EXHIBIT 2.2
EARNOUT AGREEMENT
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This Earnout Agreement ("Agreement") is entered into this 17th day of
November, 1999, by and between Pailla M. Reddy ("Reddy") and Nutrition For Life
International, Inc. ("NFLI"). Reddy and NFLI are collectively referred to as
the "parties".
RECITALS
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A. On November 5, 1999, NFLI, Advanced Nutraceuticals, Inc., BPI
Acquisition Company, Bactolac Pharmaceutical Inc. ("BPI") and Reddy entered into
an Agreement and Plan of Merger (the "Merger Agreement").
B. A condition to the closing of the merger transaction contemplated by
the Merger Agreement (the "Closing") is the execution and delivery of this
Agreement.
C. Reddy is the sole shareholder of BPI. As provided in the Merger
Agreement, Reddy, as the sole shareholder of BPI, shall receive for the
conversion of his shares of BPI, $2,500,000 in cash, a $2,500,000 subordinated
note, stock in NFLI valued at $2,750,000 and up to $500,000 in NFLI stock as an
earnout payment, the determination and payment of which shall be in accordance
with the terms and conditions of this Agreement.
STATEMENT OF AGREEMENT
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NOW THEREFORE, in consideration of the premises and of the respective
covenants and provisions herein contained, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
EARNOUT PAYMENT
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1.1 Nature of Earnout Payment.
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(a) NFLI shall reserve for issuance as an earnout payment to Reddy up
to 17,605.6 shares of NFLI's $.001 par value Series A Preferred Stock (the
"Convertible Preferred Stock") and 176,056 shares of NFLI's $.01 par value
common stock (the "Common Stock"). The 17,605.6 shares of Convertible
Preferred Stock are automatically convertible into 176,056 shares of the
Common Stock pursuant to the terms of the Statement of Designation for the
Series A Preferred Stock. The value of the 176,056 shares of Common Stock
is $500,000. The maximum of 176,056 shares of Common Stock which may be
received by Reddy as an earnout payment pursuant to this Agreement has been
determined by dividing $500,000 by the average of the closing prices per
share
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of the Common Stock on The Nasdaq Stock Market for the five trading days
preceding the trading day immediately preceding the Closing.
(b) For purposes of this Agreement, it is assumed that the NFLI
shareholders will approve the conversion of Series A Preferred Stock to
Common Stock prior to the time that Reddy would be entitled to receive his
earnout payment(s) pursuant to this Agreement. Accordingly, it is provided
in this Agreement that shares of Common Stock will be issued to Reddy. In
the event that the shareholders have not approved the conversion of Series
A Preferred Stock to Common Stock prior to the time that Reddy would be
entitled to receive his earnout payment(s), then NFLI shall issue
Convertible Preferred Stock instead of Common Stock to Reddy. In that
event, Reddy shall receive one share of Convertible Preferred Stock for
every ten shares of Common Stock that he would have received pursuant to
this Agreement if the shareholders had approved the conversion.
(c) Reddy shall receive from NFLI 352 shares of Common Stock for each
$1,000 in Pre-Tax Income in Year One which is in excess of $1,500,000.
However, in no event, will Reddy be entitled to receive more than 88,000
shares of Common Stock as an earnout payment based on Year One results.
(d) Reddy shall receive from NFLI 352 shares of Common Stock for each
$1,000 in Pre-Tax Income in Year Two in excess of $1,600,000. In addition,
if Year One income exceeded $1,750,000, then the difference between Pre-Tax
Income for Year One and $1,750,000, will be applied for purposes of
calculating Pre-Tax Income for Year Two.
(e) Reddy shall receive from NFLI 352 shares of Common Stock for each
$1,000 in Pre-Tax Income in Year Three in excess of $1,700,000. In
addition, if Year Two income exceeded $1,850,000, then the difference
between Pre-Tax Income for Year Two and $1,850,000, will be applied for
purposes of calculating Pre-Tax Income for Year Three.
(f) Notwithstanding anything herein to the contrary, the maximum
number of shares of Common Stock which may be issued as an earnout payment
pursuant to this Agreement to Reddy shall be 176,056.
1.2 Period for Payment. For purposes of calculation of the earnout
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payment, Year One will begin on December 1, 1999 and end on November 30, 2000,
Year Two will begin on December 1, 2000 and end on November 30, 2001 and Year
Three will begin on December 1, 2001 and end on December 30, 2002.
1.3 Registration Obligation. Prior to the issuance of shares of Common
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Stock to Reddy as an earnout payment pursuant to this Agreement, the Company
shall prepare and file with the Securities and Exchange Commission (the "SEC") a
registration statement with respect to such Common Stock. The Company shall use
its
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best efforts to cause such registration statement to become effective, and, upon
the request of Reddy, keep such registration statement effective for a period of
up to one year. It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this registration obligation that Reddy
shall furnish to the Company such information regarding himself and the intended
method of disposition of the Common Stock as shall be required to effect the
registration for resale by Reddy of the Common Stock received by him pursuant to
this Agreement. NFLI shall be entitled to postpone for a reasonable period of
time (not to exceed 180 days) the filing of any registration statement if, in
the good faith judgment of NFLI's Board of Directors, such registration would
materially interfere with NFLI's own impending financing.
1.4 Withholding Taxes. NFLI or its affiliates may take such steps as they
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deem necessary or appropriate for the withholding of any taxes which they may be
required by law or regulation or any governmental authority, whether federal,
state or local, domestic or foreign, to withhold in connection with the earnout
payment, including, but not limited to, the withholding of all or any portion of
any payment owed by them to Reddy, or the withholding of the issuance of NFLI
stock to be issued in connection with the earnout payment.
ARTICLE II
COMPUTATION OF PRE-TAX INCOME
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2.1 Manner of Computation. For purposes of this Agreement, "Pre-Tax
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Income" of BPI for each of Year One, Year Two and Year Three shall mean BPI's
aggregate earnings net of losses from operations, calculated as if it were being
operated as a separate and independent corporation, after deduction of all
appropriate expenses, charges, and reserves, but before adjustment for federal,
state, and local income or franchise taxes. Pre-Tax Income shall be determined
in accordance with generally accepted accounting principles (GAAP") consistently
applied by NFLI after consultation with the firm of independent certified public
accountants engaged by NFLI for purposes of its own audit ("NFLI's
Accountants"); provided, however, that in determining such Pre-Tax Income:
(a) Pre-Tax Income shall be computed without regard to "extraordinary
items" of gain or loss as that term shall be defined in GAAP;
(b) Pre-Tax Income shall not include any gains, losses or profits
realized from the sale of any assets other than in the ordinary
course of business;
(c) No deduction shall be made for any management fees, general
overhead expenses or other intercompany charges, of whatever kind
or nature, charged by NFLI to BPI, except that NFLI may charge
interest on any loans or advances made by NFLI to BPI in
connection with its business operations at a rate of 9%;
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(d) No deduction shall be made for legal or accounting fees and
expenses arising out of this Agreement or the Merger Agreement;
(e) The purchase and sales prices of goods and services sold by BPI
to NFLI or its affiliates or purchased by BPI from NFLI or its
affiliates shall be adjusted to reflect the amounts that BPI
would have realized or paid if dealing with an independent party
in an arm's length commercial transaction; however, it is
understood that NFLI or its affiliates may offer special
arrangements to BPI. Any such arrangements which modify this
Agreement shall be in writing and signed by both NFLI and Reddy;
and
(f) Depreciation and amortization of assets acquired from BPI shall
be computed under the straight-line method, using the carrying
value of depreciable assets less applicable reserves, as shown on
the books and records of BPI, and the useful lives for such
assets, or categories thereof as though the merger of BPI and
NFLI had not been effected.
2.2 Time of Determination.
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(a) The Pre-Tax Income of the BPI shall be determined promptly after
filing of NFLI's Annual Report on Form 10-K for the close of Year
One, Year Two and Year Three by NFLI after consultation with
NFLI's Accountants. Copies of the reports setting forth the
computation of the Pre-Tax Income of BPI shall be submitted in
writing to Reddy and, unless Reddy notifies NFLI within 15
business days after receipt of the report that he objects to the
computation of Pre-Tax Income set forth therein, the reports
shall be binding and conclusive for the purposes of this
Agreement. Reddy shall have access to the books and records of
BPI and to NFLI's Accountant's workpapers (to the extent that
NFLI can facilitate such access) during regular business hours to
verify the computation of Pre-Tax Income made by NFLI.
(b) If Reddy notifies NFLI in writing within 15 business days after
receipt of NFLI's report that he objects to the computation of
Pre-Tax Income set forth therein, the amount of Pre-Tax Income
for the Year (or other period) for which such report relates
shall be determined by negotiation between Reddy and NFLI. If
Reddy and NFLI are unable to reach agreement within 20 business
days after such notification, the determination of the amount of
Pre-Tax Income for the period in question shall be submitted to a
mutually agreeable third party firm of independent certified
public accountants ("Special Accountants") for determination,
whose
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determination shall be binding and conclusive on the parties. If
the Special Accountants determine that the Pre-Tax Income has
been understated by 10% or more, then NFLI shall pay the Special
Accountants' fees, costs and expenses. If Pre-Tax Income has not
been understated or has been understated by less than 10%, then
Reddy shall pay the Special Accountants' fees, costs and
expenses.
ARTICLE III
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MISCELLANEOUS
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3.1 Benefit of Parties. All the terms and provisions of this
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Agreement shall be binding upon and inure to the benefit of the parties and
their respective permitted representatives, successors and assigns.
3.2 Entire Agreement. This Agreement contains the entire
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understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings between the parties with
respect thereto.
3.3 Counterparts. This Agreement may be executed simultaneously in
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two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
3.4 Cooperation. During the Term each party will cooperate with and
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assist the other party in taking such acts as may be appropriate to enable all
parties to effect compliance with the terms of this Agreement and to carry out
the true intent and purposes hereof.
3.5 Notices. All notices, elections, request, demands or other
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communications hereunder shall be in writing and shall be deemed given at the
time delivered personally or by fax or upon receipt if deposited in the United
States mail, certified or registered, return receipt requested, postage prepaid
addressed to the parties as follows (or to such other person or place, written
notice of which any party hereto shall have given to the other):
(a) If to Reddy: Pailla M. Reddy
----------- 51 Brooklyn
Westbury, NY 11590
Fax: 516-333-4714
With a Copy to: Anthony T. Scotto, Esq.
-------------- 401 Franklin Avenue
Garden City, NY 11530
Fax: 516-739-5451
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(b) If to NFLI: Nutrition For Life International, Inc.
---------- 9101 Jameel
Houston, TX 77040
Fax: 713-895-8927
Attention: Gregory Pusey, Chairman of the
Board of Directors
With a Copy to: Patton Boggs, LLP
-------------- 1660 Lincoln Street, Suite 1900
Denver, CO 80264
Fax: 303-894-9239
Attention: Robert M. Bearman, Esq.
3.6 Waiver of Compliance. The party for whose benefit a warranty,
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representation, covenant or condition is intended may in writing waive any
inaccuracies in the warranties, representations, covenants or conditions
contained in this Agreement or waive compliance with any of the foregoing and so
waive performance of any of the obligations of the other party hereto and any
defaults hereunder; provided however, that such waiver shall not affect or
impair the waiving party's rights in respect to any other warranty,
representation, covenant, condition or default hereunder.
3.7 Index and Captions The captions of the Articles and Sections of
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this Agreement are solely for convenient reference and shall not be deemed to
affect the meaning or interpretation of any Article or Section hereof.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed in multiple original counterparts as of the date set forth above.
______________________________________
Pailla M. Reddy
NUTRITION FOR LIFE INTERNATIONAL, INC.
By: __________________________________
Authorized Officer
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