a net deferred income tax asset of $2,959,306 as of
January 31, 1999. The deferred tax assets are recorded net of a valuation
allowance of approximately $11 million as of January 31, 1999. In assessing the
amount of its net deferred tax assets considered realizable, management has
considered the following factors: (1) taxable income projected within the next
twenty-four months; (2) the expiration dates of its net operating loss and tax
credit carryovers; (3) tax planning strategies which would allow Hauser to
generate significant taxable income from existing assets (including possible
sale-lease back scenarios for its land, property and equipment held fee simple);
and (4) its planned exit from the paclitaxel business. 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
F-12
<PAGE>
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 unrestricted cash and cash equivalents were $4,124,954 at
January 31, 1999, compared to $2,081,796 at April 30, 1998. The increase is
primarily the result of increased borrowings against the bank line of credit and
a deposit related to the sale of inventory, offset by purchases of raw material
inventory and the acquisition of capital equipment.
The Company has a revolving line of credit totaling $7.0 million which
expires on May 15, 1999. As of January 31, 1999, the Company had borrowed $6.0
million under this line and $731,084 had been applied against letters of credit
for the purchase of raw materials. The Company expects to pay the balance of
this line of credit from the new credit facility with Wells Fargo Bank, N.A. as
a result of the anticipated merger with Zuellig. 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 January 31, 1999, $350,861 was available for use under
this line. The Company's current line of credit requires that a restricted cash
balance be maintained equal to one year's debt service of the outstanding line.
This account can only be used to reduce the line of credit or pay interest. The
restricted cash will be released upon the consummation of the merger and the
refinancing of the Company's existing line of credit pursuant to the refinancing
commitment secured from Wells Fargo. 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 $45.0 million to be guaranteed by each of its subsidiaries: a
revolving line of credit up to $35.0 million for general working capital
purposes maturing two years after the loan closing, and a $10.0 million
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.
The Company was not in compliance with the financial covenants associated
with its line of credit as of April 30, 1998, July 31, 1998, October 31, 1998
and January 31, 1999. The Company has obtained waivers from the bank. Management
believes that the financial covenants will not be met as of April 30, 1999 and
is planning on obtaining a waiver from the bank. However, the Company believes
that the covenants associated with the new credit facility with Wells Fargo Bank
N.A. will be met based on the forecasted operating results once the anticipated
merger is completed.
In the process of exiting the paclitaxel business, management intends to
negotiate early settlements with its growers of cultivated yew trees. An
estimate of these settlement costs has been included in the one-time charge to
earnings noted before, but the exact amount is uncertain at this time. The cost
to terminate these contracts is expected to be funded from the sale of
paclitaxel assets.
In connection with the Merger, Hauser executed an inventory purchase
agreement with Zuellig which is intended to provide interim financing for
Hauser. Included in Deposits as of January 31, 1999, is $3 million received
pursuant to this agreement. The purchase price for the inventory is the lower of
cost or market. At any time, Hauser may require Zuellig to resell to Hauser all
or any portion of the inventory
F-13
<PAGE>
purchased by Zuellig at the same price at which Zuellig purchased the inventory
and require Zuellig to purchase substantially similar raw material and finished
product having a value substantially equivalent to the repurchased inventory.
Hauser will recognize revenue from the transaction upon the sale of the
inventory to an unrelated party.
WORKING CAPITAL. Working capital as of January 31, 1999, was $12,922,743
compared to $16,671,596 as of April 30, 1998. This decrease is primarily
attributable to drawn funds that were used to fund operating losses and purchase
capital assets and to the estimated costs accrued to exit the paclitaxel
business.
PROPERTY AND EQUIPMENT. Purchases of property and equipment in the first
nine months of fiscal 1999, totaled $1,521,531. 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 $482,627 during the nine months ended January 31, 1999,
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 $10.0 million non-revolving term commitment described
above.
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 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. For the nine months ended January 31, 1999, the
Company had expensed a total of $152,000 directly related to Year 2000
remediation efforts.
As another part of 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 an
additional $50,000. The review of other software applications is underway at
this time.
F-14
<PAGE>
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.
SEASONALITY. The Company has experienced seasonality in its sales of
nutraceutical products. Lower demand for these products is evident in the summer
months and tends to increase in the fall and winter months.
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.
F-15
<PAGE>
APPENDIX G
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....................................................................... G-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.......................................................................... G-2
Combined Statements of Income.................................................................... G-3
Combined Statements of Stockholders' Equity...................................................... G-4
Combined Statements of Cash Flows................................................................ G-5
Notes to the Combined Financial Statements....................................................... G-6 - G-12
</TABLE>
i
<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
G-1
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
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.
G-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.
G-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 RETAINED DIVISIONAL TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY STOCK TOTAL
----------- ----------- ------- ------- ----------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1995... 10 $ 2,000,000 1,060 $1,060 $1,003,400 $ (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................... 10 2,000,000 1,060 1,060 1,003,400 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................... 10 2,000,000 1,060 1,060 1,003,400 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................... 10 $ 2,000,000 1,060 $1,060 $1,003,400 $ 6,079,223 $ 1,962,385 $ (400,000) $ 10,646,068
--
--
----------- ------- ------- ----------- ------------ ------------ ---------- -------------
----------- ------- ------- ----------- ------------ ------------ ---------- -------------
</TABLE>
See accompanying notes to the combined financial statements.
G-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.
G-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.
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
G-6
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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%).
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.
G-7
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
3. BANK BORROWINGS (CONTINUED)
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.
G-8
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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>
G-9
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
6. INCOME TAXES (CONTINUED)
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.
G-10
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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.
G-11
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC.
AND AFFILIATED COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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.
******
G-12
<PAGE>
APPENDIX H
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, MARCH 31,
1999 1998
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................................................................. $ 11,886 $ 1,866,735
Receivables:
Customers, less allowance for doubtful accounts of $478,369 at January 31,
1999; $215,410 at March 31, 1998............................................. 12,467,633 14,668,147
Other receivables.............................................................. 151,003 113,755
Inventories...................................................................... 26,334,737 13,071,303
Prepaid expenses and other current assets........................................ 2,965,277 1,325,241
Deferred income taxes............................................................ 440,543 440,543
Due from affiliates.............................................................. -- 1,528,868
------------- -------------
Total current assets......................................................... 42,371,079 33,014,592
------------- -------------
PROPERTY
Land............................................................................. 312,101 312,101
Machinery and equipment.......................................................... 1,015,096 950,610
Furniture and fixtures........................................................... 337,526 337,526
Vehicles......................................................................... 277,058 289,583
Leasehold improvements........................................................... 132,529 132,529
Construction in progress......................................................... 14,947 39,136
------------- -------------
2,089,257 2,061,485
Accumulated depreciation and amortization........................................ (1,570,653) (1,434,545)
------------- -------------
Property, net................................................................ 518,604 626,940
------------- -------------
OTHER ASSETS....................................................................... 230,483 275,468
------------- -------------
TOTAL.............................................................................. $ 43,120,166 $ 33,917,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings....................................................... $ 20,633,583 $ 10,305,683
Accounts payable................................................................. 7,895,173 8,244,654
Accrued liabilities.............................................................. 1,363,468 3,228,115
Due to affiliates................................................................ 1,222,111 1,492,480
------------- -------------
Total current liabilities.................................................... 31,114,335 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................................................................ 9,401,271 6,079,223
Divisional equity................................................................ -- 1,962,385
Less treasury stock.............................................................. (400,000) (400,000)
------------- -------------
Total stockholders' equity................................................... 12,005,831 10,646,068
------------- -------------
TOTAL.............................................................................. $ 43,120,166 $ 33,917,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to the condensed combined financial statements.
H-1
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED STATEMENTS OF INCOME--UNAUDITED
<TABLE>
<CAPTION>
TEN MONTHS ENDED
JANUARY 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
NET SALES TO THIRD PARTIES......................................................... $ 62,558,512 $ 76,907,355
NET SALES TO AFFILIATES............................................................ 9,323,067 5,156,613
------------- -------------
NET SALES.......................................................................... 71,881,579 82,063,968
COST OF SALES...................................................................... 61,587,642 68,178,332
------------- -------------
GROSS PROFIT....................................................................... 10,293,937 13,885,636
COMMISSION AND OTHER INCOME........................................................ 397,784 177,415
------------- -------------
10,691,721 14,063,051
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 6,361,221 7,317,222
MANAGEMENT FEE EXPENSE............................................................. 870,176 832,716
INTEREST EXPENSE................................................................... 1,122,798 987,838
------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................................... 2,337,526 4,925,275
PROVISION FOR INCOME TAXES......................................................... 977,863 2,027,926
------------- -------------
NET INCOME......................................................................... $ 1,359,663 $ 2,897,349
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to the condensed combined financial statements.
H-2
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- --------------- PAID-IN RETAINED DIVISIONAL TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY STOCK TOTAL
----------- ----------- ------- ------- ----------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1998... 10 $ 2,000,000 1,060 $1,060 $1,003,400 $ 6,079,223 $ 1,962,385 $ (400,000) $ 10,646,068
Net income............... 1,359,663 1,359,663
Reclassification of
divisional equity...... 1,962,385 (1,962,385) --
Issuance of common
stock.................. 1 1 99 100
--
----------- ------- ------- ----------- ------------ ------------ ---------- -------------
BALANCE, JANUARY 31,
1999................... 10 $ 2,000,000 1,061 $1,061 $1,003,499 $ 9,401,271 $ -- $ (400,000) $ 12,005,831
--
--
----------- ------- ------- ----------- ------------ ------------ ---------- -------------
----------- ------- ------- ----------- ------------ ------------ ---------- -------------
</TABLE>
See accompanying notes to the condensed combined financial statements.
H-3
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS--UNAUDITED
<TABLE>
<CAPTION>
TEN MONTHS ENDED
JANUARY 31,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 1,359,663 $ 2,897,349
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization.................................................. 175,058 202,424
Gain on sale of property....................................................... (2,355) (5,000)
Changes in operating assets and liabilities:
Receivables.................................................................. 2,200,514 (6,980,944)
Inventories.................................................................. (13,263,434) (1,742,550)
Prepaid expenses and other assets............................................ (1,677,284) (1,961,197)
Deposits on cultivation projects............................................. 31,460 (100,345)
Accounts payable............................................................. (349,481) 8,603,294
Accrued liabilities.......................................................... (1,864,647) 596,944
Due to/from affiliates....................................................... 1,258,599 5,744,093
-------------- -------------
Net cash (used in) provided by operating activities........................ (12,131,907) 7,254,068
-------------- -------------
INVESTING ACTIVITIES:
Decrease in other assets......................................................... 13,525 10,000
Purchase of property............................................................. (70,247) (180,213)
Proceeds from sale of property................................................... 5,880 8,000
-------------- -------------
Net cash used in investing activities...................................... (50,842) (162,213)
-------------- -------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line-of-credit agreements...................... 10,327,900 (6,679,300)
Principal payments on long term debt............................................. -- (41,250)
-------------- -------------
Net cash provided by (used in) financing activities........................ 10,327,900 (6,720,550)
-------------- -------------
NET CHANGE IN CASH................................................................. (1,854,849) 371,305
CASH, BEGINNING OF PERIOD.......................................................... 1,866,735 838,754
-------------- -------------
CASH, END OF PERIOD................................................................ $ 11,886 $ 1,210,059
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to the condensed combined financial statements.
H-4
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1999 AND MARCH 31, 1998
AND FOR THE TEN MONTHS ENDED JANUARY 31, 1999 AND 1998
(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
January 31, 1999, and results of their operations and their cash flows for the
periods ended January 31, 1999 and 1998.
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.
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>
JANUARY 31, MARCH 31,
1999 1998
------------- -------------
<S> <C> <C>
Raw materials.................................................. $ 7,690,250 $ 3,819,730
Finished goods................................................. 18,644,487 9,251,573
------------- -------------
Total.......................................................... $ 26,334,737 $ 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 under which they may borrow up to
H-5
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JANUARY 31, 1999 AND MARCH 31, 1998
AND FOR THE TEN MONTHS ENDED JANUARY 31, 1999 AND 1998
(UNAUDITED)
3. BANK BORROWINGS (CONTINUED)
$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
was 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%). The amount outstanding under the Companies' 1998 Credit Agreements was
$10,305,683 at March 31, 1998.
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 under
which 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% (rates at January 31, 1999 range from
6.51% to 7.0%). The amount outstanding under the Companies' 1999 Credit
Agreements was $20,633,583 at January 31, 1999. The aggregate amount outstanding
under the 1999 Credit Agreements for ZGNA and its subsidiaries was $38,859,315
at January 31, 1999. 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.
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.
The Companies sold products to ZBI totaling $9,323,067 and $5,156,613 during
the ten months ended January 31, 1999 and 1998, respectively. Historically,
products were sold to ZBI at margins comparable to margins generated from sales
to third parties. During 1999, it was contemplated that Wilcox would merge into
ZBI, and accordingly, all sales to ZBI during the ten months ended January 31,
1999 were made at cost.
Management fees are charged based on a net funds employed formula, derived
from key balance sheet accounts. The Companies incurred management fee expense
with affiliates of $870,176 and $832,716 during the ten months ended January 31,
1999 and 1998, respectively.
5. PROPOSED MERGER
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
H-6
<PAGE>
ZUELLIG BOTANICAL EXTRACTS, INC. AND AFFILIATED COMPANIES
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JANUARY 31, 1999 AND MARCH 31, 1998
AND FOR THE TEN MONTHS ENDED JANUARY 31, 1999 AND 1998
(UNAUDITED)
5. PROPOSED MERGER (CONTINUED)
outstanding common stock. The agreement is subject to approval by Hauser's
shareholders and customary closing conditions.
6. CONCENTRATION
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 18% and 34% for the ten
months ended January 31, 1999 and 1998, 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.
H-7
<PAGE>
-Please Detach and Mail in the Envelope Provided-
- --------------------------------------------------------------------------------
HAUSER, INC.
SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON JUNE 11, 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 the offices of Chrisman, Bynum & Johnson, P.C., 1900 15th
Street, Boulder, Colorado, 80302 at 10:00 a.m. Mountain TIme, on June 11, 1999
and at any and all adjournments thereof, for the following purposes:
(CONTINUED, AND TO BE DATED AND SIGNED ON OTHER SIDE)
<PAGE>
-Please Detach and Mail in the Envelope Provided-
- --------------------------------------------------------------------------------
/ X / PLEASE MARK YOUR
VOTES AS INDICATED
IN THIS EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE NOMINEES AND EACH
OF THE PROPOSALS LISTED BELOW.
FOR AGAINST ABSTAIN
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 a resolution authorizing the Board of / / / / / /
Directors of Hauser, in their discretion, to effect
a reverse stock split of the outstanding shares of
Common Stock, if the Merger is approved and if
necessary for NASDAQ National Market listing, whereby
Hauser would issue (1) new share of Common Stock in
exchange for between two (2) and five (5) shares of
presently outstanding Common Stock.
3. To transact such other business as may properly come / / / / / /
before the meeting, or any adjournment thereof.
The undersigned herby 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.
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.
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.
