<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1998
REGISTRATION NO. 333-52109
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NATROL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2833 95-3560780
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) No.)
</TABLE>
21411 PRAIRIE STREET
CHATSWORTH, CALIFORNIA 91311
(818) 739-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
ELLIOTT BALBERT
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
NATROL, INC.
21411 Prairie Street
Chatsworth, California 91311
(818) 739-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
JOHN R. LECLAIRE, P.C. JOHN A. BURGESS, ESQ.
ANDREW F. VILES, ESQ. VIRGINIA K. KAPNER, ESQ.
Goodwin, Procter & Hoar LLP Hale and Dorr LLP
Exchange Place 60 State Street
Boston, Massachusetts 02109-2881 Boston, Massachusetts 02109
(617) 570-1000 (617) 526-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / / 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 12, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
3,940,000 SHARES
[LOGO]
COMMON STOCK
------------------
Of the 3,940,000 shares of Common Stock offered hereby, 3,200,000 shares are
being sold by the Company and 740,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Application has been made for the quotation of the Common Stock on the
Nasdaq National Market upon completion of this offering under the symbol "NTOL."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2)(3) STOCKHOLDERS (3)
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to 295,500 and 295,500, respectively,
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and to their right to reject any order in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of Adams, Harkness & Hill, Inc., Boston,
Massachusetts, on or about , 1998.
Adams, Harkness & Hill, Inc.
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc.
The date of this Prospectus is , 1998.
<PAGE>
[A photographic display of certain of the Company's products set against a
graphic background with the Company's name and leaf logo prominently displayed
at the top of the page and the text "Quality Nutritional Supplements" directly
below the logo.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THESE
SECURITIES OR THE IMPOSITION OF PENALTY BIDS IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Natrol-Registered Trademark-, Kavatrol-TM-, My Favorite
Multiple-Registered Trademark-, Mood Support-TM-,
Quintessence-Registered Trademark-, Highgar Farms-Registered Trademark-,
SAF-Registered Trademark-, Thera-C-TM-, Cravex-TM- and the Company's logo are
trademarks of the Company and are used throughout this document as such. All
other trademarks and trade names referred to in this Prospectus are the property
of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
RISK FACTORS CONTAINED IN THIS PROSPECTUS RELATED TO THE PURCHASE OF COMMON
STOCK OF THE COMPANY. SEE "RISK FACTORS."
THE COMPANY
Natrol, Inc. ("Natrol" or the "Company") is a leading marketer and
manufacturer of branded, high quality dietary supplements. The Company sells its
products under the Natrol brand name through multiple distribution channels
throughout the United States, including domestic health food stores and mass
market drug, retail and grocery store chains. The Company's select line of more
than 145 products consists of approximately 500 stock keeping units ("SKUs") and
includes vitamins, minerals, herbs, specialty formulations, weight control
products and hormones. The Company recently strengthened its product categories
through an acquisition which included two brands of garlic products as well as a
bulk ingredient business which supplies dehydrated vegetable products to other
manufacturers. The Company's net sales have increased from $9.5 million in 1993
to $42.9 million in 1997.
The total United States retail market for dietary supplements is highly
fragmented and has experienced rapid growth, generating $6.5 billion in 1996
sales compared with $5.0 billion in 1994. The Company believes that this rapid
growth is due to a number of factors, including: (i) the aging of the "baby
boom" generation combined with consumers' tendency to purchase more dietary
supplements as they age; (ii) the publication of research findings supporting
the positive health effects of certain dietary supplements; (iii) increased
media attention on the use and efficacy of dietary supplements; (iv) the
nationwide trend toward preventive medicine in response to rising healthcare
costs; (v) increased consumer interest in herbs and herb-related supplements;
and (vi) increased interest in healthier lifestyles and the connection between
diet and health.
The Company has achieved growth within its industry by aggressively
promoting the Natrol brand and regularly introducing new products to meet
emerging trends and consumer demands. The Company uses a widespread multimedia
marketing and advertising strategy to build strong recognition of the Natrol
brand across multiple distribution channels. The Company invested 10.5%, 13.8%
and 16.2% of its annual net sales on marketing and advertising in 1995, 1996 and
1997, respectively, and seeks to invest approximately 15% of its annual net
sales on marketing and advertising on an ongoing basis. The Company's marketing
strategy focuses on national print, radio and television advertising as well as
cooperative advertising programs at the retail level. This strategy is designed
to create consumer demand, build strong relationships with the Company's
marketing partners and encourage retailers to carry more Natrol product
categories and a greater number of SKUs within those categories. Recent national
advertising initiatives include the "Natrol Health Minute," as heard on the
nationally syndicated Dr. Laura Schlessinger and Rush Limbaugh radio shows, and
commercials featured on the CNN/Turner Network.
Since its inception, the Company has emphasized the ongoing development and
marketing of new products in order to capitalize on and create market
opportunities. As a part of its product development efforts, the Company
introduced 34 new products with 53 SKUs in 1997 and 21 new products with 28 SKUs
in the three months ended March 31, 1998. Recent proprietary product
introductions include Kavatrol, Mood Support and the Natrol for Women product
line. Products introduced by the Company in 1997 accounted for $8.9 million, or
20.7%, of the Company's net sales in 1997. Net sales of these products together
with increased net sales of existing products enabled the Company to more than
offset substantial declines in net sales of Melatonin and DHEA.
The Company sells its products to health food stores through the leading
national distributors of dietary supplements, including United Natural Foods and
Tree of Life, as well as directly to GNC. The Company's mass market retail
customers include major drug and retail chains, including Walgreens, American
Drug Stores, Wal-Mart and Target, as well as grocery stores and supermarkets,
including Dominick's, Ralphs and Von's. The Company's products are also
available at a wide range of other distribution points, including mail order and
the Internet, airport shops, resort hotels and salons. The Company manufactures
substantially all of its products at its 90,000 square foot manufacturing
facility/headquarters located in Chatsworth, California. The Company believes
its manufacturing facility can support three times the Company's current sales
volume.
Natrol's objective is to enhance its position as a leading marketer and
manufacturer of branded dietary supplements that are strongly identified with
the Natrol brand. The Company pursues this objective by: (i) continuing to build
strong brand recognition; (ii) expanding its presence and penetration in the
health food store and mass market distribution channels; (iii) continuing to
develop new products; (iv) expanding its bulk sales business; (v) developing
additional distribution channels such as mail order and the Internet, direct
selling (multi-level marketing as well as sales to health professionals), direct
retail and international; and (vi) pursuing strategic acquisitions that allow it
to broaden its product lines, increase the distribution channels it serves or
otherwise complement its business or further its strategic goals.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company...................................... 3,200,000 shares
The Selling Stockholders......................... 740,000 shares
Common Stock to be outstanding after the offering
(1).............................................. 13,000,000 shares
Use of proceeds.................................... To repay existing indebtedness, to
redeem all outstanding shares of
Redeemable Preferred Stock, for capital
expenditures and for working capital
and other general corporate purposes,
including possible acquisitions. The
Company will not receive any of the
proceeds from the sale of shares of
Common Stock by the Selling
Stockholders. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. NTOL
</TABLE>
- ------------------------
(1) Excludes: (i) 655,000 shares of Common Stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $5.31 per
share at May 1, 1998; and (ii) 815,000 and 225,000 additional shares of
Common Stock reserved for issuance under the Company's 1996 Stock Option and
Grant Plan, as amended (the "1996 Stock Plan"), and the Company's 1998
Employee Stock Purchase Plan (the "Purchase Plan"), respectively. Under the
terms of the 1996 Stock Plan, the sale of the 3,200,000 shares offered by
the Company hereby will result in the reservation for issuance of an
additional 480,000 shares of Common Stock under the 1996 Stock Plan. See
"Management--Employee Stock and Other Benefit Plans--1996 Stock Option and
Grant Plan" and "--1998 Employee Stock Purchase Plan."
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER ENDED
YEAR ENDED DECEMBER 31, 31, 1997 MARCH 31,
----------------------------------------------------- PRO --------------------
1993 1994 1995 1996 1997 FORMA(1) 1997 1998
--------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales........................ $ 9,484 $ 12,214 $ 23,566 $ 40,802 $ 42,875 $ 51,583 $ 9,909 $ 13,116
Cost of goods sold............... 5,658 7,106 12,214 18,497 19,800 23,720 4,475 6,321
--------- --------- --------- --------- --------- ----------- --------- ---------
Gross profit................... 3,826 5,108 11,352 22,305 23,075 27,863 5,434 6,795
--------- --------- --------- --------- --------- ----------- --------- ---------
Selling and marketing expenses... 2,194 2,552 4,458 8,736 11,398 13,353 2,990 3,477
General and administrative
expenses....................... 1,197 1,739 3,378 5,082 4,450 7,632 1,055 1,230
--------- --------- --------- --------- --------- ----------- --------- ---------
Total operating expenses......... 3,391 4,291 7,836 13,818 15,848 20,985 4,045 4,707
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating income................. 435 817 3,516 8,487 7,227 6,878 1,389 2,088
Interest income (expense), net... 33 (25) (19) 54 (220) (1,057) (35) (131)
--------- --------- --------- --------- --------- ----------- --------- ---------
Income before income tax
provision...................... 468 792 3,497 8,541 7,007 5,821 1,354 1,957
Income tax provision............. 189 301 1,453 2,299(3) 2,816 2,327 544 782
--------- --------- --------- --------- --------- ----------- --------- ---------
Net income....................... $ 279 $ 491 $ 2,044 $ 6,242 $ 4,191 $ 3,494 $ 810 $ 1,175
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Basic earnings per share......... $ 0.05 $ 0.08 $ 0.34 $ 0.99 $ 0.59 $ 0.49 $ 0.11 $ 0.17
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Diluted earnings per share....... $ 0.05 $ 0.08 $ 0.34 $ 0.88 $ 0.41 $ 0.34 $ 0.08 $ 0.11
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Weighted average common shares
outstanding-basic.............. 6,000 6,000 6,000 6,275 7,100 7,100 7,100 7,100
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Weighted average common shares
outstanding-diluted............ 6,000 6,000 6,000 7,065 10,273 10,273 10,262 10,273
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
THREE
MONTHS
ENDED MARCH
31, 1998
PRO
FORMA(2)
-----------
<S> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales........................ $ 14,948
Cost of goods sold............... 7,168
-----------
Gross profit................... 7,780
-----------
Selling and marketing expenses... 4,002
General and administrative
expenses....................... 1,676
-----------
Total operating expenses......... 5,678
-----------
Operating income................. 2,102
Interest income (expense), net... (285)
-----------
Income before income tax
provision...................... 1,817
Income tax provision............. 727
-----------
Net income....................... $ 1,090
-----------
-----------
Basic earnings per share......... $ 0.15
-----------
-----------
Diluted earnings per share....... $ 0.11
-----------
-----------
Weighted average common shares
outstanding-basic.............. 7,100
-----------
-----------
Weighted average common shares
outstanding-diluted............ 10,273
-----------
-----------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(4)
--------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 2,229 $ 22,042
Working capital........................................................................ 5,299 29,624
Total assets........................................................................... 32,029 51,843
Long-term debt, less current maturities................................................ 7,375 --
Convertible participating preferred stock.............................................. 12,000 --
Total stockholders' equity (deficit)................................................... (389) 43,311
</TABLE>
- ------------------------------
(1) Gives effect to the Company's acquisition (the "Pure-Gar Acquisition") of
substantially all of the assets and assumption of specified liabilities of
Pure-Gar L.P. ("Pure-Gar") as if such transaction had been completed on
January 1, 1997. The pro forma consolidated statement of income data has
been adjusted for the combined operating results of Natrol and Pure-Gar,
amortization of goodwill associated with the Pure-Gar Acquisition, interest
expense on the term loan and line of credit used to fund the Pure-Gar
Acquisition, and related tax effects. The pro forma consolidated statement
of income data includes a non-recurring legal settlement expense incurred by
Pure-Gar of $733,000. See "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Gives effect to the Pure-Gar Acquisition as if such transaction had been
completed on January 1, 1998. The pro forma consolidated statement of income
data has been adjusted for the combined operating results of Natrol and
Pure-Gar, amortization of goodwill associated with the Pure-Gar Acquisition,
interest expense on the term loan and line of credit used to fund the
Pure-Gar Acquisition and related tax effects. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) In 1996, the Company was taxed under Subchapter S of the Internal Revenue
Code of 1986, as amended (the "Code") for the period from July 1, 1996
through September 29, 1996, and was taxed under Subchapter C of the Code for
the period from January 1, 1996 through June 30, 1996 and for the period
from September 30, 1996 through December 31, 1996. Accordingly, the
provision for income taxes for the period in which the Company was taxed as
a Subchapter S corporation reflects primarily state income tax, if any. If
the Company had been subject to taxation under Subchapter C of the Code for
the entire year ended December 31, 1996, the pro forma provision for income
taxes would have been $3.2 million and pro forma basic earnings per share
and pro forma diluted earnings per share would have been $0.86 and $0.76,
respectively.
(4) Gives effect to (i) the sale of 3,200,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $13.00 per
share and the receipt and application of the estimated net proceeds
therefrom as if such transaction had been completed on March 31, 1998 and
(ii) the conversion of all outstanding shares of the Company's Convertible
Participating Preferred Stock, par value $0.01 per share (the "Convertible
Preferred Stock"), into shares of Common Stock and shares of the Company's
Redeemable Preferred Stock, par value $0.01 per share (the "Redeemable
Preferred Stock"), concurrently with the completion of this offering and the
redemption of all shares of Redeemable Preferred Stock to be outstanding
immediately following such conversion for $6.0 million. See "Use of
Proceeds," "Capitalization" and "Management Discussion and Analysis of
Financial Condition and Results of Operations."
THE RESULTS FOR THE INTERIM PERIODS ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS FOR THE FULL FISCAL YEAR. THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
DATA SET FORTH ABOVE DO NOT PURPORT TO (I) REPRESENT WHAT THE CONSOLIDATED
RESULTS OF OPERATIONS OF THE COMPANY WOULD HAVE BEEN IF THE TRANSACTIONS
REFLECTED THEREIN HAD IN FACT OCCURRED AT THE ASSUMED DATES OR (II) PREDICT THE
FUTURE CONSOLIDATED RESULTS OF OPERATIONS OF THE COMPANY.
------------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN ADJUSTED TO
REFLECT (I) A 1-FOR-10 REVERSE STOCK SPLIT OF ALL CLASSES OF THE COMPANY'S
CAPITAL STOCK EFFECTED IN JANUARY 1998, (II) A 100-FOR-1 STOCK SPLIT OF THE
COMMON STOCK TO BE EFFECTIVE IN JUNE 1998, (III) THE CONVERSION OF ALL
OUTSTANDING SHARES OF THE CONVERTIBLE PREFERRED STOCK INTO SHARES OF COMMON
STOCK AND SHARES OF THE REDEEMABLE PREFERRED STOCK CONCURRENTLY WITH THE
COMPLETION OF THIS OFFERING AND (IV) THE REDEMPTION OF ALL SHARES OF THE
REDEEMABLE PREFERRED STOCK TO BE OUTSTANDING IMMEDIATELY FOLLOWING SUCH
CONVERSION OF THE CONVERTIBLE PREFERRED STOCK. UNLESS THE CONTEXT OTHERWISE
REQUIRES, ALL REFERENCES TO THE "COMPANY" OR "NATROL" MEAN NATROL, INC., ITS
PREDECESSOR AND ITS SUBSIDIARIES.
------------------------
The Company was incorporated under the laws of Delaware on October 1, 1997.
The Company's predecessor was incorporated under the laws of California in 1980.
The Company's principal executive offices are located at 21411 Prairie Street,
Chatsworth, California 91311, and its telephone number is (818) 739-6000.
5
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK OFFERED
BY THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS"
THAT INVOLVE RISK AND UNCERTAINTIES. THESE STATEMENTS MAY BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR SIMILAR EXPRESSIONS OR BY
DISCUSSIONS OF STRATEGY. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. IMPORTANT FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
EFFECT OF UNFAVORABLE PUBLICITY. The Company believes the dietary
supplement market is affected by national media attention regarding the
consumption of dietary supplements. Future scientific research or publicity may
not be favorable to the dietary supplement industry or to any particular
product, and may not be consistent with earlier favorable research or publicity.
Because of the
Company's dependence on consumers' perceptions, adverse publicity associated
with illness or other adverse effects resulting from the consumption of the
Company's products or any similar products distributed by other companies and
future reports of research that are perceived as less favorable or that question
earlier research could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is highly dependent
upon consumers' perceptions of the safety and quality of its products as well as
dietary supplements distributed by other companies. Thus, the mere publication
of reports asserting that such products may be harmful or questioning their
efficacy could have a material adverse effect on the Company's business,
financial condition and results of operations, regardless of whether such
reports are scientifically supported or whether the claimed harmful effects
would be present at the dosages recommended for such products. See "--Absence of
Conclusive Clinical Studies."
DEPENDENCE ON NEW PRODUCTS. The Company believes growth of its net sales is
substantially dependent upon its ability to introduce new products. The Company
seeks to introduce additional products each year. The success of new products is
dependent upon a number of factors, including the Company's ability to develop
products that will appeal to consumers and respond to market trends in a timely
manner. There can be no assurance that the Company's efforts to develop new
products will be successful or that consumers will accept the Company's new
products. In addition, products currently experiencing strong popularity and
rapid growth may not maintain their sales over time. For example, the Company's
net sales of DHEA, a specialty dietary supplement introduced by the Company in
March 1996, peaked at $4.6 million for the three months ended December 31, 1996
and accounted for 39.5% of the Company's net sales in such period. In
comparison, the Company's net sales of DHEA were only $273,000, or 2.1% of the
Company's net sales, for the three months ended March 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Business Strategy."
GOVERNMENT REGULATION. The manufacture, packaging, labeling, advertising,
promotion, distribution and sale of the Company's products are subject to
regulation by numerous governmental agencies, the most active of which is the
U.S. Food and Drug Administration (the "FDA"), which regulates the Company's
products under the Federal Food, Drug and Cosmetic Act (the "FDCA") and
regulations promulgated thereunder. The Company's products are also subject to
regulation by, among other regulatory entities, the Consumer Product Safety
Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA") and the
Environmental Protection Agency (the "EPA"). Advertising and other forms of
promotion and methods of marketing of the Company's products are subject to
regulation by the U.S. Federal Trade Commission (the "FTC"), which regulates
these activities under the Federal Trade
6
<PAGE>
Commission Act (the "FTCA"). The manufacture, labeling and advertising of the
Company's products are also regulated by various state and local agencies as
well as those of each foreign country to which the Company distributes its
products.
The Company's products are generally regulated as dietary supplements under
the FDCA, and are, therefore, not subject to pre-market approval by the FDA.
However, these products are subject to extensive regulation by the FDA relating
to adulteration and misbranding. For instance, the Company is responsible for
ensuring that all dietary ingredients in a supplement are safe, and must notify
the FDA in advance of putting a product containing a new dietary ingredient
(i.e., an ingredient not marketed for use as a supplement before October 15,
1994) on the market and furnish adequate information to provide reasonable
assurance of the ingredient's safety. Further, if the Company makes statements
about the supplement's effects on the structure or function of the body, the
Company must, among other things, have substantiation that the statements are
truthful and not misleading. In addition, the Company's product labels must bear
proper ingredient and nutritional labeling and the Company's supplements must be
manufactured in accordance with current Good Manufacturing Practice regulations
("GMPs") for foods. The FDA has issued an advanced notice of proposed rulemaking
to consider whether to develop specific GMP regulations for dietary supplements
and dietary supplement ingredients. Such regulations, if promulgated, may be
significantly more rigorous than current requirements and contain quality
assurance requirements similar to GMPs for drug products. A product can be
removed from the market if it is shown to pose a significant or unreasonable
risk of illness or injury. Moreover, if the FDA determines that the "intended
use" of any of the Company's products is for the diagnosis, cure, mitigation,
treatment or prevention of disease, the product would meet the definition of a
drug and would require pre-market approval of safety and effectiveness prior to
its manufacture and distribution. Failure of the Company to comply with
applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines and criminal
prosecutions.
The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to, among other things,
drugs or foods, which includes dietary supplements, is an unfair or deceptive
act or practice. Under the FTC's "substantiation doctrine," an advertiser is
required to have a "reasonable basis" for all product claims at the time the
claims are first used in advertising or other promotions. Failure to adequately
substantiate claims may be considered either as a deceptive or unfair practice.
Pursuant to this FTC requirement, the Company is required to have adequate
substantiation for all advertising claims made about its products. The type of
substantiation will be dependent upon the product claims made. For example, a
health claim normally would require competent and reliable scientific evidence,
while a taste claim would require only survey evidence.
In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it will
issue a guidance document to assist dietary supplement marketers in
understanding and complying with the substantiation requirement. Upon release of
this guidance document, Natrol will be required to evaluate its compliance with
the guideline and may be required to change its advertising and promotional
practices.
On two occasions, claims made by the Company have been the subject of
investigation by the FTC. In both matters, the FTC terminated its investigation
without further action or any formal findings. The Company is not currently a
party to any investigation, consent order or other decree of the FTC. The
Company may be subject to investigation by the FTC in the future. If the FTC has
reason to believe the law is being violated (e.g., the Company does not possess
adequate substantiation for product claims), it can initiate enforcement action.
The FTC has a variety of processes and remedies available to it for
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enforcement, both administratively and judicially, including compulsory process
authority, cease and desist orders and injunctions. FTC enforcement could result
in orders requiring, among other things, limits on advertising, consumer
redress, divestiture of assets, rescission of contracts and such other relief as
may be deemed necessary. Violation of such orders could result in substantial
financial or other penalties. Any such action by the FTC could materially
adversely affect the Company's ability to successfully market its products.
The Company manufactures certain products pursuant to contracts with
customers who distribute the products under their own or other trademarks. Such
private label customers are subject to government regulations in connection with
their purchase, marketing, distribution and sale of such products, and the
Company is subject to government regulations in connection with its manufacture,
packaging and labeling of such products. However, the Company's private label
customers are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control. The failure of
these customers to comply with applicable laws or regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors in those countries.
These distributors are independent contractors over whom the Company has limited
control.
The Company may be subject to additional laws or regulations by the FDA or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"), or more stringent
interpretations of current laws or regulations, from time to time in the future.
The Company is unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products that cannot be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, or expanded or different labeling or scientific
substantiation. Any or all of these requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Regulatory Matters."
PRODUCT LIABILITY. The Company, like other retailers, distributors and
manufacturers of products designed for human consumption, faces an inherent risk
of exposure to product liability claims in the event that the use of its
products results in injury. The Company may be subjected to various product
liability claims, including, among others, that its products include inadequate
instructions for use or inadequate warnings concerning possible side effects and
interactions with other substances. In addition, although the Company maintains
strict quality controls and procedures, including the quarantine and testing of
raw materials and qualitative and quantitative testing of selected finished
products, there can be no assurance that the Company's products will not contain
contaminated substances. In addition, in certain cases the Company relies on
third party manufacturers for its products. With respect to product liability
claims, the Company has $2.0 million in aggregate liability insurance. If such
claims should exceed $2.0 million, the Company has excess umbrella liability
insurance of up to $15.0 million. However, there can be no assurance that such
insurance will continue to be available at a reasonable cost, or, if available,
will be adequate to cover liabilities. The Company generally seeks to obtain
contractual indemnification from parties supplying raw materials for its
products or manufacturing or marketing its products, and to be added as an
additional insured under such parties' insurance policies. Any such
indemnification or insurance, however, is limited by its terms and any such
indemnification, as a practical matter, is limited to the creditworthiness of
the indemnifying party. In the event that the Company does not have adequate
insurance or contractual indemnification, product
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liabilities relating to its products could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Legal Matters."
DEPENDENCE ON SIGNIFICANT CUSTOMERS. Net sales to Walgreens accounted for
15.3% of the Company's net sales for the three months ended March 31, 1998 and
17.7% and 12.6% of the Company's net sales in 1997 and 1996, respectively. Net
sales to Tree of Life accounted for 10.4% of the Company's net sales for the
three months ended March 31, 1998 and 11.6% and 10.2% of the Company's net sales
in 1997 and 1996, respectively. Net sales to GNC accounted for 3.0% of the
Company's net sales for the three months ended March 31, 1998 and 2.3% and 14.5%
of the Company's net sales in 1997 and 1996, respectively. The Company does not
have long-term contracts with any of its customers. There can be no assurance
that Walgreens, Tree of Life or the Company's other major customers will
continue as major customers of the Company. The loss of either Walgreens or Tree
of Life as a major customer, the loss of a significant number of other major
customers, or a significant reduction in purchase volume by or financial
difficulty of such customers, for any reason, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Sales and Distribution."
DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued
success depends to a significant extent on the management and other skills of
Elliott Balbert, the Company's Chairman, Chief Executive Officer and President,
and its senior management team, as well as its ability to attract other skilled
personnel. Many of the Company's employees are not covered by a non-competition
agreement, and the ability of the Company to enforce such an agreement in
California, the state in which the Company's operations are principally located,
is limited and uncertain. The loss or unavailability of the services of Mr.
Balbert or the other members of the Company's senior management team or the
inability to attract other skilled personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management."
ABILITY TO MANAGE GROWTH. The Company believes that continued growth may
strain the Company's management, operations, sales and administrative personnel
and other resources. In order to serve the needs of its existing and future
customers, the Company has increased and intends to continue to increase its
workforce, which requires the Company to attract, train, motivate, manage and
retain qualified employees. The Company's ability to manage further growth
depends in part upon the Company's ability to expand its operating, management,
information and financial systems, and production capacity, which may
significantly increase its future operating expenses. No assurance can be given
that the Company's business will grow in the future or that the Company will be
able to effectively manage such growth. The Company's inability to manage its
growth successfully could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Business Strategy."
RISKS ASSOCIATED WITH ACQUISITIONS. The Company recently completed its
first acquisition and expects to pursue additional acquisitions in the future as
a part of its business strategy. The Company faces significant competition for
acquisition opportunities from numerous companies, many of which have greater
financial resources than the Company. Accordingly, there can be no assurance
that attractive acquisition opportunities will be available to the Company.
There can be no assurance that the Company will be able to obtain financing for
or otherwise consummate any future acquisitions. Moreover, acquisitions involve
numerous risks, including the risk that the acquired business will not perform
in accordance with expectations, difficulties in the integration of the
operations and products of the acquired businesses with those of the Company,
the diversion of the Company's management's attention from other aspects of the
Company's business, the risks associated with entering geographic and product
markets in which the Company has limited or no direct prior experience and the
potential loss of key employees of the acquired business. The acquisition of
another business can also subject the Company to liabilities and claims arising
out of such business. Future acquisitions would likely require additional
financing, which would likely result in an increase in the Company's
indebtedness or the issuance of
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additional capital stock, which may be dilutive to the Company's stockholders,
including purchasers of shares offered hereby.
The Pure-Gar Acquisition resulted in a significant increase in the Company's
goodwill and any future acquisitions may result in additional goodwill and
related amortization expense. At March 31, 1998, goodwill on the Company's
balance sheet was $9.0 million, representing 28.0% of the Company's total assets
at that date. In the event of any sale or liquidation of the Company or a
portion of its assets, there can be no assurance that the value of the Company's
intangible assets will be realized. In addition, the Company continually
evaluates whether events and circumstances have occurred indicating that any
portion of the remaining balance of the amount allocable to the Company's
intangible assets may not be recoverable. When factors indicate that the amount
allocable to the Company's intangible assets should be evaluated for possible
impairment, the Company may be required to reduce the carrying value of such
assets. Any future determination requiring the write-off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's business, financial condition and operating results.
The Company regularly evaluates potential acquisitions of other businesses,
products and product lines and may hold discussions regarding such potential
acquisitions. As a general rule, the Company will publicly announce such
acquisitions only after a definitive agreement has been signed. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources" and "Business--Business
Strategy."
ABSENCE OF CONCLUSIVE CLINICAL STUDIES. Although many of the ingredients in
the Company's products are vitamins, minerals, herbs and other substances for
which there is a long history of human consumption, some of the Company's
products contain ingredients for which no such history exists. In addition,
although the Company believes all of its products are safe when taken as
directed by the Company, there is little long-term experience with human
consumption of certain of these product ingredients in concentrated form.
Accordingly, there can be no assurance that the Company's products, even when
used as directed, will have the effects intended or will not have harmful side
effects. Any such unintended effects may result in adverse publicity or product
liability claims which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Effect of
Unfavorable Publicity" and "--Product Liability."
COMPETITION. The dietary supplement industry is highly competitive.
Numerous companies, many of which have greater financial and other resources
than the Company, compete with the Company in the development, manufacture and
marketing of dietary supplements. The Company's principal competition comes from
major private label and broadline brand manufacturers. In addition, large
pharmaceutical companies and packaged food and beverage companies compete with
the Company on a limited basis in the dietary supplement market. Increased
competition from such companies could have a material adverse effect on the
Company because such companies have greater financial and other resources
available to them and possess manufacturing, distribution and marketing
capabilities far greater than those of the Company. See "Business--Competition."
RISKS ASSOCIATED WITH SUPPLY OF RAW MATERIALS. The Company obtains all of
its raw materials for the manufacture of its products from third-party
suppliers. Many of the raw materials used in the Company's products are
harvested internationally. With the exception of bulk garlic and
Ester-C-Registered Trademark-, the Company does not have contracts with any
suppliers committing such suppliers to provide the materials required for the
production of its products. In the last few years, natural vitamin E, beta
carotene and melatonin have had significant price fluctuations as a result of
short supply or increases in demand. The Company has experienced occasional
shortages of raw materials for a limited number of its products. There can be no
assurance that suppliers, including suppliers of bulk garlic and Ester-C, will
provide the raw materials needed by the Company in the quantities requested or
at a price the Company is willing pay. Because the Company does not control the
actual production of these raw materials, it is also subject
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to delays caused by interruption in production of materials based on conditions
not within its control. Such conditions include job actions or strikes by
employees of suppliers, weather, crop conditions, transportation interruptions
and natural disasters or other catastrophic events. With respect to products
that are sold by the Company under the supplier's trademark, such as Ester-C and
Tonalin-Registered Trademark-, the Company is limited to that single supplier as
a source of raw material for that product. As a result, any shortage of raw
materials from that supplier would adversely affect the Company's ability to
manufacture that product. The inability of the Company to obtain adequate
supplies of raw materials for its products at favorable prices, or at all, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Manufacturing and Product Quality."
SALES AND EARNINGS VOLATILITY. The Company's sales and earnings continue to
be subject to volatility based upon, among other things: (i) trends and general
conditions in the dietary supplement industry and the ability of the Company to
recognize such trends and effectively introduce and market new products in
response to such trends; (ii) the introduction of new products by the Company or
its competitors; (iii) the loss of one or more significant customers; (iv)
increased media attention on the use and efficacy of dietary supplements; (v)
consumers' perceptions of the products and operations of the Company or its
competitors; and (vi) the availability of raw materials from suppliers. Sales
and earnings volatility as a result of the foregoing factors may affect the
Company's operating results from period to period which may adversely affect the
market price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations
are dependent upon the continued operation of its manufacturing facility in
Chatsworth, California, at its current levels. The operation of dietary
supplement manufacturing plants involves many risks, including the breakdown,
failure or substandard performance of equipment, natural and other disasters,
and the need to comply with the requirements of directives of government
agencies, including the FDA. In particular, the Company's manufacturing facility
is located in southern California, a geographic area that has historically been
prone to earthquakes, which in some cases have been catastrophic. Prior to the
Company's lease and build-out of the building in which its manufacturing
facility is located, the building was severely damaged in a major earthquake on
January 17, 1994, the epicenter of which was within five miles of the building.
Although the building was rebuilt with an enhanced ability to withstand
earthquakes and conforms to current local and state code requirements, the
Company's manufacturing facility could be damaged or destroyed in the event of
an earthquake. Any such damage or destruction would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company does not carry earthquake insurance because such insurance is
unobtainable on commercially reasonable terms in the Company's geographic
location. The Company's softgel and liquid products are manufactured by outside
contractors. The Company's profit margins on these products and its ability to
deliver these products on a timely basis are dependent on the ability of the
outside manufacturers to continue to supply products that meet the Company's
quality standards in a timely and cost-efficient manner. The occurrence of any
of the foregoing or other material operational problems could have a material
adverse effect on the Company's business, financial condition and results of
operations during the period of such operational difficulties. See
"Business--Manufacturing and Product Quality."
RELIANCE ON INDEPENDENT BROKERS. The Company places significant reliance on
a network of independent brokers to act as its primary sales force to mass
market retailers. Although the Company employs management personnel, including
regional sales managers, to closely monitor the brokers, such brokers are not
employed or otherwise controlled by the Company and are generally free to
conduct their business at their own discretion. Although these brokers enter
into contracts with the Company, such contracts typically can be terminated upon
30 days notice by the Company or the independent broker. The simultaneous loss
of the services of a number of these independent brokers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Sales and Distribution."
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NO ASSURANCE OF FUTURE INDUSTRY GROWTH. Market data referred to in this
Prospectus and otherwise available to prospective investors regarding the size
and projected growth rates of the market for dietary supplements generally
indicate that this market is large and growing. However, there can be no
assurance that such market is as large as reported or that such projected growth
will occur or continue. Market data and projections such as those presented in
this Prospectus are inherently uncertain, subject to change and generally not
available for 1997 and 1998. In addition, the underlying market conditions are
subject to change based on economic conditions, consumer preferences and other
factors that are beyond the Company's control. An adverse change in size or
growth rate of the market for dietary supplements is likely to have a material
adverse effect on the Company's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY PROTECTION. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products. The
Company relies on common law trademark rights to protect its unregistered
trademarks as well as its trade dress rights. Common law trademark rights
generally are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables the
registrant to stop the unauthorized use of the trademark by any third party
anywhere in the United States. The Company intends to register its trademarks in
certain foreign jurisdictions where the Company's products are sold. However,
the protection available, if any, in such jurisdictions may not be as extensive
as the protection available to the Company in the United States.
Currently, the Company has received a Notice of Allowance for its United
States patent application for its Kavatrol product and has received two United
States patents on its amino acid products, SAF and SAF for Kids. To the extent
the Company does not have patents on its products, another company may replicate
one or more of the Company's products.
Although the Company seeks to ensure that it does not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company. Natrol was contacted in June 1997 by a third party that claimed
Natrol's marketing of melatonin infringed the third party's patents relating to
a method of using melatonin and sought to license such patents to Natrol. Since
Natrol does not believe its marketing of melatonin infringes the third party's
patent claims, Natrol has declined to enter into a license agreement with the
third party. Any infringement claims by third parties against the Company may
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business-- Trademarks and Patents."
MATERIAL BENEFIT TO INSIDERS. In September 1996, the Company and its
stockholders completed a series of transactions involving TA Associates, Inc., a
private equity firm based in Boston, Massachusetts, and the then current
stockholders of the Company (the "TA Transaction"). In connection with the TA
Transaction, investment funds associated with TA Associates, Inc. (the "TA
Investors") purchased from the Company's then current stockholders and the
Company an aggregate of 27,000 shares of Convertible Preferred Stock of the
Company. Upon the completion of this offering, the Convertible Preferred Stock
will convert into 2,700,000 shares of Common Stock and 13,500 shares of
Redeemable Preferred Stock. As required by the terms of the Redeemable Preferred
Stock, the Company will immediately redeem all of the shares of the Redeemable
Preferred Stock upon issuance for $6.0 million, representing approximately 15.9%
of the estimated net proceeds to be received by the Company from this offering
at an assumed initial public offering price of $13.00 per share. See "Use of
Proceeds," "Certain Transactions" and "Principal and Selling Stockholders."
EFFECTIVE CONTROL BY PRINCIPAL STOCKHOLDERS. After giving effect to the
sale of the shares of Common Stock offered hereby, Elliott Balbert, the
Company's Chairman, Chief Executive Officer and President, and the TA Investors
will beneficially own in the aggregate approximately 48.7% (45.3% assuming
exercise of the Underwriters' over-allotment option in full) and 16.6% (16.2%
assuming exercise of the
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Underwriters' over-allotment option in full), respectively, of the outstanding
Common Stock. As a result, Mr. Balbert and the TA Investors will be able to
control or exert significant influence over the outcome of fundamental corporate
transactions requiring stockholder approval, including, but not limited to
mergers and sales of assets and the election of the members of the Company's
Board of Directors. See "Principal and Selling Stockholders" and "Shares
Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the market
price of the Common Stock. In addition to the 3,940,000 shares of Common Stock
offered hereby, up to approximately 8,760,000 shares of Common Stock owned by
current stockholders of the Company will be eligible for sale in the public
market pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), beginning on the later of 90 days after the date of this
Prospectus, and 120,000 shares of Common Stock owned by a current stockholder of
the Company will be eligible for sale in the public market in accordance with
Rule 701 under the Securities Act beginning 90 days after the date of this
Prospectus. In addition 180,000 shares subject to sale under Rule 701 are
subject to vesting provisions and will become eligible for sale in the public
market at various times as they become vested. All executive officers and
directors and stockholders of the Company, who in the aggregate will hold
9,060,000 shares of Common Stock (after giving effect to the sale of 740,000
shares by the Selling Stockholders in the offering) and options to purchase
655,000 shares of Common Stock, have agreed, pursuant to certain Lock-up
Agreements (the "Lock-up Agreements"), that until 180 days after the date of
this Prospectus, they will not, directly or indirectly, offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase, make a
distribution of, or otherwise dispose of, any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock,
otherwise than (i) as a bona fide gift or gifts, provided that the donee or
donees thereof agree in writing as a condition precedent to such gift or gifts
to be bound by the terms of the Lock-up Agreements, or (ii) with the prior
written consent of Adams, Harkness & Hill, Inc. Stockholders of the Company who
in the aggregate hold 2,160,000 shares of Common Stock following the offering
have the right on any date after three months after this offering to require the
Company to register their shares under the Securities Act for resale to the
public (i) on Form S-1, if the anticipated net aggregate proceeds exceed $10.0
million (provided that only one registration on Form S-1 is required) and (ii)
on Form S-3 if the anticipated net aggregate sale price of such registered
shares exceeds $500,000 (provided that only one registration on Form S-3 is
required in any 12 month period). All of such holders are subject to a Lock-up
Agreement. Sales of substantial amounts of Common Stock (including shares issued
in connection with future acquisitions which may be issued with registration
rights), or the availability of such shares for sale, may adversely affect the
prevailing market price for the Common Stock and could impair the Company's
ability to obtain additional capital through an offering of its equity
securities. See "Shares Eligible for Future Sale."
ABSENCE OF A PUBLIC TRADING MARKET; OFFERING PRICE; POSSIBLE VOLATILITY OF
STOCK PRICE. Prior to this offering, there has been no public market for the
Common Stock, and there can be no assurance that an active market will develop
or be sustained following the consummation of this offering. Consequently, the
offering price of the Common Stock will be determined by negotiation between the
Company, the Selling Stockholders and the representatives of the several
Underwriters based on several factors and will not necessarily reflect the
market price of the Common Stock after this offering or the price at which the
Common Stock may be sold in the public market after this offering. See
"Underwriting" for a description of the factors to be considered in determining
the initial public offering price. Following the completion of this offering,
the trading price of the Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
material announcements by the Company or its competitors, governmental
regulatory action, conditions in the dietary supplement industry, or other
events or factors, many of which are beyond the Company's control. In addition,
the stock market has historically experienced extreme price and volume
fluctuations which have particularly affected the market prices of many dietary
supplement companies and which often have been unrelated to the operating
performance of such companies. The Company's operating results in future
quarters
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may be below the expectations of securities analysts and investors. In such
event, the price of the Common Stock would likely decline, perhaps
substantially. See "Underwriting."
COMPUTER SYSTEMS AND YEAR 2000 ISSUES. Many existing computer programs and
databases use only two digits to identify a year in the date field (I.E., 98
would represent 1998). These programs and databases were designed and developed
without considering the impact of the upcoming millennium. If not corrected,
many computer systems could fail or create erroneous results relating to the
year 2000. The Company does not anticipate any significant costs, problems or
uncertainties associated with becoming Year 2000 compliant and is currently
developing a plan to ensure that its computer systems are modified to be
compliant on a timely basis. Failure of the Company, its software providers or
the Company's customers or suppliers to adequately address the Year 2000 issue
could result in misstatement of reported financial information or otherwise
adversely affect the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
DIVIDEND POLICY. The Company has not declared cash dividends on its Common
Stock since it ceased to be an S-corporation on September 30, 1996 and the
Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. Under Delaware law, the Company is permitted to pay
dividends only out of its surplus, or, if there is no surplus, out of its net
profits. Under the terms of the Company's bank credit facility, the Company is
required to utilize 25% of annual Excess Cash Flow (as defined in the Company's
credit facility) to prepay outstanding indebtedness thereunder, which may have
the effect of limiting the Company's ability to pay cash dividends. In addition,
the payment of cash dividends may be prohibited under agreements governing debt
which the Company may incur in the future. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Amended and
Restated Certificate of Incorporation (the "Certificate") and By-laws (the
"By-laws"), certain sections of the Delaware General Corporation Law, and the
ability of the Board of Directors to issue shares of preferred stock and to
establish the voting rights, preferences and other terms thereof, may be deemed
to have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which stockholders may
deem to be in their best interests). Such provisions include, among other
things, a classified Board of Directors serving staggered three-year terms, the
elimination of stockholder voting by written consent, the removal of directors
only for cause, the vesting of exclusive authority in the Board of Directors to
determine the size of the Board of Directors and (subject to certain limited
exceptions) to fill vacancies thereon, the vesting of exclusive authority in the
Board of Directors (except as otherwise required by law) to call special
meetings of stockholders and certain advance notice requirements for stockholder
proposals and nominations for election to the Board of Directors. These
provisions, and the ability of the Board of Directors to issue preferred stock
without further action by stockholders, could delay or frustrate the removal of
incumbent directors or the assumption of control by stockholders, even if such
removal or assumption of control would be beneficial to stockholders, and also
could discourage or make more difficult a merger, tender offer or proxy contest,
even if such events would be beneficial to the interest of stockholders. The
Company will be subject to Section 203 of the Delaware General Corporation Law
which, in general, imposes restrictions upon certain acquirors (including their
affiliates and associates) of 15% or more of the Company's Common Stock. See
"Description of Capital Stock--Certain Provisions of Certificate of
Incorporation and By-Laws" and "--Statutory Business Combination Provision."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock in this
offering will incur immediate and substantial dilution in the net tangible book
value per share of Common Stock. At an assumed initial public offering price of
$13.00 per share (the midpoint of the range set forth on the cover page of this
Prospectus), investors in this offering will incur dilution of $10.36 per share.
See "Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,200,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $13.00 per share, after deducting the estimated underwriting discounts
and estimated offering expenses payable by the Company, are estimated to be
$37.7 million ($41.3 million if the Underwriters' over-allotment option is
exercised in full). The Company expects to use the net proceeds as follows: (i)
approximately $11.8 million to repay all of the Company's outstanding
indebtedness under its existing bank credit facility with Wells Fargo Bank, N.A.
(the "Credit Facility"), including fees and accrued and unpaid interest; (ii)
$6.0 million to redeem all Redeemable Preferred Stock; (iii) approximately $1.0
million to fund additional capital expenditures related to the Company's
manufacturing facility; and (iv) the balance of approximately $18.9 million for
working capital and other general corporate purposes. The Company routinely
evaluates potential acquisitions of businesses and products that would
complement or expand the Company's business or further its strategic goals. The
Company may use a portion of the net proceeds from this offering for one or more
such transactions; however, it currently has no commitments or agreements with
respect to such transactions. Pending such use, the balance of the net proceeds
will be invested in short-term, investment grade, interest bearing obligations.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
The Credit Facility consists of a $9.0 million term loan (the "Term Loan")
and a $8.0 million revolving line of credit (the "Line of Credit"). The Term
Loan matures in February 2004 and the Line of Credit expires in May 2001. As of
May 1, 1998, the Company had drawn an aggregate of $3.0 million under the Line
of Credit and the outstanding principal balance of the Term Loan was $8.8
million. Amounts outstanding under the Credit Facility bear interest at variable
rates which are based upon either the prime rate or LIBOR, plus in either case a
margin which varies according to the Company's compliance with certain financial
ratios. The interest rate on such indebtedness at May 1, 1998 was 7.69% per
annum. The Company incurred $11.0 million in indebtedness under the Credit
Facility in connection with the Pure-Gar Acquisition in February 1998. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not declared any cash dividends on its Common Stock since it
ceased to be an S corporation on September 30, 1996. The Company currently
intends to retain its earnings for future growth and, therefore, does not
anticipate paying cash dividends in the foreseeable future. Under Delaware law,
the Company is permitted to pay dividends only out of its surplus, or, if there
is no surplus, out of its net profits. Under the terms of the Credit Facility,
the Company is required to utilize 25% of annual Excess Cash Flow (as defined in
the Credit Facility) to prepay outstanding indebtedness thereunder, which may
have the effect of limiting the Company's ability to pay cash dividends. In
addition, the payment of cash dividends may be prohibited under agreements
governing debt which the Company may incur in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
conversion of the Convertible Preferred Stock and (iii) as adjusted to give
effect to the sale of the 3,200,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $13.00 per share
and the application of the estimated net proceeds therefrom as described in "Use
of Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
<S> <C> <C> <C>
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term debt(1).................................... $ 1,500 $ 1,500 $ --
--------- ----------- ------------
--------- ----------- ------------
Long-term debt, less current maturities(1)................................. $ 7,375 $ 7,375 $ --
--------- ----------- ------------
Convertible Participating Preferred Stock, $0.01 par value per share:
27,000 shares authorized; 27,000 shares issued and outstanding, actual;
no shares authorized, issued or outstanding on a pro forma basis and as
adjusted................................................................. 12,000 -- --
Redeemable Preferred Stock, $0.01 par value per share: 13,500 shares
authorized; no shares issued or outstanding, actual; 13,500 shares issued
and outstanding on a pro forma basis; no shares authorized, issued or
outstanding, as adjusted(2).............................................. -- 6,000 --
Stockholders' equity:
Preferred Stock, $0.01 par value per share: no shares authorized, issued
or outstanding, actual; 2,000,000 shares authorized, no shares issued
or outstanding on a pro forma basis and as adjusted.................... -- -- --
Common Stock, $0.01 par value per share: 10,550,000 shares authorized,
7,100,000 shares issued and outstanding, actual; 50,000,000 shares
authorized, and 9,800,000 shares issued and outstanding on a pro forma
basis; 50,000,000 shares authorized, 13,000,000 shares issued and
outstanding, as adjusted(3)............................................ 71 98 130
Additional paid-in capital................................................. 560 12,533 50,201
Retained earnings (deficit)(4)............................................. (457) (6,457) (6,457)
Receivable from stockholder................................................ (563) (563) (563)
--------- ----------- ------------
Total stockholders' equity (deficit)................................... (389) 5,611 43,311
--------- ----------- ------------
Total capitalization............................................... $ 18,986 $ 20,486 $ 43,311
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
- ------------------------------
(1) See Notes 3 and 9 of Notes to Consolidated Financial Statements for
information concerning long-term debt obligations.
(2) Upon completion of this offering and as presented on a pro forma basis, the
outstanding shares of Convertible Preferred Stock will convert into an
aggregate of 2,700,000 shares of Common Stock and an aggregate of 13,500
shares of Redeemable Preferred Stock. All shares of Redeemable Preferred
Stock will be redeemed for an aggregate of $6.0 million in cash and retired
as presented on an as adjusted basis. See "Use of Proceeds" and "Certain
Transactions."
(3) Excludes: (i) 655,000 shares of Common Stock currently issuable upon
exercise of outstanding stock options, including options with respect to
255,000 shares of Common Stock granted subsequent to March 31, 1998; (ii)
95,000 additional shares of Common Stock available for future grants under
the 1996 Stock Plan as of May 1, 1998; and (iii) 225,000 additional shares
of Common Stock available for future sales under the Purchase Plan. See
"Management--Employee Stock and Other Benefit Plans--1996 Stock Option and
Grant Plan" and "--1998 Employee Stock Purchase Plan."
(4) Reflects a decrease in retained earnings (deficit) for an aggregate of $6.0
million for the redemption of the Redeemable Preferred Stock. See "Use of
Proceeds" and "Certain Transactions."
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock as of March 31,
1998 was $(9.4) million, or $(0.96) per share. Pro forma net tangible net book
value per share represents the amount of total tangible assets of the Company
less total liabilities of the Company divided by the number of Common Stock
outstanding, including all outstanding stock grants and excluding all
outstanding stock options.
After giving effect to the sale of the 3,200,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$13.00 per share the receipt and application by the Company of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Common Stock as
of March 31, 1998 would have been $34.3 million, or $2.64 per share. This
represents an immediate increase in pro forma net tangible book value $3.60 per
share to existing stockholders and an immediate dilution to $10.36 per share to
purchasers of Common Stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 13.00
---------
Pro forma net tangible book value per share at March 31, 1998.... $ (0.96)
Increase per share attributable to new stockholders.............. 3.60
---------
Pro forma net tangible book value per share after the offering....... 2.64
---------
Pro forma net tangible book value dilution per share to new
stockholders....................................................... $ 10.36
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998
after giving effect to the conversion of all outstanding shares of Convertible
Preferred Stock, the differences between existing stockholders and the new
stockholders with respect to the number of shares of Common Stock purchased from
the Company, the total consideration and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- --------------------------- AVERAGE PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- -------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 9,800,000 75.4% $ 2,145,150 4.9% $ 0.22
New stockholders...................... 3,200,000 24.6 41,600,000 95.1 13.00
------------- ----- -------------- -----
Total............................. 13,000,000 100.0% $ 43,745,150 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options after March 31, 1998 or the Underwriters'
over-allotment option. As of March 31, 1998, options to purchase 400,000 shares
of Common Stock were outstanding. To the extent any of these options or the
Underwriters' over-allotment option is exercised, there will be further dilution
to new stockholders. See "Underwriting" for information concerning the
Underwriters' over-allotment option.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of income data for each of the
three years ended December 31, 1997 and consolidated balance sheet data at
December 31, 1996 and 1997 are derived from consolidated financial statements of
the Company which have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere herein. The balance sheet data at December 31, 1995,
is derived from audited financial statements not included herein. The selected
financial information for the years ended December 31, 1993 and 1994 are derived
from unaudited financial statements not included herein. The consolidated income
data for the three months ended March 31, 1997 and 1998 and the consolidated
balance sheet data at March 31, 1998 are derived from unaudited consolidated
financial statements also included elsewhere in the Prospectus. The unaudited
consolidated financial statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the Company's consolidated
financial position and results of operations for these periods. The consolidated
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of results for the year ending December 31, 1998 or any
future period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and Notes
thereto included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales........................................................... $ 9,484 $ 12,214 $ 23,566 $ 40,802 $ 42,875
Cost of goods sold.................................................. 5,658 7,106 12,214 18,497 19,800
--------- --------- --------- --------- ---------
Gross profit...................................................... 3,826 5,108 11,352 22,305 23,075
--------- --------- --------- --------- ---------
Selling and marketing expenses...................................... 2,194 2,552 4,458 8,736 11,398
General and administrative expenses................................. 1,197 1,739 3,378 5,082 4,450
--------- --------- --------- --------- ---------
Total operating expenses........................................ 3,391 4,291 7,836 13,818 15,848
--------- --------- --------- --------- ---------
Operating income.................................................... 435 817 3,516 8,487 7,227
Interest income (expense), net...................................... 33 (25) (19) 54 (220)
--------- --------- --------- --------- ---------
Income before income tax provision.................................. 468 792 3,497 8,541 7,007
Income tax provision................................................ 189 301 1,453 2,299(2) 2,816
--------- --------- --------- --------- ---------
Net income.......................................................... $ 279 $ 491 $ 2,044 $ 6,242 $ 4,191
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share............................................ $ 0.05 $ 0.08 $ 0.34 $ 0.99 $ 0.59
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share.......................................... $ 0.05 $ 0.08 $ 0.34 $ 0.88 $ 0.41
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding--basic................... 6,000 6,000 6,000 6,275 7,100
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding--diluted................. 6,000 6,000 6,000 7,065 10,273
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------------
1997 1998(1)
--------- -----------
<S> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales........................................................... $ 9,909 $ 13,116
Cost of goods sold.................................................. 4,475 6,321
--------- -----------
Gross profit...................................................... 5,434 6,795
--------- -----------
Selling and marketing expenses...................................... 2,990 3,477
General and administrative expenses................................. 1,055 1,230
--------- -----------
Total operating expenses........................................ 4,045 4,707
--------- -----------
Operating income.................................................... 1,389 2,088
Interest income (expense), net...................................... (35) (131)
--------- -----------
Income before income tax provision.................................. 1,354 1,957
Income tax provision................................................ 544 782
--------- -----------
Net income.......................................................... $ 810 $ 1,175
--------- -----------
--------- -----------
Basic earnings per share............................................ $ 0.11 $ 0.17
--------- -----------
--------- -----------
Diluted earnings per share.......................................... $ 0.08 $ 0.11
--------- -----------
--------- -----------
Weighted average common shares outstanding--basic................... 7,100 7,100
--------- -----------
--------- -----------
Weighted average common shares outstanding--diluted................. 10,262 10,273
--------- -----------
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ -- $ 560 $ 515 $ 285 $ 1,800 $ 2,229
Working capital................................................. 251 926 2,741 4,496 8,424 5,299
Total assets.................................................... 1,689 3,972 7,608 11,345 19,716 32,029
Long-term debt, less current maturities......................... 84 84 67 405 2,606 7,375
Convertible participating preferred stock....................... -- -- -- 12,000 12,000 12,000
Total stockholders' equity (deficit)............................ 895 1,259 3,303 (5,755) (1,564) (389)
Cash dividend declared per common share......................... $ 0.00 $ 0.00 $ 0.00 $ 0.55 $ 0.00 $ 0.00
</TABLE>
- ------------------------
(1) The Consolidated Statement of Income Data for the three months ended March
31, 1998, includes the historical results of Pure-Gar for the period from
February 28, 1998 to the date of the Pure-Gar Acquisition through the end of
the period, which may affect the comparability of such data to the prior
period. See "Unaudited Pro Forma Consolidated Statements of Income."
(2) In 1996, the Company was taxed under Subchapter S of the Code for the period
from July 1, 1996 through September 29, 1996, and was taxed under Subchapter
C of the Code for the period from January 1, 1996 through June 30, 1996 and
for the period from September 30, 1996 through December 31, 1996.
Accordingly, the provision for income taxes for the period in which the
Company was taxed as a Subchapter S corporation reflects primarily state
income tax, if any. If the Company had been subject to taxation under
Subchapter C of the Code for the entire year ended December 31, 1996, the
pro forma provision for income taxes would have been $3.2 million and pro
forma basic earnings per share and pro forma diluted earnings per share
would have been $0.86 and $0.76, respectively.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS"
THAT INVOLVE RISK AND UNCERTAINTIES. THESE STATEMENTS MAY BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR SIMILAR EXPRESSIONS OR BY
DISCUSSIONS OF STRATEGY. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. IMPORTANT FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED UNDER
THE CAPTION ENTITLED "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE
HEREIN.
OVERVIEW
Natrol is a leading marketer and manufacturer of branded, high-quality
dietary supplements. The Company sells its products under the Natrol brand name
through multiple distribution channels throughout the United States, including
domestic health food stores and mass market drug, retail and grocery store
chains. The Company recently strengthened its product categories through an
acquisition which included two brands of garlic products, as well as a bulk
ingredient business which supplies dehydrated vegetable products to other
manufacturers.
Natrol derives its net sales primarily from sales of dietary supplement
products to health food and mass market retailers and sales of bulk raw
materials. The Company's growth in net sales historically has been a result of
the introduction of new products on an ongoing basis and the expansion of sales
through additional channels of distribution. During the last three years, the
Company's net sales have been affected by the success of certain products,
including Melatonin and DHEA, which were introduced in 1995 and 1996,
respectively. During 1995 and 1996, these products gained substantial popularity
with the general public and generated net sales of $6.7 million in 1995 and
$22.9 million in 1996. However, during 1997 the net-sales volume of these two
products declined by an aggregate of $9.8 million, or 42.9%. When consumer
products experience heightened public popularity, it is not uncommon for them to
enjoy peaks of pipeline sales followed by declines. Accordingly, the Company
anticipated a decline in net sales of Melatonin and DHEA and introduced 34 new
products with 53 SKUs in 1997, which accounted for $8.9 million, or 20.7%, of
net sales in 1997. Growth in existing product lines added an additional $6.8
million to 1997 net sales. In the three months ended March 31, 1998, the largest
product category comprised 25.6% of net sales. A combination of new product
introductions, increases of existing product sales and increased penetration in
the mass market and health food channels of distribution contributed to the
Company's net sales growth during 1997 and the three months ended March 31,
1998. The Company believes that its future growth in net sales will depend on a
combination of these factors to a greater extent than on the rapid success of a
limited number of products. The Company's future results may be affected
significantly by the success or failure of individual products or product lines
that rapidly achieve or lose widespread popularity.
The Company has derived a significant portion of its net sales from certain
of its mass market and health food distribution customers. Net sales to
Walgreens accounted for 15.3% of the Company's net sales for the three months
ended March 31, 1998 and 17.7% and 12.6% of the Company's net sales in 1997 and
1996, respectively. Net sales to Tree of Life accounted for 10.4% of the
Company's net sales for the three months ended March 31, 1998 and 11.6% and
10.2% of the Company's net sales in 1997 and 1996, respectively. Net sales to
GNC accounted for 3.0% of the Company's net sales for the three months ended
March 31, 1998 and 2.3% and 14.5% of the Company's net sales in 1997 and 1996,
respectively.
19
<PAGE>
During 1997 the Company invested heavily in corporate infrastructure and the
building out and equipping of a 90,000 square foot manufacturing and
headquarters facility. The facility has improved manufacturing efficiency, and
management believes the facility provides the flexibility to service customers
more effectively and respond rapidly to increases in demand for particular
products. The Company also developed a dedicated employee sales force (22
employees as of May 1, 1998) during 1997 to service the health food channel of
distribution. Net sales within the health food channel of distribution grew
approximately 23% during 1997.
On February 27, 1998, the Company acquired substantially all of the assets
and certain liabilities of Pure-Gar. The acquisition involved the purchase of
two brands of garlic supplements, Quintessence and Highgar Farms, as well as a
bulk ingredient business. In connection with the acquisition, the Company
recorded $9.0 million of goodwill which will be amortized on a straight line
basis over 15 years, amounting to $600,000 of annual amortization expenses.
RESULTS OF OPERATIONS
The following table sets forth the percentages of net sales represented by
certain items reflected in the Company's statements of income. The information
that follows should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
Net sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................... 51.8 45.3 46.2 45.2 48.2
--------- --------- --------- --------- ---------
Gross profit................................................. 48.2 54.7 53.8 54.8 51.8
--------- --------- --------- --------- ---------
Selling and marketing expenses................................... 18.9 21.4 26.8 30.2 26.5
General and administrative expenses.............................. 14.3 12.5 10.4 10.6 9.4
--------- --------- --------- --------- ---------
Total operating expenses..................................... 33.2 33.9 37.0 40.8 35.9
--------- --------- --------- --------- ---------
Operating income................................................. 15.0 20.6 16.8 14.0 15.9
Interest income (expense), net................................... (0.1) 0.1 (0.6) (0.3) (1.0)
--------- --------- --------- --------- ---------
Income before income tax provision............................... 14.9 20.7 16.2 13.7 14.9
Income tax provision............................................. 6.2 5.6(1) 6.6 5.5 6.0
--------- --------- --------- --------- ---------
Net income....................................................... 8.7% 15.1% 9.6% 8.2% 8.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) In 1996, the Company was taxed under Subchapter S of the Code for the period
from July 1, 1996 through September 29, 1996, and was taxed under Subchapter
C of the Code for the period from January 1, 1996 through June 30, 1996 and
for the period from September 30, 1996 through December 31, 1996.
Accordingly, the provision for income taxes for the period in which the
Company was taxed as a Subchapter S corporation reflects primarily state
income tax, if any. If the Company had been subject to taxation under
Subchapter C of the Code for the entire year ended December 31, 1996, the
pro forma provision for income taxes would have been 7.7% of net sales.
THREE MONTHS ENDED MARCH 31, 1998 AND THREE MONTHS ENDED MARCH 31, 1997
NET SALES. Sales are recognized at the time product is shipped. Net sales
are net of discounts, allowances, and estimated returns and credits. Net sales
increased 32.4%, or $3.2 million, to $13.1 million for the three months ended
March 31, 1998 from $9.9 million for the three months ended March 31, 1997. Of
the $3.2 million increase, $1.2 million, or 37.5%, was attributable to net sales
of Pure-Gar, acquired in February 1998, with the remainder due to increases in
net sales of the Company's other dietary supplement products. The net sales of
Pure-Gar for the month of March 1998 were higher than
20
<PAGE>
anticipated due to a larger-than-usual bulk product purchase by an existing
customer. The $2.0 million increase in net sales of the Company's other dietary
supplement products was primarily due to a $3.7 million increase in net sales of
products introduced since the end of the first quarter of 1997 and a $1.0
million increase in sales of existing products, which was partially offset by a
$2.7 million decrease in net sales of products in the Company's specialty
dietary supplements category, primarily Melatonin and DHEA. The Company believes
that sales of Melatonin have stabilized although there can be no assurance that
sales of Melatonin will not decrease in future quarters, perhaps substantially.
GROSS PROFIT. Gross profit increased 23.5%, or $1.3 million, to $6.7
million for the three months ended March 31, 1998 from $5.4 million for the
three months ended March 31, 1997. Gross margin decreased to 51.1% for the three
months ended March 31, 1998 from 54.8% for the three months ended March 31,
1997. The decline was primarily due to a shift in product mix. Based on its
current product mix the Company expects that gross margins over the near term
will be generally consistent with the gross margins for the three months ended
March 31, 1998.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of advertising and promotional expenses, cost of distribution, and
related payroll expenses and commissions. Selling and marketing expenses
increased 16.3%, or $487,000, to $3.5 million for the three months ended March
31, 1998 from $3.0 million for the three months ended March 31, 1997. The
increase was primarily due to additional advertising, promotional and payroll
expenses to support increased net sales. As a percentage of net sales, selling
and marketing expenses decreased to 26.5% for the three months ended March 31,
1998 from 30.2% for the three months ended March 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel costs related to general management functions,
finance, accounting and information systems, research and development expenses,
as well as professional fees related to legal, audit and tax matters and
depreciation and amortization. General and administrative expenses increased
16.6%, or $175,000, to $1.2 million for the three months ended March 31, 1998
from $1.0 million for the three months ended March 31, 1997. This increase was
primarily attributable to building the infrastructure to support and manage the
Company's growth, as well as $50,000 of amortization of goodwill associated with
the Pure-Gar Acquisition. The Company may incur additional amortization expense
as a result of any future acquisitions. As a percentage of net sales, general
and administrative expenses decreased to 9.4% for the three months ended March
31, 1998 from 10.6% for the three months ended March 31, 1997.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $96,000 to
$131,000 for the three months ended March 31, 1998 from $35,000 for the three
months ended March 31, 1997. The increase was a result of increased outstanding
indebtedness relating to the financing of the Pure-Gar Acquisition and capital
expenditures. See "--Liquidity and Capital Resources."
YEAR ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales increased 5.1%, or $2.1 million, to $42.9 million in
1997 from $40.8 million in 1996. The increase was due to net sales of $8.9
million attributable to products introduced in 1997 and a $3.0 million overall
increase in net sales of existing products, which more than offset a $9.8
million decrease in net sales of Melatonin and DHEA. The net increase in net
sales of new and existing products (other than Melatonin and DHEA ) was
primarily due to increased penetration and expanded presence in both the health
food store and mass market distribution channels.
GROSS PROFIT. Gross profit increased 3.5%, or $771,000, to $23.1 million in
1997 from $22.3 million in 1996. Gross margin decreased to 53.8% for 1997 from
54.7% for 1996. The decrease was primarily due to a shift in product mix as a
result of a decrease in sales in the Company's higher gross margin specialty
dietary supplements category, principally Melatonin and DHEA.
21
<PAGE>
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
30.5%, or $2.7 million, to $11.4 million in 1997 from $8.7 million in 1996. As a
percentage of net sales, selling and marketing expenses increased to 26.6% in
1997 from 21.4% in 1996. The increase was primarily due to increases in spending
to support increased net sales, in particular increases in print, radio and
television advertising, and other promotional expenses and payroll expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 12.4%, or $632,000, to $4.5 million in 1997 from $5.1 million in 1996.
As a percentage of net sales, general and administrative expenses decreased to
10.4% in 1997 from 12.5% in 1996. This decrease was primarily attributable to
increased payroll expenses as a result of significantly higher management
performance-based incentive bonuses in 1996.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $274,000 to
$220,000 in 1997 from interest income of $54,000 in 1996. The increase net was
primarily due to increased borrowings to fund capital expenditures.
INCOME TAX PROVISION. Provision for income taxes increased 22.5%, or
$518,000, to $2.8 million in 1997 from $2.3 million in 1996. The effective tax
rate for 1997 was 40.2%, compared to 26.9% for 1996. The Company was taxed under
Subchapter S of the Code for the period from July 1, 1996 through September 30,
1996, at which time the Company ceased to qualify as an S corporation. As a
result, the Company paid no federal income taxes for the third calendar quarter
of 1996.
YEAR ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 73.1%, or $17.2 million, to $40.8 million in
1996 from $23.6 million in 1995. The increase was due almost entirely to
increased sales of Melatonin and DHEA. The Company's net sales of Melatonin
increased markedly as a result of favorable publicity regarding the use of
melatonin and the Company's aggressive promotional efforts. The Company also
introduced DHEA in 1996 and benefitted from substantial favorable publicity
regarding its use.
GROSS PROFIT. Gross profit increased 96.5%, or $11.0 million, to $22.3
million in 1996 from $11.4 million in 1995. Gross margin increased to 54.7% in
1996 from 48.2% in 1995. The increase was primarily due to a shift in product
mix to products with higher gross margins, most significantly Melatonin and
DHEA.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
96%, or $4.3 million, to $8.7 million in 1996 from $4.5 million in 1995. As a
percentage of net sales, selling and marketing expenses increased to 21.4% in
1996 from 18.9 % in 1995. The increase was primarily due to increases in
spending to support increased net sales, in particular increases in print, radio
and television advertising.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 50.4%, or $1.7 million, to $5.1 million in 1996 from $3.4 million in
1995. This increase was primarily attributable to increased payroll expenses as
a result of significantly higher management performance-based incentive bonuses
in 1996. As a percentage of net sales, general and administrative expenses
decreased to 12.5% in 1996 from 14.3% in 1995.
INTEREST INCOME (EXPENSE), NET. Interest income increased $72,000 to
$54,000 in 1996 from interest expense of $19,000 in 1995. The increase was
primarily due to interest income on significantly higher cash balances as a
result of increased net sales in 1996.
22
<PAGE>
QUARTERLY FINANCIAL INFORMATION; SEASONALITY
The following table sets forth unaudited quarterly operating results for
each of the Company's last nine quarters as well as certain of such data
expressed as a percentage of net sales for the periods indicated. This
information has been prepared by the Company on a basis consistent with the
Company's audited consolidated financial statements and includes all adjustments
(consisting only of normal recurring adjustments) that management considers
necessary for a fair presentation of the data. These quarterly results are not
necessarily indicative of future results of operations. This information should
be read in conjunction with the Consolidated Financial Statements of the Company
and Notes thereto included elsewhere in this Prospectus.
The Company believes that its business is characterized by mild seasonality.
Historically, the Company has recorded higher sales and profitability during the
third and fourth quarters of the year and the weaker sales and profitability
during the second quarter of the year. The Company does not believe that the
impact of seasonality on its results of operations is material. However, the
Company has experienced quarterly volatility in net sales as a result of, among
other things, trends and general conditions in the dietary supplement industry,
introduction of new products by the Company or its competitors and increased
media attention on the use and efficacy of dietary supplements. In addition,
advertising and marketing expenses have historically fluctuated from
quarter-to-quarter, which has in some cases contributed to quarterly variations
in the Company's operating income.
23
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales.......................... $ 11,505 $ 7,369 $ 10,280 $ 11,648 $ 9,909 $ 8,191 $ 11,392
Cost of goods sold................. 5,451 2,738 4,835 5,473 4,475 3,815 5,368
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 6,054 4,631 5,445 6,175 5,434 4,376 6,024
Selling and marketing expenses..... 1,924 2,360 1,999 2,453 2,990 2,825 2,670
General and administrative
expenses......................... 1,489 1,319 993 1,282 1,055 1,046 1,067
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses......... 3,413 3,679 2,992 3,735 4,045 3,871 3,737
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income................... 2,641 952 2,453 2,440 1,389 505 2,287
Interest income (expense), net..... (7) (11) 31 42 (35) (41) (74)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income tax
provision........................ 2,634 941 2,484 2,482 1,354 464 2,213
Income tax provision............... 1,028 348 40(1) 882 544 187 889
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income......................... $ 1,606 $ 593 $ 2,443 $ 1,601 $ 810 $ 277 $ 1,324
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC. 31, MAR. 31,
1997 1998
----------- -----------
<S> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales.......................... $ 13,382 $ 13,116
Cost of goods sold................. 6,142 6,321
----------- -----------
Gross profit..................... 7,240 6,795
Selling and marketing expenses..... 2,913 3,477
General and administrative
expenses......................... 1,283 1,230
----------- -----------
Total operating expenses......... 4,196 4,707
----------- -----------
Operating income................... 3,044 2,088
Interest income (expense), net..... (69) (131)
----------- -----------
Income before income tax
provision........................ 2,975 1,957
Income tax provision............... 1,196 782
----------- -----------
Net income......................... $ 1,779 $ 1,175
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share...... $ 0.27 $ 0.10 $ 0.34 $ 0.27 $ 0.11 $ 0.04 $ 0.19
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings per share.... $ 0.27 $ 0.10 $ 0.31 $ 0.19 $ 0.08 $ 0.03 $ 0.13
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common shares
outstanding-basic........... 6,000 6,000 6,012 7,100 7,100 7,100 7,100
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common shares
outstanding-diluted......... 6,000 6,000 6,503 10,262 10,262 10,262 10,273
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
Basic earnings per share...... $ 0.25 $ 0.17
<S> <C> <C>
----------- -----------
----------- -----------
Diluted earnings per share.... $ 0.17 $ 0.11
----------- -----------
----------- -----------
Weighted average common shares
outstanding-basic........... 7,100 7,100
----------- -----------
----------- -----------
Weighted average common shares
outstanding-diluted......... 10,273 10,273
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................. 47.4 37.2 47.0 47.0 45.2 46.6 47.1
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 52.6 62.8 53.0 53.0 54.8 53.4 52.9
Selling and marketing expenses..... 16.7 32.0 19.4 21.1 30.2 34.5 23.4
General and administrative
expenses......................... 12.9 17.9 9.6 11.0 10.7 12.8 9.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses......... 29.6 49.9 29.0 32.1 40.9 47.3 32.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income................... 23.0 12.9 24.0 20.9 13.9 6.1 20.1
Interest income (expense), net..... (0.1) (0.2) 0.3 0.4 (0.4) (0.5) (0.7)
Income before income tax
provision........................ 22.9 12.7 24.2 21.3 13.5 5.6 19.4
Income tax provision............... 8.9 4.7 0.4 7.6 5.5 2.3 7.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income......................... 14.0% 8.0% 23.9% 13.7% 8.0% 3.3% 11.6%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC. 31, MAR. 31,
1997 1998
----------- -----------
<S> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales.......................... 100.0% 100.0%
Cost of goods sold................. 45.9 48.2
----------- -----------
Gross profit..................... 54.1 51.8
Selling and marketing expenses..... 21.8 26.5
General and administrative
expenses......................... 9.6 9.4
----------- -----------
Total operating expenses......... 31.4 35.9
----------- -----------
Operating income................... 22.7 15.9
Interest income (expense), net..... (0.5) (1.0)
Income before income tax
provision........................ 22.2 14.9
Income tax provision............... 8.9 6.0
----------- -----------
Net income......................... 13.3% 8.9%
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
(1) The Company was taxed under Subchapter S of the Code for the period from
July 1, 1996 through September 29, 1996. Accordingly, the provision for
income taxes for the period in which the Company was taxed as a Subchapter S
corporation reflects primarily state income tax. If the Company had been
subject to taxation under Subchapter C of the Code for the quarter ended
September 30, 1996, the pro forma provision for income taxes would have been
$862 and pro forma basic earnings per share and pro forma diluted earnings
per share would have been $0.27 and $0.25, respectively.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital
requirements primarily through funds from operations and, to a lesser extent,
borrowings. At March 31, 1998, the Company had working capital of $5.3 million,
as compared to $8.4 million in working capital at December 31, 1997. The
decrease was primarily due to an increase in the current portion of long-term
debt as a result of increased borrowings due to the Pure-Gar Acquisition.
Net cash provided by operating activities was $3.4 million for the three
months ended March 31, 1998 and $2.1 million, $4.1 million and $409,000 in 1997,
1996 and 1995, respectively. The decrease in net cash provided by operating
activities in 1997 compared to 1996 was primarily due to a decrease in net
income and reflects higher levels of accounts receivable and inventory balances,
partially offset by higher levels of depreciation and amortization, provision
for reserves for doubtful accounts and other reserves and accounts payable. The
increase in inventory balances was primarily due to the purchase of larger
quantities of raw materials to obtain favorable volume discounts and the
purchase of raw materials for new products in anticipation of new product
introductions scheduled for 1998. The increase in accounts receivable was the
result of increased sales by the Company during such period to mass market
retailers from whom accounts receivable are on average outstanding for a longer
period of time. At March 31, 1998 the Company's average trade receivable aging
was under 45 days. The increase in net cash provided by operating activities in
1996 compared to 1995 was primarily due to an increase in net income and
reflected a decrease in accounts receivable which was only partially offset by
an increase in inventory balances.
Net cash used in investing activities was $11.2 million for the three months
ended March 31, 1998 and $3.2 million, $1.9 million and $409,000 in 1997, 1996
and 1995, respectively. Of the net cash used in investing activities in the
three months ended March 31, 1998, the Company used $11.1 million to consummate
the Pure-Gar Acquisition and invested $111,000 in property and equipment.
Substantially all net cash used in investing activities in 1997 and 1996
constituted capital expenditures made in connection with the build-out of the
Company's manufacturing facility/headquarters, which the Company began in 1996.
Net cash used in investing activities in 1995 consisted entirely of capital
expenditures.
Net cash provided by (used in) financing activities was $8.3 million for the
three months ended March 31, 1998 and $2.6 million, ($2.5 million) and ($44,000)
in 1997, 1996 and 1995, respectively. Net cash provided by financing activities
in the three months ended March 31, 1998 consisted entirely of borrowings to
finance in part the Pure-Gar Acquisition. Net cash provided by financing
activities in 1997 was comprised of net borrowings of $3.0 million to finance
capital expenditures made in connection with the build-out and equipping of the
Company's manufacturing facility, which was partially offset by $400,000 used to
pay dividends to stockholders declared in 1996. Net cash provided by financing
activities in 1996 was comprised of net borrowings of $415,000 used for capital
expenditures and proceeds of $854,000 from the sale by the Company to the TA
Investors of 1,921.9 shares of Convertible Preferred Stock. These amounts were
more than offset by $854,000 used to redeem shares of Common Stock from a
stockholder and $2.9 million used to pay dividends to stockholders. Net cash
provided by financing activities in 1995 was comprised entirely of net
borrowings for working capital.
The Company's current Credit Facility consists of a $9.0 million term loan
and an $8.0 million revolving line of credit. The term loan matures in February
2004 and the line of credit expires in May 2001. As of March 31, 1998, the
Company had outstanding borrowings of $11.8 million under the Credit Facility.
The amounts outstanding under the Credit Facility bear interest at variable
rates which are based upon either the lender's base rate or LIBOR, plus, in
either case, a margin which varies according to the ratio of the Company's total
indebtedness to its earnings before interest, taxes, depreciation, and
amortization expenses for the relevant period. Furthermore, the Credit Facility
contains various financial covenants which are predicated on the Company's
present and projected financial condition. In the
25
<PAGE>
event that future operations differ materially from what is expected, the
Company may no longer be able to meet the tests set out in the Credit Facility.
Failure to meet these tests may result in a default by the Company under the
Credit Facility which may materially adversely affect the Company's liquidity.
The Credit Facility requires that the Company use 25% of its net income after
taxes, plus (i) depreciation and amortization expenses minus (ii) unfinanced
capital expenditures and scheduled principal debt and capital lease payments, to
repay outstanding indebtedness thereunder. The Credit Facility restricts or
prohibits the Company from incurring indebtedness, incurring liens, disposing of
assets or making investments or acquisitions, and requires the Company to
maintain certain financial ratios on an ongoing basis. As of June 1, 1998, the
Company was in compliance with the covenants and restrictions in the Credit
Facility. The Credit Facility is collateralized by pledges of all of the
outstanding capital stock of the Company's subsidiaries, and a lien on
substantially all of the assets of the Company.
The Company will use the net proceeds from this offering to repay all
outstanding indebtedness under the Credit Facility and to redeem for $6.0
million all Redeemable Preferred Stock to be issued upon the conversion of the
Company's Convertible Preferred Stock at the completion of this offering. The
Company believes that the remaining net proceeds from this offering, together
with cash generated from operations and borrowings under the Credit Facility,
will be sufficient to fund its anticipated working capital needs and capital
expenditures (other than financing necessary to complete future acquisitions, if
any) for at least the next 12 months. Future acquisitions, if any, could be
funded with cash from operations, the net proceeds of this offering, and
borrowings under the Credit Facility. There can be no assurance that attractive
acquisition opportunities will be available to the Company or will be available
at prices and upon such other terms that are attractive to the Company. The
Company regularly evaluates the potential acquisition of other businesses,
products and product lines and may hold discussions regarding such potential
acquisitions. As a general rule, the Company will publicly announce such
acquisitions only after a definitive agreement has been signed. The Company
currently has no commitments or agreements with respect to any acquisition. In
addition, in order to meet its long-term liquidity needs or consummate future
acquisitions, the Company may be required to incur additional indebtedness or
issue additional equity and debt securities, subject to market and other
conditions. There can be no assurance that such additional financing will be
available on terms acceptable to the Company or at all. The failure to raise the
funds necessary to finance its future cash requirements or consummate future
acquisitions could adversely affect the Company's ability to pursue its strategy
and could negatively affect its operations in future periods.
IMPACT OF INFLATION
Generally, the Company has been able to pass on inflation cost increases.
Consequently, inflation has not had a material impact on the Company's
historical operations or profitability.
YEAR 2000 COMPLIANCE
Many existing computer programs and databases use only two digits to
identify a year in the date field (I.E., 98 would represent 1998). These
programs and databases were designed and developed without considering the
impact of the upcoming millennium. If not corrected, many computer systems could
fail or create erroneous results relating to the year 2000. The Company does not
anticipate any significant costs, problems or uncertainties associated with
becoming Year 2000 compliant and is currently developing a plan to ensure that
its computer systems and other operations are modified to be compliant on a
timely basis.
26
<PAGE>
BUSINESS
OVERVIEW
Natrol, Inc. ("Natrol" or the "Company") is a leading marketer and
manufacturer of branded, high-quality dietary supplements. The Company sells its
products under the Natrol brand name through multiple distribution channels
throughout the United States, including domestic health food stores and mass
market drug, retail and grocery store chains. Natrol's select line of more than
145 products consists of approximately 500 SKUs and includes vitamins, minerals,
herbs, speciality formulations, weight control products and hormones. The
Company's strategy emphasizes building strong recognition of the Natrol brand
across multiple distribution channels through a widespread multimedia marketing
and advertising strategy. The Company recently strengthened its product
categories through an acquisition which included two brands of garlic products
as well as a bulk ingredient business which supplies dehydrated vegetable
products to other manufacturers.
INDUSTRY
Based on estimates in THE U.S. MARKET FOR VITAMINS, SUPPLEMENTS, AND
MINERALS, a 1997 market report prepared by Packaged Facts (the "Packaged Facts
Report"), an independent consumer marketing research firm, the retail market for
vitamins, minerals and other supplements (excluding sports nutrition and diet
products) has grown at a compound annual rate of 15% from $3.7 billion in 1992
to $6.5 billion in 1996. A large portion of this growth is attributable to an
increase in sales of other supplements (primarily herbal products), which grew
from $570 million in 1992 to $2.3 billion in 1996. Growth in this category has
been fueled by the popularity of such herbs as echinacea, garlic, ginseng,
ginkgo biloba and, more recently, saw palmetto and St. John's wort. The Packaged
Facts Report forecasts 13.6% compound annual growth in the market for vitamins,
minerals and other supplements (excluding sports nutrition and diet products),
including 25% compound annual growth in the market for other supplements,
through 2001. Compound annual growth rates from 1992 through 1996 for vitamins,
minerals and other supplements were 8.0%, 5.2% and 41.7%, respectively.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RETAIL SALES AND GROWTH OF THE U.S. MARKET
<S> <C> <C> <C>
for Vitamins, Minerals and Other Supplements,
1992-1996
(dollars in billions)
Sales ($)
Other Supplements Vitamins Minerals
1992 0.6 2.6 0.6
1993 0.9 2.9 0.6
1994 1.3 3.1 0.6
1995 1.8 3.3 0.7
1996 2.3 3.5 0.7
</TABLE>
- ------------------------
Source: The Packaged Facts Report
The Company believes that growth in the dietary supplement industry has been
driven by: (i) the aging of the "baby boom" generation combined with consumers'
tendency to purchase more dietary supplements as they age; (ii) the publication
of research findings supporting the positive health effects of certain dietary
supplements; (iii) increased media attention on the use and efficacy of dietary
supplements; (iv) the nationwide trend toward preventive medicine in response to
rising healthcare
27
<PAGE>
costs; (v) increased consumer interest in herbs and herb-related supplements;
and (vi) increased interest in healthier lifestyles and the connection between
diet and health.
Dietary supplements are sold through several channels of distribution,
including health food stores, mass market retailers (drug store chains,
supermarkets and other mass merchandisers), and direct sales channels (including
network marketing and catalog distribution). In 1996, according to the Packaged
Facts Report, health food stores accounted for 38.2% of sales of vitamins,
minerals and other supplements, the mass market channel accounted for
approximately 45.8% of such sales and the remaining 16.0% of such sales were
generated through direct selling, mail order and the Internet.
The Company believes the United States health food store market is comprised
of over 9,500 stores, which are generally either independently owned or
associated with one of several regional or national chains, such as GNC, Wild
Oats Markets and Whole Foods Market. The health food store channel of
distribution has continued to experience growth in recent years as national
chains as well as other industry participants continue to add stores in new and
existing markets.
The United States mass market distribution channel consists of drug stores,
including chains such as Walgreens, American Drug Stores and Eckerd, mass
merchandisers such as Wal-Mart, Kmart, BJ's Wholesale Club and ShopKo, and food
stores, including national supermarket chains. In the mass market channel, sales
of vitamins, herbs and dietary supplements have generally grown in line with the
growth in all channels due to the proliferation of retail outlets and the
expansion of SKU's offered by these stores. According to the Packaged Facts
Report, in the mass market distribution channel, sales of vitamins, minerals and
other supplements have increased from approximately $2.3 billion in 1994 to
approximately $3.0 billion in 1996. Sales from herbal and other supplements have
shown the fastest rate of growth in the mass market distribution channel from
1994 to 1996. Within drug stores and mass merchandisers, sales from herbal and
other supplements increased as a percentage of total sales of dietary
supplements from an estimated 13.1% in 1994 to an estimated 20.9% in 1996.
Herbal and other supplements have begun to penetrate food stores as well,
increasing from 8% of total sales of dietary supplements in 1994 to 12% in 1996.
Total retail sales of vitamins, minerals and other supplements were $6.5
billion in 1996. The following chart sets forth the relative amount of total
sales in each channel of distribution in the dietary supplement industry in
1996:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HEALTH AND NATURAL FOOD STORES 38.2%
<S> <C>
Drug Store Chains 20.2%
Mass Merchandisers 14.8%
Supermarkets 10.8%
Direct Selling 12.6%
Mail Order and the Internet 3.4%
</TABLE>
- ------------------------
Source: The Packaged Facts Report
28
<PAGE>
The dietary supplement industry is currently fragmented with hundreds of
manufacturers, marketers and distributors of vitamins, minerals and other
supplements in the various channels of distribution. Generally, most larger
companies sell multiple brands into each channel of distribution and smaller
companies generally target only one channel of distribution. The Company
believes that these industry dynamics present growth opportunities for a single
brand with strong brand recognition across multiple distribution channels.
BUSINESS STRATEGY
The Company's objective is to enhance its position as a leading marketer and
manufacturer of dietary supplements that are strongly identified with the Natrol
brand. Key elements of the Company's strategy include the following:
- CONTINUE TO BUILD STRONG BRAND RECOGNITION. The Company's growth strategy
emphasizes building strong recognition of the Natrol brand across multiple
distribution channels. The Company consistently promotes the Natrol brand
through a widespread multimedia marketing and advertising strategy and
seeks to spend approximately 15% of its annual net sales on marketing and
advertising. The Company uses print, radio and television advertising to
reach millions of consumers each month throughout all of the nation's top
100 markets. Recent advertising initiatives include the "Natrol Health
Minute," as heard on the nationally syndicated Dr. Laura Schlessinger and
Rush Limbaugh radio shows, and commercials featured on the CNN/ Turner
Network.
- EXPAND PRESENCE AND PENETRATION IN THE HEALTH FOOD STORE AND MASS MARKET
DISTRIBUTION CHANNELS. The Company continually seeks to increase its
market penetration within both the health food store and mass market
distribution channels by gaining more shelf space within each store and
expanding the number of products and SKUs carried by retailers. Within the
health food store distribution channel, the Company's dedicated sales
force maintains direct and regular contact with key store personnel,
informing them of new product developments and industry trends, aiding
them in the design of store sets and creating merchandising programs which
promote brand and category awareness. Within the mass market distribution
channel, the Company's regional sales managers and network of independent
brokers work with corporate buyers, focusing on special promotional
activities and brand and category awareness. The number of the Company's
customers in the mass market distribution channel increased 35.2% in 1997
over 1996 and the average number of SKUs per customer in this channel
increased 34.3% in 1997 over 1996.
- CONTINUE TO DEVELOP NEW PRODUCTS. Since its inception, the Company has
focused on the ongoing development and marketing of new products in order
to capitalize on and create market opportunities. The Company has
established a focused process to anticipate consumer trends and to monitor
product developments within the dietary supplement industry. This process
includes communication with a panel of scientific advisors, the formal
review of periodicals, scientific research and use of on-line databases.
In addition, the Company develops proprietary products such as Kavatrol,
Mood Support and the Natrol for Women product line. The Company introduced
34 new products with 53 SKUs in 1997 and has introduced 21 new products
with 28 SKUs in the three months ended March 31, 1998.
- EXPAND BULK SALES BUSINESS. The Company believes that opportunities exist
for expansion of sales of bulk raw materials to other manufacturers,
distributors and marketers of dietary supplements. The Company's bulk
ingredient business currently involves the sale of dehydrated vegetable
products, primarily garlic, acquired from Basic Vegetable Products, L.P.
("BVP") pursuant to an exclusive, multi-year supply agreement. In the
future, the Company may seek to expand its bulk sales activities to
include sales of other bulk raw materials used in the manufacture of
dietary supplements.
29
<PAGE>
- DEVELOP ADDITIONAL DISTRIBUTION CHANNELS. The Company sells a substantial
majority of its products through the domestic health food stores and mass
market distribution channels. The Company believes that sales
opportunities exist in other distribution channels such as mail order and
the Internet, direct selling (multi-level marketing as well as sales to
health professionals), direct retail and international. Over time and as
the Company deems appropriate, the Company intends to enter or expand
these distribution channels either through internal growth or
acquisitions. The Company's products have been sold in Canada, China,
Turkey, Indonesia, Korea and a limited number of South American countries.
The Company believes that opportunities may develop as consumers in other
countries gain greater awareness of the benefits of dietary supplements.
- PURSUE STRATEGIC ACQUISITIONS. The Company believes that the dietary
supplement industry is currently fragmented and that attractive
acquisition opportunities may exist in the future. The Company intends to
pursue acquisition opportunities that will allow it to broaden its product
lines, increase the distribution channels it serves or otherwise
complement its business or further its strategic goals. The Company
completed its first acquisition, the Pure-Gar Acquisition, in February
1998. This acquisition involved the purchase of two well-known brands,
Quintessence and Highgar Farms, and enabled the Company to enter the
garlic supplement market and the bulk ingredient business from a position
of strength.
The Company intends to continue investing in its management team and
corporate infrastructure to support its business strategy. The Company has,
since January 1, 1997, hired a Director of Finance to support its Chief
Financial Officer, a Director of Administration, a product development manager,
a manager of information systems, a Director of International Sales, and a
number of mid-level managers and quality control and manufacturing personnel. In
addition, the Company has improved significantly its manufacturing capabilities
with its lease and build-out of a 90,000 square foot manufacturing/ headquarters
facility, which the Company occupied in March 1997. This facility has
substantial additional capacity and manufacturing flexibility which enables the
Company to bring products to market promptly in response to consumer demand and
to support increased sales volume.
PRODUCTS
The Company focuses on premium dietary supplement products that are in high
demand as well as specialty niche and proprietary formulations that have
potentially strong margins. The Company's products include vitamins, minerals,
herbs, specialty formulations, weight control products, hormones and various
nutrients. The Company positions Natrol as a premium brand of vitamins, minerals
and other supplements rather than a value brand. The Company manufactures and
sells more than 145 products packaged into approximately 500 SKUs. The Company's
consumer products are currently divided into seven product categories: Ester-C,
Herbals, Natrol Premium, Lifestyle Products, Garlic, Specialty Dietary
Supplements and Natural Diet Control. The Company also sells bulk raw materials.
The percentage of the Company's net sales represented by each of its product
categories fluctuates from period to period. For the three months ended March
31, 1998, the largest category accounted for 25.6% of net sales while the
smallest accounted for 3.6% of net sales and for 1997 the largest category
accounted for 29.4% of net sales while the smallest accounted for 3.5% of net
sales.
ESTER-C. Introduced in 1986, Ester-C is a buffered form of pH-neutral
Vitamin C and one of Natrol's cornerstone products. Although many Natrol
competitors sell Ester-C, according to Spence Information Services, Natrol's
Ester-C held approximately 25% of the Vitamin C market in health food stores in
1997. The Company has built its market share though heavy promotion, associating
Ester-C with the Natrol brand. The Company sells approximately 45 SKUs of
Ester-C, each offering a special potency, pill count, delivery system or
specialty combination, such as Ester-C with zinc.
HERBALS. Herbal supplements are popular in the health food store channel
and are becoming increasingly popular in the mass market distribution channel.
The Company's Herbals category consists
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of more than fifty herbal extracts. These include single herb products such as
St. John's wort, ginkgo biloba and kava kava, standardized extracts such as
bilberry, and specialty formulations that combine herbs designed to meet
particular consumer needs. Examples of the Company's specialty herb formulations
are Eye Support, Hair & Nail Formula, Liver Support and Mental Support.
LIFESTYLE PRODUCTS. This category is designed to meet particular lifestyle
needs. Product formulations are generally proprietary, and include Kavatrol, an
herbal kava formulation used as a calming aid, and Mood Support, a formulation
of St. John's wort and other herbs used for mood elevation. During the three
months ended March 31, 1998, the Company launched Natrol for Women, a line in
which each formulation is designed to meet nutritional needs specific to women.
The Company believes there is significant opportunity to expand the Lifestyle
Products category with formulations that are proprietary to the Natrol label.
NATROL PREMIUM. The Natrol Premium category includes My Favorite Multiple
(called the "Cadillac of vitamins" by the Center for Science in the Public
Interest) and the Company's core group of vitamins, minerals, anti-oxidants and
generic supplements. The Natrol Premium category, which contains approximately
80 SKUs and includes many widely consumed and popular vitamins, minerals and
other supplements, is important to Natrol's business as the Company seeks to
build broad-based consumer support and brand recognition.
GARLIC. The Company's Garlic category consists of two brands, Quintessence
and Highgar Farms, acquired in the Pure-Gar Acquisition. Quintessence is sold
through the health food store distribution channel while the Highgar Farms brand
is sold through the mass market distribution channel. Both brands have a solid
reputation for delivering high quality, high potency tablets and capsules. The
Company intends to integrate the Natrol name and logo into these brands.
SPECIALTY DIETARY SUPPLEMENTS. The Company's Specialty Dietary Supplements
category includes products such as Melatonin, DHEA and Pregnenolone. Melatonin
helped establish the Company's reputation within the mass market channel of
distribution. In 1996, the Company received the Rex Award for Market Maker of
the Year and the Rex Award for Best Nutritional Supplement, each from Drug Store
News, for its introduction of Melatonin into the chain drugstore distribution
channel. According to Information Resources, Inc., the Company ranked first in
net sales of Melatonin in the food, drug and mass trade class in the United
States in 1997.
NATURAL DIET CONTROL. The Company's Natural Diet Control category consists
of products sold for weight control or weight loss. The category includes
products such as Cravex, Tonalin, Absorbitol-Registered Trademark-, Chitosan,
Calcium Pyruvate and Citrimax-Registered Trademark-. Products within the natural
diet control category typically have a shorter life cycle than other dietary
supplement products, leading Natrol to be more aggressive with new product
development in this category.
The Company emphasizes the ongoing development and introduction of products
in response to emerging trends or scientific developments in the dietary
supplement market. The Company believes it has an excellent reputation among
retailers for introducing items at the front end of the consumer demand curve
and then working to develop brand loyalty after product introduction. Management
continually evaluates its product categories and SKUs for trends in sales and
profitability, de-emphasizing or dropping products when profitability or SKU
velocity lags and regularly introducing new products to replace slower moving
products, capitalize on market trends and diversify the Company's product
offerings. See "--Research and Product Development."
In its bulk ingredient business, the Company currently sells dehydrated
vegetable products, primarily garlic, to other manufacturers, distributors and
marketers of dietary supplements. The Company obtains bulk garlic from BVP
pursuant to a multi-year supply agreement that gives the Company the exclusive
right to sell BVP's vegetable powders in the dietary supplement industry. The
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Company's future business may include sales of other bulk raw materials when, as
and if opportunities arise. See "--Manufacturing and Product Quality."
MARKETING
The Company believes that its strategy of selling through both the health
food store and mass market channels of distribution under a single
label--Natrol--distinguishes the Company from its competition. Most of the
Company's competitors sell products into each channel using different brand
names, in some cases using a premium brand for the health channel and a value
brand for the mass market. The Company's core strategy is to continue to build
the Natrol brand name within multiple channels of distribution in order to
develop increased brand awareness and strong brand recognition among consumers
seeking products with a reputation for quality. The Company believes it can
leverage its reputation for high quality products developed within the health
food distribution channel in the mass market by positioning its products as a
premium, high quality brand rather than a value brand. By maintaining a single
brand identity, the Company believes it can also leverage its advertising budget
across multiple distribution channels.
The Company utilizes print, radio and television advertising. The Company
spent $2.1 million, or 16.0% of net sales on advertising and other marketing and
promotional activities in the three months ended March 31, 1998 and $6.9
million, or 16.2% of net sales, and $5.6 million, or 13.8% of net sales, in 1997
and 1996, respectively.
The Company generally uses targeted health-oriented magazines such as BETTER
NUTRITION, DELICIOUS and GREAT LIFE to support the health food store
distribution channel and uses mainstream publications such as PREVENTION,
HEALTH, USA TODAY, TV GUIDE, MCCALLS, FAMILY CIRCLE, WOMEN'S DAY and major
airline in-flight publications to support the mass market distribution channel.
The Company has utilized talk radio since 1991 when the Company first
advertised on the original LARRY KING LIVE SHOW. Throughout 1998, the Company's
"Natrol Health Minute," which features medical nutritional specialist Dr. Bruce
Hensel, will be heard on the nationally syndicated Dr. Laura Schlessinger and
Rush Limbaugh radio shows. The "Natrol Health Minute" campaign will feature
discussions about current health and nutrition issues. The campaign is intended
to make the Natrol name synonymous with good health.
In 1997, the Company first utilized television as part of its introductory
campaign for Kavatrol. Throughout 1998, the Company's commercials will be seen
on the CNN/Turner Network, including such programs as CNN HEADLINE NEWS, CNN
MORNING NEWS, and BURDEN OF PROOF. In addition, the Natrol logo will appear on
HEADLINE WEATHER and HEADLINE SPORTS TICKER.
The Company also actively works to keep the news media aware of product
developments. In recent years the Company's products have appeared in
periodicals such as TIME, NEWSWEEK, THE WALL STREET JOURNAL and COSMOPOLITAN as
well as in television footage produced by programs such as 20/20, DATELINE, 48
HOURS and PRIME TIME LIVE.
SALES AND DISTRIBUTION
The Company distributes its products primarily to domestic health food
stores and mass market drug, retail and food stores. Net sales into these
distribution channels have historically accounted for a substantial majority of
the Company's total net sales. The Company's products are also available at a
wide range of other distribution points, including mail order and the Internet,
airport shops, resort hotels and salons.
The Company sells its products to health food stores through the leading
national distributors, including United Natural Foods and Tree of Life, as well
as directly to GNC. Natrol products are sold by health food store chains such as
Wild Oats Markets, Whole Foods Market, Hi-Health, Vitamin Cottage, Fred Meyer
Nutrition Centers and Vitamin Shoppes, as well as most independent health food
stores. The
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Company also distributes its products to domestic military exchanges. During
1996 and 1997, in order to better develop retail business within the health food
store distribution channel, the Company converted from a sales network of
independent brokers to a direct sales force of more than 22 employees under the
supervision of three regional managers (at May 1, 1998).
The mass market distribution channel is managed by the Company's Vice
President of Sales and regional managers who work with a network of independent
brokers. The Company's employees service certain of its larger mass market
accounts directly while independent brokers service others in conjunction with
the Company's management. The Company sells its products to mass market
merchandisers either directly or through distributors of vitamins, minerals and
other supplement products such as Bergen Brunswick, McKesson and Cardinal. Some
of the Company's major mass market retail customers are Walgreens, CVS, American
Drug Stores, Rite Aid, Long's Drug, Drug Emporium, Eckerd, Snyders, Brooks Drug,
Wal-Mart, Kmart, Target, ShopKo and BJ's Wholesale Club. The Company also sells
its products in grocery stores and supermarkets, including Dominick's, Ralphs,
Von's, Cub Foods, Food For Less and Wegmans. The Company believes supermarket
and grocery stores present significant opportunities for growth in the dietary
supplement industry.
The Company provides retailers in both the health food store and the mass
market distribution channel with a wide array of comprehensive services tailored
to meet their individual needs. In the health food store channel, the Company's
dedicated sales force maintains direct and regular contact with key store
personnel, informing them of new product developments and industry trends,
aiding them in the design of store sets and creating merchandising programs that
promote brand and category awareness. The Company's regional sales managers and
independent brokers in the mass market distribution channel work with corporate
buyers focusing on special promotional activities and brand and category
awareness in order to gain more shelf space. The objective of these activities
is to build strong relationships with the Company's marketing partners and to
increase the number of stores carrying its products and the amount of space
allocated to, and the overall number of, the Company's products and SKUs within
each store.
Net sales to Walgreens accounted for 15.3% of the Company's net sales for
the three months ended March 31, 1998 and 17.7% and 12.6% of the Company's net
sales in 1997 and 1996, respectively. Net sales to Tree of Life accounted for
10.4% of the Company's net sales for the three months ended March 31, 1998 and
11.6% and 10.2% of the Company's net sales in 1997 and 1996, respectively. Net
sales to GNC accounted for 3.0% of the Company's net sales for the three months
ended March 31, 1998 and 2.3% and 14.5% of the Company's net sales in 1997 and
1996, respectively. The Company does not have long-term contracts with any of
its customers.
RESEARCH AND PRODUCT DEVELOPMENT
The Company emphasizes the ongoing development and introduction of products
in response to emerging trends in the dietary supplement market. The Company
believes it has an excellent reputation among retailers for introducing items at
the front end of the consumer demand curve and then working to develop brand
loyalty after product introduction. Management continually evaluates its product
categories and SKUs for trends in sales and profitability, de-emphasizing or
dropping products when profitability or SKU velocity lags and regularly
introducing new products to replace slower moving products, capitalize on market
trends and diversify the Company's product offerings. In addition, new products
often have higher gross margins than mature items. For these reasons, the
Company considers product development essential to maintaining growth and
profitability.
The Company believes it has developed a reputation among retailers for
consistently identifying new products with market potential. During 1996 and
1997 the Company was one of the first companies to market and promote broadly
melatonin, DHEA and St. John's wort. The Company has also introduced a number of
proprietary formulations including Kavatrol, Mood Support, Thera-C, and a line
of women's specialty products. As a result of its product development efforts,
the Company introduced 34 new
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products with 53 SKUs in 1997 and has introduced 21 products with 28 SKUs in the
three months ended March 31, 1998.
The Company has established a focused process to anticipate consumer
demands, monitor product developments within the dietary supplement industry,
and facilitate generation of new ideas for product introductions. In this
process, the Company's product development staff reviews periodicals, scientific
research and relevant clinical studies within medical journals and uses on-line
databases.
The Company also consults with a panel of scientific advisors to assist
members of its product development team. These advisors include: Dr. Terry
Willard, a recognized herbal expert, author and president of the Canadian
Association of Herbal Practitioners; Dr. Alexander Schauss, Director of the Life
Sciences Division, Natural and Medicinal Products Research of the American
Institute for Biosocial Research, Inc.; Dr. Ronald R. Watson, a scientist who
has published more than 150 articles relating to nutrition and immunology; and
Dr. Bruce Hensel, a physician and journalist. The Company also communicates with
other scientists on a regular basis regarding new product concepts.
The Company sponsors scientific research by independent researchers as a
part of its product development efforts. In order to implement its strategy of
consistently developing new products, in 1998 the Company is expanding its
budget for scientific research and product development. The Company is
sponsoring research by BVP which is focused on the development of functional
foods as well as the improvement of the potency of garlic and other dehydrated
vegetable products. The Company has agreed to pay BVP royalties with respect to
sales of products developed in connection with its research. The Company
recently sponsored a randomized, double-blind, placebo-controlled study at the
University of Virginia regarding the efficacy of the Company's proprietary
Kavatrol product, which produced favorable results. The Company has also
commissioned further independent research by the same researchers at the
University of Virginia on its proprietary Kavatrol product regarding dosage
levels.
MANUFACTURING AND PRODUCT QUALITY
The Company manufactures its products at its 90,000 square foot
manufacturing facility/ headquarters located in Chatsworth, California. At this
facility, the Company manufactures both tablets and two piece capsules which
accounted for more than 90% of the Company's net sales in 1997. The Company also
manufactures dietary supplement products pursuant to purchase orders with
customers who distribute and sell the products under their own brands and for
other customers as opportunities arise. The Company uses third party vendors to
produce its liquid products and softgels.
The Company places a strong emphasis on quality control because it believes
that quality standards play a critical factor in consumer purchasing decisions
and in differentiating the Natrol brand. The Company's products are manufactured
in accordance with current GMPs of the FDA for foods and the applicable
regulations of other agencies.
The Company's manufacturing facility includes an on-site laboratory which is
staffed by the director of quality assurance, bench chemists and other quality
control personnel. The Company's laboratory contains equipment for performing
testing procedures, including high performance liquid chromatography,
ultra-violet and infra-red spectrophotometry and thin layer chromatography. The
Company requires all raw materials or finished product produced by third party
vendors to be placed in quarantine upon receipt and tested by the Company's
quality control laboratory. The Company conducts sample testing, weight testing,
purity testing, dissolution testing and, where required, microbiological
testing. When raw materials are released from quarantine each lot is assigned a
unique lot number which is tracked throughout the manufacturing process.
Materials are blended, tested and then encapsulated or formed into pills which
may or may not be coated. The Company routinely performs qualitative and
quantitative quality control procedures on its finished products.
The Company obtains all of its raw materials for the manufacture of its
products from third-party suppliers. Many of the raw materials used in Company's
products are harvested internationally. With the
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exception of bulk garlic and Ester-C, the Company does not have contracts with
any suppliers committing such suppliers to provide the materials required for
the production of its products. In the last few years, natural vitamin E, beta
carotene and melatonin have had significant price fluctuations as a result of
short supply or increases in demand. The Company has experienced occasional
shortages of raw materials for a limited number of its products but to date has
only encountered short-term production interruptions as a result of such
shortages. No single supplier accounted for more than approximately 12.5% of the
Company's total purchases in 1997. There can be no assurance that suppliers,
including suppliers of bulk garlic and Ester-C, will provide the raw materials
needed by the Company in the quantities requested or at a price the Company is
willing pay. Because the Company does not control the actual production of these
raw materials, it is also subject to delays caused by interruption in production
of materials based on conditions not within its control. Such conditions include
job actions or strikes by employees of suppliers, weather, crop conditions,
transportation interruptions and natural disasters or other catastrophic events.
With respect to products that are sold by the Company under the supplier's
trademark, such as Ester-C and Tonalin, the Company is limited to that single
supplier as a source of raw materials for that product. As a result, any
shortage of raw materials from that supplier would adversely affect the
Company's ability to manufacture that product. The inability of the Company to
obtain adequate supplies of raw materials for its products at favorable prices,
or at all, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is a party to a multi-year Distributorship/Packager/Supply
Agreement (the "Inter-Cal Agreement") with Inter-Cal Corporation ("Inter-Cal"),
under which Inter-Cal is required to supply the Company with its requirements of
bulk Ester-C. The Inter-Cal Agreement requires the Company to use its best
efforts to promote and sell Ester-C vitamin products worldwide with the
exception of certain specified countries, including Australia and New Zealand
and certain European countries. The Inter-Cal Agreement may be terminated by
Inter-Cal immediately if the Company violates the terms of certain provisions
relating to distribution and packaging and may be terminated by either party
upon a default of the obligations of the other party if the default has not been
cured within 60 days. The Company is also a party to a multi-year Supply
Agreement (the "BVP Agreement") with BVP, which requires BVP to sell and the
Company to purchase specified amounts of certain vegetable, fruit, herbal and
botanical products (the "BVP Products") manufactured by BVP. The BVP Agreement
gives the Company the exclusive right to sell certain BVP Products in the
dietary supplement industry. The BVP Agreement may be terminated by either party
upon a material breach of the obligations of the other party, or certain other
specified conditions, if the breach is not cured within 60 days, or within 15
days in the case of non-payment by the Company.
The Company has the current manufacturing capability to produce four million
tablets and capsules per eight hour shift and 420,000 bottles per week per
shift. The Company, on average, operates its manufacturing facility one shift
per day, five to six days per week. At times certain of the Company's packaging
lines or capsule and tablet production lines run longer hours as demand
warrants. The Company believes it can triple current sales volumes without the
necessity of expanding the current facility. Such a tripling of production would
require additional space for warehousing and shipping operations but would not
require substantial capital investment.
The Company operates flexible manufacturing lines which enable it to shift
output efficiently among various pieces of equipment depending upon such factors
as batch size, tablets or capsule count, and labeling requirements. The Company
strives to fulfill and ship all orders within 48 hours.
The Company has a strong commitment to maintaining the quality of the
environment. Nearly all of the plastic or glass containers used by the Company
are recyclable. The Company does not use solvents in its manufacturing
processes. The Company believes it is in compliance with all applicable
environmental regulations.
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COMPETITION
The dietary supplement industry is highly competitive. Numerous companies,
many of which have greater financial and other resources than the Company,
compete with the Company in the development, manufacture and marketing of
dietary supplements. The Company's principal competition comes from major
private label and broadline brand manufacturers. In addition, large
pharmaceutical companies and packaged food and beverage companies compete with
the Company on a limited basis in the dietary supplement market. Increased
competition from such companies could have a material adverse effect on the
Company because such companies have greater financial and other resources
available to them and possess manufacturing, distribution and marketing
capabilities far greater than those of the Company.
The Company competes on the basis of product quality, pricing, customer
service and marketing support. The Company believes that it competes favorably
with its competitors on the strength of the Company's strong brand recognition
across multiple distribution channels, ability to quickly develop new products
with market potential, sophisticated marketing, advertising and promotional
support, product quality, and strong and effective sales force and distribution
network.
REGULATORY MATTERS
The manufacture, packaging, labeling, advertising, promotion, distribution
and sale of the Company's products are subject to regulation by numerous
governmental agencies, the most active of which is the U.S. Food and Drug
Administration (the "FDA"), which regulates the Company's products under the
Federal Food, Drug and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. The Company's products are also subject to regulation by, among
other regulatory agencies, the Consumer Product Safety Commission, the U.S.
Department of Agriculture (the "USDA") and the Environmental Protection Agency
(the "EPA"). Advertising of the Company's products is subject to regulation by
the U.S. Federal Trade Commission (the "FTC"), which regulates the Company's
advertising under the Federal Trade Commission Act (the "FTCA"). The
manufacture, labeling and advertising of the Company's products are also
regulated by various state and local agencies as well as each foreign country to
which the Company distributes its products.
DSHEA revised the provisions of the FDCA concerning the regulation of
dietary supplements. In the judgment of the Company, the DSHEA is favorable to
the dietary supplement industry. The legislation for the first time defined
"dietary supplement." The term "dietary supplement" is defined as a product
intended to supplement the diet that contains one or more of certain dietary
ingredients, such as a vitamin, a mineral, an herb or botanical, an amino acid,
a dietary substance for use by man to supplement the diet by increasing the
total dietary intake, or a concentrate, metabolite, constituent, extract, or
combination of the preceding ingredients. The substantial majority of the
products marketed by the Company are regulated as dietary supplements under the
FDCA.
Under the current provisions of the FDCA there are four categories of claims
that pertain to the regulation of dietary supplements. Health claims are claims
that describe the relationship between a nutrient or dietary ingredient and a
disease or health related condition and can be made on the labeling of dietary
supplements if supported by significant scientific agreement and authorized by
FDA in advance via notice and comment rulemaking. Nutrient content claims
describe the nutritional value of the product and may be made if defined by the
FDA through notice and comment rulemaking and if one serving of the product
meets the definition. Health claims and nutrient content claims may also be made
if a scientific body of the U.S. government with official responsibility for the
public health has made an authoritative statement regarding the claim, the claim
accurately reflects that statement and the manufacturer, among other things,
provides the FDA with notice of and basis for the claim at least 120 days before
the introduction of the supplement with a label containing the claim into
interstate commerce. Statements of nutritional support or product performance,
which are permitted on labeling of dietary supplements without FDA pre-approval,
are defined to include statements that: (i) claim a benefit related to a
classical nutrient deficiency disease and discloses the prevalence of such
disease in
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the United States; (ii) describe the role of a nutrient or dietary ingredient
intended to affect the structure or function in humans; (iii) characterize the
documented mechanism by which a dietary ingredient acts to maintain such
structure or function; or (iv) describe general well-being from consumption of a
nutrient or dietary ingredient. In order to make a nutritional support claim the
marketer must possess substantiation to demonstrate that the claim is not false
or misleading and if the claim is for a dietary ingredient that does not provide
traditional nutritional value, prominent disclosure of the lack of FDA review of
the relevant statement and notification to the FDA of using the claim is
required. Drug claims are representations that a product is intended to
diagnose, mitigate, treat, cure or prevent a disease. Drug claims are prohibited
from use in the labeling of dietary supplements.
Claims made for the Company's dietary supplement products may include
statements of nutritional support and health and nutrient content claims when
authorized by the FDA or otherwise allowed by law. The FDA's interpretation of
what constitutes an acceptable statement of nutritional support may change in
the future thereby requiring that the Company revise its labeling. The FDA
recently issued a proposed rule on what constitutes permitted structure/function
claims as distinguished from prohibited disease claims. Although the Company
believes its product claims comply with the law, depending on the content of the
final regulation, it may need to revise its labeling. In addition, a dietary
supplement that contains a new dietary ingredient (i.e., one not on the market
before October 15, 1994) must have a history of use or other evidence of safety
establishing that it is reasonably expected to be safe. The manufacturer must
notify the FDA at least 75 days before marketing products containing new dietary
ingredients and provide the FDA the information upon which the manufacturer
based its conclusion that the product has a reasonable expectation of safety.
The FDA issued final dietary supplement labeling regulations in 1997 that
require a new format for product labels and will necessitate revising dietary
supplement product labels by March 23, 1999. All companies in the dietary
supplement industry are required to comply with these labeling regulations. The
FDA has also announced that it is considering promulgating new GMPs specific to
dietary supplements. Such GMPs, if promulgated, may be significantly more
rigorous than currently applicable GMP requirements and contain quality
assurance requirements similar to GMP requirements for drug products. Therefore,
the Company may be required to expend additional capital and resources on
manufacturing in the future in order to comply with the law.
The failure of the Company to comply with applicable FDA regulatory
requirements could result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines, and criminal prosecutions.
As a result of the Company's efforts to comply with applicable statutes and
regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain of its advertising claims.
The Company cannot predict the nature of any future laws, regulations,
interpretations or applications, nor can it determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the FTCA. Section 5 of the FTCA prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Section 12 of the FTCA provides that the dissemination or the causing
to be disseminated of any false advertisement pertaining to drugs or foods,
which would include dietary supplements, is an unfair or deceptive act or
practice. Under the FTC's Substantiation Doctrine, an advertiser is required to
have a "reasonable basis" for all objective product claims before the claims are
made. Failure to adequately substantiate claims may be considered either
deceptive or unfair
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practices. Pursuant to this FTC requirement the Company is required to have
adequate substantiation for all material advertising claims made for its
products.
In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it will
issue a guidance document to assist supplement marketers in understanding and
complying with the substantiation requirement. Upon release of this guidance
document Natrol will be required to evaluate its compliance with the guideline
and may be required to change its advertising and promotional practices.
The FTC has a variety of processes and remedies available to it for
enforcement, both administratively and judicially, including compulsory process,
cease and desist orders, and injunctions. FTC enforcement can result in orders
requiring, among other things, limits on advertising, corrective advertising,
consumer redress, divestiture of assets, rescission of contracts and such other
relief as may be deemed necessary. A violation of such orders could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Advertising and labeling for dietary supplements and conventional foods are
also regulated by states and local authorities. There can be no assurance that
state and local authorities will not commence regulatory action which could
restrict the permissible scope of the Company's product claims.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.
These distributors are independent contractors over whom the Company has limited
control.
In addition, the Company has in the past, from time to time, been the
subject of investigation by the FTC, however, the Company is not currently a
party to any consent order or other decree of the FTC. The Company may be the
subject of investigation in the future. The FTC may impose limitations on the
Company's advertising of its products. Any such limitations could materially
adversely affect the Company's ability to successfully market its products.
The Company manufactures certain products pursuant to contracts with
customers who distribute the products under their own or other trademarks. Such
private label customers are subject to government regulations in connection with
their purchase, marketing, distribution and sale of such products. The Company
is subject to government regulations in connection with its manufacture,
packaging and labeling of such products. However, the Company's private label
customers are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control. The failure of
these customers to comply with applicable laws or regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company may be subject to additional laws or regulations by the FDA or
other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as the Dietary
Supplement Health and Education Act of 1994, or more stringent interpretations
of current laws or regulations, from time to time in the future. The Company is
unable to predict the nature of such future laws, regulations, interpretations
or applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on its
business in the future. They could, however, require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not able to be reformulated, imposition of additional recordkeeping
requirements, expanded documentation of the properties of certain products,
expanded or different labeling and scientific substantiation. Any or all of such
requirements could have a material adverse affect on the Company's business,
financial condition and results of operations.
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TRADEMARKS AND PATENTS
The Company regards its trademarks, patent applications and other
proprietary rights as valuable assets. The Company believes that protecting its
key trademarks is crucial to its business strategy of building strong brand name
recognition and that such trademarks have significant value in the marketing of
its products. The Company may in some cases seek to protect its research and
development efforts by filing patent applications for proprietary products.
The Company's policy is to pursue registrations for all of the trademarks
associated with its key products. The Company relies on common law trademark
rights to protect its unregistered trademarks as well as its trade dress rights.
Common law trademark rights generally are limited to the geographic area in
which the trademark is actually used, while a United States federal registration
of a trademark enables the registrant to stop the unauthorized use of the
trademark by any third party anywhere in the United States. Furthermore, the
protection available, if any, in foreign jurisdictions may not be as extensive
as the
protection available to the Company in the United States.
Currently, the Company has received a Notice of Allowance for its United
States patent application for its Kavatrol product and has received two United
States patents on its amino acid products, SAF and SAF for Kids. To the extent
the Company does not have patents on its products, another company may replicate
one or more of the Company's products.
Although the Company seeks to ensure that it does not infringe the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company. Natrol was contacted in June 1997 by a third party that claimed
Natrol's marketing of melatonin infringed the third party's patents relating to
a method of using melatonin and sought to license such patents to Natrol. Since
Natrol does not believe its marketing of melatonin infringes the third party's
patent claims, Natrol has declined to enter into a license agreement with the
third party. Any infringement claims by third parties against the Company may
have a material adverse effect on the Company's business, financial condition
and results of operations.
LEGAL MATTERS
From time to time the Company is subject to litigation incidental to its
business including possible product liability claims. Such claims, if
successful, could exceed applicable insurance coverage.
The Company is not currently a party to any material legal proceedings.
EMPLOYEES
As of May 1, 1998, the Company had approximately 185 employees. Of such
employees, 42 were engaged in marketing and sales, 115 were devoted to
production and distribution and 28 were responsible for management and
administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
PROPERTIES
The Company leases a 90,000 square foot manufacturing, distribution and
office facility in Chatsworth, California. The Company has occupied this
facility since March 1997. The facility was designed and constructed to the
Company's specifications and includes areas for shipping and receiving,
quarantine of new materials, manufacture, quality control and laboratory
activities, research and development, packaging, warehousing and administrative
offices. The lease for the facility has a ten-year term (which expires in
October 2006). In 1997 the Company had total lease costs of $573,000 which
covered the manufacturing facility and other space.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
May 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Elliott Balbert.................. 52 Chairman of the Board, Chief Executive Officer and President
Dennis R. Jolicoeur.............. 49 Chief Financial Officer, Treasurer, Executive Vice President and
Director
Cheryl A. Richitt................ 40 Vice President of Marketing
Gary P. DeMello.................. 44 Vice President of Operations
Jon J. Denis..................... 50 Vice President of Sales
Norman Kahn(1)................... 67 Director
David Laufer(1)(2)............... 56 Director
P. Andrews McLane(2)............. 50 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Balbert founded the Company in 1980 and has served as the Company's
Chairman of the Board, Chief Executive Officer and President since its
inception.
Mr. Jolicoeur joined the Company as Chief Financial Officer, Treasurer and
Executive Vice President in July 1996 and has served as a director of the
Company since that date. From October 1993 to June 1996, Mr. Jolicoeur was a
principal of Gardiner & Rauen, Inc., an investment banking firm. In 1980 Mr.
Jolicoeur founded Lighthouse Press, Inc. ("Lighthouse"), and actively managed
Lighthouse until 1989. In 1993, Mr. Jolicoeur and other investors acquired
Naiman Printing, Inc. ("Naiman"). Mr. Jolicoeur became President of each of
Lighthouse and Naiman in August 1994 following the dismissal of the then-acting
President of each company. Naiman and Lighthouse filed voluntary petitions under
Chapters 7 and 11, respectively, of the federal bankruptcy code in September
1996.
Ms. Richitt joined the Company in September 1989 and has served as Vice
President of Marketing since 1992. Prior to joining the Company, Ms. Richitt
held sales and administrative positions with Vidal Sassoon and Rachel Perry,
Inc., a natural cosmetics company.
Mr. DeMello joined the Company in June 1992 and has been Vice President of
Operations since that time. Prior to joining the Company, Mr. DeMello was the
Director of Purchasing for Tree of Life, Inc.
Mr. Denis joined the Company as Vice President of Sales in August 1997.
Prior to joining the Company, Mr. Denis served as Vice President of Sales at
Conair Inc., a personal care and appliance products company, for 15 years,
preceded by eight years in various sales positions at Revlon, Inc.
Mr. Kahn has served as a director of the Company since April 1995. Mr. Kahn,
a private investor, was the Managing Director of the San Marino Financial Group,
an investment banking firm, from 1993 to 1996.
Mr. Laufer has served as a director of the Company since 1996. Since 1996,
Mr. Laufer has been a partner of Arter & Hadden LLP, a law firm. Prior to
joining Arter & Hadden LLP, Mr. Laufer was a partner or co-managing partner of
Kindel & Anderson LLP, a law firm, from 1986 to 1996.
Mr. McLane has served as a director of the Company since September 1996. He
has been at TA Associates, Inc. or its predecessor since 1979, where he is
Senior Managing Director and a member of the firm's Executive Committee. Mr.
McLane is also a director of Affiliated Managers Group, Inc., an
40
<PAGE>
investment management company, and several private companies, including Altamira
Management Ltd., a Canadian mutual fund company, and Eight-in-One Pet Products,
Inc.
BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at five. Following
the offering, the Company's Board of Directors will be divided into three
classes, with the members of each class of directors serving for staggered
three-year terms. The Board will consist of two Class I Directors (Messrs.
Jolicoeur and Kahn), two Class II Directors (Messrs. Laufer and McLane) and one
Class III Director (Mr. Balbert), whose initial terms will expire at the 1999,
2000 and 2001 annual meetings of stockholders, respectively. Mr. McLane was
elected a director as the nominee of the holders of the Convertible Preferred
Stock.
The Board of Directors has established an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee"). The
Audit Committee recommends the firm to be appointed as independent accountants
to audit the Company's financial statements and to perform services related to
such audit, reviews the scope and results of such audit with the independent
accountants, reviews with management and the independent accountants the
Company's year-end operating results, considers the adequacy of the internal
accounting procedures and considers the effect of such procedures on the
accountants' independence. The Audit Committee currently consists of Messrs.
Kahn and Laufer, neither of whom is an officer or an employee of the Company.
The Compensation Committee reviews and recommends the compensation arrangements
for officers and other senior level employees, reviews general compensation
levels for other employees as a group, determines the options or stock to be
granted to eligible persons under the 1996 Stock Plan and takes such other
action as may be required in connection with the Company's compensation and
incentive plans. The Compensation Committee currently consists of Messrs. Laufer
and McLane. See "--Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions."
On April 8, 1998, the Company granted options to purchase 25,000 shares of
Common Stock under the 1996 Stock Plan to Mr. Laufer, a non-employee director.
Such options vest as follows: 12,500 shares vested on the date of grant, 4,200
shares vest on each of April 8, 1999 and April 8, 2000 and 4,100 shares vest on
April 8, 2001 as long as he continues to serve as a director of the Company.
Directors receive such compensation for their services as the Board of
Directors may from time to time determine. Further, each director is reimbursed
for reasonable travel and other expenses incurred in attending meetings.
41
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the four other most highly compensated
executive officers of the Company for 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------------------------
NUMBER OF SHARES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS GRANTED(#) COMPENSATION(1)
- -------------------------------------------------- --------- --------- -------------------- -----------------
<S> <C> <C> <C> <C>
Elliott Balbert................................... $ 600,000 $ 400,000 -- $ 29,500
Chairman, Chief Executive Officer and President
Dennis R. Jolicoeur............................... 212,500 61,953 -- --
Chief Financial Officer
Cheryl R. Richitt................................. 128,786 62,274 100,000 --
Vice President of Marketing
Gary P. DeMello................................... 112,180 44,234 -- --
Vice President of Operations
Jon J. Denis(2)................................... 100,731 26,633 100,000 2,307
Vice President of Sales
</TABLE>
- ------------------------
(1) Mr. Balbert received $27,400 in life insurance benefits and $2,100 in
benefits for the use of a Company car. Mr. Denis received $2,307 in car
allowance.
(2) Mr. Denis joined the Company in August 1997.
OPTION GRANTS, EXERCISES AND HOLDINGS. The following table sets forth
information regarding stock options granted during 1997 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------------ AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN OR BASE PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
- ------------------------------------ --------------- --------------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cheryl R. Richitt................... 100,000(4) 50% 2.10 7/29/07 132,067 334,686
Jon J. Denis........................ 100,000(5) 50% 2.10 8/11/07 132,067 334,686
</TABLE>
- ------------------------------
(1) Vesting of options is subject to the continuation of such employee's service
relationship with the Company. The options terminate ten years after the
grant date, subject to earlier termination in accordance with the 1996 Stock
Plan and the applicable option agreement.
(2) The exercise price equals the fair market value of the stock as of the grant
date as determined by the Board of Directors after consideration of a number
of factors, including, but not limited to, the Company's financial
performance, the Company's status as a private company at the time of
grants, the minority interests represented by the option shares and the
price of shares of equity securities sold to or purchased by outside
investors.
(3) The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term
using the 5% and 10% appreciation rates established in regulations of the
Securities and Exchange Commission, compounded annually. The potential
realizable value of the options to each of Ms. Richitt and Mr. Denis using
the assumed initial public offering price of $13.00 per share is, in each
case, $1,907,563 at an assumed 5% appreciation rate and $3,161,865 at an
assumed 10% appreciation rate. The potential realizable value is not
intended to predict future appreciation of the price of the Common Stock.
The values shown do not consider nontransferability, vesting or termination
of the options upon termination of such employee's service relationship with
the Company.
(4) Options vest 6.25% on October 29, 1997 and then an additional 6.25% every
three months thereafter.
(5) Options vest in three equal annual installments commencing on the first
anniversary of the date of grant. These options were granted on August 11,
1997.
42
<PAGE>
OPTION EXERCISES AND YEAR-END HOLDINGS. The following table sets forth
information concerning the number and value of unexercised options to purchase
Common Stock held by the Named Executive Officers. None of the Named Executive
Officers exercised any stock options during Fiscal 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Cheryl R. Richitt.................................... 71,250 128,750 791,250 1,411,250
Gary P. DeMello...................................... 45,000 55,000 500,625 611,875
Jon J. Denis......................................... -- 100,000 -- 1,090,000
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $13.00 per share, less the
applicable exercise price.
MANAGEMENT BONUS PLAN. The Board of Directors has adopted an individualized
bonus plan for each Named Executive Officer for 1998 to be administered by the
Compensation Committee. Awards under the Plan are determined on the basis of the
Company's financial performance and certain individual goals. Awards are granted
under the Plan at the sole discretion of the Compensation Committee.
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
1996 STOCK OPTION AND GRANT PLAN. The 1996 Stock Plan was initially adopted
by the Board of Directors and approved by the Company's stockholders in November
1996. The 1996 Stock Plan as amended and restated is expected to be approved by
the Company's Board of Directors and stockholders in June 1998. The following
description gives effect to the expected amendment and restatement. The 1996
Stock Plan permits (i) the grant of Incentive Options, (ii) the grant of
Non-Qualified Options, (iii) the issuance or sale of Common Stock with or
without vesting or other restrictions ("Restricted Stock") or without
restrictions ("Unrestricted Stock" and collectively with Restricted Stock,
"Stock Grants"), (iv) the grant of Common Stock upon the attainment of specified
performance goals ("Performance Share Awards"), (v) the grant of the right to
receive cash dividends with the holders of the Common Stock as if the recipient
held a specified number of shares of the Common Stock ("Dividend Equivalent
Rights") and (vi) the grant of the right to receive the value of the excess of
the fair market value of the Common Stock over the exercise price of such rights
("Stock Appreciation Rights" or "SARs"). These grants may be made to officers
and other employees, directors, advisors, consultants and other key persons of
the Company and its subsidiaries. The 1996 Stock Plan provides for the issuance
of 1,770,000 shares of Common Stock, which amount shall be increased as of each
June 30 and December 31 by an additional number of shares of Common Stock equal
to fifteen percent (15%) of the shares of stock issued by the Company in the
previous six months. The sale of 3,200,000 shares of Common Stock offered by the
Company hereby will result in an additional 480,000 shares of Common Stock being
reserved for issuance under the 1996 Stock Plan. Of the shares reserved for
issuance under the 1996 Stock Plan, (i) 655,000 shares were subject to
outstanding options with a weighted average exercise price of $5.31 per share as
of May 1, 1998 and (ii) 300,000 shares were sold as restricted stock awards for
an aggregate purchase price of $562,800 in November 1996. On and after the date
the 1996 Stock Plan becomes subject to Section 162(m) of the Code, options with
respect to no more than 150,000 shares of Common Stock may be granted to any one
individual in any calendar year.
The 1996 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1996 Stock Plan, the Compensation Committee has full
power to determine from among the persons eligible for grants under the 1996
Stock Plan the individuals to whom grants will be made, the
43
<PAGE>
combination of grants to participants and the specific terms of each grant,
including vesting. Incentive Options may be made only to officers or other
full-time employees of the Company or its subsidiaries, including members of the
Board of Directors who are also full-time employees of the Company or its
subsidiaries. The Compensation Committee may delegate the power to grant options
to non-executive employees to the Company's Chief Executive Officer.
The exercise price of options granted under the 1996 Stock Plan is
determined by the Compensation Committee. In the case of Incentive Options, the
exercise price may not be less than 100% of the fair market value of the
underlying shares on the date of grant. If any employee of the Company or any
subsidiary owns (or is deemed to own) at the date of grant shares of stock
representing in excess of 10% of the combined voting power of all classes of
stock of the Company or any parent or subsidiary, the option exercise price for
Incentive Options granted to such employee may not be less than 110% of the fair
market value of the underlying shares on that date. Non-Qualified Options may be
granted at prices which are less than the fair market value of the underlying
shares on the date granted. Options typically are subject to vesting schedules,
terminate 10 years from the date of grant and may be exercised for specified
periods subsequent to the termination of the optionee's employment or other
service relationship with the Company. At the discretion of the Compensation
Committee, any option may include a "reload" feature pursuant to which an
optionee exercising an option receives in addition to the number of shares of
Common Stock due on the exercise of such an option an additional option with an
exercise price equal to the fair market value of the Common Stock on the date
such additional option is granted. Upon the exercise of options, the option
exercise price must be paid in full either in cash or by certified or bank check
or other instrument acceptable to the Compensation Committee or, in the sole
discretion of the Compensation Committee, by delivery of shares of Common Stock
already owned by the optionee. The exercise price may also be delivered to the
Company by a broker pursuant to irrevocable instructions to the broker selling
the underlying shares from the optionee.
The 1996 Stock Plan also permits Stock Grants, Performance Share Awards,
grants of Dividend Equivalent Rights and SARs. Stock Grants may be made to
persons under the 1996 Stock Plan, subject to such conditions and restrictions
as the Compensation Committee may determine. Prior to the vesting of shares,
recipients of Stock Grants generally will have all the rights of a stockholder
with respect to the shares, including voting and dividend rights, subject only
to the conditions and restrictions set forth in the 1996 Stock Plan or in any
agreement. The Compensation Committee may also make Stock Grants in recognition
of past services or other valid consideration, or in lieu of cash compensation.
In the case of Performance Share Awards, the issuance of shares of Common Stock
will occur only after the conditions and restrictions set forth in the grant
agreement are satisfied. SARs may be granted in tandem with, or independently
of, Incentive Options or Non-Qualified Options. The Compensation Committee may
also grant Dividend Equivalent Rights in conjunction with any other grant made
pursuant to the 1996 Stock Plan or as a free standing grant. Dividend Equivalent
Rights may be paid currently or deemed to be reinvested in additional shares of
Common Stock, which may thereafter accrue further dividends.
The Compensation Committee may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the 1996 Stock Plan may be exercised or vest. Generally, upon a dissolution,
liquidation or sale of a majority of the outstanding voting stock or
substantially all of the assets of the Company, 50% of all unvested options,
SARs and other awards shall become vested as of the effective date of such
transaction, except as the Compensation Committee may otherwise specify with
respect to particular awards and except that 100% of unvested options held by
directors vest in such circumstances. To the extent not fully vested and
exercised, options granted under the 1996 Plan terminate upon the dissolution,
liquidation or sale of a majority of the outstanding voting stock or
substantially all of the assets of the Company, except as the parties to any
such transaction may otherwise agree in their discretion. Vesting of options
which remain in effect following a change-in-control generally accelerates in
the event the optionee's service relationship with the Company is
44
<PAGE>
terminated by the Company without cause or by the optionee for good reason
within 18 months following the change-in-control transaction.
RESTRICTED STOCK GRANT. In November 1996 the Company sold 300,000 shares of
Restricted Stock to Dennis R. Jolicoeur under the 1996 Stock Plan for an
aggregate purchase price of $562,800. These shares of Restricted Stock vest in
equal three-month installments over four years beginning on July 1, 1997, with
unvested shares subject to repurchase at cost upon the termination of Mr.
Jolicoeur's employment with the Company for any reason. A total of 50% of Mr.
Jolicoeur's unvested shares would vest on any sale of a majority of the voting
stock or substantially all of the assets of the Company with unvested shares
subject to repurchase at cost in the event of any such transaction except to the
extent outstanding awards are assumed by the buyer in any such transaction. In
the event of such an assumption vesting would occur upon termination of Mr.
Jolicoeur's employment with the Company without cause or for good reason within
18 months following such a transaction. See "Certain Transactions."
1998 EMPLOYEE STOCK PURCHASE PLAN. The Purchase Plan was adopted by the
Board of Directors and subsequently approved by the Company's stockholders in
May 1998. Up to 225,000 shares of Common Stock may be issued under the Purchase
Plan. The Purchase Plan is administered by the Compensation Committee.
The first offering under the Purchase Plan will begin on September 1, 1998
and end on December 31, 1998. Subsequent offerings will commence on each January
1 and July 1 thereafter and will have a duration of six months. Generally, all
employees who are customarily employed for more than 20 hours per week as of the
first day of the applicable offering period are eligible to participate in the
Purchase Plan. An employee who owns or is deemed to own shares of stock
representing in excess of 5% of the combined voting power of all classes of
stock of the Company may not participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares which may
be purchased by any participating employee during any offering period is limited
to 1,000 shares (as adjusted by the Compensation Committee from time to time).
Unless the employee has previously withdrawn from the offering, his accumulated
payroll deductions will be used to purchase Common Stock on the last business
day of the period at a price equal to 85% of the fair market value of the Common
Stock on the first or last day of the offering period, whichever is lower. Under
applicable tax rules, an employee may purchase no more than $25,000 worth of
Common Stock in any calendar year. No Common Stock has been issued to date under
the Purchase Plan.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
In July 1997 the Company and Jon J. Denis entered into a letter agreement
pursuant to which the Company agreed to pay Mr. Denis an annual base salary of
$270,000 and provide certain incentive compensation based on sales and severance
benefits equal to six months base salary for the first six months of the term
and three months base salary thereafter. The Company's obligations under the
letter agreement terminate in August 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Laufer and McLane.
Neither of these individuals is an executive officer of the Company. Mr. Laufer
is a partner of Arter & Hadden LLP, a law firm which provides services to the
Company. Mr. McLane is Senior Managing Director of TA Associates, Inc.
In September 1996, the TA Investors purchased from the Company 1,921.9
shares of Convertible Preferred Stock for $854,000. The Company used the
proceeds of this investment to redeem shares of
45
<PAGE>
Common Stock from Norman Kahn, a director. The TA Investors also purchased
25,078.1 shares of Convertible Preferred Stock from stockholders of the Company.
Pursuant to this transaction, the Company granted the TA Investors (i) "piggy
back" registration rights from the Company, (ii) certain demand registration
rights from the Company as described under "Shares Eligible for Future Sale,"
(iii) certain rights (the "Co-Sale Rights") from the then current stockholders
to participate on a pro rata basis in certain resales of Common Stock by such
stockholders (who also agreed to restrictions on transfers of their shares of
Common Stock), and (iv) participation rights with respect to certain future
issuances of securities by the Company. In addition, the terms of the
Convertible Preferred Stock held by the TA Investors provide that the holders
thereof shall have the right to elect one director by a vote of a majority of
the holders of the outstanding shares thereof voting as a separate class. As a
condition to the purchase of the Convertible Preferred Stock by the TA
Investors, P. Andrews McLane, the nominee of the TA Investors as holders of all
of the outstanding shares of Convertible Preferred Stock, was elected as a
director of the Company. The Company also agreed to indemnify the TA Investors
and the controlling persons of the TA Investors (including Mr. McLane) against
claims and liabilities arising in connection with their investment in or
relating to the Company, including claims and liabilities under the securities
laws. Effective upon and subject to the completion of this offering, provisions
described above relating to the participation rights, the Co-Sale Rights, and
restrictions on transfers of shares will expire in accordance with their
original terms and, as a result of the conversion of all outstanding shares of
Convertible Preferred Stock upon completion of this offering and the retirement
of such class of stock, those stockholders who held shares of Convertible
Preferred Stock will no longer have the right to elect a director. The
registration rights and indemnification arrangements will remain in effect.
46
<PAGE>
CERTAIN TRANSACTIONS
In September 1996, the TA Investors purchased from the Company 1,921.9
shares of Convertible Preferred Stock for $854,000. The Company used the
proceeds of this investment to redeem shares of Common Stock from Norman Kahn, a
director. The TA Investors also purchased 25,078.1 shares of Convertible
Preferred Stock from stockholders of the Company. Pursuant to this transaction,
the Company granted the TA Investors (i) "piggy back" registration rights from
the Company, (ii) certain demand registration rights from the Company as
described under "Shares Eligible for Future Sale," (iii) the Co-Sale Rights from
the then current stockholders (who also agreed to restrictions on transfers of
their shares of Common Stock), and (iv) participation rights with respect to
certain future issuances of securities by the Company. In addition, the terms of
the Convertible Preferred Stock held by the TA Investors provide that the
holders thereof shall have the right to elect one director by a vote of a
majority of the holders of the outstanding shares thereof voting as a separate
class. As a condition to the purchase of the Convertible Preferred Stock by the
TA Investors, P. Andrews McLane, the nominee of the TA Investors as holders of
all of the outstanding shares of Convertible Preferred Stock, was elected as a
director of the Company. The Company also agreed to indemnify the TA Investors
and the controlling persons of the TA Investors (including Mr. McLane) against
claims and liabilities arising in connection with their investment in or
relating to the Company, including claims and liabilities under the securities
laws. Effective upon and subject to the completion of this offering, provisions
described above relating to the participation rights, the Co-Sale Rights, and
restrictions on transfers of shares will expire in accordance with their
original terms and, as a result of the conversion of all outstanding shares of
Convertible Preferred Stock upon completion of the offering and the retirement
of such class of stock, those stockholders who held shares of Convertible
Preferred Stock will no longer have the right to elect one director. The
registration rights and indemnification arrangements will remain in effect.
In November 1996, the Company sold 300,000 shares of Restricted Stock to Mr.
Jolicoeur under the 1996 Stock Plan for an aggregate purchase price of $562,800.
Also in November 1996, the Company loaned Mr. Jolicoeur $562,500 and agreed to
pay Mr. Jolicoeur annual bonuses equal to the amount of interest on the loan
(computed at a rate of 6.6% per annum). The loan to Mr. Jolicoeur matures in
November 2004, is required to be prepaid to the extent of the after-tax net
proceeds realized from the sale of the Restricted Stock as such Restricted Stock
is sold, and is secured by a pledge of the Restricted Stock, with recourse to
Mr. Jolicoeur's personal assets limited to 25% of the principal and accrued and
unpaid interest thereon.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
47
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of May 1, 1998 (after giving effect to the
conversion of all of the Convertible Preferred Stock upon completion of this
offering) and as adjusted to reflect the sale of the shares of Common Stock
offered hereby of (i) each person known by the Company to own beneficially five
percent or more of the outstanding shares of Common Stock, (ii) each director
and Named Executive Officer of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) each of the Selling Stockholders.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares
of Common stock, except to the extent authority is shared by spouses under
applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1) NUMBER OFFERING(1)(2)
---------------------- OF SHARES ----------------------
NAME OF BENEFICIAL OWNER(3) NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- ---------------------------------------------------------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Elliott Balbert (4)....................................... 6,325,000 64.5% -- 6,325,000 48.7%
TA Associates Group (5)................................... 2,700,000 27.6 540,000 2,160,000 16.6
Dennis R. Jolicoeur (6)................................... 300,000 3.1 -- 300,000 2.3
Cheryl R. Richitt (7)..................................... 123,750 1.2 -- 123,750 *
Gary P. DeMello (8)....................................... 60,000 * -- 60,000 *
Jon J. Denis (9).......................................... -- -- -- -- --
Norman Kahn............................................... 425,000 4.3 200,000 225,000 1.7
David Laufer(10).......................................... 12,500 * -- 12,500 *
P. Andrews McLane (11).................................... 4,607 * 921 3,686 *
All executive officers and directors as a group (eight
persons)................................................ 7,250,857 72.5 200,921 7,049,936 53.4
</TABLE>
- ------------------------
* Less than 1%.
(1) All percentages have been determined as of May 1, 1998 in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). For purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares of Common Stock which
such person has the right to acquire within 60 days after the date of this
Prospectus. For purposes of computing the percentage of outstanding shares
of Common Stock held by each person or group of persons named above, any
security which such person or persons have the right to acquire within 60
days after the date of this Prospectus is deemed to be outstanding, but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The address of the TA Associates Group is High Street Tower, Suite 2500, 125
High Street, Boston, MA 02110-2720. The address of Mr. McLane is c/o TA
Associates, Inc., High Street Tower, Suite 2500, 125 High Street, Boston, MA
02110-2720. The address of all other listed stockholders is c/o Natrol,
Inc., 21411 Prairie Street, Chatsworth, CA 91311.
(4) Consists of shares owned by the Balbert Family Trust, a revocable trust of
which Mr. Balbert and his wife, Cheryl Balbert, are trustees and of which
Mr. and Mrs. Balbert and other members of their family are the
beneficiaries. Mr. Balbert has granted the Underwriters the right to
purchase up to 295,500 shares of Common Stock solely to cover
over-allotments. If the Underwriters' over-allotment option is exercised in
full, Mr Balbert will beneficially own 6,029,500 shares of Common Stock, or
45.3% of the outstanding shares of Common Stock, upon completion of the
offering, and all executive officers and directors as a group will
beneficially own 6,754,436 shares of Common Stock, or 50.1% of the
outstanding shares of Common Stock, upon completion of the offering.
(5) Includes (i) 1,710,000 shares of Common Stock owned by Advent VII L.P., (ii)
787,500 shares of Common Stock owned by Advent Atlantic and Pacific III
L.P., (iii) 171,000 shares of Common Stock owned by Advent New York L.P.,
and (iv) 31,500 shares of Common Stock owned by TA Venture Investors L.P.
Advent VII L.P., Advent Atlantic and Pacific III L.P., Advent New York L.P.,
and TA Venture Investors L.P. are part of an affiliated group of investment
partnerships referred to, collectively, as the TA Associates Group. The
general partner of Advent VII L.P. is TA Associates VII L.P. The general
partner of Advent Atlantic and Pacific III L.P. is TA Associates AAP III
Partners L.P. The general partner of Advent New York L.P. is TA Associates
VI L.P. The general partner of each of TA Associates VII, L.P., TA
Associates VI L.P. and TA Associates AAP III Partners, L.P. is TA
Associates, Inc. In such capacity, TA Associates, Inc. exercises sole voting
and investment power with respect to all of the shares held of record by the
named investment partnerships, with the exception of those shares held by TA
Venture Investors L.P.; individually, no stockholder, director or officer of
TA Associates, Inc. is deemed to have or share such voting or investment
power. Principals
48
<PAGE>
and employees of TA Associates, Inc. (including Mr. McLane, a director of
the Company) comprise the general partners of TA Venture Investors L.P. In
such capacity, Mr. McLane may be deemed to share voting and investment power
with respect to the 31,500 shares held of record by TA Venture Investors
L.P. Mr. McLane disclaims beneficial ownership of all shares, except as to
shares held by TA Venture Investors L.P., as to which he holds a pecuniary
interest. See Note 11.
(6) Constitutes shares of Restricted Stock held by Mr. Jolicoeur, of which
120,000 shares will be vested within 60 days of May 1, 1998 and 15,000
additional shares vest each calendar quarter thereafter, subject to
repurchase upon termination of Mr. Jolicoeur's employment with the Company
and in the event of a sale of a majority of the voting stock or
substantially all of the assets of the Company. See "Certain Transactions."
(7) Constitutes shares of Common Stock which may be purchased within 60 days of
May 1, 1998 upon the exercise of stock options. Excludes 76,250 shares of
Common Stock which may be acquired pursuant to unvested stock options, which
vest in quarterly installments through July 2001.
(8) Constitutes shares of Common Stock which may be purchased within 60 days of
May 1, 1998 upon the exercise of stock options. Excludes 140,000 shares of
Common Stock which may be acquired pursuant to unvested stock options, of
which 40,000 vest in quarterly installments through July 2000 and 100,000
vest in four annual installments commencing in April 1999.
(9) Mr. Denis may acquire 100,000 shares pursuant to unvested stock options
which vest in three annual installments commencing in August 1998.
(10) Constitutes shares of Common Stock which may be purchased within 60 days of
May 1, 1998 upon the exercise of stock options. Excludes 12,500 shares of
Common Stock which may be acquired pursuant to unvested stock options, which
vest in three annual installments commencing in April 1999.
(11) Constitutes shares of Common Stock beneficially owned by Mr. McLane through
TA Venture Investors Limited Partnership, all of which shares are included
in the 2,700,000 shares described in footnote (5) above. Does not include
any shares beneficially owned by Advent VII L.P., Advent Atlantic and
Pacific III L.P. or Advent New York L.P., of which Mr. McLane disclaims
beneficial ownership.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Prior to the completion of this offering, there are 27,000 shares of
Convertible Preferred Stock outstanding and 7,100,000 shares of Common Stock
(including all outstanding stock grants) outstanding. In connection with and
subject to this offering, each share of Convertible Preferred Stock will convert
into one hundred shares of Common Stock and one-half of a share of Redeemable
Preferred Stock and will thereafter be retired. Pursuant to the terms of the
Redeemable Preferred Stock, all of the outstanding shares of Redeemable
Preferred Stock will be redeemed by the Company at the time of this offering for
$6.0 million.
Upon completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, of which 13,000,000
shares will be issued and outstanding, and 2,000,000 shares of undesignated
preferred stock issuable in one or more series by the Board of Directors
("Preferred Stock"), of which no shares will be issued and outstanding.
COMMON STOCK. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders and are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred Stock
with a dividend preference over Common Stock could adversely affect the dividend
rights of holders of Common Stock. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the directors then standing
for election, subject to any voting rights of the holders of any then
outstanding Preferred Stock. The holders of Common Stock have no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock. All outstanding shares
of Common Stock, including the shares offered hereby, are, or will be upon
completion of the offering, fully paid and non-assessable.
The Certificate and By-laws, which will be effective upon completion of this
offering provide, subject to the rights of the holders of any Preferred Stock
then outstanding, that the number of directors shall be fixed by the Board of
Directors. The directors, other than those who may be elected by the holders of
any Preferred Stock, are divided into three classes, as nearly equal in number
as possible, with each class serving for a three-year term. Subject to any
rights of the holders of any Preferred Stock to elect directors, and to remove
any director whom the holders of any Preferred Stock had the right to elect, any
director of the Company may be removed from office only with cause and by the
affirmative vote of at least two-thirds of the total votes which would be
eligible to be cast by stockholders in the election of such director.
UNDESIGNATED PREFERRED STOCK. The Board of Directors of the Company is
authorized, without further action of the stockholders, to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the designations,
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereon as set forth in the Certificate. Any such Preferred Stock
issued by the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding Common
Stock.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS
A number of provisions of the Certificate and By-laws which will be
effective upon completion of this offering concern matters of corporate
governance and the rights of stockholders. Certain of these provisions, as well
as the ability of the Board of Directors to issue shares of Preferred Stock and
to set the
50
<PAGE>
voting rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors, including takeovers which stockholders may deem to be in
their best interests. To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of the Common Stock, which may result from
actual or rumored takeover attempts, may be inhibited. These provisions,
together with the classified Board of Directors and the ability of the Board to
issue Preferred Stock without further stockholder action, also could delay or
frustrate the removal of incumbent directors or the assumption of control by
stockholders, even if such removal or assumption would be beneficial to
stockholders of Company. These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even if favorable to the
interests of stockholders, and could depress the market price of the Common
Stock. The Board of Directors believes that these provisions are appropriate to
protect the interests of the Company and all of its stockholders. The Board of
Directors has no present plans to adopt any other measures or devices which may
be deemed to have an anti-takeover effect.
MEETINGS OF STOCKHOLDERS. The By-laws provide that a special meeting of
stockholders may be called only by the President or the Board of Directors
unless otherwise required by law. The By-laws provide that only those matters
set forth in the notice of the special meeting may be considered or acted upon
at that special meeting unless otherwise provided by law. In addition, the
By-laws set forth certain advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of Directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence or
gross negligence in business combinations, unless the director has breached his
or her duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or a knowing violation of law, paid a dividend or approved a stock
repurchase in violation of the Delaware General Corporation Law or obtained an
improper personal benefit. This provision does not alter a director's liability
under the federal securities laws and does not affect the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. The Company also entered into indemnification agreements with each of its
directors reflecting the foregoing and requiring the advancement of expenses in
proceedings involving the directors in most circumstances.
AMENDMENT OF THE CERTIFICATE. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and (with
certain exceptions) thereafter approved by a majority (or 80% in the case of any
proposed amendment to the provisions of the Certificate relating to the
composition of the Board or amendments of the Certificate) of the total votes
eligible to be cast by holders of voting stock with respect to such amendment.
AMENDMENT OF BY-LAWS. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an annual
meeting of stockholders or a special meeting called for such purpose, unless the
Board of Directors recommends that the stockholders approve such amendment or
repeal at such meeting, in which case such amendment or repeal shall only
require the
51
<PAGE>
affirmative vote of a majority of the total votes eligible to be cast by holders
of voting stock with respect to such amendment or repeal.
ABILITY TO ADOPT SHAREHOLDER RIGHTS PLAN. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares to implement a shareholder rights plan. A shareholder rights plan
typically gives stockholders of the Company special rights which are intended to
discourage persons seeking to gain control of the Company by means of a merger,
tender offer, proxy contest or otherwise if such change in control is not in the
best interest of the Company and its stockholders. The Board of Directors has no
present intention of adopting a shareholder rights plan and is not aware of any
attempt to obtain control of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
A Delaware corporation may, at its option, exclude itself from the coverage
of Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such by-law or
charter amendment shall not become effective until 12 months after the date it
is adopted. Neither the Certificate nor the By-laws contains any such exclusion.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of
13,000,000 shares of Common Stock outstanding. Of these shares, the 3,940,000
shares of Common Stock offered hereby will be freely tradable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined in the Securities Act, who would be
required to sell such shares under Rule 144 under the Securities Act. The
remaining 9,060,000 shares of Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 (the "Restricted Shares"). The
Restricted Shares were issued and sold by the Company in private transactions in
reliance upon exemptions from registration under the Securities Act.
Of the Restricted Shares, 8,760,000 shares of Common Stock owned by current
stockholders of the Company will be eligible for sale in the public market
pursuant to Rule 144 under the Securities Act beginning 90 days after the date
of this Prospectus, and 120,000 shares of Common Stock owned by current
stockholders of the Company will be eligible for sale in the public market in
accordance with Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus. In addition 180,000 shares subject to sale under Rule
701 are subject to vesting provisions and will become eligible for sale in the
public market at various times as they become vested. In addition, shares
acquired upon exercise of vested options as described below are eligible for
resale under Rule 701 under the Securities Act beginning 90 days after the date
of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year (including the holding period of any prior owner except an
affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Common
Stock then outstanding (approximately 130,000 shares upon completion of the
offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at the time during 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), would be
entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired pursuant to the exercise of options outstanding prior to this
offering or the grant of Common Stock prior to this offering pursuant to written
compensation plans or contracts may be resold by persons other than affiliates
beginning 90 days after the date of this Prospectus, subject only to the manner
of sale provisions of Rule 144, and by affiliates, beginning 90 days after the
date of this Prospectus, subject to all provisions of Rule 144 except its
one-year minimum holding period requirement.
The Company's executive officers and directors and stockholders, who in the
aggregate will hold 9,060,000 shares of Common Stock (after giving effect to the
sale of 740,000 shares by the Selling Stockholders in the offering) and options
to purchase 655,000 shares of Common Stock, have agreed, pursuant to certain
Lock-up Agreements, that until 180 days after the date of this Prospectus, they
will not, directly or indirectly, offer, sell, assign, transfer, encumber,
contract to sell, grant an option to purchase, make a distribution of, or
otherwise dispose of, any shares of Common Stock, or any securities convertible
into or exchangeable for shares of Common Stock, otherwise than (i) as a bona
fide gift or gifts, provided that the donee or donees thereof agree in writing
as a condition precedent to such gift or gifts to be bound by the terms of the
Lock-up Agreements, or (ii) with the prior written consent of Adams,
53
<PAGE>
Harkness & Hill, Inc. In addition, the Company has agreed that, without the
prior written consent of Adams, Harkness & Hill, Inc. on behalf of the
Underwriters, the Company will not, directly or indirectly, sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities, convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock, or enter into any swap or other
agreement that transfers, in whole or in part any of the economic consequences
or ownership of Common Stock, during the 180-day period following the date of
this Prospectus, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its current stock option and purchase
plans and may issue, and grant options to purchase, shares of Common Stock under
its current stock option and purchase plans and may issue shares of Common Stock
in connection with certain acquisition transactions, provided such shares are
subject to the 180-day Lock-up Agreement.
Upon completion of the offering, a total of (i) 2,250,000 shares of Common
Stock will be reserved for issuance under the 1996 Stock Plan, of which 655,000
shares will be issuable upon the exercise of outstanding stock options and
300,000 shares will have been granted as restricted stock, and (ii) 225,000
shares of Common Stock will be reserved for issuance under the Purchase Plan.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management-- Employee Stock and Other Benefit Plans--1996 Stock
Option and Grant Plan" and "--1998 Employee Stock Purchase Plan." The Company
intends to file a registration statement on Form S-8 under the Securities Act to
register all shares of Common Stock issuable pursuant to the 1996 Stock Plan or
the Purchase Plan. The Company expects to file this registration statement
within approximately 90 days following the date of this Prospectus, and such
registration statement will become effective upon filing. Shares covered by this
registration statement will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates and the
Lock-up Agreements described above.
The stockholders of the Company who will own 2,160,000 shares of Common
Stock upon completion this offering have the right on any date three months
after this offering to require the Company to register their shares under the
Securities Act for resale to the public (i) on Form S-1, if the anticipated net
aggregate proceeds exceed $10.0 million (provided that only one registration on
Form S-1 is required) and (ii) on Form S-3 if the anticipated net aggregate sale
price of such registered shares exceeds $500,000 (provided that only one
registration on Form S-3 is required in any 12 month period).
Prior to this offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Adams,
Harkness & Hill, Inc., NationsBanc Montgomery Securities LLC and Piper Jaffray
Inc. are acting as representatives (the "Representatives"), has severally agreed
to purchase from the Company and the Selling Stockholders, the respective number
of shares of Common Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Adams, Harkness & Hill, Inc. ................................................
NationsBanc Montgomery Securities LLC........................................
Piper Jaffray Inc. ..........................................................
---------------
Total........................................................................ 3,940,000
---------------
---------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares
of Common Stock are released for sale to the public, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase up
to an aggregate of 591,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments, if any, in connection with the sale of the
3,940,000 shares of Common Stock offered hereby.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Adams, Harkness & Hill,
Inc., except for the shares of Common Stock offered hereby and except that the
Company may issue securities pursuant to the Company's stock plans, upon
exercise of outstanding options and warrants or in connection with certain
acquisition transactions, provided such shares are subject to the 180-day
Lock-up Agreement. In addition, the Company's executive officers and directors
and stockholders, who in the aggregate will hold 9,060,000 shares of Common
Stock (after giving effect to the sale of 740,000 shares by the Selling
Stockholders in the offering) and options to purchase 655,000 shares of Common
Stock, have agreed, pursuant to certain Lock-up Agreements, that until 180 days
after the date of this Prospectus, they will not, directly or indirectly, offer,
sell, assign, transfer, encumber, contract to sell, grant an option to purchase,
make a distribution of, or otherwise dispose of, any shares of Common Stock, or
any securities convertible into or exchangeable for shares of Common Stock,
otherwise than (i) as a bona fide gift or gifts, provided that the donee or
donees thereof agree in writing
55
<PAGE>
as a condition precedent to such gift or gifts to be bound by the terms of the
Lock-up Agreements, or (ii) with the prior written consent of Adams, Harkness &
Hill, Inc.
The Representatives of the Underwriters have informed the Company that they
do not intend to confirm sales to any account over which they exercise
discretionary authority.
In connection with this offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the Common Stock. Syndicate short positions
involve the sale by the Underwriters of a greater number of shares of Common
Stock than they are required to purchase from the Company in this offering. The
Underwriters also may impose a penalty bid, whereby the syndicate may reclaim
selling concessions allowed to syndicate members or other broker-dealers in
respect of the Common Stock sold in this offering for their account if the
syndicate repurchases the shares in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may as a result be higher than the price that might
otherwise prevail in the open market. These transactions may be affected on
Nasdaq, in the over-the-counter market or otherwise, and may, if commenced, be
discontinued at any time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company,
the Selling Stockholders and the Representatives. Among the factors to be
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, are the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuations of companies in related
businesses.
Application has been made to list the Common Stock for quotation and trading
on the Nasdaq National Market under the symbol "NTOL."
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of Pure-Gar as of and for the years ended December
31, 1996 and 1997 included in this Prospectus and elsewhere in this registration
statement have been audited by Farber & Hass LLP, independent public auditors,
as indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Exchange Act. The Company has filed with the Commission a Registration
Statement (which term shall include any amendments thereto) on Form S-1 under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement,
including the exhibits and schedules thereto, copies of which may be examined
without charge at the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, 14th Floor, Chicago, Illinois 60661-2511. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at its public reference facilities in New York, New York, and Chicago, Illinois,
at prescribed rates. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants (which, after this offering, will include the Company)
that file electronically with the Commission (at http://www.sec.gov).
Immediately following this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act. As
long as the Company is subject to such periodic reporting and information
requirements, it will file with the Commission all reports, proxy statements and
other information required thereby. The Company intends to furnish holders of
the Common Stock with annual reports containing financial statements audited by
an independent certified public accounting firm.
57
<PAGE>
NATROL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF NATROL, INC.
Report of Ernst & Young LLP, Independent Public Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998
(unaudited)......................................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997
and the Three Months Ended March 31, 1997 and 1998 (unaudited)...................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December
31, 1995, 1996 and 1997 and the Three Months Ended March 31, 1998 (unaudited)....... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and the Three Months Ended March 31, 1997 and 1998 (unaudited)................. F-6
Notes to Consolidated Financial Statements............................................ F-7
CONSOLIDATED FINANCIAL STATEMENTS OF PURE-GAR L.P. (A DIVISION OF BASIC VEGETABLE
PRODUCTS L.P.)
Report of Farber & Hass LLP, Independent Public Auditors.............................. F-19
Balance Sheets as of December 28, 1996 and December 27, 1997.......................... F-20
Statements of Income for the Years Ended December 28, 1996 and December 27, 1997...... F-21
Statements of Partners' Equity for the Years Ended December 28, 1996 and December 27,
1997................................................................................ F-22
Statements of Cash Flows for the Years Ended December 28, 1996 and December 27,
1997................................................................................ F-23
Notes to Financial Statements......................................................... F-24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Income for the Year Ended December 31,
1997 and the Three Months Ended March 31, 1998...................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Natrol, Inc.
We have audited the accompanying consolidated balance sheets of Natrol, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows for each of
the years in the three year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Natrol, Inc.
and subsidiaries at December 31, 1996 and 1997 and the consolidated results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Woodland Hills, California
April 13, 1998
The financial statements included herein have been adjusted to give effect
to the common stock split and the anticipated increase in the authorized common
stock of the Company to 50,000,000 shares of $0.01 par value common stock as
described in Note 10 to the consolidated financial statements. We expect to be
in a position to render the above audit report upon the effectiveness of such
events assuming that from April 13, 1998 to the effective date of such events,
no other events will have occurred that would affect the consolidated financial
statements or notes thereto.
ERNST & YOUNG LLP
Woodland Hills, California
April 13, 1998
F-2
<PAGE>
NATROL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
----------- ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 285,187 $ 1,800,202 $ 2,228,671
Accounts receivable, net of allowances of $160,000 in
1996 and $262,000 in 1997 and $307,000 at March
31,1998............................................. 3,999,124 5,396,625 7,649,634
Inventories........................................... 3,874,300 6,934,181 7,425,772
Deferred taxes........................................ 635,973 553,890 553,420
Income taxes receivable............................... 178,861 -- --
Prepaid expenses and other current assets............. 200,523 340,649 412,523
----------- ------------ ------------
Total current assets.................................... 9,173,968 15,025,547 18,270,020
Equipment and leasehold improvements:
Furniture and office equipment........................ 339,649 871,048 899,873
Machinery and equipment............................... 1,296,258 2,804,346 3,035,646
Leasehold improvements................................ 135,352 1,875,625 1,875,625
Construction in progress.............................. 1,193,546 -- --
----------- ------------ ------------
2,964,805 5,551,019 5,811,144
Accumulated depreciation and amortization............. (869,613) (922,839) (1,114,511)
----------- ------------ ------------
2,095,192 4,628,180 4,696,633
Other assets:
Deposits.............................................. 53,067 43,497 43,497
Trademarks and patents, net........................... 22,549 18,876 17,958
Goodwill.............................................. -- -- 9,001,229
----------- ------------ ------------
75,616 62,373 9,062,684
----------- ------------ ------------
Total assets............................................ $11,344,776 $ 19,716,100 $ 32,029,337
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit........................................ $ -- $ -- $ 3,000,000
Accounts payable...................................... 2,988,997 3,867,846 5,084,344
Accrued expenses...................................... 838,715 899,311 1,853,359
Accrued payroll and related liabilities............... 246,504 413,687 584,728
Income taxes payable.................................. -- 422,083 948,573
Dividends payable..................................... 400,000 -- --
Current portion of long-term debt..................... 204,167 998,611 1,500,000
----------- ------------ ------------
Total current liabilities............................... 4,678,383 6,601,538 12,971,004
Deferred income taxes, noncurrent....................... 16,694 72,774 72,314
Long-term debt, less current portion.................... 404,861 2,606,250 7,375,000
Convertible participating preferred stock, $0.01 par
value per share, 27,000 shares authorized, issued and
outstanding as of December 31, 1996 and 1997;
liquidation preference of $12,000,000; no shares
authorized, issued or outstanding on a pro forma
basis................................................. 12,000,000 12,000,000 12,000,000 $ --
Redeemable preferred stock, $0.01 par value per share,
13,500 shares authorized; none issued and outstanding;
13,500 shares issued and outstanding on a pro forma
basis................................................. -- -- -- 6,000,000
Commitments
Stockholders' equity (deficit):
Preferred stock, par value of $0.01 per share:
Authorized shares--2,000,000..........................
Issued and outstanding shares--none................... -- -- -- --
Common stock, par value of $0.01 per share:
Authorized shares -- 50,000,000.....................
Issued and outstanding shares -- 7,100,000;
9,800,000 on a pro forma basis.................... 71,000 71,000 71,000 98,000
Additional paid-in capital............................ 559,500 559,500 559,500 12,532,500
Retained earnings (deficit)........................... (5,823,162) (1,632,462) (456,981) (6,456,981)
----------- ------------ ------------ --------------
(5,192,662) (1,001,962) 173,519 6,173,519
Receivable from stockholder........................... (562,500) (562,500) (562,500) (562,500)
----------- ------------ ------------ --------------
Total stockholders' equity (deficit).................... (5,755,162) (1,564,462) (388,981) $ 5,611,019
----------- ------------ ------------ --------------
Total liabilities and stockholders' equity.............. $11,344,776 $ 19,716,100 $ 32,029,337
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 23,565,664 $ 40,802,352 $ 42,874,759 $ 9,908,946 $ 13,116,420
Cost of goods sold................. 12,214,148 18,497,818 19,799,712 4,474,497 6,320,642
------------- ------------- ------------- -------------- --------------
11,351,516 22,304,534 23,075,047 5,434,449 6,795,778
Selling and marketing expenses..... 4,457,928 8,735,815 11,398,390 2,989,644 3,477,162
General and administrative
expenses......................... 3,378,175 5,082,368 4,450,244 1,055,038 1,230,300
------------- ------------- ------------- -------------- --------------
7,836,103 13,818,183 15,848,634 4,044,682 4,707,462
------------- ------------- ------------- -------------- --------------
Operating income................... 3,515,413 8,486,351 7,226,413 1,389,767 2,088,316
Interest income.................... 25,163 109,102 20,695 -- 21,146
Interest expense................... (43,891) (55,472) (240,250) (35,359) (152,481)
------------- ------------- ------------- -------------- --------------
Income before income tax
provision........................ 3,496,685 8,539,981 7,006,858 1,354,408 1,956,981
Income tax provision............... 1,452,670 2,298,593 2,816,158 544,355 781,500
------------- ------------- ------------- -------------- --------------
Net income......................... $ 2,044,015 $ 6,241,388 $ 4,190,700 $ 810,053 $ 1,175,481
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
PRO FORMA NET INCOME DATA (NOTE 4):
Income before provision for income
taxes............................ $ 3,496,685 $ 8,539,981 $ 7,006,858 $ 1,354,408 $ 1,956,981
Pro forma income tax provision
(actual for the years ended 1995
and 1997 and the three months
ended 1997 and 1998)............. 1,452,670 3,159,793 2,816,158 544,355 781,500
------------- ------------- ------------- -------------- --------------
Pro forma net income............... $ 2,044,015 $ 5,380,188 $ 4,190,700 $ 810,053 $ 1,175,481
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Basic earnings per share........... $ 0.34 $ 0.99 $ 0.59 $ 0.11 $ 0.17
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Diluted earnings per share......... $ 0.34 $ 0.88 $ 0.41 $ 0.08 $ 0.11
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Weighted average shares
outstanding--basic............... 6,000,000 6,275,000 7,100,000 7,100,000 7,100,000
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
Weighted average shares
outstanding--diluted............. 6,000,000 7,065,385 10,272,859 10,261,538 10,272,859
------------- ------------- ------------- -------------- --------------
------------- ------------- ------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ORIGINALLY ISSUED
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE
--------------------- ---------------------- PAID-IN EARNINGS FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDER
---------- --------- --------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995............ 6,000,000 $ 10,000 -- $ -- $ 50,000 $ 1,199,435 $ --
Net income............................ -- -- -- -- -- 2,044,015 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at December 31, 1995.......... 6,000,000 10,000 -- -- 50,000 3,243,450 --
Dividends, $0.55 per share............ -- -- -- -- -- (3,300,000) --
Exchanged shares in exchange for new
shares.............................. (6,000,000) (10,000) 7,027,780 70,278 (50,000) (13,250) --
Repurchase from stockholder........... -- -- (227,780) (2,278) -- (851,900) --
Restricted stock issued............... -- -- 300,000 3,000 559,500 -- (562,500)
Adjustment for liquidation value of
convertible participating preferred
stock............................... -- -- -- -- -- (11,142,850) --
Net income............................ -- -- -- -- -- 6,241,388 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at December 31, 1996.......... -- -- 7,100,000 71,000 559,500 (5,823,162) (562,500)
Net income............................ -- -- -- -- -- 4,190,700 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at December 31, 1997.......... -- -- 7,100,000 71,000 559,500 (1,632,462) (562,500)
Net income (unaudited)................ -- -- -- -- -- 1,175,481 --
---------- --------- --------- ----------- ----------- ----------- ------------
Balance at March 31, 1998
(unaudited)......................... -- $ -- 7,100,000 $ 71,000 $ 559,500 $ (456,981) $ (562,500)
---------- --------- --------- ----------- ----------- ----------- ------------
---------- --------- --------- ----------- ----------- ----------- ------------
<CAPTION>
TOTAL
-----------
<S> <C>
Balance at January 1, 1995............ $ 1,259,435
Net income............................ 2,044,015
-----------
Balance at December 31, 1995.......... 3,303,450
Dividends, $0.55 per share............ (3,300,000)
Exchanged shares in exchange for new
shares.............................. (2,972)
Repurchase from stockholder........... (854,178)
Restricted stock issued............... --
Adjustment for liquidation value of
convertible participating preferred
stock............................... (11,142,850)
Net income............................ 6,241,388
-----------
Balance at December 31, 1996.......... (5,755,162)
Net income............................ 4,190,700
-----------
Balance at December 31, 1997.......... (1,564,462)
Net income (unaudited)................ 1,175,481
-----------
Balance at March 31, 1998
(unaudited)......................... $ (388,981)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
NATROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 2,044,015 $ 6,241,388 $ 4,190,700 $ 810,053 $ 1,175,481
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 192,490 364,158 690,335 169,863 192,100
Amortization of goodwill................ -- -- -- -- 50,000
Provision for bad debts and returns..... 264,366 314,820 1,002,683 230,763 12,100
Deferred taxes.......................... (143,151) (397,461) 138,163 -- 10
Changes in operating assets and
liabilities:
Accounts receivable................... (3,155,866) (88,178) (1,440,220) (231,887) (204,393)
Inventories........................... (319,160) (1,770,548) (3,059,881) (236,721) 1,231,274
Income taxes receivable/payable....... 355,933 (1,031,246) 600,944 674,946 526,490
Deposits.............................. 5,450 (40,757) 9,570 -- --
Prepaid expenses and other current
assets.............................. 55,422 (52,632) (140,126) 46,473 (115,396)
Accounts payable...................... 710,906 549,052 878,849 (913,041) (638,117)
Accrued expenses...................... 187,210 (3,475) (899,368) 741,718 954,048
Accrued payroll and related
liabilities......................... 211,255 35,201 167,183 113,846 171,041
------------ ------------ ------------ ------------ -------------
Net cash provided by operating
activities.............................. 408,870 4,120,322 2,138,832 1,406,013 3,354,638
INVESTING ACTIVITIES
Assets purchased, net of liabilities
assumed in connection with Pure-Gar
acquisition............................. -- -- -- -- (11,085,736)
Purchases of equipment and leasehold
improvements............................ (409,354) (1,865,099) (3,219,650) (1,557,550) (110,572)
------------ ------------ ------------ ------------ -------------
Net cash used in investing activities..... (409,354) (1,865,099) (3,219,650) (1,557,550) (11,196,308)
FINANCING ACTIVITIES
Proceeds from long-term debt.............. 66,667 750,000 4,000,000 600,000 9,000,000
Repayments on long-term debt.............. (84,000) (207,639) (1,004,167) (51,041) (3,729,861)
Proceeds (repayments) on line of credit,
net..................................... (26,389) (127,778) -- -- 3,000,000
Convertible participating preferred stock
sold.................................... -- 854,178 -- -- --
Repurchase of common stock................ -- (854,178) -- -- --
Dividends paid to stockholders............ -- (2,900,000) (400,000) (400,000) --
------------ ------------ ------------ ------------ -------------
Net cash provided by (used in) financing
activities.............................. (43,722) (2,485,417) 2,595,833 148,959 8,270,139
------------ ------------ ------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents............................. (44,206) (230,194) 1,515,015 (2,578) 428,469
Cash and cash equivalents, beginning of
year.................................... 559,587 515,381 285,187 285,187 1,800,202
------------ ------------ ------------ ------------ -------------
Cash and cash equivalents, end of year.... $ 515,381 $ 285,187 $ 1,800,202 $ 282,609 $ 2,228,671
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.............................. $ 43,891 $ 55,472 $ 240,250 $ 35,359 $ 152,481
Income taxes.......................... $ 916,990 $ 3,770,000 $ 2,215,000 $ -- $ --
</TABLE>
Supplemental non-cash transactions
During the year ended December 31, 1996, the Company adjusted retained earnings
(deficit) for $11,142,850, which increases the convertible participating
preferred stock to its liquidation value.
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Natrol, Inc. (collectively with its subsidiaries, referred to as the
Company) is a leading marketer and manufacturer of branded, high quality dietary
supplement products, including vitamins, minerals, herbs and specialty
formulations, weight control products and hormones. The Company sells its
products under the Natrol brand name through multiple distribution channels
throughout the United States, including domestic health food stores and mass
market drug, retail and grocery store chains.
On July 1, 1996, the Company elected to be treated as an S Corporation for
federal income and California franchise tax purposes under Subchapter S of the
Internal Revenue Code and the corresponding provisions of the California
statute. Accordingly, the stockholders reported their equity in the earnings or
losses of the Company on their individual tax returns. In connection with this
election, the Company changed its year end from June 30 to a calendar year end.
On September 30, 1996, the Company filed an amendment to its charter whereby
all outstanding shares of common stock were split-up and converted to shares of
common stock and 25,078.1 shares of convertible participating preferred stock.
The original stockholders subsequently sold all of their convertible
participating preferred stock to unrelated third parties (the new stockholders).
The Company also sold an additional 1,921.9 shares of the convertible
participating preferred stock to the new stockholders. Upon completion of the
transactions, the new stockholders held 27,000 shares of convertible
participating preferred stock which were convertible into approximately 27% of
the then outstanding shares of Common Stock and 13,500 shares of redeemable
preferred stock.
Upon the creation and issuance of the convertible participating preferred
stock on September 30, 1996, the Company was required to change its status for
income tax purposes back to a C Corporation.
PRESENTATION
For purposes of comparability to the year ended December 31, 1997, the
consolidated financial information for the prior years has been restated to
include each of the twelve month periods ended December 31, 1995 and 1996. These
twelve month periods are referred to in the consolidated financial statements
and the following notes to the consolidated financial statements as the years
ended December 31, 1995 and 1996.
On January 15, 1998, the Company reincorporated itself in the State of
Delaware. Effective with the reincorporation, a ten-for-one reverse stock split
occurred affecting all classes of stock then outstanding. All references in the
accompanying consolidated financial statements to the number of shares and per
share amounts have been retroactively adjusted to reflect the reverse stock
split.
The pro forma March 31, 1998 unaudited information reflected in the
accompanying balance sheets reflect the conversion of the convertible
participating preferred stock into redeemable preferred stock and common stock.
Upon completion of the proposed initial public offering as described in Note 10
to the consolidated financial statements, the redeemable preferred stock will be
redeemed for $6,000,000.
The accompanying unaudited financial statements as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted. In the opinion of the Company, all
adjustments,
F-7
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consisting of only normal recurring accruals, necessary to present fairly the
financial position, results of operations and cash flows for the periods
presented have been made.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of
Natrol, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts have been eliminated in consolidation.
ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates, although management does not believe that any differences would
materially affect the Company's consolidated financial position or results of
operations.
MAJOR CUSTOMERS
The Company had net sales to two customers which individually represented
17.2% and 10.0%, respectively, of total Company net sales during the year ended
December 31, 1995. The Company had net sales to three customers which
individually represented 14.5%, 12.6% and 10.2%, respectively, of total Company
net sales during the year ended December 31, 1996. The Company had net sales to
two customers which individually represented 17.8% and 11.6%, respectively, of
total Company net sales during the year ended December 31, 1997. The Company had
net sales to two customers which individually represented 14.8% and 11.1% and
15.3% and 10.4%, respectively, of total Company net sales during the three
months ended March 31, 1997 and 1998, respectively.
MAJOR PRODUCTS
The Company's sales of two products each comprised approximately 28.7% and
27.3%, respectively, of net sales during the year ended December 31, 1995. The
Company's sales of three products each comprised approximately 36.0%, 18.8% and
18.1%, respectively, of net sales during the year ended December 31, 1996. The
Company's sales of two products each comprised approximately 17.1% and 17.7%,
respectively, of net sales during the year ended December 31, 1997. The
Company's sales of three products each comprised approximately 23.7%, 20.7% and
20.0%, respectively, of net sales during the three months ended March 31, 1997.
The Company's sales of two products each comprised approximately 15.1% and
12.2%, respectively, of net sales during the three months ended March 31, 1998.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables, other than
significant customers previously discussed, are limited, due to the distribution
of sales over a large customer base. The Company performs periodic credit
evaluations of its customers' financial conditions and generally does not
require collateral. Credit losses have been within management's expectations.
F-8
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out method) or
market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated on the basis of cost.
Depreciation on furniture, machinery and equipment is computed using the
straight-line method over the estimated useful lives of the assets ranging from
five to ten years. Amortization on leasehold improvements is computed using the
straight-line method over the shorter of the estimated lives of the assets or
the lease terms.
TRADEMARKS AND PATENTS
Costs of obtaining trademarks and patents are capitalized and amortized
using the straight-line basis over the estimated useful life of eleven years.
Accumulated amortization was $17,951 and $21,624 at December 31, 1996 and 1997,
respectively. The costs of servicing the Company's patents and trademarks are
expensed as incurred.
REVENUE RECOGNITION
The Company sells its products to retail outlets through a direct salesforce
and a national broker network. Sales are recorded when products are shipped to
customers by the Company. Net sales represent products shipped, less estimated
returns and allowances for which provisions are made at the time of sale.
ADVERTISING COSTS
Advertising and promotional costs are expensed at first showing. In
addition, the Company advertises on a cooperative basis by accruing an
obligation to reimburse retailers for qualified advertising of Company products.
The Company provides for cooperative advertising obligations in the same period
as the related revenue is recognized. Advertising and promotional costs amounted
to $2,473,659, $5,638,500 and $6,944,454, respectively, for the years ended
December 31, 1995, 1996 and 1997 and $2,086,725 and $2,092,693 for the three
months ended March 31, 1997 and 1998, respectively.
RESEARCH AND DEVELOPMENT COSTS
The Company incurs research and development costs relating to the
development of its dietary supplement products. Research and development costs
are expensed as incurred and amounted to $106,848, $117,184 and $357,064 for the
years ended December 31, 1995, 1996 and 1997, respectively, and $64,414 and
$79,946 for the three months ended March 31, 1997 and 1998, respectively.
F-9
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees."
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings per Share." Pro forma basic earnings per share have been computed by
dividing pro forma net income by the pro forma weighted average number of common
shares outstanding. Pro forma diluted earnings per share have been computed by
dividing pro forma net income by securities or other contracts to issue common
stock as if these securities were exercised or converted to common stock.
The following table sets forth the calculation for basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------------------------
1995 1996 1997 1997 1998
------------- ------------- -------------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Earnings:
Net income...................... $ 2,044,015 $ 6,241,388 $ 4,190,700 $ 810,053 $ 1,175,481
------------- ------------- -------------- -------------- -----------------
------------- ------------- -------------- -------------- -----------------
Shares:
Weighted average shares for
basic earnings per share...... 6,000,000 6,275,000 7,100,000 7,100,000 7,100,000
Conversion of convertible
participating preferred
stock......................... -- 675,000 2,700,000 2,700,000 2,700,000
Share equivalent for redeemable
preferred stock............... -- 115,385 461,538 461,538 461,538
Stock options................... -- -- 11,321 -- 11,321
------------- ------------- -------------- -------------- -----------------
Weighted average shares for
diluted earnings per share.... 6,000,000 7,065,385 10,272,859 10,261,538 10,272,859
------------- ------------- -------------- -------------- -----------------
------------- ------------- -------------- -------------- -----------------
</TABLE>
As discussed further in Notes 1 and 4, the Company elected to be taxed as an
S Corporation for federal income and California franchise tax purposes for the
period from July 1, 1996 through September 29, 1996, and was taxed as a C
Corporation for all the other periods in the year ended December 31, 1996.
Accordingly, the provision for income taxes for the period in which the Company
was taxed as an S Corporation reflects primarily state income tax, if any. If
the Company had been subject to tax as a C Corporation for the entire year ended
December 31, 1996, pro forma basic and diluted earnings per share would have
been $0.86 and $0.76, respectively.
F-10
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the fair value of a long-lived asset, which would
generally approximate estimated undiscounted future cash flows expected to
result from the use of the asset and its eventual disposition is less than the
carrying amount. No such impairment losses have been identified by the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). This statement establishes standards for reporting and display of
comprehensive income and its components. Components of comprehensive income are
net income and all other non-owner changes in equity such as unrealized gains on
available-for-sale securities that are not included in net income. This
statement requires that an enterprise: (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings in the
equity section of the balance sheet. While SFAS No. 130 is effective for
financial statements issued for periods beginning after December 15, 1997, and
therefore was adopted in the year ended December 31, 1998, there were no items
of comprehensive income and no impact on the Company's results of operations or
related disclosures for the three months ended March 31, 1997 and 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 is effective for fiscal
years beginning subsequent to December 15, 1997, and therefore, will be adopted
by the Company for the year ended December 31, 1998. The Company does not expect
the adoption of SFAS No. 131 to result in any material changes in its disclosure
and this statement will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the presentation in 1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
Raw material and packaging supplies............................. $ 2,309,822 $ 3,837,856
Finished goods.................................................. 1,564,478 3,096,325
------------- -------------
$ 3,874,300 $ 6,934,181
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCING
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1997
----------- -------------
Note payable to a bank, payable in monthly installments of $41,667, beginning October
31, 1997, plus interest at the prime rate plus 0.25%, due October 31, 2002.......... $ -- $ 1,875,000
Note payable to a bank, payable in monthly installments of $25,000, beginning June 30,
1997, plus interest at the prime rate plus 0.25%, due June 30, 2002................. -- 1,325,000
Note payable to a bank, payable in monthly installments of $11,458, beginning July 1,
1996, plus interest at the prime rate plus 0.75%, due June 1, 2000.................. 481,250 343,750
Note payable to a bank, payable in monthly installments of $5,556 plus interest at the
prime rate plus 0.75%, due November 1, 1998......................................... 127,778 61,111
----------- -------------
609,028 3,604,861
Less current portion.................................................................. 204,167 998,611
----------- -------------
$ 404,861 $ 2,606,250
----------- -------------
----------- -------------
</TABLE>
Future maturities of long-term debt at December 31 are as follows:
<TABLE>
<S> <C>
1998........................................................................... $ 998,611
1999........................................................................... 937,500
2000........................................................................... 868,750
2001........................................................................... 675,000
2002........................................................................... 125,000
----------
$3,604,861
----------
----------
</TABLE>
In addition to the term loans, the Company has an agreement with a bank
which provides for maximum borrowings on a revolving line of credit up to
$2,500,000, based on a formula, through December 1, 1998, with interest at the
prime rate plus 0.5% (prime rate was 8.50% at December 31, 1997). No amounts
were outstanding under this agreement at December 31, 1996 and 1997. The line of
credit and term loans are collateralized by substantially all of the Company's
assets and include requirements that the Company comply with certain financial
covenants. The agreement provides for a letter of credit up to a maximum of
$250,000, of which no amounts were outstanding at December 31, 1996 and 1997.
This agreement was subsequently replaced by the agreement described in Note 9 to
the consolidated financial statements.
4. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between enacted rates and laws
that will be in effect when the differences are expected to reverse.
F-12
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- -------------
Current:
Federal............................................................ $ 1,260,351 $ 2,078,292 $ 2,161,400
State.............................................................. 335,470 617,762 516,595
------------- ------------- -------------
1,595,821 2,696,054 2,677,995
Deferred:
Federal............................................................ (133,574) (303,734) 72,202
State.............................................................. (9,577) (93,727) 65,961
------------- ------------- -------------
(143,151) (397,461) 138,163
------------- ------------- -------------
Total income tax provision........................................... $ 1,452,670 $ 2,298,593 $ 2,816,158
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
As described in Note 1 to the consolidated financial statements, in 1996 the
Company elected to be treated as an S Corporation for federal income and
California franchise tax purposes under Subchapter S of the Internal Revenue
Code and the corresponding provisions of the California statute. Upon the
creation and issuance of the convertible participating preferred stock as
discussed in Notes 1 and 6 to the consolidated financial statements, the Company
was required to change its status for income tax purposes back to a C
corporation. The following unaudited pro forma income tax information has been
determined as if the Company operated as a C corporation for the entire year
ended December 31, 1996. The pro forma information presented below represents
actual amounts for the years ended December 31, 1995 and 1997 as the Company was
operating as a C corporation during those periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- -------------
Federal tax provision................................................ $ 1,126,777 $ 2,599,860 $ 2,233,602
State income taxes net of federal benefit............................ 325,893 559,933 582,556
------------- ------------- -------------
Total pro forma income tax provision................................. $ 1,452,670 $ 3,159,793 $ 2,816,158
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The difference between actual income tax expense and the U.S. Federal
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Statutory rate...................................................................... 34.0% 34.0% 34.0%
State tax provision................................................................. 6.0 4.0 6.0
S Corporation status................................................................ -- (10.0) --
Other............................................................................... 1.5 (1.0) --
--- --------- ---
Effective tax rate.................................................................. 41.5% 27.0% 40.0%
--- --------- ---
--- --------- ---
</TABLE>
F-13
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1997
----------- -----------
Deferred tax assets:
Accounts receivable reserves.......................................................... $ 334,712 $ 264,126
Inventory reserves.................................................................... 141,158 46,486
Various accrued liabilities........................................................... 93,938 120,626
State taxes........................................................................... 66,165 122,652
----------- -----------
635,973 553,890
Deferred tax liability:
Depreciation.......................................................................... (16,694) (72,774)
----------- -----------
$ 619,279 $ 481,116
----------- -----------
----------- -----------
</TABLE>
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or noncurrent depending on the
periods in which the temporary differences are expected to reverse.
5. COMMITMENTS
The Company leases certain equipment and facilities under noncancelable
operating leases that expire in various years through 2001. Rent expense under
operating leases totaled $168,937, $406,446 and $641,731, for the years ended
December 31, 1995, 1996 and 1997, respectively, and $44,940 and $121,196 for the
three months ended March 31, 1997 and 1998, respectively. In August 1996, the
Company entered into a 120-month lease for an operating facility with an option
to extend the term of the lease for 60 months at 95% of the then market value
for similar space.
Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at December 31,
1997:
<TABLE>
<S> <C>
1998........................................................................... $ 503,720
1999........................................................................... 526,345
2000........................................................................... 520,811
2001........................................................................... 489,258
2002........................................................................... 448,085
Thereafter..................................................................... 1,711,430
----------
Total minimum lease payments................................................... $4,199,649
----------
----------
</TABLE>
6. STOCKHOLDERS' EQUITY
In September 1996, the shares of common stock held by the original
stockholders were split-up and converted into 7,027,780 shares of common stock
and 25,078.1 shares of convertible participating preferred stock. In addition,
the Company sold an additional 1,921.9 shares of its convertible participating
preferred stock to third parties.
F-14
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Each share of convertible participating preferred stock is convertible based
on a formula upon the written election of not less than 66 2/3% of the
outstanding shares of convertible participating preferred stock such that each
outstanding share of convertible participating preferred stocks will convert
into one share of common stock (prior to giving effect the 100-for-1 stock split
described in Note 10) and one-half of one share of redeemable preferred stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions. The convertible participating preferred stock has an
automatic conversion feature which provides for each share of convertible
participating preferred stock to be automatically converted into shares of
common stock and redeemable preferred stock based on the then effective
conversion price immediately upon the closing of the Company's first firm
commitment public offering pursuant to an effective registration statement under
the Securities Act of 1933, as amended, provided that such registration
statement covers the offer and sale of common stock of which the aggregate net
proceeds exceeds $15 million at a price per share reflecting a valuation of the
Company's equity of at least $50 million.
The convertible participating preferred stock contains a liquidation
preference of $444.445 per share, adjusted for any stock splits, stock
dividends, recapitalizations, plus any declared but unpaid dividends. The
convertible participating preferred stock contains voting rights equal to the
number of full shares of common stock they are convertible into.
Upon the occurrence of certain events on or after September 26, 2002, the
Company is required to redeem all of the outstanding shares of convertible
participating preferred stock at the liquidation preference value.
RECEIVABLE FROM STOCKHOLDER
The receivable from stockholder represents an interest bearing note from a
stockholder in the amount of $562,500 issued by the stockholder to finance in
part the purchase of 300,000 shares of the Company's common stock. The note
bears interest at 6.60% per year with interest payments due annually. The note
is due within ten days of the receipt by the stockholder of proceeds from the
sale of the Company's common stock or November 14, 2006, whichever occurs first.
Included in interest income is $9,300 and $37,125 for the years ended December
31, 1996 and 1997, respectively, for interest from this stockholder.
STOCK OPTIONS
The Company has adopted the 1996 Stock Option and Grant Plan, as amended
(the Plan), which authorizes the Board of Directors of the Company to grant
incentive stock options or non-qualified stock options. Incentive stock options
may be granted only to employees of the Company. Non-qualified stock options may
be granted to officers and employees of the Company as well as to non-employees.
The maximum number of shares of common stock to be issued under the Plan is
1,050,000 shares. All options granted under the Plan have been made at prices
not less than the estimated fair market value of the stock at the date of grant.
Generally the options granted under the Plan vest over 3-5 years. Options
granted under the plan have a term of not more than 10 years.
F-15
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity, and related information is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
---------------------------------------------
<S> <C> <C> <C>
WEIGHTED
AVERAGE EXERCISE
NUMBER OF EXERCISE PRICE PRICE
OPTIONS PER SHARE PER SHARE
----------- -------------- ----------------
Outstanding at January 1, 1996.................................... -- $ -- $ --
Granted......................................................... 200,000 1.875 1.875
----------- ------- ----------------
Outstanding at December 31, 1996.................................. 200,000 1.875 1.875
Granted......................................................... 200,000 2.100 2.100
----------- ------- ----------------
Outstanding at December 31, 1997.................................. 400,000 $ 1.988 $ 1.875-2.100
----------- ------- ----------------
----------- ------- ----------------
Exercisable at:
December 31, 1996............................................... 70,000 $ 1.875 $ 1.875
December 31, 1997............................................... 116,250 $ 1.887 $ 1.875-$2.100
----------- ------- ----------------
----------- ------- ----------------
</TABLE>
At December 31, 1997, 350,000 shares were available for future grant.
Subsequent to year end, the Company granted 255,000 options under the Plan at
prices not less than the estimated fair market value of the stock at the date of
grant. After these options were granted, 95,000 shares were available for future
grant. The weighted average remaining contractual life for the outstanding
options in years was 10 and 9.38 at December 31, 1996 and 1997, respectively.
If the Company had elected to recognize compensation expense based on the
fair value of the options granted at grant date for its stock-based compensation
plans consistent with the method prescribed by SFAS No. 123, the Company's net
income would have been reduced by approximately $100 and $4,900 for the years
ended December 31, 1996 and 1997, respectively, and there would have been no
effect on the reported earnings per share. The fair value of the options is
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1996 and 1997, respectively: dividend
yield of 6.0% and 3.0%; risk free interest rate of 6.3% and 6.0%; and expected
life of 6.0 years and 5.0 years.
7. PROFIT SHARING PLAN
The Company has a profit sharing 401(k) plan that covers substantially all
of its employees. Eligible employees may contribute up to 10% of their
compensation. Contributions are discretionary, however, the Company generally
matches 10% of the employees' contributions up to the maximum of 1% of eligible
compensation. Amounts recognized as expense were $5,055, $12,764 and $0 for the
years ended December 31, 1995, 1996 and 1997, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The carrying amount approximates
fair value.
F-16
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM DEBT: The fair values of the Company's long-term notes payable are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. The
carrying amount of long-term notes payable approximate their fair value.
9. SUBSEQUENT EVENTS
ACQUISITIONS
On February 27, 1998, the Company purchased substantially all of the assets
and assumed certain liabilities of Pure-Gar L.P. (Pure-Gar), a distributor of
bulk dehydrated vegetable products and dietary supplements, for a total purchase
price of $11,085,736, which included $85,736 of deferred acquisition costs.
Assets purchased include accounts receivable of $2,060,716 and inventories of
$1,722,865, as well as fixed assets of $149,063 and intangible assets of the
business of $8,965,000. Liabilities assumed consisted primarily of trade
payables of $1,854,614. In addition, the Company entered into long-term supply
and royalty agreements with the seller. The acquisition was accounted for using
the purchase method, and accordingly, the acquired assets and liabilities are
recorded at their estimated fair values. The excess of cost over the fair value
of assets acquired will be amortized over fifteen years. Amortization expense
for the three months ended March 31, 1998 was $50,000 and is included in general
and administrative expenses.
Pro forma revenues, net income, basic earnings per share and diluted
earnings per share would have been $51,583,312, $3,493,037, $0.23 and $0.16,
respectively, for the year ended December 31, 1997, if the acquisition of
Pure-Gar had taken place on January 1, 1997. Pro forma revenues, net income,
basic earnings per share and diluted earnings per share would have been
$14,948,264, $1,090,636, $0.09 and $0.06, respectively, for the three months
ended March 31, 1998, if the acquisition of Pure-Gar had taken place on January
1, 1998.
FINANCING
On February 27, 1998, the Company entered into an amended credit facility
(Loan Agreement) with a bank that provides for a revolving line of credit for
borrowings up to $8,000,000, based on a formula, through April 30, 2001. The
Loan Agreement amends and restates the previous revolving line of credit
agreement with the bank. Advances under the Loan Agreement bear interest at the
bank's adjusted LIBOR rate plus 1.25% or the bank's prime rate at the option of
the Company. The Loan Agreement also provides for a letter of credit up to a
maximum of $250,000. Proceeds from the initial funding under the Loan Agreement
were used to assist in the funding of the Pure-Gar acquisition and further
fundings are to be used for working capital requirements.
In addition to providing for the revolving loans, the Loan Agreement
provides for a term loan of $9,000,000 to be used for financing the acquisition
of Pure-Gar. The term loan calls for monthly installments of $125,000 during the
period March 1, 1998 through February 28, 2004 and bears interest at the bank's
adjusted LIBOR rate plus 1.25% or the bank's prime rate at the option of the
Company. Mandatory prepayments are required on the term loan based on excess
cash flows, as defined.
The Loan Agreement is collateralized by substantially all of the assets of
the Company and requires the Company to maintain certain minimum amounts and
ratios of net worth and other financial measurements.
F-17
<PAGE>
NATROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED)
During May 1998, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission, relating to
an initial public offering of 3,200,000 shares of the Company's unissued common
stock and 740,000 shares to be sold by selling stockholders. If the initial
public offering is consummated under the terms anticipated, all of the
convertible participating preferred stock will convert into 2,700,000 shares of
common stock and 13,500 shares of redeemable preferred stock. The shares of
redeemable preferred stock are then required to be immediately redeemed by the
Company for $6,000,000 in cash.
In connection with the initial public offering, the Board of Directors has
approved a one hundred-for-one-stock split of the Company's common stock which
is to be effective prior to the registration statement going effective. All
references in the accompanying consolidated financial statements to the number
of shares of common stock and per common share amounts have been retroactively
adjusted to reflect the stock split. In addition, the Company's capital
structure will be changed upon completion of the offering to reflect 50,000,000
shares of common stock and an additional 2,000,000 shares of preferred stock
authorized. The Board of Directors has authority to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares of
preferred stock without any future vote or action by the shareholders.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Natrol, Inc.:
We have audited the accompanying balance sheets of Pure-Gar L.P. (a division
of Basic Vegetable Products, L.P.) (the "Partnership") as of December 28, 1996
and December 27, 1997 and the related statements of income, partners' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership'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 presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of the Partnership at December 28,
1996 and December 27, 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Farber & Hass LLP
Oxnard, California
April 17, 1998
F-19
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash......................................................................... $ 465 $ 42,000
Accounts receivable (less allowance for doubtful accounts of $53,000 in 1996
and 1997).................................................................... 1,074,415 1,683,976
Inventories.................................................................. 2,684,242 1,922,753
Prepaid expenses and other current assets.................................... 169,431 66,684
-------------- --------------
Total current assets........................................................... 3,928,553 3,715,413
Property and equipment......................................................... 208,248 270,616
Less accumulated depreciation and amortization............................... (73,425) (113,497)
-------------- --------------
Property and equipment--net.................................................... 134,823 157,119
-------------- --------------
Total assets................................................................... $ 4,063,376 $ 3,872,532
-------------- --------------
-------------- --------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Bank overdraft............................................................... $ 271,872 $ --
Accounts payable............................................................. 225,611 175,166
Accrued expenses............................................................. 313,090 234,458
Related party payable........................................................ 2,144,049 2,318,698
-------------- --------------
Total current liabilities...................................................... 2,954,622 2,728,322
-------------- --------------
Partners' equity:
Limited partner.............................................................. 1,097,666 1,132,768
General partner.............................................................. 11,088 11,442
-------------- --------------
Total partners' equity......................................................... 1,108,754 1,144,210
-------------- --------------
Total liabilities and partners' equity......................................... $ 4,063,376 $ 3,872,532
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
F-20
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27,
1996 1997
-------------- --------------
<S> <C> <C>
Net sales...................................................................... $ 7,947,565 $ 8,708,553
Cost of goods sold............................................................. 3,802,207 3,920,226
-------------- --------------
Gross profit................................................................... 4,145,358 4,788,327
-------------- --------------
Operating expenses:
Selling and marketing expenses............................................... 1,900,559 1,954,543
General and administrative expenses.......................................... 1,924,024 1,849,161
Litigation settlement expense................................................ -- 733,120
-------------- --------------
Total operating expenses....................................................... 3,824,583 4,536,824
-------------- --------------
Income from operations......................................................... 320,775 251,503
Related party interest expense................................................. (177,785) (229,735)
Other income................................................................... 119,412 13,688
-------------- --------------
Net income..................................................................... $ 262,402 $ 35,456
-------------- --------------
-------------- --------------
PRO FORMA NET INCOME DATA:
Income before provision for income taxes....................................... $ 262,402 $ 35,456
Pro forma income taxes......................................................... 85,587 5,318
-------------- --------------
Pro forma net income........................................................... $ 176,815 $ 30,138
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1996 AND DECEMBER 27, 1997
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
--------- ------------- -------------
<S> <C> <C> <C>
Partners' equity at January 1, 1996..................................... $ 8,464 $ 837,888 $ 846,352
Net income for 1996..................................................... 2,624 259,778 262,402
--------- ------------- -------------
Partners' equity at December 28, 1996................................... 11,088 1,097,666 1,108,754
Net income for 1997..................................................... 354 35,102 35,456
--------- ------------- -------------
Partners' equity at December 27, 1997................................... $ 11,442 $ 1,132,768 $ 1,144,210
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
See notes to financial statements.
F-22
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27,
1996 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 262,402 $ 35,456
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................ 26,776 40,072
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 71,028 (609,561)
Inventories.................................................................. (1,812,793) 761,489
Prepaid expenses............................................................. (133,426) 102,747
Accounts payable, accrued expenses and other liabilities..................... 350,953 (400,949)
-------------- --------------
Net cash used in operating activities.......................................... (1,235,060) (70,746)
-------------- --------------
CASH FLOWS USED BY INVESTING ACTIVITIES
Capital expenditures......................................................... (74,779) (62,368)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net related party borrowings from limited partner............................ 1,303,186 174,649
-------------- --------------
NET INCREASE (DECREASE) IN CASH................................................ (6,653) 41,535
CASH, BEGINNING OF YEAR........................................................ 7,118 465
-------------- --------------
CASH, END OF YEAR.............................................................. $ 465 $ 42,000
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................................... $ -- $ --
Taxes...................................................................... $ -- $ --
</TABLE>
See notes to financial statements.
F-23
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Pure-Gar L.P. (a division of Basic Vegetable Products, L.P.), a Delaware
Limited Partnership (the "Partnership"), is a distributor of dehydrated
vegetable products and dietary supplements. The Partnership utilizes the 52/53
week convention to report financial results.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Partnership to
significant concentrations of credit risk are principally trade accounts
receivable.
Concentrations of credit risk with respect to trade accounts receivable are
due to concentrations of sales to certain customers. At December 28, 1996, one
customer accounted for 24% of the Partnership's trade receivables. At December
27, 1997, two customers accounted for 17% and 16%, respectively, of the
Partnership's trade receivables. The Partnership performs ongoing credit
evaluations of its customers and normally does not require collateral to support
accounts receivable.
MAJOR CUSTOMERS
During the year ended December 28, 1996, two customers accounted for 35% and
24%, respectively, of the Partnership's net sales. During the year ended
December 27, 1997, two customers accounted for 22% and 20%, respectively, of the
Partnership's net sales.
MAJOR SUPPLIER
The Partnership purchases substantially all of its raw garlic from the
Partnership's limited partner, Basic Vegetable Products, L.P. ("BVP") (see Note
3). During the years ended December 28, 1996 and December 27, 1997, these
purchases amounted to approximately $2,979,000 and $2,748,000, respectively,
which includes a mark-up of approximately $687,000 and $634,000, respectively.
INVENTORIES
Inventories consist primarily of finished goods which are stated at the
lower of cost (first-in, first-out basis) or market. The net amount of
inventories at December 27, 1997 reflects an allowance for slow-moving and
obsolete inventories totalling $208,094.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Partnership uses the
straight-line method of depreciation.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures........................................ 5 years
Life of
Leasehold improvements........................................ Lease
</TABLE>
F-24
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Partnership sells its products to retail outlets and food processors
through a direct sales force, sales representatives and a national broker
network. Sales are recorded when products are shipped to customers by the
Partnership. Net sales represents products shipped, less estimated returns and
allowances for which provisions are made at the time of sale.
RESEARCH AND DEVELOPMENT
Company-sponsored research and development costs related to both present and
future products are expensed as incurred.
INCOME TAXES
The Partnership is not subject to Federal and state income taxes. Instead,
each Partner's share of Partnership profit is reported on their separate income
tax return.
PRO FORMA NET INCOME DATA
The unaudited pro forma net income data included in the Statements of Income
was presented as if the Partnership operated as a C Corporation for the entire
years ended December 28, 1996 and December 27, 1997. The pro forma income taxes
represents only Federal taxes since there are no income taxes in the State of
Washington where its primary facility was located.
PERVASIVENESS 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Partnership for bank
loans with similar terms and maturities, the fair value of the Partnership's
related party debt approximates the carrying value. Furthermore, the carrying
value of all other financial instruments potentially subject to valuation risk
(principally consisting of accounts receivable and accounts payable) also
approximates fair value.
F-25
<PAGE>
PURE-GAR L.P.
(A DIVISION OF BASIC VEGETABLE PRODUCTS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Furniture and fixtures.............................................. $ 135,806 $ 227,056
Leasehold improvements.............................................. 43,560 43,560
Construction in progress............................................ 28,882 --
----------- -----------
Total property and equipment........................................ $ 208,248 $ 270,616
----------- -----------
----------- -----------
</TABLE>
3. RELATED PARTY ACTIVITIES
The Partnership purchases substantially all of its raw garlic from the
Partnership's limited partner, BVP. In addition, BVP allocated certain operating
expenses to the Partnership based on BVP management's estimate of the
utilization of common occupancy and labor costs for its various operating
entities and divisions. Management believes the allocation methodology to be
reasonable. Total purchases and allocated operating expenses amounted to
$7,039,642 and $5,552,652 in the years ended December 28, 1996 and December 27,
1997, respectively. Borrowings from BVP are subject to interest at 8%.
Repayments are made to BVP as funds are available. The balance in the related
party payable at December 28, 1996 and December 27, 1997 represents borrowings
and accrued interest thereon.
4. LEASE COMMITMENTS
The Partnership leases office facilities and equipment under operating lease
agreements. Total lease expense was $50,445 and $101,823 in the years ended
December 28, 1996 and December 27, 1997, respectively. Future minimum payments
required under non-cancellable operating leases as of December 27, 1997 total
$29,538 for 1998.
5. LITIGATION SETTLEMENT
In March 1997, the Partnership settled a lawsuit with a supplier for
$733,120. Management does not anticipate any further liability to be incurred
related to this issue.
6. SUBSEQUENT EVENT (UNAUDITED)
In February 1998, the partners entered into an agreement with Natrol, Inc.
to sell substantially all of the Partnership's assets and certain specified
liabilities for approximately $11 million. In addition, the partners entered
into long-term supply and royalty agreements with the buyer. The financial
statements do not contain any adjustments to reflect the sale of the
Partnership's assets and liabilities.
F-26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The unaudited pro forma consolidated statements of income presented below
are based on the financial statements of the Company, giving effect to the
assumptions and adjustments set forth in the footnotes to the pro forma
consolidated statements of income. The pro forma statements of income have been
prepared by management based on the historical financial statements of the
Company and Pure-Gar L.P. (Pure-Gar) as of and for the years ended December 31,
1997 and December 27, 1997, respectively, and as of and for the three months
ended March 31, 1998, adjusted where necessary to reflect the acquisition of
Pure-Gar and related operations as if the acquisition had been consummated at
the beginning of the periods presented. The pro forma consolidated financial
information is presented for illustrative purposes and it does not purport to
represent what the consolidated results of the operations of the Company for the
periods presented would have been had the acquisition been consummated as of
such dates and is not indicative of the results of that may be obtained in the
future.
<TABLE>
<CAPTION>
NATROL, INC. PURE-GAR L.P.
YEAR ENDED YEAR ENDED BUSINESS YEAR ENDED
DECEMBER 31, 1997, DECEMBER 27, 1997, COMBINATION DECEMBER 31, 1997,
ACTUAL ACTUAL ADJUSTMENTS PRO FORMA COMBINED
-------------------- -------------------- ------------- --------------------
<S> <C> <C> <C> <C>
Net sales.......................... $ 42,874,759 $ 8,708,553 $ 51,583,312
Cost of goods sold................. 19,799,712 3,920,226 23,719,938
-------------------- ----------- --------------------
Gross profit..................... 23,075,047 4,788,327 27,863,374
-------------------- ----------- --------------------
Selling and marketing expenses... 11,398,390 1,954,543 13,352,933
General and administrative
expenses....................... 4,450,244 2,582,281 600,000(1) 7,632,525(3)
-------------------- ----------- --------------------
Total expenses................... 15,848,634 4,536,824 20,985,458
-------------------- ----------- --------------------
Operating income................... 7,226,413 251,503 6,877,916
Interest income (expense), net..... (219,555) (216,047) (681,832)(2) (1,117,454)
-------------------- ----------- --------------------
Income before income tax
provision........................ 7,006,858 35,456 5,760,462
Income tax provision............... 2,816,158 -- (512,733)(4) 2,303,425
-------------------- ----------- --------------------
Net income......................... $ 4,190,700 $ 35,456 $ 3,457,037
-------------------- ----------- --------------------
-------------------- ----------- --------------------
Basic earnings per share........... $ 0.59 $ 0.49
-------------------- --------------------
-------------------- --------------------
Diluted earnings per share......... $ 0.41 $ 0.34
-------------------- --------------------
-------------------- --------------------
Weighted average common shares
outstanding--basic............... 7,100,000 7,100,000
-------------------- --------------------
-------------------- --------------------
Weighted average common shares
outstanding--diluted............. 10,272,859 10,272,859
-------------------- --------------------
-------------------- --------------------
</TABLE>
- ------------------------
(1) Gives effect to the amortization of goodwill of $600,000, as if the
acquisition of Pure-Gar L.P. (the "Pure-Gar Acquisition") had taken place on
January 1, 1997.
(2) Gives effect to pro forma interest expense of $1,151,817 offset by actual
interest expense of $469,985, as if the debt incurred in the Pure-Gar
Acquisition was made on January 1, 1997. Pro forma interest expense is based
on a term note (8.5% interest rate) and line of credit (8.5% to 7.69%
interest rate) with principal balances of $8,875,000 and $5,524,167,
respectively.
(3) Pro forma general and administrative expenses include a non-recurring legal
settlement expense incurred by Pure-Gar of $733,000.
(4) Gives effect to taxes for adjustments described in footnotes 1 and 2 such
that the pro forma income tax provision is at the statutory rate for the
period presented.
F-27
<PAGE>
<TABLE>
<CAPTION>
NATROL, INC. PURE-GAR L.P. THREE MONTHS
THREE MONTHS THREE MONTHS ENDED
ENDED ENDED BUSINESS MARCH 31, 1998,
MARCH 31, 1998, MARCH 31, 1998, COMBINATION PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 11,879,996 $ 3,068,268 -- $ 14,948,264
Cost of goods sold........................... 5,707,501 1,735,495 -- 7,442,996
---------------- ---------------- ----------------
Gross Profit............................... 6,172,495 1,332,773 -- 7,505,268
---------------- ---------------- ----------------
Selling expenses............................. 3,283,612 717,945 -- 4,001,557
General and administrative expenses.......... 1,198,943 377,134 100,000(1) 1,676,077
---------------- ---------------- ------------- ----------------
Total expenses............................. 4,482,555 1,095,079 -- 5,677,634
---------------- ---------------- ------------- ----------------
Operating income............................. 1,689,940 237,694 -- 1,827,634
Interest income (expense), net............... (63,207) (100,424) 136,276(2) (299,907)
---------------- ---------------- ------------- ----------------
Income before income tax provision........... 1,626,733 137,270 -- 1,527,726
Income tax provision......................... 650,694 -- 39,603(3) 611,091
---------------- ---------------- ------------- ----------------
Net income................................... $ 976,039 $ 137,270 -- $ 916,636
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Basic earnings per share..................... $ 0.14 $ 0.15
---------------- ----------------
---------------- ----------------
Diluted earnings per share................... $ 0.10 $ 0.11
---------------- ----------------
---------------- ----------------
Weighted average common shares
outstanding--basic......................... 7,100,000 7,100,000
---------------- ----------------
---------------- ----------------
Weighted average common shares
outstanding--diluted....................... 10,272,859 10,272,859
---------------- ----------------
---------------- ----------------
</TABLE>
- ------------------------
(1) Gives effect to the amortization of goodwill of $150,000, as if the Pure-Gar
Acquisition had taken place on January 1, 1998, net of recorded goodwill
amortization.
(2) Gives effect to pro forma interest expense of $299,907 offset by actual
interest expense of $163,631, as if the debt incurred in the Pure-Gar
Acquisition was made on January 1, 1998. Pro forma interest expense is based
on a term note (8.5% interest rate) and line of credit (8.5% to 7.69%
interest rate) with principal balances of $8,875,000 and $5,524,167,
respectively.
(3) Gives effect to taxes for adjustments described in footnotes 1 and 2 such
that the pro forma income tax provision is at the statutory rate for the
period presented.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 19
Business.................................................................. 27
Management................................................................ 40
Certain Transactions...................................................... 47
Principal and Selling Stockholders........................................ 48
Description of Capital Stock.............................................. 50
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 55
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 57
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,940,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
ADAMS, HARKNESS & HILL, INC.
NATIONSBANC MONTGOMERY
SECURITIES LLC
PIPER JAFFRAY INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
The following table sets forth the estimated expenses payable by the Company
in connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
SEC Registration Fee........................................................... $ 18,714
NASD Filing Fee................................................................ 6,844
Nasdaq Listing Fee............................................................. 84,875
Accounting Fees and Expenses................................................... *
Legal Fees and Expenses........................................................ *
Printing Expenses.............................................................. *
Blue Sky Qualification Fees and Expenses....................................... *
Transfer Agent's Fee........................................................... *
Miscellaneous.................................................................. *
-------------
TOTAL........................................................................ $ 1,000,000
</TABLE>
- ------------------------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq fees, are
in each case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL"), Article VIII of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") provides that no director of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, or (iv)
for any transaction from which the director derived an improper personal
benefit. In addition, the Certificate provides that if the DGCL is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended.
Article V of the Company's Amended and Restated By-laws provides for
indemnification by the Company of its officers and certain non-officer employees
under certain circumstances against expenses (including attorneys fees,
judgments, fines and amounts paid in settlement) reasonably incurred in
connection with the defense or settlement of any threatened, pending or
completed legal proceeding in which any such person is involved by reason of the
fact that such person is or was an officer or employee of the Company if such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
criminal actions or proceedings, if such person had no reasonable cause to
believe his or her conduct was unlawful.
The Company has entered into indemnification agreements with each of its
directors reflecting the foregoing provisions of its By-laws and requiring the
advancement of expenses in proceedings involving such directors in most
circumstances.
The Stock Purchase and Shareholders Agreement, filed as Exhibit 2.1 hereto,
provides for indemnification by the Company of certain of its existing principal
stockholders and the controlling persons of
II-1
<PAGE>
such stockholders (one of whom is a director of the Company) against claims and
liabilities, including claims and liabilities arising under the securities laws.
Under Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto,
the Underwriters have agreed to indemnify, under certain conditions, the
Company, its directors, certain officers and persons who control the Company
within the meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of share of capital stock issued by the Company for the past three years
beginning in May 1995. Further included is the consideration, if any, received
by the Company for such shares, and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed. The following transactions give effect to the Company's 100-to-1 stock
split of its Common Stock, which will become effective in June 1998.
(1) In September 1996, pursuant to a Stock Purchase and Shareholders'
Agreement, the Company and certain stockholders of the Company sold an
aggregate of 27,000 shares of the Company's Convertible Participating
Preferred Stock for an aggregate purchase price of $12.0 million to
Advent VII L.P., Advent Atlantic and Pacific III L.P., Advent New York
L.P., and TA Venture Investors Limited Partnership, in reliance upon the
exemption from registration under Regulation D of the Securities Act.
(2) In November 1996, pursuant to the Company's 1996 Stock Plan, the Company
sold 300,000 shares of restricted Common Stock for an aggregate purchase
price of $562,800 to an employee in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(3) In November 1996, pursuant to the Company's 1996 Stock Plan, the Company
granted options to purchase up to an aggregate of 200,000 shares of
Common Stock to two employees in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(4) In July 1997, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 100,000 shares of Common Stock to an
employee in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act.
(5) In August 1997, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 100,000 shares of Common Stock to an
employee in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act.
(6) In April 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted options to purchase up to an aggregate of 225,000 shares of
Common Stock to eight employees in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(7) In April 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted options to purchase up to an aggregate of 5,000 shares of Common
Stock to a director in reliance upon the exemption from registration
under Rule 701 promulgated under the Securities Act.
(8) In April 1998, pursuant to the Company's 1996 Stock Plan, the Company
granted an option to purchase up to 5,000 shares of Common Stock to a
consultant in reliance upon the exemption from registration under Rule
701 promulgated under the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
<C> <C> <S>
* 1.1 Form of Underwriting Agreement.
2.1 Stock Purchase and Shareholders' Agreement dated as of September 30, 1996 by and among the
Registrant and the Investors named therein (excluding schedules, which the Registrant agrees to
furnish supplementally to the Commission upon request).
3.1 Amended and Restated Certificate of Incorporation.
* 3.2 Amendment to Amended and Restated Certificate of Incorporation.
* 3.3 Form of Second Amended and Restated Certificate of Incorporation (to be filed immediately prior to
effectiveness of the Registration Statement).
* 3.4 Form of Third Amended and Restated Certificate of Incorporation (to be filed following the closing
of the Offering referred to in the Registration Statement).
3.5 By-Laws.
* 3.6 Form of Amended and Restated By-laws (to be effective upon effectiveness of the Registration
Statement).
4.1 Specimen certificate for shares of Common Stock, $.01 par value, of the Registrant.
* 5.1 Opinion of Goodwin, Procter & Hoar LLP as to the validity of the securities being offered.
10.1 Lease dated as of August 12, 1996, as amended by Amendment No. 1, between the Registrant and
Lincoln-Whitehall Pacific, L.L.C.
* 10.2 Amended and Restated 1996 Stock Option and Grant Plan of the Registrant, as amended.
* 10.3 1998 Employee Stock Purchase Plan of the Registrant.
10.4 Form of Indemnification Agreement between the Registrant and each of its directors.
10.5 Restricted Stock Agreement dated November 14, 1996 by and between the Registrant and Dennis R.
Jolicoeur.
10.6 Promissory Note of Dennis R. Jolicoeur dated November 14, 1996.
10.7 Pledge Agreement dated as of November 14, 1996 by and between the Registrant and Dennis R.
Jolicoeur.
10.8 Amended and Restated Credit Agreement with Wells Fargo Bank, N.A.
10.9 Form of Stock Option Agreement
+** 10.10 Supply Agreement dated as of February 28, 1998, by and between the Registrant and Basic Vegetable
Products, L.P.
+** 10.11 Distributorship/Packager/Supply Agreement dated as of January 1, 1995 by and between the Registrant
and Inter-Cal Corporation.
10.12 Letter Agreement dated July 18, 1997 between the Registrant and Jon J. Denis.
21.1 Subsidiaries of the Registrant.
* 23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Farber & Hass.
** 24.1 Powers of Attorney
** 27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment to this Registration Statement.
** Previously filed.
+ Confidential treatment requested as to these Exhibits.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because the
required information is given in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement (File No.
333-52109) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chatsworth, State of California, on June 12, 1998.
<TABLE>
<S> <C>
NATROL,
INC.
By:
/s/
ELLIOTT
BALBERT
-
Elliott
Balbert
PRESIDENT
AND CHIEF
EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ ELLIOTT BALBERT
- ------------------------------ Chairman of the Board, June 12, 1998
Elliott Balbert Chief Executive Officer,
President and Director
(Principal Executive
Officer)
/s/ DENNIS R. JOLICOEUR
- ------------------------------ Chief Financial Officer, June 12, 1998
Dennis R. Jolicoeur Executive Vice President
and Director (Principal
Financial Officer and
Principal Accounting
Officer)
*
- ------------------------------ Director June 12, 1998
Norman Kahn
*
- ------------------------------ Director June 12, 1998
David Laufer
*
- ------------------------------ Director June 12, 1998
P. Andrews McLane
*By: /s/ ELLIOTT BALBERT
--------------------------
Elliott Balbert,
Attorney-in-Fact
II-5
<PAGE>
Exhibit 2.1
Natrol, Inc.
---------------------------------
STOCK PURCHASE
AND SHAREHOLDERS AGREEMENT
---------------------------------
As of September 30, 1996
<PAGE>
Natrol, Inc.
Stock Purchase
and Shareholders Agreement
As of September 30, 1996
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. PURCHASE AND SALE OF SHARES....................................2
1.1 Description of Securities......................................2
1.2 Sale and Purchase..............................................2
1.3 Closing........................................................2
SECTION 2. REPRESENTATIONS AND WARRANTIES.................................3
2.1 Organization and Corporate Power...............................3
2.2 Authorization and Non-Contravention............................3
2.3 Capitalization.................................................4
2.4 Subsidiaries; Investments......................................5
2.5 Financial Statements and Matters...............................5
2.6 Absence of Undisclosed Liabilities.............................5
2.7 Absence of Certain Developments................................6
2.8 Ordinary Course................................................6
2.9 Inventories....................................................6
2.10 Accounts Receivable............................................6
2.11 Title to Properties............................................7
2.12 Tax Matters....................................................7
2.13 Certain Contracts and Arrangements.............................8
2.14 Intellectual Property Rights...................................9
2.15 Litigation....................................................10
2.16 Employee Benefit Plans........................................10
2.17 Labor Laws....................................................11
2.18 List of Certain Employees and Suppliers.......................11
2.19 Hazardous Waste, Etc..........................................11
2.20 Business; Compliance with Laws................................11
2.21 Investment Banking; Brokerage.................................12
2.22 Insurance.....................................................12
2.23 Transactions with Affiliates..................................12
2.24 Customers and Distributors....................................12
2.25 Disclosure....................................................12
SECTION 2A. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS...............13
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 3. CONDITIONS OF PURCHASE........................................14
3.1 Satisfaction of Conditions....................................14
3.2 Director Election.............................................14
3.3 Opinion of Counsel............................................14
3.4 Authorization.................................................14
3.5 All Proceedings Satisfactory..................................15
3.6 Investors' Fees...............................................15
3.7 No Violation or Injunction....................................15
3.8 Consents and Waivers..........................................15
3.9 Distribution..................................................15
SECTION 4. COVENANTS.....................................................15
4.1 Financial Statements and Budgetary Information; Inspection....15
4.2 Indemnification...............................................16
4.3 Key Person Insurance..........................................16
4.4 Board of Directors............................................16
4.5 Stock Options.................................................16
4.6 Intellectual Property. ......................................17
4.7 Reorganization................................................17
4.8 Stock Option Plan.............................................17
4.9 Distribution..................................................17
SECTION 5. CO-SALE RIGHT.................................................18
5.1 General Restriction...........................................18
5.2 Co-Sale Procedure.............................................18
5.3 Assignment....................................................20
SECTION 6. RIGHTS TO PURCHASE............................................20
6.1 Right to Participate in Certain Sales of Additional
Securities....................................................20
6.2 Assignment of Rights..........................................21
SECTION 7. REGISTRATION RIGHTS...........................................21
7.1 Optional Registrations........................................21
7.2 Required Registrations........................................22
7.3 Registrable Securities........................................23
7.4 Further Obligations of the Company............................23
7.5 Indemnification; Contribution.................................25
7.6 Rule 144 and Rule 144A Requirements...........................27
7.7 Transfer of Registration Rights...............................27
SECTION 8 GENERAL.......................................................28
8.1 Amendments, Waivers and Consents..............................28
8.2 Indemnification from the Company..............................28
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
8.3 Survival of Representations; Warranties and Covenants;
Assignability of Rights.......................................30
8.4 Legend on Securities..........................................30
8.5 Governing Law.................................................31
8.6 Section Headings and Gender...................................31
8.7 Counterparts..................................................31
8.8 Notices and Demands...........................................31
8.9 Remedies; Severability........................................32
8.10 Integration...................................................32
</TABLE>
(iii)
<PAGE>
STOCK PURCHASE
AND SHAREHOLDERS AGREEMENT
STOCK PURCHASE AND SHAREHOLDERS AGREEMENT made as of this 30th
day of September, 1996, by and among Natrol, Inc., a California corporation
(together with any predecessor thereto, the "Company"), Mr. Elliott Balbert and
Ms. Cheryl Balbert (the "Balberts") and Norman Kahn ("Kahn" and collectively
with the Balberts, the "Shareholders") and the investment partnerships named in
Exhibit A hereto (collectively the "Investors," and each individually an
"Investor").
WHEREAS, all of the outstanding shares of the Company's capital stock
prior to the date hereof are owned by the Shareholders; and
WHEREAS, the outstanding capital stock of the Company consists of 702,778
shares of Common Stock, par value $.01 per share ("Common Stock"), and 250,781
shares of Convertible Participating Stock, par value $.01 per share
("Convertible Stock"), as a result of a recapitalization of the Company
effective as of September 30, 1996 (the "Recapitalization"); and
WHEREAS, each of the Investors desires to purchase and each Shareholder
desires to sell the number of shares of Convertible Stock set forth opposite the
name of such Investor in Exhibit A hereto, representing an aggregate sale of
250,781 shares of Convertible Stock for the aggregate purchase price of
$11,145,822.37; and
WHEREAS, in connection with the above-described stock purchase, each of
the Investors desires to purchase, and the Company desires to issue and sell the
number of shares of Convertible Stock set forth opposite the name of such
Investor in Exhibit A hereto, and to grant the Investors the rights set forth
herein, representing an aggregate issuance of 19,219 shares of Convertible Stock
for an aggregate purchase price of $854,177.63; and
WHEREAS, immediately prior to the Closing (as hereafter defined) the
Company will make dividend payments on the outstanding shares of Common Stock in
an aggregate amount of $2,000,000 in cash; and
WHEREAS, concurrently with the Closing the Company will repurchase 22,778
shares of Common Stock from Kahn for the purchase price of $37.50 per share or
an aggregate purchase price of $854,175; and
WHEREAS, the parties hereto desire to set forth the terms of their ongoing
relationship in connection with the Company.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
<PAGE>
SECTION 1. PURCHASE AND SALE OF SHARES
1.1 Description of Securities. The Company's authorized capital stock
consists of the Common Stock, the Convertible Stock, which is convertible into
Redeemable Preferred Stock, par value $.01 per share (the "Redeemable Preferred
Stock"), and Redeemable Preferred Stock. The Convertible Stock and the
Redeemable Preferred Stock have the rights, preferences and other terms set
forth in Exhibit C. All of the outstanding equity securities of the Company
prior to the transactions contemplated by this Agreement are owned beneficially
and of record by the Shareholders. For purposes of this Agreement, the shares of
Convertible Stock to be acquired by the Investors from the Shareholders and the
Company hereunder are referred to as the "Convertible Shares," the shares of
Redeemable Preferred Stock and Common Stock issuable upon conversion of the
Convertible Stock are referred to as the "Conversion Securities," and the
Convertible Shares and the Conversion Securities are sometimes referred to
herein as the "Securities."
1.2 Sale and Purchase. Upon the terms and subject to the conditions
herein, and, in the case of the purchases of Convertible Stock by the Investors,
in reliance on the representations and warranties set forth in Section 2, (a)
each Investor will purchase and acquire from the Shareholders as listed on
Exhibit A hereto, and the Shareholders will sell to each of the Investors, at
the Closing, the number of shares of Convertible Stock set forth opposite the
name of such Investor in Exhibit A hereto for the purchase price of $44.444445
per share, or an aggregate of 250,781 shares for an aggregate purchase price of
$11,145,822.37; (b) each Investor will purchase from the Company, and the
Company will issue and sell to each of the Investors, at the Closing, the number
of shares of Convertible Stock set forth opposite the name of such Investor in
Exhibit A for the purchase price of $44.444445 per share, or an aggregate of
19,219 shares of Convertible Stock for an aggregate purchase price of
$854,177.63 and the Company hereby grants the Investors the rights set forth
herein; and (c) the Company will redeem 22,778 shares of Common Stock from Kahn
for the purchase price of $37.50 per share, or an aggregate of $854,175. Each of
the parties hereto, including the Shareholders, hereby agrees and consents to
terms of this Agreement, including the Company's grant of the rights set forth
herein to the Investors and the dividend and redemption payments set forth in
Section 1.2 and 3.9. All purchase payments hereunder shall be made by wire
transfer of next day available funds.
1.3 Closing. The closing of the purchases and sales of the Convertible
Shares (the "Closing") shall take place at 10:00 a.m., on September 30, 1996
(the "Closing Date").
SECTION 2. REPRESENTATIONS AND WARRANTIES
In order to induce the Investors to enter into this Agreement, the
Company, and with respect to Section 2.2(b) below, each Shareholder, severally
as to themselves or himself,
2
<PAGE>
represents and warrants to each of the Investors the following, unless otherwise
set forth in the General Disclosure Schedule, attached hereto:
2.1 Organization and Corporate Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, and is qualified to do business as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on its assets, liabilities, condition (financial or other),
business, results of operations or prospects. The Company has all required
corporate power and authority to carry on its business as presently conducted,
to enter into and perform this Agreement and the agreements contemplated hereby
to which it is a party and to carry out the transactions contemplated hereby and
thereby, including the issuance of the Securities. The copies of the Amended and
Restated Articles of Incorporation and Bylaws of the Company, as amended to
date, which have been furnished to the Investors by the Company, are correct and
complete at the date hereof (the "Articles of Incorporation" and the "Bylaws,"
respectively). The Company is not in violation of any term of its Articles of
Incorporation or By-laws.
2.2 Authorization and Non-Contravention.
(a) The execution, delivery and performance by the Company of this
Agreement and all other agreements, documents and instruments to be executed and
delivered by the Company as contemplated hereby and the issuance and delivery of
(i) the Convertible Shares, and (ii) upon the conversion of the Convertible
Shares, the Conversion Shares, have been duly authorized by all necessary
corporate and other action of the Company. This Agreement and all documents
executed by the Company pursuant hereto are valid and binding obligations of the
Company, enforceable in accordance with their terms. The Recapitalization, the
execution, delivery and performance by the Company of this Agreement and all
other agreements, documents and instruments to be executed and delivered by the
Company as contemplated hereby and the issuance and delivery of (i) the
Convertible Shares and (ii) upon the conversion of the Convertible Shares, the
Conversion Shares, do not and will not: (A) violate, conflict with or result in
a default (whether after the giving of notice, lapse of time or both) under any
contract or obligation to which the Company or any Shareholder is a party or by
which it or any Shareholder, or its or any Shareholder's assets are bound, or
any provision of the Articles of Incorporation or By-laws of the Company, or
cause the creation of any encumbrance upon any of the assets of the Company or
any Shareholder; (B) violate or result in a violation of, or constitute a
default under, any provision of any law, regulation or rule, or any order of, or
any restriction imposed by, any court or governmental agency applicable to the
Company or any Shareholder; (C) require from the Company or any Shareholder any
notice to, declaration or filing with, or consent or approval of any
governmental authority or third party; or (D) accelerate any obligation under,
or give rise to a right of termination of, any agreement, permit, license or
authorization to which the Company or any Shareholder is a party or by which the
Company or any Shareholder is bound.
3
<PAGE>
(b) Each Shareholder has full right, authority, power and capacity
to enter into this Agreement and each agreement, document and instrument to be
executed and delivered by or on behalf of such Shareholder pursuant to or as
contemplated by this Agreement and to carry out the transactions contemplated
hereby and thereby. This Agreement and each agreement, document and instrument
executed and delivered by each Shareholder pursuant to or as contemplated by
this Agreement constitute, or when executed and delivered will constitute, valid
and binding obligations of such Shareholder enforceable in accordance with their
respective terms. The execution, delivery and performance by such Shareholder of
this Agreement and each such other agreement, document and instrument, and the
performance by such Shareholder of the transactions contemplated hereby and
thereby do not and will not: (A) violate, conflict with or result in a default
(whether after the giving of notice, lapse of time or both) under any contract
or obligation to which such Shareholder is a party or by which he or his assets
are bound, or any provision of the Articles of Incorporation or By-laws of the
Company, or cause the creation of any encumbrance upon any of the assets of such
Shareholder; (B) violate or result in a violation of, or constitute a default
under, any provision of any law, regulation or rule, or any order of, or any
restriction imposed by, any court or other governmental agency applicable to the
Company or such Shareholder; (C) require from such Shareholder any notice to,
declaration or filing with, or consent or approval of any governmental authority
or other third party; or (D) accelerate any obligation under, or give rise to a
right of termination of, any agreement, permit, license or authorization to
which such Shareholder is a party or by which the Shareholder is bound.
2.3 Capitalization. As of the Closing and after giving effect to the
transactions contemplated hereby, the authorized capital stock of the Company
will consist of 1,055,000 shares of Common Stock, of which 680,000 shares will
be issued and outstanding, 270,000 shares of Convertible Stock, of which 270,000
shares will be issued and outstanding, and 135,000 shares of Redeemable
Preferred Stock, of which no shares will be issued and outstanding. In addition,
the Company has authorized and reserved for issuance upon conversion of the
Convertible Shares 270,000 shares of Common Stock and 135,000 shares of
Redeemable Preferred Stock and has reserved for issuance upon exercise of
options under the Company's 1996 Stock Option Plan to be adopted hereafter (the
"Plan") 105,000 shares of Common Stock (subject in each case to adjustments for
stock splits, stock dividends and the like). Except for the options for 105,000
shares of Common Stock and the Conversion Shares, the Company has not issued or
agreed to issue and is not obligated to issue any outstanding warrants, options
or other rights to purchase or acquire any shares of its capital stock, nor any
outstanding securities convertible into such shares or any warrants, options or
other rights to acquire any such convertible securities. As of the Closing, and
after giving effect to the transactions contemplated hereby, all of the
outstanding shares of capital stock of the Company (including without limitation
the Convertible Shares) will have been duly and validly authorized and issued
and will be fully paid and nonassessable and will have been offered, issued,
sold and delivered in compliance with applicable federal and state securities
laws and not subject to any preemptive rights. The Conversion Shares issuable
upon conversion of the Convertible Shares will upon issuance be duly and validly
authorized and issued, fully paid and
4
<PAGE>
nonassessable and not subject to any preemptive rights and will be issued in
compliance with federal and state securities laws. The relative rights,
preferences and other provisions relating to the Convertible Shares and the
Redeemable Preferred Stock are as set forth in Exhibit C attached hereto. There
are no preemptive rights, rights of first refusal, put or call rights or
obligations or anti-dilution rights with respect to the issuance, sale or
redemption of the Company's capital stock, other than rights to which the
Investors are entitled as set forth in this Agreement and the Articles of
Incorporation. Other than the rights set forth herein, there are no rights to
have the Company's capital stock registered for sale to the public under the
laws of any jurisdiction, no agreements relating to the voting of the Company's
voting securities, and no restrictions on the transfer of the Company's capital
stock. After giving effect to the transactions contemplated hereby, the
outstanding shares of the Company's capital stock are held beneficially and of
record by the persons identified in Schedule 2.3 in the amounts indicated
thereon.
2.4 Subsidiaries; Investments. The Company has no subsidiaries or
intentions to invest in corporations, joint ventures, partnerships or other
entities.
2.5 Financial Statements and Matters.
(a) The Company has previously furnished to the Investors copies
of its audited financial statements for the fiscal years ended June 30, 1995 and
1996 and unaudited financial statements for the year ended June 30, 1994. Such
financial statements referred to in Section 2.5(a) were prepared in conformity
with generally accepted accounting principles applied on a consistent basis, are
complete, correct and consistent in all material respects with the books and
records of the Company and fairly and accurately present the financial position
of the Company as of the dates thereof and the results of operations and cash
flows of the Company for the periods shown therein.
(b) The projections which have been separately disclosed in
writing to the Investors in the Company's Financial Plan from a computer run
generated June 15, 1996 represent good faith estimates of the Company's
performance for 1997 and future years based upon assumptions which are set forth
therein and which were in good faith believed to be reasonable when made and
continue to be reasonable as of the date hereof.
2.6 Absence of Undisclosed Liabilities. Except as and to the extent
reflected or reserved against in the audited consolidated balance sheet of the
Company at June 30, 1996 contained in the financial statements referred to in
Section 2.5(a) (the "Base Balance Sheet"), the Company, to the best of its
knowledge, does not have and is not subject to any material liability or
obligation of any nature, whether accrued, absolute, contingent or otherwise.
2.7 Absence of Certain Developments. Since the date of the Base Balance
Sheet, there has not been any: (i) material adverse change in the financial
condition of the Company or in the assets, liabilities, condition (financial or
other), business, results of operations or
5
<PAGE>
prospects of the Company, (ii) declaration, setting aside or payment of any
dividend or other distribution with respect to, or any direct or indirect
redemption or acquisition of, any of the capital stock of the Company, except as
provided in Sections 1.2, 3.9 and 4.9 (iii) waiver of any material right of the
Company or cancellation of any material debt or claim held by the Company, (iv)
loss, destruction or damage to any property which is material to the assets,
liabilities, properties, business or prospects of the Company, whether or not
insured, (v) acquisition or disposition of any assets or other transaction by
the Company other than in the ordinary course of business, (vi) transaction or
agreement involving the Company and any officer, director, employee or
shareholder of the Company, (vii) material increase, direct or indirect, in the
compensation paid or payable to any officer, director, employee or agent of the
Company or any establishment or creation of any material employment or severance
agreement or employee benefit plan, (viii) material loss of personnel of the
Company, material change in the terms and conditions of the employment of the
Company's key personnel or any labor trouble involving the Company, (ix)
arrangements relating to any royalty, dividend or similar payment based on the
sales volume of the Company, whether as part of the terms of the Company's
capital stock or by any separate agreement, (x) material agreement with respect
to the endorsement of the Company's products, (xi) loss or any development that
could result in a loss of any significant customer, account or employee of the
Company, (xii) incurrence of material indebtedness or lien, (xiii) transaction
not occurring in the ordinary course of business, or (xiv) any agreement with
respect to any of the foregoing actions.
2.8 Ordinary Course. Since the date of the Base Balance Sheet, the Company
has conducted its business only in the ordinary course and consistent with its
prior practices.
2.9 Inventories. All of the Company's inventory items are of a quality and
quantity salable in the ordinary course of its business and the Company
maintains adequate inventory reserves. The inventories stated in the Base
Balance Sheet reflect the normal inventory valuation policies of the Company and
are based on and consistent with the Company's inventory records, and in the
reasonable judgment of the Company are properly valued. Since the date of the
Base Balance Sheet, no inventory items have been sold or disposed of except
through sales in the ordinary course of business, on the whole, at profit
margins consistent with the Company's experience in prior years.
2.10 Accounts Receivable. All of the accounts receivable of the Company,
whether shown or reflected on the Base Balance Sheet or otherwise, represent
bona fide completed sales made in the ordinary course of business, are valid and
enforceable claims, are subject to no known set-offs or counterclaims, and are,
in the reasonable judgment of the Company, fully collectible in the normal
course of business after deducting the reserve set forth in the Base Balance
Sheet and adjusted since that date, which reserve is a reasonable estimate of
the Company's uncollectible accounts.
2.11 Title to Properties. Schedule 2.11 sets forth the addresses and uses
of all real property that the Company owns, leases or subleases. The Company has
good, valid and (if
6
<PAGE>
applicable) marketable title (or valid leasehold interest) to all of its assets
including without limitation all rights to the manufacturing facility located in
Chatsworth, California and to those assets reflected on the Base Balance Sheet
or acquired by it after the date thereof (except for properties disposed of
since that date in the ordinary course of business), free and clear of all
liens, claims or encumbrances of any nature, except as set forth in Schedule
2.11 and except as incurred in the ordinary course of business, the existence of
which does not and will not impair or interfere with the conduct of the
Company's business. All equipment included in such properties which is necessary
to the business of the Company is in good condition and repair (ordinary wear
and tear excepted) and all leases of real or personal property to which the
Company is a party are fully effective and afford the Company peaceful and
undisturbed possession of the subject matter of the lease. To its actual
knowledge, the Company is not in violation of any zoning, building or safety
ordinance, regulation or requirement or other law or regulation applicable to
the operation of its owned or leased properties, which violation would have a
material adverse effect on the assets, liabilities, financial condition,
business, results of operations or prospects of the Company, nor has it received
any notice of any such violation. There are no defaults by the Company or to the
best knowledge of the Company, by any other party, which might curtail in any
material respect the present use of the Company's property. The performance by
the Company of this Agreement will not result in the termination of, or in any
increase of any amounts payable under, any lease listed on Schedule 2.11.
2.12 Tax Matters. The Company has filed all federal, state, local and
foreign income, excise and franchise tax returns, real estate and personal
property tax returns, sales and use tax returns and other tax returns required
to be filed by it where the failure to file such returns would have a material
adverse effect on the assets, liabilities, financial condition, business,
results of operations or prospects of the Company and has paid all taxes owing
by it, except taxes which have not yet accrued or otherwise become due, for
which adequate provision has been made in the pertinent financial statements
referred to in Section 2.5 above or which will not have a material adverse
effect on the assets, liabilities, financial condition, business, results of
operations or prospects of the Company. The provision for taxes on the Base
Balance Sheet is sufficient as of its date for the payment of all accrued and
unpaid federal, state, county and local taxes of any nature of the Company, and
any applicable taxes owing to any foreign jurisdiction, whether or not assessed
or disputed. All taxes and other assessments and levies which the Company is
required to withhold or collect have been withheld and collected and have been
paid over to the proper governmental authorities except where the failure to
withhold or collect and pay over would not have a material adverse effect on the
assets, liabilities, financial condition, business, results of operations or
prospects of the Company. With regard to the federal income tax returns of the
Company, the Company has never received notice of any audit or of any proposed
deficiencies from the Internal Revenue Service, except as set forth in Schedule
2.12. There are in effect no waivers of applicable statutes of limitations with
respect to any taxes owed by the Company for any year. Neither the Internal
Revenue Service nor any other taxing authority is now asserting or, to the best
knowledge of the Company, threatening to assert against the Company any
deficiency or claim for additional taxes or interest thereon or penalties in
connection therewith. The Company is
7
<PAGE>
and has been since July 1, 1996 a "S Corporation" within the meaning of Section
1361(a)(1) of the Internal Revenue Code of 1986, as amended, and California
Revenue and Taxation Code Section 23,800 et seq.
2.13 Certain Contracts and Arrangements. Except as set forth in Schedule
2.13 hereto (with true and correct copies delivered to the Investors), the
Company is not a party or subject to or bound by:
(a) any plan or contract providing for collective bargaining or
the like, or any contract or agreement with any labor union;
(b) any contract, lease or agreement creating any obligation of
the Company to pay to any third party $50,000 or more with respect to any single
such contract or agreement;
(c) any contract or agreement for the sale, license, lease or
disposition of products in excess of $100,000;
(d) any contract containing covenants directly or explicitly
limiting the freedom of the Company to compete in any line of business or with
any person or entity;
(e) any material license agreement (as licensor or licensee);
(f) any contract or agreement for the purchase of any leasehold
improvements, equipment or fixed assets for a price in excess of $100,000;
(g) any indenture, mortgage, promissory note, loan agreement,
guaranty or other agreement or commitment for borrowing in excess of $100,000 or
any pledge or security arrangement;
(h) any material joint venture, partnership, manufacturing,
development or supply agreement;
(i) any material endorsement or any other material advertising,
promotional or marketing agreement;
(j) any material employment contracts, or material agreements with
officers, directors, employees or shareholders of the Company or persons or
organizations related to or affiliated with any such persons;
(k) any stock redemption or purchase agreements or other
agreements affecting or relating to the capital stock of the Company, including
without limitation any agreement with any shareholder of the Company which
includes without limitation,
8
<PAGE>
anti-dilution rights, registration rights, voting arrangements, operating
covenants or similar provisions;
(l) any pension, profit sharing, retirement or stock options
plans;
(m) any royalty, dividend or similar arrangement based on the
sales volume of the Company;
(n) any acquisition, merger or similar agreement;
(o) any material contract with a governmental body under which the
Company may have an obligation for renegotiation;
(p) any agreement with any shareholder of the Company or any
affiliate of any shareholder; or
(q) any other material contract not executed in the ordinary
course of business.
All of the Company's contracts and commitments are in full force and
effect and neither the Company, nor, to the knowledge of the Company, any other
party is in default thereunder (nor, to the knowledge of the Company, has any
event occurred which with notice, lapse of time or both would constitute a
default thereunder), except to the extent that any such default would not have a
material adverse effect on the assets, liabilities, financial condition,
business, results of operations or prospects of the Company, and the Company has
not received notice of any alleged default under any such contract, agreement,
understanding or commitment.
2.14 Intellectual Property Rights. Except as set forth in Schedule 2.14:
(a) The Company has exclusive ownership of, with the exclusive
right to use, sell, license, dispose of, and bring actions for infringement of,
the tradename and trademark "Natrol." To its actual knowledge, the Company has
exclusive ownership of or an enforceable right to use and bring actions for
infringement in connection with all Intellectual Property Rights (as hereinafter
defined) used to the conduct its business as presently conducted, including
without limitation all rights to the product name "Kavatrol" (collectively with
the Company rights described in the previous sentence, the "Company Rights");
(b) The use of the tradename "Natrol" and the trademark "Natrol"
and, to the Company's actual knowledge, the business of the Company as presently
conducted and the manufacturing and marketing of the products of the Company, do
not violate any agreements which the Company has with any third party or
infringe any patent, trademark, copyright or trade secret or, any other
Intellectual Property Rights of any third party;
9
<PAGE>
(c) No claim is pending or, to the best knowledge of the Company,
threatened against the Company nor has the Company received any notice or claim
from any person asserting that any of the Company's present or contemplated
activities infringe or may infringe any Intellectual Property Rights of such
person, and the Company is not aware of any infringement by any other person of
any rights of the Company under any Intellectual Property Rights.
As used herein, the term "Intellectual Property Rights" shall mean all
intellectual property rights, including, without limitation, all of the
registered rights set forth on Schedule 2.14 and all patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, copyright applications,
computer programs and other computer software, inventions, designs, samples,
specifications, schematics, know-how, trade secrets, proprietary processes and
formulae, including production technology and processes, all source and object
code, algorithms, promotional materials and marketing research, and all
documentation and media constituting, describing or relating to the foregoing,
including without limitation, manuals, memoranda and records. Schedule 2.14
contains a list and brief description of all Intellectual Property Rights owned
by or registered in the name of the Company or of which the Company is the
licensor or a licensee of a material right or in which the Company has any
material right.
2.15 Litigation. Except as set forth in Schedule 2.15, there is no
litigation or governmental proceeding or investigation pending or, to the best
knowledge of the Company, threatened against the Company or affecting any of its
properties or assets or against any officer, director or key employee of the
Company in his or her capacity as an officer, director or employee of the
Company, which litigation, proceeding or investigation is reasonably likely to
have a material adverse effect on the assets, liabilities, financial condition,
business, results of operations or prospects of the Company, or which may call
into question the validity or hinder the enforceability of this Agreement or any
other agreements or transactions contemplated hereby; nor to the best knowledge
of the Company has there occurred any event nor does there exist any condition
on the basis of which any such litigation, proceeding or investigation might be
properly instituted or commenced.
2.16 Employee Benefit Plans. The Company does not maintain or contribute
to any employee benefit plan, stock option, bonus or incentive plan, severance
pay policy or agreement, deferred compensation agreement, or any similar plan or
agreement (an "Employee Benefit Plan") other than the Employee Benefit Plans
identified in Schedule 2.16. The terms and operation of each Employee Benefit
Plan comply in all material respects with all applicable laws and regulations
relating to such Employee Benefit Plans. There are no unfunded obligations of
the Company under any retirement, pension, profit-sharing, deferred compensation
plan or similar program. The Company is not required to make any payments or
contributions to any Employee Benefit Plan pursuant to any collective bargaining
agreement or, to the knowledge of the Company, any applicable labor relations
law. Except as set forth
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in Schedule 2.16, the Company has never maintained or contributed to any
Employee Benefit Plan providing or promising any health or other nonpension
benefits to terminated employees.
2.17 Labor Laws. The Company employs 88 employees and generally enjoys
good employer-employee relationships. The Company is not delinquent in payments
to any of its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it as of the date hereof or
amounts required to be reimbursed to such employees. To its actual knowledge,
except as set forth in Schedule 2.17, the Company is in compliance in all
material respects with all applicable laws and regulations respecting labor,
employment, fair employment practices, terms and conditions of employment, and
wages and hours. There are no charges of employment discrimination or unfair
labor practices or strikes, slowdowns, stoppages of work or any other concerted
interference with normal operations existing, pending or, to the best knowledge
of the Company, threatened against or involving the Company.
2.18 List of Certain Employees and Suppliers. Schedule 2.18(a) contains a
list of all managers, employees and consultants of the Company who,
individually, have received compensation from the Company for the fiscal years
of the Company ended June 30, 1995 or June 30, 1996 in excess of $75,000. In
each case such Schedule includes the current job title and aggregate annual
compensation of each such individual. Schedule 2.18(b) sets forth a list of all
suppliers of the Company to whom during the fiscal years ended June 30, 1995 and
June 30, 1996 the Company made payments aggregating $200,000 or more, showing,
with respect to each, the name, address and dollar volume involved. To the
actual knowledge of the Company, no supplier has any plan or intention to
terminate or reduce its business with the Company or to materially and adversely
modify its relationship with the Company.
2.19 Hazardous Waste, Etc. To the actual knowledge of the Company, no
hazardous wastes, substances or materials or oil or petroleum products have been
generated, transported, used, disposed, stored or treated by the Company and no
hazardous wastes, substances or materials, or oil or petroleum products have
been released, discharged, disposed, transported, placed or otherwise caused to
enter the soil or water in, under or upon any real property owned, leased or
operated by the Company.
2.20 Business; Compliance with Laws. The Company has all necessary
franchises, permits, licenses and other rights and privileges necessary to
permit it to own its property and to conduct its business as it is presently or
contemplated to be conducted. The Company is, and for the past five (5) years
has been, in compliance in all material respects with all laws and regulations
administered by or promulgated by the Federal Trade Commission and/or the Food
and Drug Administration and, to the actual knowledge of the Company, the
Company, is and for the past five (5) years has been in compliance with all
other federal, state, local and foreign laws and regulations.
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2.21 Investment Banking; Brokerage. There are no claims for investment
banking fees, brokerage commissions, finder's fees or similar compensation
(exclusive of professional fees to lawyers and accountants) in connection with
the transactions contemplated by this Agreement payable by the Company or based
on any arrangement or agreement made by or on behalf of the Company.
2.22 Insurance. The Company has fire, casualty, product liability and
business interruption and other insurance policies, with extended coverage,
which the Company believes are sufficient in amount to allow it to replace any
of its material properties which might be damaged or destroyed or sufficient to
cover liabilities to which the Company may reasonably become subject, subject to
the limitations set forth in Schedule 2.22. To the Company's actual knowledge,
there is no default or event which could give rise to a default under any such
policy.
2.23 Transactions with Affiliates. There are no loans, leases, contracts
or other transactions between the Company and any officer, director or five
percent (5%) shareholder of the Company or any family member or affiliate of the
foregoing persons.
2.24 Customers and Distributors. Schedule 2.24 sets forth each
representative and distributor of the Company at the date hereof (whether
pursuant to a commission, royalty or other arrangement), and each customer,
distributor and/or broker of the Company who accounted for more than 5% of the
sales of the Company for the twelve (12) months ended June 30, 1995 and June 30,
1996 (collectively, the "Customers, Distributors and Brokers"). The
relationships of the Company with its Customers, Distributors, and Brokers are
generally good commercial working relationships. Except as set forth in Schedule
2.24, no Customer, Distributor or Broker of the Company has canceled or
otherwise terminated its relationship with the Company, or has during the last
twelve months decreased materially its services, supplies or materials to the
Company or its usage or purchases of the services or products of the Company. No
Customer, Distributor or Broker has, to the actual knowledge of the Company, any
plan or intention to terminate, to cancel or otherwise materially and adversely
modify its relationship with the Company or to decrease materially or limit its
services, supplies or materials to the Company or its usage, purchase or
distribution of the services or products of the Company.
2.25 Disclosure. The representations and warranties made or contained in
this Agreement and the schedules hereto when taken together, do not and shall
not contain any untrue statement of a material fact and do not and shall not
omit to state a material fact required to be stated therein or necessary in
order to make such representations, warranties or other material not misleading
in light of the circumstances in which they were made or delivered. To the best
knowledge of the Company, there have been no events or transactions, or
information which has come to the attention of the management of the Company,
having a direct impact on the Company or its assets, liabilities, financial
condition, business, results of operations or prospects which, in the reasonable
judgment of such management, could be
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expected to have a material adverse effect on the assets, liabilities, financial
condition, business, results of operations or prospects of the Company.
SECTION 2A. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
(a) Each Investor represents to the Company and the Shareholders
that it has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of the investment contemplated
by this Agreement and making an informed investment decision with respect
thereto. Each Investor represents that it is an "accredited investor" as such
term is defined in Rule 501 under the Securities Act of 1933, as amended (the
"Securities Act"). Each Investor represents to the Company and the Shareholders
that it is purchasing the Convertible Shares for its own account, for investment
only and not with a view to, or any present intention of, effecting a
distribution of such securities or any part thereof except pursuant to a
registration or an available exemption under applicable law. Such Investor
acknowledges that its respective Convertible Shares have not been registered
under the Securities Act or the securities laws of any state or other
jurisdiction and cannot be disposed of unless they are subsequently registered
under the Securities Act and any applicable state laws or exemption from such
registration is available.
(b) Each Investor has full right, authority and power under its
governing partnership agreement to enter into this Agreement and each agreement,
document and instrument to be executed and delivered by or on behalf of such
Investor pursuant to or as contemplated by this Agreement and to carry out the
transactions contemplated hereby and thereby, and the execution, delivery and
performance by such Investor of this Agreement and each such other agreement,
document and instrument have been duly authorized by all necessary action under
such Investor's governing partnership agreement. This Agreement and each
agreement, document and instrument executed and delivered by each Investor
pursuant to or as contemplated by this Agreement constitute, or when executed
and delivered will constitute, valid and binding obligations of each of the
Investors enforceable in accordance with their respective terms. The execution,
delivery and performance by each Investor of this Agreement and each such other
agreement, document and instrument, and the performance of the transactions
contemplated hereby and thereby do not and will not: (A) violate, conflict with
or result in a default (whether after the giving of notice, lapse of time or
both) under any contract or obligation to which any Investor is a party or by
which it or its assets are bound, or cause the creation of any encumbrance upon
any of the assets of any Investor; (B) violate or result in a violation of, or
constitute a default under, any provision of any law, regulation or rule, or any
order of, or any restriction imposed by, any court or other governmental agency
applicable to such Investor; (C) require from such Investor any notice to,
declaration or filing with, or consent or approval of any governmental authority
or other third party; or (D) accelerate any obligation under, or give rise to a
right of termination of, any agreement, permit, license or authorization to
which any Investor is a party or by which such Investor is bound.
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(c) Each Investor represents that there are no claims for
investment banking fees, brokerage commissions, finder's fees or similar
compensation (exclusive of professional fees to lawyers and accountants) in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of such Investor.
SECTION 3. CONDITIONS OF PURCHASE
Each of the Investors' obligation to purchase and pay for the Convertible
Shares to be purchased by it shall be subject to compliance by the Company and
the Shareholders with their agreements herein contained and to the fulfillment
to the Investors' satisfaction, or the waiver by the Investors, on or before and
at the Closing Date of the following conditions:
3.1 Satisfaction of Conditions. The representations and warranties of the
Company and the Shareholders contained in this Agreement shall be true and
correct on and as of the Closing Date; each of the conditions specified in this
Section 3 shall have been satisfied or waived in writing by the Investors; there
shall have been no material change with respect to the Company's business; and,
on the Closing Date, certificates to such effect executed by the President and
Chief Financial Officer of the Company shall have been delivered to the
Investors.
3.2 Director Election. P. Andrews McLane, as the nominee of the Investors,
shall have been elected as a director of the Company (together with any
subsequent nominee of the Investors, the "Investors' Nominee") and the Company
shall have entered into an Indemnification Agreement with the Investors' Nominee
in the form attached hereto as Exhibit D.
3.3 Opinion of Counsel. The Investors shall have received from counsel for
the Company, Kindel & Anderson L.L.P., an opinion dated as of the Closing Date
substantially in the form attached hereto as Exhibit E.
3.4 Authorization. The Board of Directors of the Company shall have duly
adopted resolutions in the form reasonably satisfactory to the Investors and
shall have taken all action necessary for the purpose of authorizing the Company
to consummate the transactions contemplated hereby in accordance with the terms
hereof and to cause the Articles of Incorporation establishing the Convertible
Shares substantially in the form attached hereto as Exhibit C to become
effective; and the Investors shall have received a certificate of the Secretary
of the Company setting forth a copy of the resolution and the Articles of
Incorporation and By-laws of the Company and such other matters as may be
reasonably requested by the Investors.
3.5 All Proceedings Satisfactory. All corporate and other proceedings
taken prior to or at the Closing in connection with the transactions
contemplated by this Agreement, and
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all documents and evidences incident thereto, shall be reasonably satisfactory
in form and substance to the Investors.
3.6 Investors' Fees. The Company shall have paid on behalf of the
Investors all legal fees and related expenses incurred by the Investors in
connection with the transactions contemplated by this Agreement in an amount not
to exceed $50,000.
3.7 No Violation or Injunction. The consummation of the transactions
contemplated by this Agreement shall not be in violation of any law or
regulation, and shall not be subject to any injunction, stay or restraining
order.
3.8 Consents and Waivers. The Company shall have obtained all consents or
waivers necessary to execute this Agreement and the other agreements and
documents contemplated herein, to issue and sell the securities to be sold to
the Investors hereunder and to carry out the transactions contemplated hereby
and thereby and shall have delivered evidence thereof to the Investors. All
corporate and other action and governmental filings necessary to effectuate the
terms of this Agreement and other agreements and instruments executed and
delivered by the Company in connection herewith shall have been made or taken.
3.9 Distribution. The Company shall have made dividend payments in an
aggregate amount of $2,000,000 in cash, and evidence thereof shall have been
delivered to the Investors.
SECTION 4. COVENANTS
The Company agrees for the benefit of the Investors that it shall comply
with the following covenants, provided that the covenants set forth in Sections
4.1, 4.3, 4.4, 4.5 and 4.6 shall terminate upon the earlier of (a) the closing
of the Company's first Qualified Public Offering or (b) the time the Investors
no longer hold any of the Convertible Stock and the Redeemable Preferred Stock,
except as may be agreed to in writing by two-thirds in interest of the
Investors. A "Qualified Public Offering" shall have the meaning provided in the
Articles of Incorporation attached hereto as Exhibit C.
4.1 Financial Statements and Budgetary Information; Inspection. So long as
the Investors hold at least 25,000 Convertible Shares and/or shares of Common
Stock (subject to adjustments for stock splits, stock dividends and the like),
the Investors shall have the rights, and the Company shall have the obligations,
set forth in this Section 4.1. The Company will deliver to TA Associates, Inc.
as representative of the Investors internally prepared unaudited monthly and
quarterly financial statements and audited annual financial statements, as well
as annual budgetary information. The monthly and quarterly financial information
will be provided within 30 days after the end of each month and quarter. The
annual budgetary information will be presented at a Board of Directors' meeting
at least one month prior to each
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fiscal year-end of the Company. An annual audit by an accounting firm of
national recognition selected by the Board of Directors will be provided within
90 days after each fiscal year-end of the Company.
The Company will, upon reasonable prior notice to the Company,
permit authorized representatives of TA Associates, Inc. as representative of
the Investors to visit and inspect any of the properties of the Company,
including its books of account (and to make copies thereof and take extracts
therefrom), and to discuss its affairs, finances and accounts with its officers,
administrative employees and independent accountants, all at such reasonable
times and as often as may be reasonably requested.
4.2 Indemnification. For so long as any of the Securities remains
outstanding, the Articles of Incorporation or By-laws of the Company will at all
times during which any nominee of any of the Investors serves as director of the
Company provide for indemnification of the directors and limitations on the
liability of the directors to the fullest extent permitted under applicable
state law.
4.3 Key Person Insurance. The Company will use its best efforts to
promptly increase the coverage under the existing "key person" term life
insurance policy on the life of Elliott Balbert from $500,000 to $2,000,000,
provided such an increase can be obtained at a commercially reasonable cost to
the Company. The Company hereby agrees that such policy shall not be assigned,
borrowed against or pledged.
4.4 Board of Directors. The Company shall cause meetings of its Board of
Directors to be held at least four (4) times each year at intervals of not more
than four (4) months and shall pay all reasonable out-of-pocket expenses
incurred by the Investors' Nominee in connection with attending meetings or
other functions of the Company's Board of Directors or any committees thereof
and shall pay the Investor's Nominee fees in an amount equal to any fees that
are paid to the other non-management directors of the Company.
4.5 Stock Options. The Company will not issue stock or grant stock
options, warrants, other rights to purchase stock, phantom stock rights or other
equity interests or quasi-equity interests in the Company to employees,
officers, directors, advisers or consultants except for the issuance of stock
options for up to 105,000 shares of Common Stock (subject to adjustments for
stock splits, stock dividends and the like) pursuant to and in accordance with
the terms of the Plan.
4.6 Intellectual Property. The Company will take all commercially
reasonable steps required to establish and preserve its ownership of all of the
Company Rights. The Company will use its best efforts to cause each current
employee of the Company, and each of the Company's consultants and independent
contractors involved in development of any of the Company Rights, to execute an
agreement regarding confidentiality, proprietary information and assignment of
inventions and copyrights to the Company. The Company will diligently
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enforce its rights under such agreements with such employees, consultants or
independent contractors.
4.7 Reorganization. Promptly, and in any case within 90 days following the
Closing, the Company agrees, and each of the Shareholders agrees to take all
action necessary, to reorganize under the laws of Delaware pursuant to a
Certificate of Incorporation in the form attached hereto as Exhibit F and
otherwise on the basis that all rights and obligations embodied herein shall be
substantially identical.
4.8 Stock Option Plan. Promptly after the Closing Date, the Company shall
establish the Plan, subject to the consent of the Investors, which consent shall
not be unreasonably withheld, pursuant to which options may be granted to
employees, officers, directors, advisers and consultants at prices determined in
good faith by the Board of Directors or a committee thereof, as applicable, and
otherwise on such terms as the Board of Directors or a committee thereof, as
applicable, shall determine.
4.9 Distribution. Within 90 days after the Closing Date, the Company shall
determine (i) the aggregate amount of its taxable income (the "Taxable Income")
for the period beginning July 1, 1996 and ending on the effective date of the
Reorganization and (ii) the federal and California state tax owed by each
Shareholder relative to the Taxable Income (the "Additional Amount"). The
Company shall promptly pay to each Shareholder the Additional Amount as
evidenced by certain promissory notes and notify the Investors of such payment.
A representative of the Investors shall have the right to review the calculaton
of the Taxable Income and the Additional Amount. In the event, the Investors and
the Company disagree over the calculation of the Taxable Income and the payment
of the Additional Amount, such Additional Amount shall be conclusively settled
by an independent accounting firm chosen by the Company and the Investors.
SECTION 5. CO-SALE RIGHT
Notwithstanding anything herein to the contrary, the following provisions
of this Section 5 shall terminate immediately prior to the closing of a
Qualified Public Offering and shall not apply with respect to any Qualified
Public Offering. For the purposes of this Section 5, all references to the
"Balberts" shall include either Balbert transferring shares of the Company's
capital stock.
5.1 General Restriction.
(a) The Balberts agree that neither of them nor any of their
permitted transferees as contemplated by Section 5.1(b) below will directly or
indirectly offer, transfer, donate, sell, assign, pledge, hypothecate or
otherwise dispose of (any such action a "Transfer") all or any portion of the
shares of capital stock of the Company now owned or hereafter acquired by any of
them, except in bona fide sales to third parties for value following
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compliance with Section 5.2 or to permitted transferees as permitted by Section
5.1(b) (hereinafter "Permitted Transfers").
(b) Permitted Transfers by the Balberts shall include Transfers
(i) to either spouse or their children (including adopted children), to a trust
of which either is the settlor or a trustee for the benefit of either spouse or
their children (including adopted children) or to charitable institutions and
(ii) transfers upon either Balbert's death to such Balbert's heirs, executors or
administrators or to a trust under his or her will or to his or her guardian or
conservator; provided that in any such case the transferee shall have entered
into an enforceable written agreement providing that all shares so Transferred
shall continue to be subject to all provisions of this Agreement as if such
shares were still held by the Balberts. Anything to the contrary in this
Agreement notwithstanding, transferees permitted by this Section 5.1(b) shall
take any shares so Transferred subject to all obligations under this Agreement
as if such shares were still held by the Balberts whether or not they so
expressly agree.
5.2 Co-Sale Procedure. (a) In the event the Balberts and/or any permitted
transferee under Section 5.1(b) proposes to sell any shares of the Company's
capital stock, the Balberts may transfer the shares subject thereto only
following compliance with this Section 5.2. In such event, the Balberts shall
give prompt written notice of the proposed sale to the Investors, which shall
identify the proposed transferee, the number of shares proposed to be sold and
the terms of the proposed transaction (the "Co-Sale Notice"). Each of the
Investors thereupon shall have the right, exercisable upon written notice to the
Balberts and any such permitted transferee within 20 days after delivery to it
of the Co-Sale Notice (the "Co-Sale Notice Period"), to participate in the sale
on the terms and conditions stated in the Co-Sale Notice, except that any
Investor who holds Convertible Shares shall be permitted to sell to the relevant
purchaser shares of Common Stock acquired upon conversion thereof or, at its
election, either (i) an option to acquire such Common Stock when it receives the
same upon such conversion at the election of such Investor or as otherwise
provided in the Company's Articles of Incorporation with the same effect as if
Common Stock were being conveyed, or (ii) shares of Convertible Stock provided
the acquiror pays the full liquidation preference of the shares being sold plus
the relevant price per share for the underlying Common Stock. Each of the
Investors shall have the right to sell all or any portion of its shares on the
terms and conditions in the Co-Sale Notice (subject to the foregoing), with the
maximum number of shares equal to the product obtained by multiplying the number
of shares proposed to be sold by the Balberts and any permitted transferees as
described in the Co-Sale Notice by a fraction, the numerator of which is the
number of Convertible Shares or shares of Common Stock, as applicable, owned by
such Investor on the date of the Co-Sale Notice, as the case may be, and the
denominator of which is the sum of the number of shares of the Common Stock
owned by the Balberts and all permitted transferees and the number of
Convertible Shares or shares of Common Stock, as applicable, owned by all of the
Investors (including all assignees of the Investors), as of the date of the
Co-Sale Notice. To the extent one or more Investors elect not to sell the full
amount of shares which they are entitled to sell pursuant to this Section
5.2(a),
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the other participating Investors' rights to sell shares shall be increased
proportionately to their relative holdings of Securities, such that the
Investors shall have the right to sell the full number of shares allocable to
them in any transaction subject to this Section 5.2(a) even if some Investors
elect not to participate. Within five days after the expiration of the Co-Sale
Notice Period, the Balberts shall notify each participating Investor of the
number of shares held by such Investor that will be included in the sale and the
date on which the sale will be consummated, which shall be no later than the
later of (i) 30 days after the delivery of the Co-Sale Notice and (ii) the
satisfaction of all governmental approval requirements, if any. Each of the
Investors may effect its participation in any sale hereunder by delivery to the
purchaser, or to the Balberts for transfer to the purchaser, of one or more
instruments, certificates and/or option agreements, properly endorsed for
transfer, representing the shares it elects to sell therein, provided that no
Investor shall be required to make any representations or warranties or to
provide any indemnities in connection therewith other than with respect to title
to the stock being conveyed. At the time of consummation of the sale, the
purchaser shall remit directly to each Investor that portion of the sale
proceeds to which each Investor is entitled by reason of its participation
therein. All costs and expenses in connection with any sales pursuant to this
Section 5.2 shall be paid for by the sellers of shares on a pro rata basis
(based on participation rather than holdings) or otherwise as they may have
agreed; provided, however, that all costs and expenses in connection with any
sale pursuant to this Section 5.2 that relate specifically or incrementally to
participation therein by a seller (including the fees and expenses of counsel to
such selling Investor, if any) shall be paid for by such seller. No shares may
be purchased by a purchaser from the Balberts or any permitted transferee unless
the purchaser simultaneously purchases from the Investors all of the shares that
they have elected to sell pursuant to this Section 5.2(a).
(b) Any shares held by the Balberts or any permitted transferee
that the Balberts or transferee desire to sell following compliance with Section
5.2(a) may be sold to the purchaser only during the 90-day period after the
expiration of the Co-Sale Notice Period and only on terms no more favorable to
the Balberts and such transferee than those contained in the Co-Sale Notice.
Promptly after such sale, the Balberts shall notify the Investors of the
consummation thereof and shall furnish such evidence of the completion and time
of completion of such sale and of the terms thereof as may reasonably be
requested by the Investors. So long as the purchaser is neither a party, nor an
affiliate or relative of a party, to this Agreement, such purchaser shall take
the shares so Transferred free and clear of any further restrictions of this
Section 5. If, at the end of such 90-day period, the Balberts or transferee has
not completed the sale of such shares as aforesaid, all the restrictions on
Transfer contained in this Section 5 shall again be in effect with respect to
such shares.
5.3 Assignment. Each Investor shall have the right to assign its rights
under this Section 5 in connection with any transaction or series of related
transactions involving the transfer to one or more transferees of at least
25,000 shares of capital stock of the Company (subject to adjustments for stock
splits, stock dividends and the like and aggregating all contemporaneous
transfers by two or more Investors), or to any fund managed by or associated
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with TA Associates, Inc. ("TA Funds"), and upon any such transfer such
transferee or TA Fund thereupon shall be deemed an "Investor," as the case may
be, for purposes of this Section 5.
SECTION 6. RIGHTS TO PURCHASE
Notwithstanding anything herein to the contrary, the following provisions
of this Section 6 shall terminate immediately prior to the closing of a
Qualified Public Offering and shall not apply with respect to any Qualified
Public Offering.
6.1 Right to Participate in Certain Sales of Additional Securities. The
Company agrees that it will not sell or issue any shares of capital stock of the
Company, or other securities convertible into or exchangeable for capital stock
of the Company, or options, warrants or rights carrying any rights to purchase
capital stock of the Company unless the Company first submits a written offer to
the Investors identifying the terms of the proposed sale (including price,
number or aggregate principal amount of securities and all other material
terms), and offers to each Investor the opportunity to purchase its Pro Rata
Share (as hereinafter defined) of the securities (subject to increase for
over-allotment if some Investors do not fully exercise their rights) on terms
and conditions, including price, not less favorable to the Investors than those
on which the Company proposes to sell such securities to a third party or
parties. Each Investor's "Pro Rata Share" of such securities shall be based on
the ratio which the shares of the Securities owned by it bears to all the issued
and outstanding shares of the Securities, Common Stock and Common Stock
equivalents of the Company, calculated in each case on a fully-diluted basis
giving effect to vested options as of the date of such written offer. The
Company's offer to the Investors shall remain open and irrevocable for a period
of 30 days, and Investors who elect to purchase shall have the first right to
take up and purchase any shares or other securities which other Investors do not
elect to purchase, based on the relative holdings of the electing Investors. Any
securities so offered which are not purchased pursuant to such offer may be sold
by the Company but only on the terms and conditions set forth in the initial
offer to the Investors, at any time within 120 days following the termination of
the above-referenced 30-day period but may not be sold to any other person or on
terms and conditions, including price, that are more favorable to the purchaser
than those set forth in such offer or after such 120-day period without renewed
compliance with this Section 6.1.
Notwithstanding the foregoing, the Company may (i) issue options for up to
an aggregate 105,000 shares of Common Stock (subject to adjustments for stock
splits, stock dividends and the like) pursuant to the terms of the Plan and may
issue shares of its Common Stock upon the exercise of any such stock options,
and (ii) issue Conversion Shares upon the conversion of the Convertible Shares.
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6.2 Assignment of Rights. Each Investor may assign its rights under this
Section 6 in connection with any transaction or series of related transactions
involving the transfer to one or more transferees of at least 25,000 shares of
capital stock of the Company (subject to adjustments for stock splits, stock
dividends and the like and aggregating all contemporaneous transfers by
Investors), or to any TA Fund, and upon any such transfer such transferee or TA
Fund shall be deemed an "Investor" for purposes of Sections 6.1 and 6.2 with the
rights set forth in such Sections.
SECTION 7. REGISTRATION RIGHTS
7.1 Optional Registrations. If at any time or times after the date hereof,
the Company shall seek to register any shares of its capital stock or securities
convertible into capital stock under the Securities Act (whether in connection
with a public offering of securities by the Company (a "primary offering"), a
public offering of securities by shareholders of the Company (a "secondary
offering"), or both), the Company will promptly give written notice thereof to
each Investor (the "Holders," subject to Section 7.7) holding Registrable
Securities as hereinafter defined in Section 7.3 below. If within 30 days after
their receipt of such notice one or more Holders request the inclusion of some
or all of the Registrable Securities owned by them in such registration, the
Company will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which such Holders may request in a
writing delivered to the Company within 30 days after their receipt of the
notice given by the Company. In the case of the registration of shares of
capital stock by the Company in connection with any underwritten public
offering, if the underwriter(s) determines that marketing factors require a
limitation on the number of Registrable Securities to be offered, the Company
shall not be required to register Registrable Securities of the Investors in
excess of the amount, if any, of shares of the capital stock which the principal
underwriter of such underwritten offering shall reasonably and in good faith
agree to include in such offering in excess of any amount to be registered for
the Company; provided, however, that the number of shares of Registrable
Securities of the Holders included in any such offering subsequent to the
Company's first Qualified Public Offering shall in no event be less than
twenty-five percent (25%) of the aggregate number of shares of capital stock to
be registered, unless the aggregate number of shares of Registrable Securities
the Holders requested in writing to be in such offering is less than twenty-five
percent (25%) of the aggregate number of shares of capital stock to be
registered. If any limitation of the number of shares of Registrable Securities
to be registered by the Holders is required pursuant to this Section 7.1, the
number of shares that may be included in the registration on behalf of the
Holders shall be allocated among the Holders or the holders of any other
registration rights in proportion, as nearly as practicable, to the respective
holdings of Registrable Securities of all Holders requesting registration. The
provisions of this Section will not apply to a registration effected solely to
implement (i) an employee benefit plan, or (ii) a transaction to which Rule 145
or any other similar rule of the Securities and Exchange Commission (the "SEC"or
the "Commission") under the Securities Act is applicable.
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7.2 Required Registrations. If at any time during the period beginning 90
days after the effective date of the Company's first registration statement
under the Securities Act and ending five years thereafter, an Investor or
Investors holding Registrable Securities notifies the Company in writing that
they intend to offer or cause to be offered for public sale such portion of
their Registrable Securities, (i) in the case of a proposed registration on Form
S-1, as is anticipated to result in aggregate offering proceeds to such
Investors, net of underwriter discounts and commissions, of at least $10 million
(or at least 80% of the Registrable Securities of the Investors, if less), and
(ii) in the case of a proposed registration on Form S-3, as is anticipated to
result in aggregate offering proceeds to such Investors, net of underwriter
discounts and commissions, of at least $500,000 (or at least 80% of the
Registrable Securities of the Investors, if less), the Company will notify all
of the Holders who would be entitled to notice of a proposed registration under
Section 7.1 above and any other holder of piggyback registration rights of its
receipt of such notification from such Investor or Investors. Upon the written
request of any such Holder or other holder of the Company's securities delivered
to the Company within 20 days after receipt from the Company of such
notification, the Company will either (i) elect to make a primary offering in
which case the rights of such Holders shall be as set forth in Section 7.1 above
(in which case the registration shall not count as one of the Investors'
permitted demand registrations hereunder), or (ii) use its best efforts to cause
such of the Registrable Securities as may be requested by any Holders and any
other holders of piggyback registration rights to be registered under the
Securities Act in accordance with the terms of this Section 7.2; provided,
however, that the number of shares of Registrable Securities of the Holders
included in any such offering shall in no event be less than twenty-five percent
(25%) of the aggregate number of shares of capital stock to be registered,
unless the aggregate number of shares of Registrable Securities the Holders
requested in writing to be in such offering is less than twenty-five percent
(25%) of the aggregate number of shares of capital stock to be registered. The
Company will not be obligated pursuant to this Section 7.2 to effect (i) more
than one registration statement on Form S-1 or S-2, and (ii) more than one
registration statement on Form S-3 per any twelve-month period. The Company may
postpone the filing of any registration statement required hereunder for a
reasonable period of time, not to exceed 60 days during any twelve-month period,
if the Company has been advised by legal counsel that such filing would require
a special audit or the disclosure of a material impending transaction or other
matter and the Company's Board of Directors determines reasonably and in good
faith that such disclosure would have a material adverse effect on the Company.
The Company shall not be required to cause a registration statement requested
pursuant to this Section 7.2 to become effective prior to 90 days following the
effective date of a registration statement initiated by the Company, if the
request for registration has been received by the Company subsequent to the
giving of written notice by the Company, made in good faith, to the Investors
that the Company is commencing to prepare a Company-initiated registration
statement (other than a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 or any other similar rule of the
SEC under the Securities Act is applicable); provided, however, that the Company
shall use its best efforts to achieve such effectiveness promptly.
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7.3 Registrable Securities. For the purposes of this Section 7, the term
"Registrable Securities" shall mean any shares of Common Stock held by a Holder
or subject to acquisition by a Holder upon conversion of Convertible Shares, as
applicable, including any shares issued by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization; provided, however, that if an Investor
owns Convertible Shares, the Investor may exercise its registration rights
hereunder by converting the shares to be sold publicly into Common Stock as of
the closing of the relevant offering and shall not be required to cause such
Convertible Shares to be converted to Common Stock until and unless such Closing
occurs, it being understood that the Company shall at the request of the
relevant Investor effect the reconversion of Common Stock and any Redeemable
Preferred Stock to Convertible Stock if such a conversion occurs notwithstanding
the foregoing and a public offering does not close; and provided, further, that
any Common Stock that is sold in a registered sale pursuant to an effective
registration statement under the Securities Act or pursuant to Rule 144
thereunder, or that may be sold without restriction as to volume or otherwise
pursuant to Rule 144 under the Securities Act (as confirmed by an unqualified
opinion of counsel to the Company), shall not be deemed Registrable Securities.
7.4 Further Obligations of the Company. Whenever the Company is required
hereunder to register any Registrable Securities, it agrees that it shall also
do the following:
(a) Pay all expenses of such registrations and offerings
(exclusive of underwriting discounts and commissions) and the reasonable fees
and expenses of not more than one independent counsel for the Holders
satisfactory to the Holders;
(b) Use its best efforts (with due regard to management of the
ongoing business of the Company and the allocation of managerial resources)
diligently to prepare and file with the SEC a registration statement and such
amendments and supplements to said registration statement and the prospectus
used in connection therewith as may be necessary to keep said registration
statement effective for at least 120 days (or 60 days in the case of Form S-3)
and to comply with the provisions of the Securities Act with respect to the sale
of securities covered by said registration statement for the period necessary to
complete the proposed public offering;
(c) Furnish to each selling Holder such copies of each preliminary
and final prospectus and such other documents as such Holder may reasonably
request to facilitate the public offering of its Registrable Securities;
(d) Enter into any reasonable underwriting agreement required by
the proposed underwriter (which underwriter shall be selected by the selling
Investors in connection with any registration requested pursuant to Section
7.2(ii)), if any, in such form and containing such terms as are customary;
provided, however, that no Holder shall be required to make any representations
or warranties or provide any indemnity other than with respect to its title to
the Registrable Securities and any written information provided by the Holder
to the
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Company, and if the underwriter requires that any other representations or
warranties be made and that indemnification with respect to such representations
and warranties be provided, the Company shall make all such representations and
warranties and provide all such indemnities, including, without limitation, in
respect of the Company's business, operations and financial information and the
disclosures relating thereto in the prospectus;
(e) Use its best efforts (with due regard to management of the
ongoing business of the Company and the allocation of managerial resources) to
register or qualify the securities covered by said registration statement under
the securities or "blue sky" laws of such jurisdictions as any selling Holder
may reasonably request, provided that the Company shall not be required to
register or qualify the securities in any jurisdictions which require it to
qualify to do business therein;
(f) Immediately notify each selling Holder, at any time when a
prospectus relating to his Registrable Securities is required to be delivered
under the Securities Act, of the happening of any event as a result of which
such prospectus contains an untrue statement of a material fact or omits any
material fact necessary to make the statements therein not misleading, and, at
the request of any such selling Holder, prepare a supplement or amendment to
such prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(g) Use its best efforts to cause all such Registrable Securities
to be listed on each securities exchange or quotation system on which similar
securities issued by the Company are then listed or quoted;
(h) Otherwise use its best efforts to comply with the securities
laws of the United States and other applicable jurisdictions and all applicable
rules and regulations of the SEC and comparable governmental agencies in other
applicable jurisdictions and make generally available to its holders, in each
case as soon as practicable, but not later than 45 days after the close of the
period covered thereby, an earnings statement of the Company which will satisfy
the provisions of Section 11(a) of the Securities Act;
(i) Obtain and furnish to each selling Holder, immediately prior
to the effectiveness of the registration statement (and, in the case of an
underwritten offering, at the time of delivery of any Registrable Securities
sold pursuant thereto), a cold comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters as the holders of a majority of the
Registrable Securities being sold may reasonably request; and
(j) Otherwise cooperate with the underwriter or underwriters, the
Commission and other regulatory agencies and take all actions and execute and
deliver or cause
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to be executed and delivered all documents necessary to effect the registration
of any Registrable Securities under this Section 7.
7.5 Indemnification; Contribution.
(a) Incident to any registration statement referred to in this
Section 7, the Company will indemnify and hold harmless each underwriter to the
extent requested thereby, each Holder who offers or sells any such Registrable
Securities in connection with such registration statement (including its
partners (including partners of partners and stockholders of any such partners),
and directors, officers, employees and agents of any of them (a "Selling
Holder"), and each person who controls any of them within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934
(the "Exchange Act") (a "Controlling Person"), from and against any and all
losses, claims, damages, expenses and liabilities, joint or several (including
any investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted, as the same are incurred), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based on (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement (including any related preliminary or definitive
prospectus, or any amendment or supplement to such registration statement or
prospectus), (ii) any omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it not misleading, or (iii) any violation by the Company of the Securities Act,
any state securities or "blue sky" laws or any rule or regulation thereunder in
connection with such registration; provided, however, that the Company will not
be liable to the extent that such loss, claim, damage, expense or liability
arises from and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
furnished in writing to the Company by such underwriter, Selling Holder or
Controlling Person expressly for use in such registration statement. With
respect to such untrue statement or omission or alleged untrue statement or
omission in the information furnished in writing to the Company by such Selling
Holder expressly for use in such registration statement, such Selling Holder
will indemnify and hold harmless each underwriter, the Company (including its
directors, officers, employees and agents), each other Holder (including its
partners (including partners of partners and stockholders of such partners) and
directors, officers, employees and agents of any of them, and each person who
controls any of them within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, expenses and liabilities, joint or several, to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise to the
same extent provided in the immediately preceding sentence. In no event,
however, shall the liability of a Selling Holder for indemnification under this
Section 7.5(a) exceed the lesser of (i) that proportion of the total of such
losses, claims, damages or liabilities indemnified against equal to the
proportion of the total securities sold under such registration
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statement which is being sold by such Selling Holder or (ii) the proceeds
received by such Selling Holder from its sale of Registrable Securities under
such registration statement.
(b) If the indemnification provided for in Section 7.5(a) above
for any reason is held by a court of competent jurisdiction to be unavailable to
an indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
7.5, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the other
Selling Holders and the underwriters from the offering of the Registrable
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the other Selling Holders and the underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Holders and the underwriters shall be deemed to be in the same
respective proportions that the net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Holders and the underwriting
discount received by the underwriters, in each case as set forth in the table on
the cover page of the applicable prospectus, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of the Company,
the Selling Holders and the underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Holders or the underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company, the Selling Holders, and the underwriters agree that
it would not be just and equitable if contribution pursuant to this Section
7.5(b) were determined by pro rata or per capita allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. In no event, however, shall
a Selling Holder be required to contribute any amount under this Section 7.5(b)
in excess of the lesser of (i) that proportion of the total of such losses,
claims, damages or liabilities indemnified against equal to the proportion of
the total Registrable Securities sold under such registration statement which
are being sold by such Selling Holder or (ii) the proceeds received by such
Selling Holder from its sale of Registrable Securities under such registration
statement. No person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation.
(c) The amount paid by an indemnifying party or payable to an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in this Section 7.5 shall be deemed to include, subject to the
limitations set forth above, any legal or other
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expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim, payable as the same are
incurred. The indemnification and contribution provided for in this Section 7.5
will remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified parties or any officer, director, employee, agent
or controlling person of the indemnified parties.
7.6 Rule 144 and Rule 144A Requirements. In the event that the Company
becomes subject to Section 13 or Section 15(d) of the Exchange Act, the Company
shall use its best efforts to take all action as may be required as a condition
to the availability of Rule 144 or Rule 144A under the Securities Act (or any
successor or similar exemptive rules hereafter in effect). The Company shall
furnish to any Holder, within 15 days of a written request, a written statement
executed by the Company as to the steps it has taken to comply with the current
public information requirement of Rule 144 or Rule 144A or such successor rules.
7.7 Transfer of Registration Rights. The registration rights and related
obligations under this Section 7 of the Holders with respect to their
Registrable Securities may be assigned in connection with any transaction or
series of related transactions involving the transfer to one or more transferees
of at least 25,000 shares of capital stock of the Company, other than pursuant
to an effective registration statement under the Securities Act or pursuant to
Rule 144 thereunder (subject to adjustments for stock splits, stock dividends
and the like and aggregating all contemporaneous transfers by Holders), or to
any fund managed by or associated with TA Associates, Inc. ("TA Funds"), and
upon any such transfer such transferee or TA Fund shall be deemed to be included
within the definition of a "Holder" for purposes of this Section 7 with the
rights set forth herein. The relevant Holder as the case may be, shall notify
the Company at the time of such transfer.
SECTION 8 GENERAL
8.1 Amendments, Waivers and Consents. For the purposes of this Agreement
and all agreements executed pursuant hereto, no course of dealing between or
among any of the parties hereto and no delay on the part of any party hereto in
exercising any rights hereunder or thereunder shall operate as a waiver of the
rights hereof and thereof. No provision hereof may be waived otherwise than by a
written instrument signed by the party or parties so waiving such covenant or
other provision. No amendment to this Agreement may be made without the written
consent of the Company and the Investors (and, for purposes of any amendment to
Section 5, the Balberts). Any actions required to be taken or consents,
approvals, votes or waivers required or contemplated to be given by the
Investors shall require a vote of a two-thirds in interest of the Investors,
based on their relative holdings of capital stock of the Company at the relevant
time, and any such action by such Investors shall bind all of the Investors.
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8.2 Indemnification from the Company.
(a) Without limitation of any other provision of this Agreement,
the Company agrees to defend, indemnify and hold the Investors and their
affiliates and their respective direct and indirect partners, members,
stockholders, directors, officers, employees and agents and each person who
controls any of them within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act (parties receiving the benefit of the
indemnification agreement herein shall be referred to collectively as
"Indemnified Parties" and individually as an "Indemnified Party") harmless from
and against any and all losses, claims, damages, obligations, liens,
assessments, judgments, fines, liabilities, and other costs and expenses
(including without limitation interest, penalties and any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, as the same
are incurred, and including any diminution in the value of the Investors'
shares) of any kind or nature whatsoever which may be sustained or suffered by
any such Indemnified Party, without regard to any investigation by any of the
Indemnified Parties, based upon, arising out of, by reason of or otherwise in
respect of or in connection with (i) any inaccuracy in or breach of any
representation or warranty made by the Company or any Shareholder in this
Agreement or in any agreement or instrument or other document delivered pursuant
to this Agreement, (ii) any breach of any covenant or agreement made by the
Company in this Agreement or in any agreement or instrument delivered pursuant
to this Agreement or (iii) any third party or governmental action relating to
any action taken or omitted to be taken or alleged to have been taken or omitted
to have been taken by any Indemnified Party as shareholder, director, agent,
representative or controlling person of the Company, including, without
limitation, any and all losses, claims, damages, expenses and liabilities, joint
or several (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted, as the same may be incurred) arising or
alleged to arise under the Securities Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or otherwise, including without
limitation any such claim alleging so-called control person liability or
securities law liability; provided, however, that the Company will not be liable
to the extent that such loss, claim, damage, expense or liability arises from
and is based on (i) an untrue statement or omission or alleged untrue statement
or omission in a registration statement or prospectus which is made in reliance
on and in conformity with written information furnished to the Company in an
instrument duly executed by or on behalf of such Indemnified Party specifically
stating that it is for use in the preparation thereof or (ii) a knowing and
willful violation of the federal securities laws by an Indemnified Party, as
finally determined by a court of competent jurisdiction.
(b) If the indemnification provided for in Section 8.2(a) above
for any reason is held by a court of competent jurisdiction to be unavailable to
a Indemnified Party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then the Company, in lieu of indemnifying such
Indemnified Party thereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages,
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expenses or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Investors, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Investors in connection with the action or inaction which resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In connection with any registration of the Company's
securities, the relative benefits received by the Company and the Investors
shall be deemed to be in the same respective proportions that the net proceeds
from the offering (before deducting expenses) received by the Company and the
Investors, in each case as set forth in the table on the cover page of the
applicable prospectus, bear to the aggregate public offering price of the
securities so offered. The relative fault of the Company and the Investors shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Investors
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Investors agree that it would not be just and
equitable if contribution pursuant to this Section 8.2(b) were determined by pro
rata or per capita allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. In connection with the registration of the Company's
securities, in no event shall an Investor be required to contribute any amount
under this Section 8.2(b) in excess of the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities indemnified against equal
to the proportion of the total securities sold under such registration statement
which is being sold by such Investor or (ii) the proceeds received by such
Investor from its sale of securities under such registration statement. No
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not found guilty of such fraudulent misrepresentation.
(c) The indemnification and contribution provided for in this
Section 8.2 will remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Parties or any officer, director,
partner, employee, agent or controlling person of the Indemnified Parties.
(d) The provisions of this Section 8.2 are in addition to and
shall supplement those set forth in Section 7.5 which shall apply in the case of
the registration and sale of Registrable Securities held by any of the Investors
registered pursuant to Section 7 hereof.
(e) Following the Closing, the Company agrees to pay and hold the
Investors harmless against liability for payment of all reasonable out-of-pocket
costs and expenses incurred by them following the Closing in connection with
their ongoing investment in the Company, including the fees and disbursements of
counsel and other professionals. In
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addition, the Company agrees to pay any and all stamp, transfer and other
similar taxes, if any, payable or determined to be payable in connection with
the execution and delivery of this Agreement and the issuance of securities
hereunder.
8.3 Survival of Representations; Warranties and Covenants; Assignability
of Rights. All covenants, agreements, representations and warranties of the
Company, the Shareholders and the Investors made herein and in the certificates,
lists, exhibits, schedules or other written information delivered or furnished
to any Investor in connection herewith (a) are material, shall be deemed to have
been relied upon by the party or parties to whom they are made and shall survive
the Closing regardless of any investigation or knowledge on the part of such
party or its representatives and (b) shall bind the parties' successors and
assigns, whether so expressed or not, and, except as otherwise provided in this
Agreement, all such covenants, agreements, representations and warranties shall
inure to the benefit of the Investors' successors and assigns and to their
transferees of Securities, whether so expressed or not, subject to the
provisions of Sections 5.3, 6.2 and 7.7. For purposes of this Agreement, the
Company's successors shall include any corporation into which the Company is
merged in connection with its reincorporation.
8.4 Legend on Securities. The Company, the Investors and the Shareholder
acknowledge and agree that the following legend shall be typed on each
certificate evidencing any of the securities issued hereunder held at any time
by an Investor or the Shareholder:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE
SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A STOCK
PURCHASE AND SHAREHOLDERS AGREEMENT DATED AS OF SEPTEMBER 30, 1996, INCLUDING
THEREIN CERTAIN RESTRICTIONS ON TRANSFER. A COMPLETE AND CORRECT COPY OF THIS
AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND
WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.
8.5 Governing Law. This Agreement shall be deemed to be a contract made
under, and shall be construed in accordance with, the laws of the State of
California (and upon the reincorporation of the Company as contemplated herein,
the laws of the state of such reincorporation), without giving effect to
conflict of laws principles thereof.
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8.6 Section Headings and Gender. The descriptive headings in this
Agreement have been inserted for convenience only and shall not be deemed to
limit or otherwise affect the construction of any provision thereof or hereof.
The use in this Agreement of the masculine pronoun in reference to a party
hereto shall be deemed to include the feminine or neuter, and vice versa, as the
context may require.
8.7 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which when so executed and delivered shall be
taken to be an original; but such counterparts shall together constitute but one
and the same document.
8.8 Notices and Demands. Any notice or demand which is required or
provided to be given under this Agreement shall be deemed to have been
sufficiently given and received for all purposes when delivered by hand,
telecopy, telex or other method of facsimile, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, or two days after being sent by overnight delivery providing receipt
of delivery, to the following addresses: if to the Company or the Shareholders,
at 20731 Marilla Street, Chatsworth, CA 91311-4408, or at any other address
designated by the Company or the Shareholders to the Investors and the
Shareholders in writing; if to an Investor, c/o TA Associates, Inc. at its
mailing address as shown on Exhibit A hereto, or at any other address designated
by TA Associates, Inc. to the Company, the other Investors and the Shareholders
in writing.
8.9 Remedies; Severability. It is specifically understood and agreed that
any breach of the provisions of this Agreement by any person subject hereto will
result in irreparable injury to the other parties hereto, that the remedy at law
alone will be an inadequate remedy for such breach, and that, in addition to any
other legal or equitable remedies which they may have, such other parties may
enforce their respective rights by actions for specific performance (to the
extent permitted by law) and shall be entitled to such other remedies as may be
available under applicable law. The Company may refuse to recognize any
unauthorized transferee as one of its shareholders for any purpose, including,
without limitation, for purposes of dividend and voting rights, until the
relevant party or parties have complied with all applicable provisions of this
Agreement. Whenever possible, each provision of this Agreement shall be
interpreted in such a manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be deemed prohibited or invalid
under such applicable law, such provision shall be ineffective to the extent of
such prohibition or invalidity, and such prohibition or invalidity shall not
invalidate the remainder of such provision or the other provisions of this
Agreement.
8.10 Integration. This Agreement, including the exhibits, documents and
instruments referred to herein or therein, constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, including, without
limitation, the letter of intent between the parties hereto in respect of the
transactions contemplated herein, which letter of intent shall
31
<PAGE>
be completely superseded by the representations, warranties and covenants of the
Company contained herein.
[PAGE INTENTIONALLY LEFT BLANK]
32
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
COMPANY:
NATROL, INC.
By: /s/ ELLIOTT BALBERT
------------------------------
SHAREHOLDERS:
/s/ ELLIOTT BALBERT
---------------------------------
Elliott Balbert
/s/ CHERYL BALBERT
---------------------------------
Cheryl Balbert
With respect to Section 1, Section 2.2(b)
and Section 4.8 only
/s/ NORMAN KAHN
---------------------------------
Norman Kahn
33
<PAGE>
INVESTORS:
ADVENT VII L.P.
By: TA Associates VI L.P.,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: *
-----------------------------
ADVENT ATLANTIC AND
PACIFIC III L.P.
By: TA Associates AAP III Partners,
its General Partner
By: *
-----------------------------
ADVENT NEW YORK L.P.
By: TA Associates VI L.P.,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: *
-----------------------------
34
<PAGE>
TA VENTURE INVESTORS L.P.
By: *
-----------------------------
/s/ P. ANDREWS McLANE
- -------------------------------
P. Andrews McLane, Managing
Director or Partner
35
<PAGE>
Exhibit A
List of Investors
<TABLE>
<CAPTION>
Number of
shares of
Shares Aggregate
Name Purchased Payment
- ---- --------- -------
<S> <C> <C> <C>
Advent VII L.P. From the Balberts: 144,717 6,431,866.75
From Kahn: 9,426 418,933.34
From the Company: 16,857 749,199.91
Advent Atlantic and
Pacific III L.P. From the Balberts: 68,537 3,046,088.93
From Kahn: 9,426 418,933.34
From the Company: 787 34,977.73
Advent New York L.P. From the Balberts: 10,875 483,333.34
From Kahn: 5,438 241,688.89
From the Company: 787 34,977.77
TA Venture Investors L.P. From the Balberts: 1,574 69,955.56
From Kahn: 788 35,022.22
From the Company: 788 35,022.22
Total ------- -----------
270,000 $12,000,000
======= ===========
</TABLE>
Notices to:
TA Associates, Inc.
High Street Tower, Suite 2500
125 High Street
Boston, MA 02110
36
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NATROL, INC.
ARTICLE I
The name of the Corporation is Natrol, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
ARTICLE IV
The total number of shares of capital stock which the Corporation shall
have authority to issue is 146,000 of which (a) 40,500 shares shall be preferred
stock, par value $.01 per share ("Preferred Stock"), and (b) 105,500 shares
shall be common stock, par value $.01 per share.
Except as otherwise restricted by this Certificate of Incorporation, the
Corporation is authorized to issue, from time to time, all or any portion of the
capital stock of the Corporation which may have been authorized but not issued,
to such person or persons and for such lawful consideration as it may deem
appropriate, and generally in its absolute discretion to determine the terms and
manner of any disposition of such authorized but unissued capital stock.
Any and all such shares issued for which the full consideration has been
paid or delivered shall be deemed fully paid shares of capital stock, and the
holder of such shares shall not be liable for any further call or assessment or
any other payment thereon.
<PAGE>
The voting powers, designations, preferences, privileges and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of each class of capital stock of the Corporation,
shall be as provided in this Article IV.
A. CONVERTIBLE PARTICIPATING PREFERRED STOCK
1. Designation. A total of 27,000 shares of the Corporation's Preferred
Stock shall be designated as Convertible Participating Preferred Stock, $.01 par
value per share (the "Convertible Stock").
2. Election of Directors; Voting.
(a) Election of Directors. The holders of outstanding shares of
Convertible Stock shall, voting together as a separate class, be entitled
to elect one (1) Director of the Corporation. Such Director shall be the
candidate receiving the highest number of affirmative votes (with each
holder of Convertible Stock entitled to cast one vote for or against each
candidate with respect to each share of Convertible Stock held by such
holder) of the outstanding shares of Convertible Stock (the "Convertible
Stock Director Designee"), with votes cast against such candidate and
votes withheld having no legal effect. The election of the Convertible
Stock Director Designee by the holders of the Convertible Stock shall
occur (i) at the annual meeting of holders of capital stock, (ii) at any
special meeting of holders of capital stock, (iii) at any special meeting
of holders of Convertible Stock called by holders of a majority of the
outstanding shares of Convertible Stock or (iv) by the unanimous written
consent of holders of the outstanding shares of Convertible Stock. If at
any time when any share of Convertible Stock is outstanding the
Convertible Stock Director Designee should cease to be a Director for any
reason, the vacancy shall only be filled by the vote or written consent of
the holders of the outstanding shares of Convertible Stock, voting
together as a separate class, in the manner and on the basis specified
above. The holders of outstanding shares of Convertible Stock shall also
be entitled to vote for all other Directors of the Corporation together
with holders of all other shares of the Corporation's outstanding capital
stock entitled to vote thereon, voting as a single class, with each
outstanding share entitled to the same number of votes specified in
Section A.2(b).
(b) Voting Generally. The holder of each share of Convertible Stock
shall be entitled to the number of votes equal to the largest number of
full shares of Common Stock (as defined in Section C of this Article IV)
into which each share of Convertible Stock could be converted pursuant to
Section A.6 hereof on the record date for the vote or for written consent
of stockholders, if applicable. The holder of each share of Convertible
Stock shall be entitled to notice of any stockholders' meeting in
accordance with the by-laws of the Corporation and shall vote with holders
of the Common Stock, voting together as single class, upon all matters
submitted to a vote of stockholders excluding those matters required to be
submitted to a class or series vote pursuant to the
2
<PAGE>
terms hereof (including without limitation Section A.8) or by law.
Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all
shares of Common Stock into which shares of Convertible Stock held by each
holder could be converted) shall be rounded to the nearest whole number
(with one-half rounded upward to one).
3. Dividends. The holders of Convertible Stock shall be entitled to
receive dividends out of funds legally available therefor at such times and in
such amounts as the Board of Directors may determine in its sole discretion,
provided, however, that no such dividend may be declared or paid on any shares
of Convertible Stock unless at the same time a dividend is declared or paid on
all outstanding shares of Common Stock and vice versa, with holders of
Convertible Stock and Common Stock sharing in any such dividends as if they
constituted a single class of stock and with each holder of a share of
Convertible Stock entitled to receive such dividends based on the number of
shares of Common Stock into which such share of Convertible Stock is then
convertible hereunder. The right to dividends on shares of Convertible Stock
shall not be cumulative, and no right shall accrue to holders of Convertible
Stock by reason of the fact that dividends on said shares are not declared in
any prior period.
4. Liquidation.
(a) Liquidation Preference. Upon any liquidation, dissolution or
winding up of the Corporation and its subsidiaries, whether voluntary or
involuntary (a "Liquidation Event"), each holder of outstanding shares of
Convertible Stock shall be entitled to be paid out of the assets of the
Corporation available for distribution to stockholders, whether such
assets are capital, surplus or earnings, and before any amount shall be
paid or distributed to the holders of Common Stock or of any other stock
ranking on liquidation junior to the Convertible Stock, an amount in cash
equal to (i) $444.44445 per share (adjusted appropriately for stock
splits, stock dividends, recapitalizations and the like with respect to
the Convertible Stock) plus (ii) any declared but unpaid dividends to
which such holder of outstanding shares of Convertible Stock is then
entitled, if any (the "Convertible Liquidation Preference Amount");
provided, however, that if, upon any Liquidation Event, the amounts
payable with respect to the Convertible Stock are not paid in full, the
holders of the Convertible Stock shall share ratably in any distribution
of assets in proportion to the full respective preferential amounts to
which they are entitled; and provided further, however, that if upon any
Liquidation Event the holders of the outstanding shares of Convertible
Stock would receive more than the Convertible Liquidation Preference
Amount in the event their shares were converted into Redeemable Preferred
Stock (as defined in Section B of this Article IV) and Common Stock
immediately prior to the record date for distributions in connection with
such Liquidation Event, then each outstanding share of Convertible Stock
shall receive an amount per share equal to one-half of the liquidation
preference for a share of Redeemable Preferred Stock under Section B.4
before any amount shall be paid or distributed to the holders of Common
Stock or of any other stock ranking on liquidation junior to the
Convertible Stock, and
3
<PAGE>
thereafter shall share ratably with the holders of Common Stock in the
assets available for distribution, with such distributions to be made in
cash and as if each share of Convertible Stock had been converted into the
number of shares of Redeemable Preferred Stock and Common Stock issuable
upon the conversion of such share of Convertible Stock immediately prior
to any such Liquidation Event. The provisions of this Section A.4 shall
not in any way limit the right of the holders of Convertible Stock to
elect to convert their shares into Redeemable Preferred Stock and Common
Stock pursuant to Section A.6 prior to or in connection with any
Liquidation Event.
(b) Notice. Prior to the occurrence of any Liquidation Event, the
Corporation will furnish each holder of Convertible Stock notice in
accordance with Section A.9 hereof, together with a certificate prepared
by the chief financial officer of the Corporation describing in detail the
facts of such Liquidation Event, stating in detail the amount(s) per share
of Convertible Stock each holder of Convertible Stock would receive
pursuant to the provisions of Section A.4(a) hereof and stating in detail
the facts upon which such amount was determined.
5. Redemption.
(a) Redemption Events.
(i) On or After September 26, 2002. Upon the election of the
holder or holders of not less than sixty-six and two-thirds percent of the
voting power of the outstanding Convertible Stock made at any time on or
after September 26, 2002, the Corporation shall redeem all (and not less
than all, other than pursuant to Section A.5(e) below) of the outstanding
shares of Convertible Stock at the Convertible Redemption Price specified
in Section A.5(d). The foregoing election shall be made by such holders
giving the Corporation and each of the other holders of Convertible Stock
not less than fifteen (15) days prior written notice, which notice shall
set forth the date for such redemption.
(ii) Extraordinary Transactions. Upon the election of the
holder or holders of not less than sixty-six and two-thirds percent in
voting power of the outstanding Convertible Stock in connection with (A) a
merger or consolidation of the Corporation with or into another
corporation (with respect to which less than a majority of the outstanding
voting power of such surviving corporation is held by stockholders of the
Corporation immediately prior to such event), (B) the sale or transfer of
all or substantially all of the properties and assets of the Corporation
and its subsidiaries, (C) any purchase by any party of shares of capital
stock of the Corporation (either through a negotiated stock purchase or a
tender for such shares), the effect of which is that such party that did
not beneficially own a majority of the voting power of the outstanding
shares of capital stock of the Corporation immediately prior to such
4
<PAGE>
purchase beneficially owns at least a majority of such voting power
immediately after such purchase, or (D) the redemption or repurchase of
shares representing a majority of the voting power of the outstanding
shares of capital stock of the Corporation (each an "Extraordinary
Transaction"), then, as a part of and as a condition to the effectiveness
of such Extraordinary Transaction, unless the holders of Convertible Stock
shall have elected to convert their shares of Convertible Stock into
Redeemable Preferred Stock and Common Stock in accordance with the
voluntary conversion provisions of Section A.6 prior to the effective date
of such Extraordinary Transaction, the Corporation shall, on the effective
date of such Extraordinary Transaction, redeem all (but not less than all,
other than as provided in Section A.5(e) below) of the outstanding shares
of Convertible Stock for an amount (subject to Section A.5(e)) equal to
the Convertible Liquidation Preference Amount; provided, however, that if
upon any Extraordinary Transaction the holders of the outstanding shares
of Convertible Stock would receive more than the Convertible Liquidation
Preference Amount in the event their shares were converted into Redeemable
Preferred Stock and Common Stock immediately prior to such Extraordinary
Transaction, then each outstanding share of Convertible Stock shall
receive an amount equal to one-half of the per share liquidation
preference for a share of Redeemable Preferred Stock under Section B.4
before any amount shall be paid or distributed to the holders of Common
Stock or of any other stock ranking on liquidation junior to the
Convertible Stock, payable in cash, and thereafter shall share ratably
with the holders of the Common Stock in the proceeds of such Extraordinary
Transaction or, as applicable, shall receive from the Corporation an
amount equal to the amount per share that would be paid if the shares of
Common Stock receivable upon conversion of the Convertible Stock were
being acquired in the Extraordinary Transaction at the same price per
share as is paid for Common Stock, which amount shall be paid in the same
form of consideration as is paid to holders of Common Stock, as if each
share of Convertible Stock had been converted into the number of shares of
Redeemable Preferred Stock and Common Stock issuable upon the conversion
of such share of Convertible Stock immediately prior to such Extraordinary
Transaction. The foregoing election shall be made by such holders giving
the Corporation and each holder of Convertible Stock not less than five
(5) days prior written notice, which notice shall set forth the date for
such redemption. The provisions of this Section A.5 shall not in any way
limit the right of the holders of Convertible Stock to elect to convert
their shares into shares of Redeemable Preferred Stock and Common Stock
pursuant to Section A.6 prior to or in connection with any Extraordinary
Transaction.
(b) Valuation of Distribution Securities. Any securities or other
consideration to be delivered to the holders of the Convertible Stock upon
any Extraordinary Transaction in accordance with the terms hereof shall be
valued as follows:
(i) If traded on a nationally recognized securities exchange
or inter-dealer quotation system, the value shall be deemed to be the
average of the closing
5
<PAGE>
prices of the securities on such exchange or system over the 30-day period
ending three (3) business days prior to the closing;
(ii) If traded over-the-counter, the value shall be deemed to
be the average of the closing bid prices over the 30-day period ending
three (3) business days prior to the closing; and
(iii) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the Corporation
and the holders of not less than sixty-six and two-thirds percent in
voting power of the outstanding shares of Convertible Stock, provided that
if the Corporation and the holders of sixty-six and two-thirds percent in
voting power of the outstanding shares of Convertible Stock are unable to
reach agreement, then by independent appraisal by a mutually agreed to
investment banker, the fees of which shall be paid in equal amounts by the
Corporation and the holders of the outstanding shares of Convertible
Stock.
(c) Notice. Prior to the occurrence of any Extraordinary
Transaction, the Corporation will furnish each holder of Convertible Stock
notice in accordance with Section A.9 hereof, together with a certificate
prepared by the chief financial officer of the Corporation describing in
detail all material terms of such Extraordinary Transaction, including
without limitation the consideration to be delivered in connection with
such Extraordinary Transaction and the identities of the parties to the
Extraordinary Transaction.
(d) Redemption Date; Redemption Price. Upon the election of the
holders of not less than sixty-six and two-thirds of the voting power of
the outstanding Convertible Stock to cause the Corporation to redeem the
Convertible Stock pursuant to Section A.5(a)(i) or (ii), all holders of
Convertible Stock shall be deemed to have elected to cause the Convertible
Stock to be so redeemed. Any date upon which a redemption shall occur in
accordance with Section A.5(a) shall be referred to as a "Convertible
Redemption Date." The redemption price for each share of Convertible Stock
redeemed pursuant to Section A.5 shall be the Convertible Liquidation
Preference Amount or such greater amount as may be payable pursuant to the
proviso to Section A.5(a)(ii), if applicable; provided, however, that if
at a Convertible Redemption Date shares of Convertible Stock are unable to
be redeemed (as contemplated by Section A.5(e) below), the holders of
Convertible Stock shall also be entitled to any interest accrued pursuant
to Section A.5(e) (collectively, the "Convertible Redemption Price"). The
Convertible Redemption Price shall be payable in cash in immediately
available funds on the Convertible Redemption Date except to the extent
contemplated by the proviso to Section A.5(a)(ii) and subject to Section
A.5(e). Until the full Convertible Redemption Price has been paid for all
shares of Convertible Stock being redeemed: (A) no dividend whatsoever
shall be paid or declared, and no distribution shall be made, on any
capital stock of the Corporation; and (B) no shares of capital stock of
the Corporation (other than the Convertible Stock in accordance with this
6
<PAGE>
Section A.5) shall be purchased, redeemed or acquired by the Corporation
and no monies shall be paid into or set aside or made available for a
sinking fund for the purchase, redemption or acquisition thereof.
(e) Redemption Prohibited. If, at a Convertible Redemption Date, the
Corporation is prohibited under the General Corporation Law of the State
of Delaware from redeeming all shares of Convertible Stock for which
redemption is required hereunder, then it shall redeem such shares on a
pro-rata basis among the holders of Convertible Stock in proportion to the
full respective redemption amounts to which they are entitled hereunder to
the extent possible and shall redeem the remaining shares to be redeemed
as soon as the Corporation is not prohibited from redeeming some or all of
such shares under the General Corporation Law of the State of Delaware,
subject to Section A.8(i). The shares of Convertible Stock not redeemed
shall remain outstanding and entitled to all of the rights and preferences
provided in this Article IV. In the event that the Corporation fails to
redeem shares for which redemption is required pursuant to this Section
A.5, then during the period from the applicable Convertible Redemption
Date through the date on which such shares are redeemed, the applicable
Convertible Redemption Price of such shares shall bear interest at the
rate of 10% per annum, which interest rate shall increase by an additional
.5% at the end of each six (6) month period thereafter until the
Convertible Redemption Price (and any interest thereon) is paid in full,
subject to a maximum rate of 15% per annum and with such interest to be
compounded annually. In the event the Corporation fails to redeem shares
for which redemption is required pursuant to this Section A.5 within
twelve (12) months after the date on which redemption is required, for any
reason, and such failure thereafter continues (the period during which
such failure shall continue being referred to herein as a "Voting
Period"), the number of Directors constituting the Board of Directors
shall be automatically increased by a number equal to the number of
Directors then constituting the Board of Directors, plus two, and the
holders of shares of Convertible Stock then outstanding shall be entitled,
voting as a class on a one-vote-per-share basis (to the exclusion of the
holders of all other securities and classes of capital stock of the
Corporation), to elect such additional Directors. As soon as practicable
after the commencement of the Voting Period, the Corporation shall call a
special meeting of the holders of shares of Convertible Stock by mailing a
notice of such special meeting to such holders, such meeting to be held
not more than ten (10) days after the date of mailing of such notice. If
the Corporation fails to send a notice, the meeting may be called by any
such holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth business day preceding the day on which
such notice is mailed. At any such special meeting and at each meeting of
holders of shares of Convertible Stock held during a Voting Period at
which Directors are to be elected (or with respect to any action by
written consent in lieu of a meeting of shareholders), such holders,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be
entitled to elect the number of Directors prescribed in this Section
A.5(e), and each share of Convertible Stock shall be entitled
7
<PAGE>
to one (1) vote (whether voted in person by the holder thereof or by proxy
or pursuant to a shareholders' consent). The terms of office of all
persons who are Directors of the Corporation at the time of a special
meeting of the holders of Convertible Stock to elect Directors shall
continue, notwithstanding the election at such meeting of the additional
Directors that such holders are entitled to elect, and the persons so
elected by such holders, together with the remaining incumbent Directors,
shall constitute the duly elected Directors of the Corporation.
Simultaneously with the termination of a Voting Period upon the redemption
of all outstanding shares of Convertible Stock, the terms of office of the
additional Directors elected by the holders of the Convertible Stock shall
terminate, the remaining Directors shall constitute the Directors of the
Corporation and the voting rights of such holders to elect additional
Directors pursuant to this Section A.5(e) shall cease.
(f) Dividend After Convertible Redemption Date. From and after a
Convertible Redemption Date, no shares of Convertible Stock subject to
redemption shall be entitled to dividends, if any, as contemplated by
Section A.3, provided, however, that in the event that shares of
Convertible Stock are unable to be redeemed and continue to be outstanding
in accordance with Section A.5(e), such shares shall continue to be
entitled to interest thereon as provided in Sections A.5(e) until the date
on which such shares are actually redeemed by the Corporation.
(g) Surrender of Certificates. Each holder of shares of Convertible
Stock to be redeemed shall surrender the certificate or certificates
representing such shares to the Corporation, duly assigned or endorsed for
transfer (or accompanied by duly executed stock powers relating thereto),
or shall deliver an affidavit or agreement satisfactory to the Corporation
to indemnify the Corporation from any loss incurred by it in connection
therewith (an "Affidavit of Loss") with respect to such certificates at
the principal executive office of the Corporation or the office of the
transfer agent for the Convertible Stock or such office or offices in the
continental United States of an agent for redemption as may from time to
time be designated by notice to the holders of Convertible Stock, and each
surrendered certificate shall be canceled and retired. Upon receipt of the
certificate or certificates, as the case may be, or an Affidavit of Loss,
the Corporation shall pay the applicable Convertible Redemption Price by
certified check or wire transfer.
6. Conversion. The holders of the Convertible Stock shall have the
following conversion rights:
(a) Voluntary Conversion. At any time the holders of shares of
Convertible Stock shall be entitled, upon the written election of the
holder or holders of not less than sixty-six and two-thirds percent in
voting power of the outstanding shares of Convertible Stock as provided in
Section A.6(c) below, without the payment of any additional consideration,
to cause all (but not less than all) of the outstanding shares of
Convertible Stock to be converted into (i) the number of fully paid and
nonassessable
8
<PAGE>
shares of Common Stock (as hereinafter defined) which results from
dividing the Conversion Price (as defined in this Section A.6(a)) per
share in effect for the Convertible Stock at the time of conversion into
the per share Conversion Value (as defined in this Section A.6(a)) of the
Convertible Stock and (ii) one half (.5) of a fully paid and nonassessable
share of Redeemable Preferred Stock per share of Convertible Stock. Upon
the election to so convert in the manner and on the basis specified in the
preceding sentence all holders of the Convertible Stock shall be deemed to
have elected to voluntarily convert all outstanding shares of Convertible
Stock pursuant to this Section A.6. Upon the filing of this Certificate of
Incorporation with the Delaware Secretary of State, the "Conversion Price"
per share of Convertible Stock shall be $444.44445, and the per share
"Conversion Value" of Convertible Stock shall be $444.44445. The
Conversion Price per share of Convertible Stock and the Conversion Rate
shall be subject to adjustment from time to time as provided in Section
A.7 hereof. The number of shares of Common Stock into which a share of a
Convertible Stock is convertible is hereinafter referred to as the "Common
Stock Conversion Rate." The number of shares of Redeemable Preferred Stock
into which a share of Convertible Stock is convertible is hereinafter
referred to as the "Redeemable Conversion Rate." If the holders of shares
of Convertible Stock elect to convert the outstanding shares of
Convertible Stock at a time when there are any declared but unpaid
dividends or other amounts due on or in respect of such shares, such
dividends and other amounts shall be paid in full in cash by the
Corporation in connection with such conversion.
(b) Automatic Conversion Upon QPO. Each share of Convertible Stock
shall automatically be converted, without the payment of any additional
consideration, into shares of Common Stock and Redeemable Preferred Stock
as of, and in all cases subject to, the closing of the Corporation's first
firm commitment public offering pursuant to an effective registration
statement under Securities Act of 1933, as amended, provided that (i) such
registration statement covers the offer and sale of Common Stock of which
the aggregate net proceeds attributable to sales for the account of the
Corporation exceed $15,000,000 at a price per share reflecting a valuation
for the Corporation's equity of at least $50,000,000, and (ii) either all
outstanding shares of Redeemable Preferred Stock are redeemed immediately
upon and as of the closing of such offering or contemporaneously with such
offering cash in an amount sufficient to redeem all outstanding shares of
Redeemable Preferred Stock is segregated and irrevocably held by the
Corporation for payment to holders of Redeemable Preferred Stock in
connection with the redemption thereof pursuant to Section B.5(a)(i) (a
"QPO" or a "Qualified Public Offering"); provided that if a closing of a
QPO occurs, all outstanding shares of Convertible Stock shall be deemed to
have been converted into shares of Common Stock and Redeemable Preferred
Stock immediately prior to such closing. Any such conversion shall be at
the Common Stock Conversion Rate and Redeemable Conversion Rate in effect
upon the closing of a QPO, as applicable.
(c) Procedure for Voluntary Conversion; Effective Date. Upon
election to convert pursuant to Section A.6(a), each holder of Convertible
Stock (i) shall provide
9
<PAGE>
written notice of conversion (the "Voluntary Conversion Notice") to the
Corporation and (ii) shall surrender the certificate or certificates
representing its Convertible Stock, duly assigned or endorsed for transfer
to the Corporation (or accompanied by duly executed stock powers relating
thereto), at the principal executive office of the Corporation or the
offices of the transfer agent for the Convertible Stock or such office or
offices in the continental United States of an agent for conversion as may
from time to time be designated by notice to the holders of the
Convertible Stock by the Corporation, or shall deliver an Affidavit of
Loss with respect to such certificates. The Voluntary Conversion Notice
shall specify (i) the number of shares of Convertible Stock held by such
holder, (ii) the name or names in which such holder wishes the certificate
or certificates for Common Stock and Redeemable Preferred Stock to be
issued upon such conversion and (iii) the address to which such holder
wishes delivery to be made of such new certificates to be issued upon such
conversion. The issuance by the Corporation of shares of Common Stock and
Redeemable Preferred Stock upon a conversion of Convertible Stock pursuant
to Section A.6(a) hereof shall be effective as of the surrender of the
certificate or certificates for the Convertible Stock to be converted,
duly assigned or endorsed for transfer to the Corporation (or accompanied
by duly executed stock powers relating thereto), or as of the delivery of
an Affidavit of Loss. Upon surrender of a certificate representing
Convertible Stock for conversion, or delivery of an Affidavit of Loss, the
Corporation shall issue and send by hand delivery, by courier or by first
class mail (postage prepaid) to the holder thereof or to such holder's
designee, at the address designated by such holder, certificates for the
number of shares of Common Stock and Redeemable Preferred Stock to which
such holder shall be entitled upon conversion. The issuance of
certificates for Common Stock and Redeemable Preferred Stock upon
conversion of Convertible Stock will be made without charge to the holders
of such shares for any issuance tax in respect thereof or other costs
incurred by the Corporation in connection with such conversion and the
related issuance of such stock. Notwithstanding anything to the contrary
set forth in this Section A.6(c), in the event that the holders of shares
of Convertible Stock elect to convert such shares pursuant to Section
A.6(a) in connection with any Liquidation Event or Extraordinary
Transaction, (i) the Voluntary Conversion Notice shall be delivered to the
Corporation no later than five (5) days before the effective date of or
record date for (as applicable) such Liquidation Event or Extraordinary
Transaction and such Voluntary Conversion Notice shall be effective as of,
and shall in all cases be subject to, the occurrence of such Liquidation
Event or closing of such Extraordinary Transaction and (ii) if such
Liquidation Event or Extraordinary Transaction occurs, all outstanding
shares of Convertible Stock shall be deemed to have been converted into
shares of Common Stock and Redeemable Preferred Stock immediately prior
thereto, provided that the Corporation shall make appropriate provisions
(x) for the Common Stock issued upon such conversion to be treated on the
same basis as all other Common Stock in such Liquidation Event or
Extraordinary Transaction and (y) for the payment of the Redeemable
Preferred Liquidation Preference Amount (as defined in Section B.4) in
connection with any Liquidation Event or the redemption of the Redeemable
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Preferred Stock (issued upon such conversion) upon election of such
redemption in connection with any Extraordinary Transaction, if
applicable, as provided herein.
(d) Procedure for Automatic Conversion. As of, and in all cases
subject to, the closing of a QPO (the "Automatic Conversion Date"), all
outstanding shares of Convertible Stock shall be converted automatically
without any further action by the holders of such shares and whether or
not the certificates representing such shares of Convertible Stock are
surrendered to the Corporation or its transfer agent; provided, however,
that all holders of Convertible Stock shall be given prior written notice
of the occurrence of a QPO in accordance with Section A.9 hereof. The
Corporation shall not be obligated to issue certificates evidencing the
shares of Redeemable Preferred Stock or Common Stock issuable on the
Automatic Conversion Date (or the cash payment for the shares of
Redeemable Preferred Stock which are redeemed immediately after such
automatic conversion as provided below and in Section B.5(a)(i)) unless
certificates evidencing such shares of the Convertible Stock being
converted, or an Affidavit of Loss with respect to such certificates, is
delivered to the Corporation or its transfer agent. On the Automatic
Conversion Date, all rights with respect to the Convertible Stock so
converted shall terminate, except any of the rights of the holders thereof
upon surrender of their certificate or certificates therefor or delivery
of an Affidavit of Loss thereof to receive certificates for the number of
shares of Common Stock and Redeemable Preferred Stock into which such
Convertible Stock has been converted (or the cash payment to which such
holder is entitled as provided below and in Section B.5(a)(i)). If so
required by the Corporation, certificates surrendered for conversion shall
be endorsed or accompanied by written instrument or instruments of
transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or by his or its attorney duly authorized in writing.
Upon surrender of such certificates or Affidavit of Loss the Corporation
shall issue and deliver to such holder, promptly (and in any event in such
time as is sufficient to enable such holder to participate in such QPO) at
such office and in its name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of
Common Stock and number of shares of Redeemable Preferred Stock into which
the shares of the Convertible Stock surrendered were convertible on the
Automatic Conversion Date. Notwithstanding anything to the contrary set
forth in this Section A.6(d), the Corporation may deliver, in lieu of
certificates for Redeemable Preferred Stock, cash in an amount determined
pursuant to Section B.5(b) hereof on account of the redemption of such
Redeemable Preferred Stock, and upon payment of such cash the Redeemable
Preferred Stock into which such Convertible Stock would have been
converted shall be deemed to have been issued and redeemed by the
Corporation.
(e) No Impairment. The Corporation shall not, by amendment of this
Certificate of Incorporation or through any Extraordinary Transaction or
other reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the
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Corporation but shall at all times in good faith assist in the carrying
out of all the provisions of this Section A.6 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion and other rights of the holders of the Convertible Stock and
the Redeemable Preferred Stock against impairment.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock and Redeemable Preferred Stock solely for
the purpose of effecting the conversion of the shares of Convertible Stock
such number of its shares of Common Stock and Redeemable Preferred Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Convertible Stock; and if at any time the number of
authorized but unissued shares of Common Stock and Redeemable Preferred
Stock shall not be sufficient to effect the conversion of all then
outstanding shares of Convertible Stock, the Corporation will take such
corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock and Redeemable Preferred Stock to such
number of shares as shall be sufficient for such purpose.
(g) No Closing of Transfer Books. The Corporation shall not close
its books against the transfer of shares of Convertible Stock in any
manner which would interfere with the timely conversion of any shares of
Convertible Stock.
7. Adjustments.
(a) If the number of shares of Common Stock outstanding at any time
after the date hereof is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock,
then, on the date such payment is made or such change is effective, the
Conversion Price of the Convertible Stock shall be appropriately decreased
so that the number of shares of Common Stock issuable on conversion of any
shares of Convertible Stock shall be increased in proportion to such
increase of outstanding shares of Common Stock.
(b) If the number of shares of Common Stock outstanding at any time
after the date hereof is decreased by a combination or reverse split of
the outstanding shares of Common Stock, then, on the effective date of
such combination or reverse split, the Conversion Price of the Convertible
Stock shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion of any shares of Convertible Stock
shall be decreased in proportion to such decrease in outstanding shares of
Common Stock.
(c) In case, at any time after the date hereof, of any capital
reorganization (other than a reorganization constituting an Extraordinary
Transaction), or any reclassification of the stock of the Corporation
(other than as a result of a stock dividend payable on shares of Common
Stock in the form of Common Stock or subdivision, split-up or combination
involving the Common Stock), the shares of
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Convertible Stock shall, after such capital reorganization or
reclassification, be convertible into the kind and number of shares of
stock or other securities or property of the Corporation or otherwise to
which such holder would have been entitled if immediately prior to such
capital reorganization or reclassification he or it had converted his or
its shares of Convertible Stock into Common Stock and Redeemable Preferred
Stock. The provisions of this clause (c) shall similarly apply to
successive capital reorganizations or reclassifications.
(d) All calculations under this Section A.7 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the
case may be.
(e) Upon the occurrence of each adjustment or readjustment pursuant
to this Section A.7, the Corporation at its expense shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Convertible Stock a certificate
setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The Corporation
shall, upon written request at any time of any holder of Convertible
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Conversion
Prices before and after such adjustment or readjustment, and (iii) the
number of shares of Common Stock and Redeemable Preferred Stock and the
amount, if any, of other property which at the time would be received upon
the conversion of such holder's shares of Convertible Stock.
8. Covenants. So long as any shares of Convertible Stock (or Redeemable
Preferred Stock, as applicable) shall be outstanding, the Corporation shall not,
without first having provided the written notice of such proposed action to each
holder of outstanding shares of Convertible Stock (or Redeemable Preferred
Stock, as applicable) and having obtained the affirmative vote or written
consent of the holders of not less than sixty-six and two-thirds percent in
voting power of the outstanding shares of Convertible Stock (or Redeemable
Preferred Stock, as applicable), voting as a single class, with each share of
Convertible Stock (or Redeemable Preferred Stock, as applicable) entitling the
holder thereof to one vote per share of Convertible Stock held by such holder:
(a) (i) amend, alter or repeal any provision of, or add any
provision to, Article IV of this Certificate of Incorporation, or (ii)
otherwise amend, alter or repeal any provision of, or add any provision
to, this Certificate of Incorporation or the Corporation's by-laws if such
latter action would alter or change the preferences, rights, privileges or
powers of, or the restrictions provided for the benefit of, any of the
Convertible Stock or the Redeemable Preferred Stock;
(b) merge with or into or consolidate with another entity (other
than any reincorporation merger not involving any change in the rights and
obligations of the parties hereto), in either case in which the
Corporation is not the surviving corporation or in which the owners of the
Corporation's outstanding equity securities prior to the
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merger or consolidation do not own at least a majority of the outstanding
equity securities of the merged as consolidated entity;
(c) reclassify any capital stock;
(d) create, obligate itself to create, authorize or issue any new
class or classes of stock or new series of common stock or preferred stock
or any security convertible into or evidencing the right to purchase
shares of any new class or series of common stock or preferred stock or
any new capital stock of the Corporation having preference over or being
on parity with the Convertible Stock or the Redeemable Preferred Stock in
any respect;
(e) apply any of its assets to the redemption, retirement, purchase
or other acquisition, directly or indirectly, through subsidiaries or
otherwise, of any shares of Common Stock except from employees, officers
or Directors of, or consultants, advisors or independent contractors to,
the Corporation or any of its subsidiaries pursuant to an agreement
containing vesting and/or repurchase provisions approved by the Board of
Directors of the Corporation or a committee thereof in connection with the
grant of such stock under the Corporations's 1996 Stock Option and Grant
Plan;
(f) effect (I) any Liquidation Event, to the extent a voluntary act
of the Corporation, (II) any Extraordinary Transaction or other sale or
transfer of all or any substantial portion of the properties and assets of
any subsidiary of the Corporation, (III) any recapitalization of the
Corporation or (IV) any other transaction or series of related
transactions in which more than 50% of the voting power of the Corporation
is disposed of;
(g) authorize the issuance of, issue or reserve for issuance, any
equity securities (including without limitation options, warrants,
convertible or exchangeable securities or rights giving the holder thereof
the right to acquire equity securities or any of the foregoing) or
otherwise engage in any equity financing, including without limitation in
connection with a stock acquisition, but excluding the issuance of stock
options for up to 10,500 shares of Common Stock (subject to adjustments
for stock splits, stock dividends and the like) to directors, officers,
employees, advisers and consultants on terms approved by the Board of
Directors;
(h) declare or make dividend payments on any shares of its Common
Stock or any other class of its capital stock; or
(i) enter into any agreement or arrangement or take any other action
that eliminates, amends, restricts or otherwise materially adversely
affects the rights of the holders of the Convertible Stock or the
Redeemable Preferred Stock or its ability to perform its obligations
hereunder. Without limitation of the foregoing, the Corporation shall take
such action as shall be necessary or appropriate to remove promptly any
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impediment to its ability to redeem Convertible Stock or Redeemable
Preferred Stock under the circumstances contemplated by Section A.5(e) or
B.5(c).
9. Notice
(a) Liquidation Events, Extraordinary Transactions, Etc. In the
event (i) the Corporation establishes a record date to determine the
holders of any class of securities who are entitled to receive any
dividend or other distribution or who are entitled to vote at a meeting
(or by written consent) in connection with any of the transactions
identified in clause (ii) hereof, or (ii) any Liquidation Event (as
defined in Section A.4), any Extraordinary Transaction (as defined in
Section A.5), any QPO (as defined in Section A.6) or any other public
offering becomes reasonably likely to occur, the Corporation shall mail or
cause to be mailed by first class mail (postage prepaid) to each holder of
Convertible Stock (or each holder of Redeemable Preferred Stock, as
applicable) at least forty-five (45) days prior to such record date
specified therein or the expected effective date of any such transaction,
a notice specifying (A) the date of such record date for the purpose of
such dividend or distribution or meeting or consent and a description of
such dividend or distribution or the action to be taken at such meeting or
by such consent, (B) the date on which any such Liquidation Event,
Extraordinary Transaction, QPO or other public offering is expected to
become effective, and (C) the date on which the books of the Corporation
shall close or a record shall be taken with respect to any such event.
(b) Waiver of Notice. The holder or holders of not less than
sixty-six and two-thirds percent in voting power of the outstanding shares
of Convertible Stock (or Redeemable Preferred Stock, as applicable) may,
at any time upon written notice to the Corporation, waive any notice
provisions specified herein for the benefit of such holders, and any such
waiver shall be binding upon all holders of such securities.
(c) General. In the event that the Corporation provides any notice,
report or statement to any holder of Common Stock, the Corporation shall
at the same time provide a copy of any such notice, report or statement to
each holder of outstanding shares of Convertible Stock (or Redeemable
Preferred Stock, as applicable).
10. No Reissuance of Convertible Stock. No share or shares of Convertible
Stock acquired by the Corporation by reason of redemption, purchase, conversion
or otherwise shall be reissued, and all such shares shall be canceled, retired
and eliminated from the shares which the Corporation shall be authorized to
issue.
11. Contractual Rights of Holders. The various provisions set forth herein
for the benefit of the holders of the Convertible Stock and the Redeemable
Preferred Stock shall be deemed contract rights enforceable by them, including
without limitation however, one or more actions for specific performance.
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B. REDEEMABLE PREFERRED STOCK
1. Designation; Ranking. A total of 13,500 shares of the Corporation's
Preferred Stock shall be designated as Redeemable Preferred Stock, $.01 par
value per share (the "Redeemable Preferred Stock").
2. Election of Directors; Voting.
(a) Election of Directors. The holders of outstanding shares of
Redeemable Preferred Stock shall, voting together as a separate class, be
entitled to elect one (1) Director. Such Director shall be the candidate
receiving the highest number of affirmative votes (with each holder of
Redeemable Preferred Stock entitled to cast one vote for or against each
candidate with respect to each share of Redeemable Preferred Stock held by
such holder) of the outstanding shares of Redeemable Preferred Stock (the
"Redeemable Preferred Stock Director Designee"), with votes cast against
such candidate and votes withheld having no legal effect. The election of
the Redeemable Preferred Stock Director Designee by the holders of the
Redeemable Preferred Stock shall occur (i) at the annual meeting of
holders of capital stock, (ii) at any special meeting of holders of
capital stock, (iii) at any special meeting of holders of Redeemable
Preferred Stock called by holders of a majority of the outstanding shares
of Redeemable Preferred Stock or (iv) by the unanimous written consent of
holders of the outstanding shares of Redeemable Preferred Stock. Upon
conversion of the Convertible Stock, the Convertible Stock Director
Designee then serving on the Corporation's board of directors shall
continue in such capacity as the Redeemable Preferred Stock Designee. If
at any time when any share of Redeemable Preferred Stock is outstanding
the Redeemable Preferred Stock Director Designee should cease to be a
Director for any reason, the vacancy shall only be filled by the vote or
written consent of holders of the outstanding shares of Redeemable
Preferred Stock, voting together as a separate class, in the manner and on
the basis specified above.
(b) Voting Generally. Except as set forth above with respect to the
election of the Redeemable Preferred Stock Director Designee, the holders
of Redeemable Preferred Stock shall not be entitled to vote on any matters
except to the extent otherwise required under the General Corporation Law
of the State of Delaware.
3. Dividends. The holders of outstanding shares of Redeemable Preferred
Stock shall be entitled to receive, out of any funds legally available therefor,
cumulative dividends on the Redeemable Preferred Stock in cash, at the rate per
annum of five percent (5%) of the Redeemable Base Liquidation Amount (as defined
in Section B.4 below) per share of Redeemable Preferred Stock (a "Redeemable
Cumulative Dividend"). Such dividends will accrue commencing as of the date of
issuance of the Redeemable Preferred Stock and be cumulative, to the extent
unpaid, whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Redeemable Cumulative Dividends shall become due and
payable with respect to
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any share of Redeemable Preferred Stock as provided in Section B.4 and Section
B.5. So long as any shares of Redeemable Preferred Stock are outstanding: (A) no
dividend whatsoever shall be paid or declared, and no distribution shall be
made, on any capital stock of the Corporation ranking junior to the Redeemable
Preferred Stock; and (B) no shares of capital stock of the Corporation ranking
junior to the Redeemable Preferred Stock shall be purchased, redeemed or
acquired by the Corporation and no monies shall be paid into or set aside or
made available for a sinking fund for the purchase, redemption or acquisition
thereof. All numbers relating to the calculation of dividends pursuant to this
Section B.3 shall be subject to equitable adjustment in the event of any stock
split, combination, reorganization, recapitalization, reclassification or other
similar event involving a change in the Redeemable Preferred Stock.
4. Liquidation. Upon any Liquidation Event, each holder of outstanding
shares of Redeemable Preferred Stock shall be entitled to be paid out of the
assets of the Corporation available for distribution to stockholders, whether
such assets are capital, surplus, or earnings as follows, and before any amount
shall be paid or distributed to the holders of Common Stock or of any other
stock ranking on liquidation junior to the Redeemable Preferred Stock, an amount
in cash equal to the sum of (a) $444.44445 per share (adjusted appropriately for
stock splits, stock dividends, recapitalizations and the like with respect to
the Redeemable Preferred Stock) (the "Redeemable Base Liquidation Amount"), plus
(b) any unpaid dividends to which such holder of outstanding shares of
Redeemable Preferred Stock is entitled pursuant to Section B.3 and B.5(d)
hereof, plus (c) any interest accrued pursuant to Section B.5(c) (the
"Redeemable Liquidation Preference Amount"); provided, however, that if, upon
any Liquidation Event, the amounts payable with respect to the Redeemable
Preferred Stock are not paid in full, the holders of the Redeemable Preferred
Stock shall share ratably in any distribution of assets in proportion to the
full respective preferential amounts to which they are entitled.
5. Redemption.
(a) Redemption Events.
(i) Automatic. Immediately upon and as of, and in all cases
subject to, the closing of a QPO, the Corporation shall redeem all
(and not less than all) of the outstanding shares of Redeemable
Preferred Stock at the Redemption Price specified in Section B.5(b).
(ii) On or After September 26, 2001. Upon the election of the
holder or holders of not less than sixty-six and two-thirds percent
of the outstanding Redeemable Preferred Stock (or the holder or
holders of not less than sixty-six and two thirds percent of the
outstanding Convertible Stock proposing to convert the same in order
to effect a redemption of the Redeemable Preferred Stock received
upon such conversion hereunder) made at any time on or after
September 26, 2001 the Corporation shall redeem all (and not less
than all, other than pursuant to Section B.5(c) below) of the
outstanding shares of
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Redeemable Preferred Stock. The foregoing election shall be made by
such holders giving the Corporation and each of the other holders of
Redeemable Preferred Stock (or Convertible Stock, as applicable) not
less than fifteen (15) days prior written notice which notice shall
set forth the date for such redemption.
(iii) Upon Extraordinary Transactions. Upon the election of
the holder or holders of not less than sixty-six and two-thirds
percent in voting power of the outstanding Redeemable Preferred
Stock (or Convertible Stock, as applicable, proposing to convert the
same in order to effect a redemption of the Redeemable Preferred
Stock received upon such conversion hereunder), the Corporation
shall redeem all (and not less than all, other than pursuant to
Section B.5(c) below) of the outstanding shares of Redeemable
Preferred Stock upon the occurrence of an Extraordinary Transaction
(as defined in Section A.5). The foregoing election shall be made by
such holders giving the Corporation and each other holder of
Redeemable Preferred Stock (or Convertible Stock, as applicable) not
less that five (5) days prior written notice, which notice shall set
forth the date for such redemption.
(b) Redemption Date; Redemption Price. Upon the election of the
holders of not less than sixty-six and two-thirds percent in voting power
of the outstanding Redeemable Preferred Stock to cause the Corporation to
redeem the Redeemable Preferred Stock pursuant to Section B.5(a)(ii) or
(iii), all holders of Redeemable Preferred Stock shall be deemed to have
elected to cause the Redeemable Preferred Stock to be so redeemed. Any
date upon which a redemption shall occur in accordance with Section B.5(a)
shall be referred to as a "Redemption Date." The redemption price for each
share of Redeemable Preferred Stock redeemed pursuant to this Section B.5
shall be the sum of (x) the Redeemable Base Liquidation Amount, plus (y)
any unpaid dividends to which such holder of outstanding shares of
Redeemable Preferred Stock is entitled under Section B.3 and Section
B.5(d) hereof (the "Redemption Price"); provided, however, that if at a
Redemption Date shares of Redeemable Preferred Stock are unable to be
redeemed (as contemplated by Section B.5(c) below), in addition to the
Redemption Price the holders of Redeemable Preferred Stock shall be
entitled to any interest accrued pursuant to Section B.5(c). The
Redemption Price shall be payable in cash in immediately available funds
on the Redemption Date. Until the full Redemption Price, including any
interest thereon, has been paid in cash for all shares of Redeemable
Preferred Stock redeemed as of the applicable Redemption Date: (A) no
dividend whatsoever shall be paid or declared, and no distribution shall
be made, on any capital stock of the Corporation; and (B) no shares of
capital stock of the Corporation (other than the Redeemable Preferred
Stock in accordance with this Section B.5) shall be purchased, redeemed or
acquired by the Corporation and no monies shall be paid into or set aside
or made available for a sinking fund for the purchase, redemption or
acquisition thereof.
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(c) Redemption Prohibited. If, at a Redemption Date, the Corporation
is prohibited under the General Corporation Law of the State of Delaware
from redeeming all shares of Redeemable Preferred Stock for which
redemption is required hereunder, then it shall redeem such shares on a
pro-rata basis among the holders of Redeemable Preferred Stock in
proportion to the full respective redemption amounts to which they are
entitled hereunder to the extent possible and shall redeem the remaining
shares to be redeemed as soon as the Corporation is not prohibited from
redeeming some or all of such shares under the General Corporation Law of
the State of Delaware, subject to Section A.8(i). The shares of Redeemable
Preferred Stock not redeemed shall remain outstanding and entitled to all
of the rights and preferences provided in this Article IV. In the event
that the Corporation fails to redeem shares for which redemption is
required pursuant to Section B.5, then during the period from the
applicable Redemption Date through the date on which such shares are
redeemed, the applicable Redemption Price of such shares shall bear
interest at the rate of 10% per annum, which interest rate shall increase
by an additional .5% at the end of each six (6) month period thereafter
until the Redemption Price (and any interest thereon) is paid in full,
subject to a maximum rate of 15% per annum and with such interest to be
compounded annually. In the event the Corporation fails to redeem shares
for which redemption is required pursuant to Section B.5 within twelve
(12) months after the date on which redemption is required, for any
reason, and such failure thereafter continues (the period during which
such failure shall continue being referred to herein as a "Voting
Period"), the number of Directors constituting the Board of Directors
shall be automatically increased by a number equal to the number of
Directors then constituting the Board of Directors, plus two, and the
holders of shares of Redeemable Preferred Stock then outstanding shall be
entitled, voting as a class on a one-vote-per-share basis (to the
exclusion of the holders of all other securities and classes of capital
stock of the Corporation), to elect such additional Directors. As soon as
practicable after the commencement of the Voting Period, the Corporation
shall call a special meeting of the holders of shares of Redeemable
Preferred Stock by mailing a notice of such special meeting to such
holders, such meeting to be held not less than ten (10) nor more than
thirty (30) days after the date of mailing of such notice. If the
Corporation fails to send a notice, the meeting may be called by any such
holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth business day preceding the day on which
such notice is mailed. At any such special meeting and at each meeting of
holders of shares of Redeemable Preferred Stock held during a Voting
Period at which Directors are to be elected (or with respect to any action
by written consent in lieu of a meeting of shareholders), such holders,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be
entitled to elect the number of Directors prescribed in this Section
B.5(c), and each share of Redeemable Preferred Stock shall be entitled to
one (1) vote (whether voted in person by the holder thereof or by proxy or
pursuant to a shareholders' consent). The terms of office of all persons
who are Directors of the Corporation at the time of a special meeting of
the holders of Redeemable Preferred Stock to elect Directors shall
continue,
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notwithstanding the election at such meeting of the additional Directors
that such holders are entitled to elect, and the persons so elected by
such holders, together with the remaining incumbent Directors, shall
constitute the duly elected Directors of the Corporation. Simultaneously
with the termination of a Voting Period upon the redemption of all
outstanding shares of Redeemable Preferred Stock, the terms of office of
the additional Directors elected by the holders of the Redeemable
Preferred Stock shall terminate, the remaining Directors shall constitute
the Directors of the Corporation and the voting rights of such holders to
elect additional Directors pursuant to this Section B.5(c) shall cease.
(d) Dividend After Redemption Date. From and after the closing of a
QPO or an Extraordinary Transaction (in the case of a redemption pursuant
to Section B.5(a)(i) or (iii)) or the date specified for redemption in the
election notice of the requisite holders as set forth in Section
B.5(a)(ii), no shares of Redeemable Preferred Stock subject to redemption
shall be entitled to any further dividends pursuant to Section B.3 hereof,
provided, however, that in the event that shares of Redeemable Preferred
Stock are unable to be redeemed and continue to be outstanding in
accordance with Section B.5(c), such shares shall continue to be entitled
to dividends through such date and interest as provided in Section B.5(c)
until the date on which such shares are actually redeemed by the
Corporation.
(e) Surrender of Certificates. Each holder of shares of Redeemable
Preferred Stock to be redeemed shall surrender the certificate or
certificates representing such shares to the Corporation, duly assigned or
endorsed for transfer (or accompanied by duly executed stock powers
relating thereto), or shall deliver an Affidavit of Loss with respect to
such certificates at the principal executive office of the Corporation or
the office of the transfer agent for the Redeemable Preferred Stock or
such office or offices in the continental United States of an agent for
redemption as may from time to time be designated by notice to the holders
of Redeemable Preferred Stock (or the holders of Convertible Stock, as
applicable), and each surrendered certificate shall be canceled and
retired. Upon receipt of the certificate or certificates, as the case may
be, or an Affidavit of Loss, the Corporation shall pay the applicable
Redemption Price by certified check or wire transfer.
6. Notice. In the event that the Corporation provides or is required to
provide notice to any holder of Convertible Stock or any holder of Common Stock
in accordance with the provisions of this Certificate of Incorporation
(including the provisions of Section A.5(c) and Section A.9) and/or the
Corporation's by-laws, the Corporation shall at the same time provide a copy of
any such notice to each holder of outstanding shares of Redeemable Preferred
Stock.
7. No Reissuance of Redeemable Preferred Stock. No share or shares of
Redeemable Preferred Stock acquired by the Corporation by reason of redemption,
purchase,
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conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
8. Covenants. So long as any shares of Redeemable Preferred Stock shall be
outstanding the provisions of Section A.8 shall apply to all shares of
Redeemable Preferred Stock as if such shares were shares of Convertible Stock.
C. COMMON STOCK
1. Designation; Ranking. A total of 105,500 shares of the Corporation's
common stock shall be designated as Common Stock, $.01 par value per share (the
"Common Stock").
2. Voting.
(a) Election of Directors. The holders of Common Stock voting
together with the holders of outstanding Convertible Stock as a single
class, shall be entitled to elect all of the Directors of the Corporation
other than the Director who is subject to election by the holders of
Convertible Stock or Redeemable Preferred Stock as a separate class) for
so long as any shares of Convertible Stock or Redeemable Preferred Stock
remain outstanding and thereafter shall be entitled to elect all of the
Directors of the Corporation. Such Directors shall be the candidates
receiving the highest number of affirmative votes entitled to be cast
(with each holder entitled to cast one vote for or against each candidate
with respect to each share held by such holder), with votes cast against
such candidates and votes withheld having no legal effect. The election of
such Directors shall occur at the annual meeting of holders of capital
stock or at any special meeting called and held in accordance with the
by-laws of the Corporation. If a person elected in accordance with the
foregoing provisions should cease to be a Director for any reason, the
vacancy shall only be filled by the vote or written consent of holders of
the outstanding shares entitled to vote for such Directors, in the manner
and on the basis specified above.
(b) Other Voting. The holder of each share of Common Stock shall be
entitled to one vote for each such share as determined on the record date
for the vote or consent of stockholders and shall vote together with the
holders of the Convertible Stock as a single class upon any items
submitted to a vote of stockholders, except as otherwise provided herein.
3. Dividends. The holders of Common Stock shall be entitled to receive
dividends out of funds legally available therefor at such times and in such
amounts as the Board of Directors may determine in its sole discretion, with
holders of Convertible Stock and Common Stock sharing pari passu in such
dividends as contemplated by Section A.3.
4. Liquidation. Upon any Liquidation Event, after the payment or provision
for payment of all debts and liabilities of the Corporation and all preferential
amounts to which the
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holders of Convertible Stock or Redeemable Preferred Stock, as applicable, are
entitled with respect to the distribution of assets in liquidation, the holders
of Common Stock (and to the extent applicable under Section A.4(a) Convertible
Stock) shall be entitled to share ratably in the remaining assets of the
Corporation available for distribution.
5. Fractional Shares; Uncertificated Shares. The Corporation may issue
fractional shares (up to five decimal places) of Common Stock and Preferred
Stock. Fractional shares shall be entitled to dividends (on a pro rata basis),
and the holders of fractional shares shall be entitled to all rights as
stockholders of the Corporation to the extent provided herein and under
applicable law in respect of such fractional shares. Shares of Common Stock and
preferred stock, or fractions thereof, may, but need not be represented by share
certificates. Such shares, or fractions thereof, not represented by share
certificates ("Uncertificated Shares") shall be registered in the stock records
book of the Corporation. The Corporation at any time at its sole option may
deliver to any registered holder of such shares share certificates to represent
Uncertificated Shares previously issued (or deemed issued) to such holder.
ARTICLE V
In furtherance of and not in limitation of the powers conferred by
statute, it is further provided:
1. Election of Directors need not be by written ballot unless the by-laws
of the Corporation so provide.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the by-laws of the Corporation to the extent specified therein.
ARTICLE VI
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. No action required to be taken or which
may be taken at any annual or special meeting of stockholders of the Corporation
may be taken, except at a duly convened meeting or by unanimous written consent
of the stockholders entitled to vote thereat with respect to the matters
submitted thereto, and the power of stockholders to act by other than unanimous
written consent without a meeting, is specifically denied, provided that the
foregoing shall not apply with respect to consent, approval or waiver rights of
the holders of the Convertible or Redeemable Preferred Stock set forth herein in
cases for which less than unanimous consent by the holders of such class of
securities is contemplated hereby.
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ARTICLE VII
To the extent permitted by law, the books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated in
the by-laws of the Corporation or from time to time by its Board of Directors.
ARTICLE VIII
No person shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of his or her fiduciary duty as a
Director of the Corporation, except for liability (a) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
of the State of Delaware, or (d) for any transaction from which the Director
derived an improper personal benefit. If the General Corporation Law of the
State of Delaware is amended after the effective date of this Amended and
Restated Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of each past or present Director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended.
Any repeal or modification of this Article VIII by (a) the stockholders of
the Corporation or (b) an amendment to the General Corporation Law of the State
of Delaware (unless such statutory amendment specifically provides to the
contrary) shall not adversely affect any right or protection existing at the
time of such repeal or modification with respect to any acts or omissions
occurring either before or after such repeal or modification, of a person
serving as a Director prior to or at the time of such repeal or modification.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
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THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed as of
this 31 day of December, 1997.
NATROL, INC.
By: /s/ ELLIOTT BALBERT
__________________________
Name: Elliott Balbert
Title: President
ATTEST:
/s/ CHERYL BALBERT
_____________________________
Name: Cheryl Balbert
Title: Secretary
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Exhibit 3.5
BY-LAWS
of
NATROL, INC.
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held on
such date during September, October or November of each year commencing in 1997
as may be specified by the Board of Directors or the President, at the principal
office of the corporation at ten o'clock, a.m. unless a different hour or place
within or without the State of Delaware is fixed by the Board of Directors or
the President. The purposes for which the annual meeting is to be held, in
addition to those prescribed by law, by the Certificate of Incorporation (the
"Certificate of Incorporation") or by these By-laws (the "By-Laws"), may be
specified by the Board of Directors or the President. If no annual meeting has
been held on the date fixed above, a special meeting in lieu thereof may be held
or there may be action by written consent of stockholders, and such special
meeting or written consent shall have for the purposes of these By-Laws or
otherwise all the force and effect of an annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by the
President or by the Board of Directors, provided that Special meetings of
stockholders holding particular classes or series of stock may be held as
contemplated by the Certificate of Incorporation. Special meetings shall be
called by the Secretary, or in case of death, absence, incapacity or refusal of
the Secretary, by any other officer, upon written application of one or more
stockholders who hold at least twenty-five percent in interest of the capital
stock entitled to vote at such meeting. The call for the meeting may be oral or
written and shall state the place, date, hour and purposes of the meeting.
3. Notice of Meetings. A written notice stating the place, date and hour
of all meetings of stockholders, and in the case of special meetings, the
purposes of the meeting shall be given by the Secretary (or other person
authorized by these By-Laws or by law) not less than ten nor more than fifty
days before the meeting to each stockholder entitled to vote thereat and to each
stockholder who, under the Certificate of Incorporation or under these By-laws
is entitled to such notice, by delivering such notice to him or by mailing it,
postage prepaid, and addressed to such stockholder at his address as it appears
in the records of the corporation. Notice need not be given to a stockholder if
a written waiver of notice is executed before or after the meeting by such
stockholder, if communication with such stockholder is unlawful, or if such
stockholder attends the meeting in question, unless such attendance was for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. If a meeting is adjourned to another
<PAGE>
time or place, notice need not be given of the adjourned meeting if the time and
place are announced at the meeting at which the adjournment is taken, except
that if the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, notice of the
adjourned meeting shall be given to each stockholder of record entitled to vote
at the meeting.
4. Quorum. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting (whether comprising the
stockholders entitled to vote generally or stockholders of a particular class or
series, as contemplated by the Certificate of Incorporation) shall constitute a
quorum. Any meeting may be adjourned from time to time by a majority of the
votes properly cast upon the question, whether or not a quorum is present.
5. Voting and Proxies. Stockholders shall have one vote for each share of
stock entitled to vote owned by them of record according to the books of the
corporation unless otherwise provided by law or by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy, but
no proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. Proxies shall be filed with the
Secretary of the meeting, or of any adjournment thereof. Except as otherwise
limited therein, proxies shall entitle the persons authorized thereby to vote at
any adjournment of such meeting. A proxy purporting to be executed by or on
behalf of a stockholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
6. Action at Meeting. When a quorum is present, any matter before the
meeting shall be decided by vote of the holders of a majority of the shares of
stock voting on such matter except where a larger or different vote is required
by law, by the Certificate of Incorporation or by these By-laws. Any election by
stockholders shall be determined by a plurality of the votes cast, except where
a larger or different vote is required by law, by the Certificate of
Incorporation or by these By-laws. No ballot shall be required for any election
unless requested by a stockholder entitled to vote in the election. The
corporation shall not directly or indirectly vote any share of its own stock;
provided, however, that the corporation may vote shares which it holds in a
fiduciary capacity to the extent permitted by law.
7. Action without a Meeting. Subject to the terms of the Certificate of
Incorporation, any action required or permitted by law to be taken at any annual
or special meeting of stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the number of votes specified in the Certificate of Incorporation.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent, if and to the extent action by less than
unanimous written consent is authorized under the Certificate of Incorporation,
shall be given to those stockholders who have not consented in writing.
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8. Stockholder Lists. The Secretary (or other person authorized by these
By-laws or by law) shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a Board of
Directors who may exercise all the powers of the corporation except as otherwise
provided by law, by the Certificate of Incorporation or by these By-laws. In the
event of a vacancy in the Board of Directors, the remaining Directors, except as
otherwise provided by law, may exercise the powers of the full Board until the
vacancy is filled.
2. Election and Qualification. Subject to the provisions of the
Certificate of Incorporation relating to the election of Directors, at each
annual meeting the stockholders shall fix the number of Directors (which shall
not be less than three or the number of stockholders if fewer than three) and
shall elect not more than the number of Directors so designated. No Director
need be a stockholder.
3. Vacancies; Reduction of Board. Subject to the provisions of the
Certificate of Incorporation relating to the election of Directors, any vacancy
in the Board of Directors however occurring including a vacancy resulting from
the enlargement of the Board of Directors may be filled by the stockholders or
by the Directors then in office or by a sole remaining Director, provided that
in lieu of filling any such vacancy the stockholders or Board of Directors may
reduce the number of Directors but not to a number fewer than three or the
number of stockholders if fewer than three. When one or more Directors shall
resign from the Board of Directors, effective at a future date, a majority of
the Directors then in office, including those who so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, subject to the provisions of
the Certificate of Incorporation relating to the election of Directors.
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4. Enlargement of the Board. Subject to the provisions of the Certificate
of Incorporation relating to the election of Directors, the Board of Directors
may be enlarged by the stockholders at any meeting or by vote of a majority of
the Directors then in office.
5. Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws, Directors shall hold office until their
successors are elected and qualified or until their earlier resignation or
removal. Any Director may resign by delivering his written resignation to the
corporation. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
6. Removal. Subject to the provisions of the Certificate of Incorporation
relating to the election of Directors, a Director may be removed from office (a)
with or without cause by vote of the holders of a majority of the shares of
stock entitled to vote in the election of Directors, or (b) for cause by vote of
a majority of the Directors then in office. A Director may be removed for cause
only after reasonable notice and opportunity to be heard before the body
proposing to remove him.
7. Meetings. Regular meetings of the Board of Directors may be held
without notice at such time, date and place as the Board of Directors may from
time to time determine. Special meetings of the Board of Directors may be
called, orally or in writing, by the President, Treasurer or two or more
Directors, designating the time, date and place thereof. Directors may
participate in meetings of the Board of Directors by means of conference
telephone or similar communications equipment by means of which all Directors
participating in the meeting can hear each other, and participation in a meeting
in accordance herewith shall constitute presence in person at such meeting.
8. Notice of Meetings. Notice of the time, date and place of all special
meetings of the Board of Directors shall be given to each Director by the
Secretary, or Assistant Secretary, or in case of the death, absence, incapacity
or refusal of such persons, by the officer or one of the Directors calling the
meeting. Notice shall be given to each Director in person or by telephone or by
telecopy sent to his business or home address at least twenty-four hours in
advance of the meeting, or by written notice mailed to his business or home
address at least forty-eight hours in advance of the meeting. Notice need not be
given to any Director if a written waiver of notice is executed by him before or
after the meeting, or if communication with such Director is unlawful. A notice
or waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting.
9. Quorum. At any meeting of the Board of Directors, a majority of the
Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice.
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10. Action at Meeting. At any meeting of the Board of Directors at which a
quorum is present, a majority of the Directors present may take any action on
behalf of the Board of Directors, unless a larger number is required by law, by
the Certificate of Incorporation or by these By-laws.
11. Action by Consent. Any action required or permitted to be taken at any
meeting of the Board of Directors may be taken without a meeting if a written
consent thereto is signed by all the Directors and filed with the records of the
meetings of the Board of Directors. Such consent shall be treated as a vote of
the Board of Directors for all purposes.
12. Committees. The Board of Directors, by vote of a majority of the
Directors then in office, may establish one or more committees, each committee
to consist of one or more Directors, and may delegate thereto some or all of its
powers except those which by law, by the Certificate of Incorporation, or by
these By-laws may not be delegated. Except as the Board of Directors may
otherwise determine, any such committee may make rules for the conduct of its
business, but in the absence of such rules its business shall be conducted so
far as possible in the same manner as is provided in these By-laws for the Board
of Directors. All members of such committees shall hold their committee offices
at the pleasure of the Board of Directors, and the Board may abolish any
committee at any time. Each such committee shall report its action to the Board
of Directors who shall have power to rescind any action of any committee without
retroactive effect.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Secretary, and such other officers, including a
Chairman and one or more Vice Presidents, Assistant Treasurers and Assistant
Secretaries, as the Board of Directors may determine.
2. Election. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at their first meeting following the annual
meeting of stockholders. Other officers may be chosen by the Board of Directors
at such meeting or at any other meeting.
3. Qualification. No officer need be a stockholder or Director. Any two or
more offices may be held by the same person. Any officer may be required by the
Board of Directors to give bond for the faithful performance of his duties in
such amount and with such sureties as the Board of Directors may determine.
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4. Tenure. Except as otherwise provided by the Certificate of
Incorporation or by these By-laws, each of the officers of the corporation shall
hold his office until his successor is elected and qualified or until his
earlier resignation or removal. Any officer may resign by delivering his written
resignation to the corporation, and such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event.
5. Removal. The Board of Directors may remove any officer with or without
cause by a vote of a majority of the entire number of Directors then in office;
provided, that an officer may be removed for cause only after reasonable notice
and opportunity to be heard by the Board of Directors.
6. Vacancies. Any vacancy in any office may be filled for the unexpired
portion of the term by the Board of Directors.
7. President, Chairman and Vice Presidents. The President shall be the
chief executive officer of the corporation and shall, subject to the direction
of the Board of Directors, have general supervision and control of its business.
Unless otherwise provided by the Board of Directors he shall preside, when
present, at all meetings of stockholders and of the Board of Directors.
The Chairman (if any, and who may also be the President) and any Vice
President shall have such powers and shall perform such duties as the Board of
Directors may from time to time designate.
8. Treasurer and Assistant Treasurers. The Treasurer shall, subject to the
direction of the Board of Directors, have general charge of the financial
affairs of the corporation and shall cause to be kept accurate books of account.
He shall have custody of all funds, securities, and valuable documents of the
corporation, except as the Board of Directors may otherwise provide.
Any Assistant Treasurer shall have such powers and perform such duties as
the Board of Directors may from time to time designate.
9. Secretary and Assistant Secretaries. The Secretary shall record all the
proceedings of the meetings of the stockholders and the Board of Directors
(including committees of the Board) in books kept for that purpose. In his
absence from any such meeting or at the request of the Board of Directors, an
Assistant Secretary, or if there be none or he is absent, a temporary secretary
chosen at the meeting, shall record the proceedings thereof.
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The Secretary shall have charge of the stock ledger (which may, however,
be kept by any transfer or other agent of the corporation) and shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the President.
Any Assistant Secretary shall have such powers and perform such duties as
the Board of Directors may from time to time designate.
10. Other Powers and Duties. Subject to these By-laws, each officer of the
corporation shall have in addition to the duties and powers specifically set
forth in these By-laws, such duties and powers as are customarily incident to
his office, and such duties and powers as may be designated from time to time by
the Board of Directors.
ARTICLE IV
Capital Stock
1. Certificates of Stock. Each stockholder shall be entitled to a
certificate of the capital stock of the corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary. Such signatures may be
facsimile if the certificate is signed by a transfer agent or registrar, other
than the corporation or its employee. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the time
of its issue. Every certificate for shares of stock which are subject to any
restriction on transfer and every certificate issued when the corporation is
authorized to issue more than one class or series of stock shall contain such
legend with respect thereto as is required by law.
2. Transfers. Subject to any restrictions on transfer shares of stock may
be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate therefor properly endorsed
or accompanied by a written assignment or power of attorney properly executed,
with transfer stamps (if necessary) affixed, and with such proof of the
authenticity of signature as the corporation or its transfer agent may
reasonably require.
3. Record Holders. Except as may otherwise be required by law, by the
Certificate of Incorporation or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
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It shall be the duty of each stockholder to notify the corporation of his
post office address.
4. Record Date. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor fewer than ten days before the date of
such meeting, nor more than sixty days prior to any other action. In such case
only stockholders of record on such record date shall be so entitled
notwithstanding any transfer of stock on the books of the corporation after the
record date.
If no record date is fixed, (a) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, (b) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed, and
(c) the record date for determining stockholders for any other purpose shall be
at the close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
5. Replacement of Certificates. In case of the alleged loss, destruction
or mutilation of a certificate of stock, a duplicate certificate may be issued
in place thereof, upon such terms as the Board of Directors may prescribe.
ARTICLE V
Indemnification of Directors, Officers and Others
1. Indemnification of Directors and Officers. The corporation shall
indemnify, to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than said law permitted
the corporation to provide prior to such amendment):
(a) Any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action or suit
by or in the right of the corporation) by reason of the fact that he is or was a
Director or officer of the corporation or
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any of its subsidiaries, or is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such suit, action or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Notwithstanding the foregoing, the corporation shall indemnify any such person
seeking indemnification in connection with an action, suit or proceeding
initiated by such person only if the initiation and continued prosecution of
such action, suit or proceeding was authorized by the Board of Directors of the
corporation.
(b) Any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a Director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless, and only to the extent that, the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a Director or officer of the corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) or (b), or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
2. Indemnification of Employees and Agents. The Board of Directors, in its
discretion, may authorize the corporation to indemnify:
(a) Any person who was or is a party or is threatened to be made a party
to any threatened pending or completed action, suit or proceeding, whether
civil, criminal,
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administrative or investigative by reason of the fact that he is or was an
employee or agent of the corporation, or is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was an employee or agent of the
corporation, or is or was serving at the request of the corporation as
an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the
corporation unless, and only to the extent that, the Court of Chancery
of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnify for such expenses
which the Court of Chancery or such other court shall deem proper.
3. Determination of Entitlement. Any indemnification hereunder (unless
required by law or ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
Director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in paragraphs 1 or 2. The
determination shall be made by (i) a majority vote of those Directors who are
not involved in such Proceeding (the "Disinterested Directors"); (ii) by the
stockholders of the corporation; or (iii) if directed by a majority of
Disinterested Directors, by independent legal counsel in a written opinion.
However, if fewer than a majority of the Directors are Disinterested Directors,
the determination shall be made by (i) a majority vote of a committee of one or
more disinterested Director(s) chosen by the Disinterested Director(s) at a
regular or special meeting; (ii) by the stockholders of the corporation; or
(iii) by independent legal counsel in a written opinion.
10
<PAGE>
4. Advance Payments. Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding, only as authorized by the
Board of Directors in the specific case (including by one or more Directors who
may be parties to such action, suit or proceeding), upon receipt of an
undertaking by or on behalf of the Director, officer, employee or agent to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the corporation as authorized in this Article V.
5. Non-Exclusive Nature of Indemnification. The indemnification provided
herein shall not be deemed exclusive of any other rights to which any person,
whether or not entitled to be indemnified hereunder, may be entitled under any
statute, by-law, agreement, vote of stockholders or Directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a Director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person. Each person
who is or becomes a Director or officer as aforesaid shall be deemed to have
served or to have continued to serve in such capacity in reliance upon the
indemnity provided for in this Article V.
6. Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of the General Corporation Law of the State
of Delaware (as presently in effect or hereafter amended), the Certificate of
Incorporation of the corporation or these By-laws.
7. No Duplicate Payments. The corporation's indemnification under
paragraphs 1 and 2 of this Article V of any person who is or was a Director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
reduced by any amounts such person receives as indemnification (i) under any
policy of insurance purchased and maintained on his behalf by the corporation,
(ii) from such other corporation, partnership, joint venture, trust or other
enterprise, or (iii) under any other applicable indemnification provision.
8. Limitation. Notwithstanding anything herein to the contrary, the
corporation shall not be required to indemnify any person hereunder as to any
matter with respect to which such person or his or its affiliates are obligated
to indemnify the corporation or any of its affiliates pursuant to any agreement
with the corporation or any of its affiliates.
11
<PAGE>
9. Amendment. This Article V may be amended only so as to have a
prospective effect. Any amendment to this Article V which would result in any
person having a more limited entitlement to indemnification may be approved only
by the stockholders.
ARTICLE VI
Miscellaneous Provisions
1. Fiscal Year. Except as otherwise determined by the Board of Directors,
the fiscal year of the corporation shall end on December 31 of each year.
2. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or the Treasurer
except as the Board of Directors may generally or in particular cases otherwise
determine.
3. Voting of Securities. Unless otherwise provided by the Board of
Directors, the President or Treasurer may waive notice of and act on behalf of
this corporation, or appoint another person or persons to act as proxy or
attorney in fact for this corporation with or without discretionary power and/or
power of substitution, at any meeting of stockholders or stockholders of any
other corporation or organization, any of whose securities are held by this
corporation.
4. Resident Agent. The Board of Directors may appoint a resident agent
upon whom legal process may be served in any action or proceeding against the
corporation.
5. Corporate Records. The original or attested copies of the Certificate
of Incorporation, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock and transfer records,
which shall contain the names of all stockholders, their record addresses and
the amount of stock held by each, shall be kept at the principal office of the
corporation, at the office of its counsel, or at an office of its transfer
agent.
6. Certificate of Incorporation. All references in these By-laws to the
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
7. Amendments. These By-laws may be amended or repealed or additional
By-laws adopted by the stockholders or by the Board of Directors except as
provided in Article V, Section 8; provided, that (a) the Board of Directors may
not amend or repeal this Section 7 or any provision of these By-laws which by
law, by the Certificate of Incorporation or by these By-laws requires action by
the stockholders, (b) any amendment or repeal of these
12
<PAGE>
By-laws by the Board of Directors and any By-law adopted by the Board of
Directors may be amended or repealed by the stockholders.
Adopted and Effective as of October 2, 1997.
13
<PAGE>
================================================================================
COMMON STOCK COMMON STOCK
NATROL(R)
----------------
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN BOSTON, MA OR NEW YORK, NY CUSIP 638789 10 7
NATROL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF
ONE CENT ($.01) EACH OF THE COMMON STOCK OF
NATROL, INC., transferable on the books of the Corporation by the holder hereof
in person or by duly authorized attorney, upon surrender of this certificate
properly endorsed. This certificate and the shares represented hereby are issued
and shall be held subject to the laws of The State of Delaware and the
Certificate of Incorporation and the By-Laws of the Corporation, as the same may
be from time to time amended, to all of which the holder by acceptance hereof
assents. This certificate is not valid unless countersigned by the Transfer
Agent and Registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[NATROL, INC. 1997 DELAWARE STAMP]
/s/ Cheryl Balbert /s/ Elliott Balbert
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
By /s/ M. Penezic
AUTHORIZED SIGNATURE
================================================================================
AMERICAN BANK NOTE COMPANY.
<PAGE>
NATROL, INC.
The Corporation has more than one class of stock authorized to be
issued. The Corporation will furnish without charge to each stockholder upon
request a copy of the full text of the powers, designations, preferences and
relative, participating, optional or other rights of the shares of each class
of stock (and any series thereof), authorized to be issued by the Corporation
and the qualifications, limitations or restrictions of such preferences
and/or rights, all as set forth in the Certificate of Incorporation and
amendments thereto filed with the Secretary of State of the State of Delaware.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with rights
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT -- Custodian
------------- ---------------
(Cust) (Minor)
Under Uniform Gifts to Minors
Act
------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received,________________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ---------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated
------------------
-------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By
- -------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 10.1
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment to Lease Agreement ("First Amendment") is made and entered
as of November 22, 1996 between Lincoln-Whitehall Pacific, L.L.C., a Delaware
limited liability company ("Landlord"), and Natrol, Inc. A California
corporation ("Tenant") with reference to the following facts:
RECITALS
A. The parties entered into a Lease Agreement dated August 12, 1996 (the
"Original Lease").
B. The parties desire to amend certain provisions of the Original Lease.
Accordingly, the parties have agreed as follows:
AGREEMENT
1. The next to the last sentence of Section 15.1 is deleted and replaced with
the following:
For purposes hereof, in the event Tenant is a corporation, partnership, joint
venture, trust or other entity other than a natural person, any change in the
direct or indirect ownership of Tenant (whether pursuant to one or more
transfers) which results in a change of more than fifty percent (50%) in the
direct or indirect ownership of Tenant shall be deemed to be an assignment
within the meaning of this Section 15 and shall be subject to all provisions
hereof; provided, however, that any change in the direct or indirect ownership
of Tenant because of any of the following transactions shall not be deemed an
assignment within the meaning of Section 15: (a) any equity changes in Tenant
resulting from the public sale of Tenant's stock by Tenant or any of its
stockholders; (b) any equity changes in Tenant resulting from the sale of Tenant
or substantially all of its assets, whether pursuant to a sale of assets, a
merger or otherwise; (c) any equity changes in Tenant resulting from the
acquisition by Tenant of any business and the issuance of stock by Tenant in
connection therewith; or (d) any reorganization or restructuring of Tenant,
including without limitation a reincorporation of Tenant. Any successor to
Tenant resulting from the transactions described in the preceding sentence
shall be deemed the Tenant under this Lease.
2. The Original Lease, as amended by this First Amendment, shall continue in
full force and effect.
3. In any conflict between the Original Lease and this First Amendment, this
First Amendment shall control.
Executed as of the date stated above.
LANDLORD:
LINCOLN-WHITEHALL PACIFIC, L.L.C.,
a Delaware limited liability company
BY: Lincoln Property Company Management Services, Inc.
As Agent and Manager for Landlord
By: /s/ Terry Thompson
------------------------------
Terry Thompson, Vice President
TENANT:
NATROL, INC.
A California Corporation
By: /s/ Elliott Balbert
---------------------------
Elliott Balbert, President
<PAGE>
LEASE AGREEMENT
(Net)
Basic Lease Information
Lease Date: August 12, 1996
Landlord: Lincoln-Whitehall Pacific, L.L.C., a Delaware limited
liability company
Landlord's Address: c/o Lincoln Property Company Management Services, Inc.
30 Executive Park, Suite 100
Irvine, California 92713
Tenant: Natrol, Inc., a California Corporation
Tenant's Address: 21411 Prairie Street Chatsworth, California
Premises: Approximately 80,012 rentable square feet as shown on
Exhibit A
Premises Address: Same as Tenant's address
Building: 80,012 square feet
Lot (Building's
tax parcel): 212,573 square feet
Term: One Hundred Twenty (122) months
8/27, 1996 ("Commencement Date"), through
(October) 10/26, 2006 ("Expiration Date")
Base Rent (P3): Thirty-Seven Thousand Two Hundred Five and 00/100 Dollars
($37,205.00) per month.
Advanced Rent: Twenty-Three Thousand Three Hundred Fifty and 00/100
Dollars ($23,350.00) shall be paid upon Lessee's signature
and delivery of Lease to Landlord.
Adjustments to
Base Rent: Months 1 - 2: Free Base Rent and Operating
Expense Period.
Months 3 - 14: $23,350 per month
Months 15 - 38: $37,205 per month
Months 39 - 122: CPI adjustment every 24 months (see
addendum)
Security Deposit
(P4.1): Thirty-Seven Thousand Two Hundred Five and
00/l00 Dollars ($37,205.00)
Tenant's Share of Operating Expenses (P6.1): 100% of the Building
Tenant's Share of Tax Expenses (P6.2): 100% of the Lot
Tenant's Share of Common Area Utility Costs (P7): 100% of the Building
Permitted Uses: General office, manufacturing, assembly and warehousing of
lawful products pertaining to the Tenant's business.
Unreserved
Parking Spaces: 223 nonexclusive and undesignated spaces
Broker (P38): Capital Commercial Real Estate (listing)
CB Commercial (procuring)
Exhibits: Exhibit A - Premises, Building, Lot and/or Park
Exhibit B - Tenant Improvements
Exhibit C - Rules and Regulations
Exhibit D - Intentionally omitted
Exhibit E - Hazardous Materials Disclosure Certificate
Exhibit F - Intentionally omitted
Exhibit G - Change of Commencement Date - Example
Exhibit H - Sign Criteria
Exhibit I - Intentionally omitted
Addenda: Addendum I: Option to Extend
Addendum II: CPI Increase
Addendum III: First Right of Offer to Purchase
LANDLORD'S INITIALS: /s/ TT
---
TENANT'S INITIALS: /s/ EB
---
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. PREMISES ...................................................... 3
2. ADJUSTMENT OF COMMENCEMENT DATE; CONDITION OF THE PREMISES .... 3
3. RENT .......................................................... 3
4. SECURITY DEPOSIT .............................................. 4
5. TENANT IMPROVEMENTS ........................................... 4
6. ADDITIONAL RENT ............................................... 4
7. UTILITIES ..................................................... 6
8. LATE CHARGES .................................................. 7
9. USE OF PREMISES ............................................... 7
10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES .......... 8
11. REPAIRS AND MAINTENANCE ....................................... 8
12. INSURANCE ..................................................... 9
13. WAIVER OF SUBROGATION ......................................... 10
14. LIMITATION OF LIABILITY AND INDEMNITY ......................... 10
15. ASSIGNMENT AND SUBLEASING ..................................... 11
16. AD VALOREM TAXES .............................................. 12
17. SUBORDINATION ................................................. 12
18. RIGHT OF ENTRY ................................................ 13
19. ESTOPPEL CERTIFICATE .......................................... 13
20. TENANT'S DEFAULT .............................................. 13
21. REMEDIES FOR TENANT'S DEFAULT ................................. 14
22. HOLDING OVER .................................................. 15
23. LANDLORD'S DEFAULT ............................................ 15
24. PARKING ....................................................... 15
25. SALE OF PREMISES .............................................. 15
26. WAIVER ........................................................ 15
27. CASUALTY DAMAGE ............................................... 15
28. CONDEMNATION .................................................. 16
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS ..................... 16
30. FINANCIAL STATEMENTS .......................................... 19
31. GENERAL PROVISIONS ............................................ 19
32. SIGNS ......................................................... 20
33. MORTGAGEE PROTECTION .......................................... 21
34. QUITCLAIM ..................................................... 21
35. MODIFICATIONS FOR LENDER ...................................... 21
36. WARRANTIES OF TENANT .......................................... 21
37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT ............... 21
38. BROKERAGE COMMISSION .......................................... 22
39. QUIET ENJOYMENT ............................................... 22
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS 22
</TABLE>
LANDLORD'S INITIALS: /s/ TT
---
TENANT'S INITIALS: /s/ EB
---
<PAGE>
LEASE AGREEMENT
DATE: This Lease is made and entered into as of the Lease Date set forth on
Page 1. The Basic Lease Information set forth on Page 1 and this Lease
are and shall be construed as a single instrument.
1. Premises: Landlord hereby leases the Premises to Tenant upon the terms and
conditions contained herein. Landlord hereby grants to Tenant a revocable
license for the right to use, on a non-exclusive basis, parking areas and
ancillary facilities located within the Common Area of the Building, subject to
the terms of this Lease. Landlord and Tenant hereby agree that for purposes of
this Lease, as of the Lease Date, the rentable square footage area of the
Premises, the Building and Lot shall be deemed to be the number of rentable
square feet set forth in the Basic Lease Information on Page 1. Landlord shall
confirm and revise if necessary the square footage of the Building by
contracting with a qualified space planner who will remeasure the Building using
BOMA standards.
2. Adjustment of Commencement Date; Condition of the Premises: The Term of this
Lease shall commence on the date specified on the basic lease information page
hereof and the commencement of the Term. After delivery of the Premises to
Tenant, Tenant shall execute a written acknowledgment in the form attached
hereto as Exhibit F and by this reference it shall be incorporated herein. If
Landlord cannot deliver possession of the Premises on the Commencement Date,
Landlord shall not be subject to any liability nor shall the validity of the
Lease be affected; provided the Lease term and the obligation to pay Rent shall
commence on the date possession is tendered and the Expiration Date shall be
extended by a period of time equal to the period computed from the Commencement
Date to the date possession is tendered by Landlord to Tenant. In the event the
commencement date and/or the expiration date of this Lease is other than the
Commencement Date and/or Expiration Date provided on Page 1, as the case may be,
Landlord and Tenant shall execute a written amendment to this Lease,
substantially in the form of Exhibit G hereto, wherein the parties shall specify
the actual commencement date, expiration date and the date on which Tenant is to
commence paying Rent.
Except as provided in Exhibit B of this Lease, taking possession of the
Premises, Tenant shall be deemed to have accepted the Premises in a good, clean
and completed condition and state of repair, in compliance with all applicable
laws, codes, regulations, administrative orders and ordinances, and subject to
all matters of record. Tenant hereby acknowledges and agrees that neither
Landlord has nor Landlord's agents or representatives have made any
representations or warranties as to the suitability, safety or fitness of the
Premises for Tenant's business, Tenant's intended use of the Premises or for any
other purpose, and that neither Landlord nor Landlord's agents or
representatives have agreed to undertake any alterations or construct any Tenant
Improvements to the Premises except as expressly provided in this Lease.
3. Rent: On the date that Tenant executes this Lease, Tenant shall deliver to
Landlord the original executed Lease, the Base Rent, the Security Deposit, and
all insurance certificates evidencing the insurance required to be obtained by
Tenant under Section 12 of this Lease. Tenant agrees to pay Landlord, without
prior notice or demand, or abatement, offset, deduction or claim, the Base Rent
described on Basic Lease Information Page, payable in advance at Landlord's
address shown on Page 1 on the first day of each month throughout the term of
the Lease. In addition to the Base Rent set forth on Page 1, Tenant shall pay
Landlord in advance and on the first (1st) day of each month throughout the term
of this Lease (including any extensions of such term), as Additional Rent
Tenant's share, as set forth on Page 1, of Operating Expenses, Tax Expenses,
Common Area Utility Costs, and Utility Expenses, and Administrative Expenses all
in the manner as specified in Sections 6.1, 6.2, 6.3, 6.4 and 7 of this Lease,
respectively. Additionally, Tenant shall pay to Landlord as Additional Rent
hereunder, immediately on Landlord's demand therefor, any and all costs and
expenses incurred by Landlord to enforce the provisions of this Lease,
including, but not limited to, costs associated with any proposed assignment or
subletting of all or any portion of the Premises by Tenant, costs associated
with the delivery of notices, delivery and recordation of notice(s) of default,
attorneys' fees, expert fees, court costs and filing fees (collectively, the
"Enforcement Expenses"). The term "Rent" whenever used herein refers to the
aggregate of all these amounts. If Landlord permits Tenant to occupy the
Premises without requiring Tenant to pay rental payments for a period of time,
the waiver of the requirement to pay rental payments shall only apply to waiver
of the Base Rent and Tenant shall otherwise perform all other obligations of
Tenant hereunder, including, but not limited to paying to Landlord any and all
amounts considered additional rent, such as Tenant's share of Operating
Expenses, Tax Expenses, Common Area Utility Costs, and Utility Expenses, and
Administrative Expenses. If, at any time, Tenant is in default of or otherwise
breaches any term, condition or provision of this Lease, any such waiver by
Landlord of Tenant's requirement to pay rental payments shall be null and void
and Tenant shall immediately pay to Landlord all rental payments waived by
Landlord. The Rent for any fractional part of a calendar month at the
commencement or termination of the Lease term shall be a prorated amount of the
Rent for a full calendar month based upon a thirty (30) day month. The prorated
Rent shall be paid on the Commencement Date. The Termination Date of the Lease
shall always be the last day of the calendar month in which the Lease Term
commenced.
4. Security Deposit:
LANDLORD'S INITIALS: /s/ TT
---
TENANT'S INITIALS: /s/ EB
---
<PAGE>
4.1 Security Deposit: Upon Tenant's execution of this Lease, Tenant shall
deliver to Landlord, as a Security Deposit for the performance by Tenant of its
obligations under this Lease, the amount described on Page 1. If Tenant is in
default, Landlord may, but without obligation to do so, use the Security
Deposit, or any portion thereof, to cure the default or to compensate Landlord
for all damages sustained by Landlord resulting from Tenant's default,
including, but not limited to the Enforcement Expenses. Tenant shall,
immediately on demand, pay to Landlord a sum equal to the portion of the
Security Deposit so applied or used so as to replenish the amount of the
Security Deposit held to increase such deposit to the amount initially deposited
with Landlord if Tenant is late three times in one 12 month period. At any time
after Tenant has defaulted hereunder and the default has not been cured within
applicable cure periods as defined in this Lease, then, Landlord may require an
increase in the amount of the Security Deposit required hereunder for the then
balance of the Lease term and Tenant shall, immediately on demand, pay to
Landlord additional sums in the amount of such increase. Within 120 days after
the termination of this Lease, Landlord shall return the Security Deposit to
Tenant, less such amounts as are reasonably necessary, as determined by
Landlord, to remedy Tenant's default(s) hereunder or to otherwise restore the
Premises to a clean and safe condition, reasonable wear and tear excepted. If
the cost to restore the Premises exceeds the amount of the Security Deposit,
Tenant shall promptly deliver to Landlord any and all of such excess sums as
reasonably determined by Landlord. Landlord shall not be required to keep the
Security Deposit separate from other funds, and, unless otherwise required by
law, Tenant shall not be entitled to interest on the Security Deposit. In no
event or circumstance shall Tenant have the right to any use of the Security
Deposit and, specifically, Tenant may not use the Security Deposit as a credit
or to otherwise offset any payments required hereunder, including, but not
limited to, Rent or any portion thereof.
4.2 Cleaning Deposit: Intentionally omitted
5. Tenant Improvements: Tenant hereby accepts the Premises in its current "as
is" condition unless otherwise specified in Exhibit B, attached hereto and
incorporated herein by this reference. If so specified in Exhibit B hereto,
Landlord or Tenant, as the case may be, shall install the improvements ("Tenant
Improvements") on the Premises as described and in accordance with the terms,
conditions, criteria and provisions set forth in Exhibit B, attached and
incorporated herein by this reference. Tenant acknowledges that neither Landlord
has nor any of Landlord's agents, representatives or employees have made any
representations as to the suitability or fitness of the Premises for Tenant's
business, including, without limitation, any storage incidental thereto, or for
any other purpose, and that neither Landlord nor any of Landlord's agents,
representatives or employees has agreed to undertake any alterations or
construct any Tenant Improvements to the Premises except as expressly provided
in Exhibit B to this Lease.
6. Additional Rent: The costs and expenses described in this Section 6 and all
other sums, charges, costs and expenses specified in this Lease other than Base
Rent, including, but not limited to, Operating Expenses, Utility Expenses,
Tenant's share of Common Area Utility Costs, Tax Expenses, Administrative
Expenses and Late Charges are to be paid by Tenant to Landlord as additional
rent (collectively, "Additional Rent"). All Operating Expenses, Tax Expenses and
Administrative Expenses/Management fees shall not exceed $0.06 per square foot
per month of the Premises during the first calendar year of the Lease with
subsequent annual increases not to exceed four percent (4%) per year. This cap
specifically excludes any increase in property taxes as a result of a sale of
the Premises, Building or Park.
6.1 Operating Expenses: In addition to the Base Rent set forth in Section
3, Tenant shall pay Tenant's share, which is defined on Page 1, of all Operating
Expenses. The term "Operating Expenses" as used herein shall mean the total
amounts paid or payable by Landlord in connection with the ownership,
maintenance, repair and operation of the Premises, the Building and the Lot, and
where applicable, of the Park referred to on Page 1. The amount of Tenant's
share of Operating Expenses shall be reviewed from time to time by Landlord and
shall be subject to modification by Landlord as reasonably determined by
Landlord based upon the size of the Park or Building. These Operating Expenses
may include, but are not limited to:
6.1.1 Landlord's cost of repairs to, and maintenance of, the roof,
the roof membrane and the exterior walls of the Building;
6.1.2 Landlord's cost of maintaining the outside paved area,
landscaping and other common areas for the Building. The term "Common
Area" shall mean all areas and facilities outside of the Building
exclusive of the Premises. The Common Area includes, but is not limited
to, parking areas, access and perimeter roads, sidewalks, landscaped areas
and similar areas and facilities;
6.1.3 Landlord's annual cost of insurance insuring against fire and
extended coverage (including, if Landlord elects, "all risk" coverage) and
all other insurance, including, but not limited to, earthquake, flood
and/or surface water endorsements for the Building, the Lot and the Park
(including the Common Area), rental value insurance against loss of Rent
in an amount equal to the amount of Rent for a period of at least six (6)
months commencing on the date of loss, and subject to the provisions of
Section 27 below, any deductible on said policies;
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6.1.4 Landlord's cost of modifications to the Building, the Common
Area occasioned by any rules, laws or regulations effective subsequent to
the date on which the Building was originally constructed;
6.1.5 Landlord's cost of modifications to the Building, the Common
Area and/or the Park occasioned by any rules, laws or regulations arising
from Tenant's use of the Premises regardless of when such rules, laws or
regulations became effective, provided, however, that any such costs of
modifications to the Building, the Common Area, and/or the Park shall not
be deemed Operating Expenses where such modifications would have been
required prior to Tenant's possession of the Premises;
6.1.6 If Landlord elects to so procure, Landlord's cost of
preventative maintenance, and repair contracts including, but not limited
to, contracts for elevator systems and heating, ventilation and air
conditioning systems, lifts for disabled persons, and trash or refuse
collection;
6.1.7 Landlord's cost of security and fire protection services for
the Building and/or the Park, as the case may be, if in Landlord's sole
discretion such services are provided;
6.1.8 Landlord's establishment of reasonable reserves for
replacements and/or repairs of Common Area improvements, equipment and
supplies;
6.1.9 Intentionally omitted.
6.1.10 Landlord's cost of supplies, equipment, rental equipment and
other similar items used in the operation and/or maintenance of the Park;
and
6.1.11 Landlord's cost for the repairs and maintenance items set
forth in Section 11.2 below.
Operating Expenses shall not include the following:
(a) Capital improvements related to: (i) replacement of the roof;
(ii) complete replacement of the HVAC system not necessitated
by the intentional or negligent acts or omissions of Tenant
(this does not include partial replacement or repairs); or
(iii) the foundations and exterior walls of the Building to
the extent not necessitated by the intentional or negligent
acts or omissions of Tenant or any third party during the
period of Tenant's possession of the Premises and/or the term
of this Lease, inclusive of options to extend;
(b) Amounts paid (including interest and penalties) in order to
comply with or cure violations of statutes, laws, or
ordinances by Landlord of any part of the Building, the Common
Area and/or the Park;
(c) Repairs or other work occasioned by fire, windstorm, or other
casualty to the extend covered by insurance proceeds;
(d) Except as set forth in paragraph 6.3 below, salaries and
fringe benefits paid to Landlord's officers and partners and
its executive and administrative personnel;
(e) Any charge for depreciation of the Building, the Common Area
and/or the Park;
(f) Leasing commissions, accountants', consultants' or attorneys'
fees.
6.2 Tax Expenses: In addition to the Base Rent set forth in Section 3,
Tenant shall pay its share, which is defined on Page 1, of all real property
taxes applicable to the land and improvements included within the Lot on which
the Premises are situated and one hundred percent (100%) of all personal
property taxes now or hereafter assessed or levied against the Premises or
Tenant's personal property. The amount of Tenant's share of Tax Expenses shall
be reviewed from time to time by Landlord and shall be subject to modification
by Landlord as reasonably determined by Landlord. Tenant shall also pay one
hundred percent (100%) of any increase in real property taxes attributable, in
Landlord's reasonable discretion, to any and all alterations, Tenant
Improvements or other improvements of any kind, which are above standard
improvements customarily installed for similar buildings located within the
Building or the Park (as applicable), whatsoever placed in, on or about the
Premises for the benefit of, at the request of, or by Tenant. The term "Tax
Expenses" shall mean and include, without limitation, any form of tax and
assessment (general, special, supplemental, ordinary or extraordinary),
commercial rental tax, payments under any improvement bond or bonds, license,
rental tax, transaction tax, levy, or penalty imposed by authority having the
direct or indirect power of tax (including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
district thereof) as against any legal or equitable interest of Landlord in the
Premises, the Building, the Lot or the Park, as against Landlord's right to rent
or other income therefrom, or as against Landlord's business of leasing the
Premises or the occupancy of Tenant or any other tax, fee, or excise, however
described, including, but not limited to, any value added tax, or any tax
imposed in substitution (partially or totally) of any tax previously included
within the
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definition of real property taxes, or any additional tax the nature of which was
previously included within the definition of real property taxes. The term "Tax
Expenses" shall not include any franchise, transfer, estate, inheritance, net
income, or excess profits tax imposed upon Landlord.
6.3 Administrative Expenses: In addition to the Base Rent set forth in
Section 3 hereof, Tenant shall pay Landlord, without prior notice or demand, on
the first (1st) day of each month throughout the term of this Lease (including
any extensions of such term), as compensation to Landlord for accounting and
management services rendered on behalf of the Building, one-twelfth (1/12th) of
an amount equal to ten percent (10%) of the estimated amount of the aggregate of
the Tenant's share of (i) the total Operating Expenses and Tax Expenses as
described in Sections 6.1 and 6.2 above, respectively, and (ii) all Common Area
Utility Costs for the Park and the Premises as described in Section 7 below; as
such amounts are estimated by Landlord in accordance with the provisions of
Section 6.4 below (collectively, the "Administrative Expenses"). Tenant's
obligations to pay such Administrative Expenses and/or Management Fee shall
survive the expiration or earlier termination of this Lease.
6.4 Payment of Expenses: Landlord shall estimate Tenant's share of the
Operating Expenses and Tax Expenses for the calendar year in which the Lease
commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this
estimated amount shall be paid by Tenant to Landlord, as Additional Rent, on the
first (1st) day of each month and throughout the remaining months of such
calendar year. Thereafter, Landlord may estimate such expenses as of the
beginning of each calendar year and Tenant shall pay one-twelfth (1/12th) of
such estimated amount as Additional Rent hereunder on the first day of each
month during such calendar year and for each ensuing calendar year throughout
the term of this Lease (including any extensions of the term). By April 30th of
each of the following calendar years, or as soon thereafter as reasonably
possible, including the calendar year after the calendar year in which this
Lease terminates or the term expires, Landlord shall endeavor to furnish Tenant
with an accounting of actual Operating Expenses and Tax Expenses. Within thirty
(30) days of Landlord's delivery of such accounting, Tenant shall pay to
Landlord the amount of any underpayment. Notwithstanding the foregoing, failure
by Landlord to give such accounting by such date shall not constitute a waiver
by Landlord of its right to collect any of Tenant's underpayment at any time.
Landlord shall credit the amount of any overpayment by Tenant toward the next
estimated monthly installment(s) falling due, or where the term of the Lease has
expired, refund the amount of overpayment to Tenant. Tenant, at its sole cost
and expense through any certified public accountant designated by it, shall have
the right to examine and/or audit the books and records evidencing such costs
and expenses for the previous two (2) calendar years, beginning from the date in
which Landlord purchased the Building, during Landlord's reasonable business
hours and not more frequently than once during any calendar year. Tenant's
obligations to pay its share of Operating Expenses and Tax Expenses shall
survive the expiration or earlier termination of this Lease.
6.5 Annual Reconciliation: If the term of the Lease expires prior to the
annual reconciliation of expenses, if any, Landlord shall have the right to
reasonably estimate Tenant's share of such expenses, and if Landlord determines
that an underpayment is due, Tenant hereby agrees that Landlord shall be
entitled to deduct such underpayment from Tenant's Security Deposit. If Landlord
reasonably determines that an overpayment has been made by Tenant, Landlord
shall refund said overpayment to Tenant as soon as practicable thereafter.
Notwithstanding the foregoing, failure of Landlord to accurately estimate
Tenant's share of such expenses or to otherwise perform such reconciliation of
expenses, including, without limitation, Landlord's failure to deduct any
portion of any underpayment from Tenant's Security Deposit, shall not constitute
a waiver of Landlord's right to collect any of Tenant's underpayment at any time
during the term of the Lease or at any time after the expiration or earlier
termination of this Lease.
7. Utilities: Utility Expenses, Common Area Utility Costs and all other sums or
charges set forth in this Section 7 are considered part of Additional Rent.
Tenant shall pay the cost of all water, sewer use, sewer discharge fees and
sewer connection fees, gas, heat, electricity, refuse pickup, janitorial
service, telephone and other utilities billed or metered separately to the
Premises and/or Tenant. Tenant shall also pay its share of any assessments or
charges for utility or similar purposes included within any tax bill for the Lot
on which the Premises are situated, including, without limitation, entitlement
fees, allocation unit fees, and/or any similar fees or charges, and any
penalties related thereto. For any such utility fees or use charges that are not
billed or metered separately to Tenant, Tenant shall pay to Landlord, as
Additional Rent, without prior notice or demand, on the first (1st) day of each
month throughout the term of this Lease the amount which is attributable to
Tenant's use of the utilities or similar services, as reasonably estimated and
determined by Landlord based upon factors such as size of the Premises and
intensity of use of such utilities by Tenant such that Tenant shall pay the
portion of such charges reasonably consistent with Tenant's use of such
utilities and similar services ("Utility Expenses"). If Tenant disputes any such
estimate or determination, then Tenant shall either pay the estimated amount or
cause the Premises to be separately metered at Tenant's sole expense. In
addition, Tenant shall pay to Landlord its share, which is described on Page 1,
as Additional Rent, without prior notice or demand, on the first (1st) day of
each month throughout the term of this Lease, of any Common Area utility costs,
fees, charges or expenses ("Common Area Utility Costs"). Tenant shall pay to
Landlord one-twelfth (1/12th) of the estimated amount of Tenant's share of the
Common Area Utility Costs in the same manner and time periods as specified in
Section 6.4 above and any reconciliation thereof shall also be in the same
manner as specified in Sections 6.4 and 6.5 above. The amount of Tenant's share
of Common Area Utility Costs shall be reviewed from time to time by Landlord and
shall be subject to modification by Landlord as reasonably determined by
Landlord. Tenant acknowledges that the Premises may become subject to the
rationing of utility services or restrictions on utility use as required by a
public utility company,
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governmental agency or other similar entity having jurisdiction thereof.
Notwithstanding any such rationing or restrictions on use of any such utility
services, Tenant acknowledges and agrees that its tenancy and occupancy
hereunder shall be subject to such rationing restrictions as may be imposed upon
Landlord, Tenant, the Premises, the Building or the Park, and Tenant shall in no
event be excused or relieved from any covenant or obligation to be kept or
performed by Tenant by reason of any such rationing or restrictions. Tenant
further agrees to timely and faithfully pay, prior to delinquency, any amount,
tax, charge, surcharge, assessment or imposition levied, assessed or imposed
upon the Premises, or Tenant's use and occupancy thereof, or as a result
directly or indirectly of any such rationing or restrictions.
8. Late Charges: Any and all sums or charges set forth in this Section 8 are
considered part of Additional Rent. Tenant acknowledges that late payment (the
tenth day of each month or anytime thereafter, with notice given to Tenant if
payment is not received by the fifth of the month) by Tenant to Landlord of Base
Rent, Tenant's share of Operating Expenses, Tax Expenses, Common Area Utility
Costs, Utility Expenses, Administrative Expenses, Management Fee or other sums
due hereunder, will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord by the
terms of any note secured by any encumbrance against the Premises, and late
charges and penalties due to the late payment of real property taxes on the
Premises. Therefore, if any installment of Rent or any other sum due from Tenant
is not received by Landlord when due, Tenant shall promptly pay to Landlord all
of the following, as applicable: (a) an additional sum equal to ten percent
(10%) of such delinquent amount (b) the amount of seventy-five dollars ($75) for
each three-day notice prepared for, or served on, Tenant, (c) the amount of
fifty dollars ($50) relating to checks for which there are not sufficient funds.
If Tenant delivers to Landlord a check for which there are not sufficient funds,
Landlord may, at its sole option, require Tenant to replace such check with a
cashier's check for the amount of such check and all other charges payable
hereunder. The parties agree that this late charge and the other charges
referenced above represent a fair and reasonable estimate of the costs that
Landlord will incur by reason of late payment by Tenant. Acceptance of any !ate
charge or other charges shall not constitute a waiver by Landlord of Tenant's
default with respect to the delinquent amount, nor prevent Landlord from
exercising any of the other rights and remedies available to Landlord for any
other breach of Tenant under this Lease. If a late charge or other charge
becomes payable for any three (3) installments of Rent within any twelve (12)
month period, then Landlord, at Landlord's sole option, can either require the
Rent be paid quarterly in advance, or be paid monthly in advance by cashier's
check or by electronic funds transfer.
9. Use of Premises:
9.1 Compliance with Laws, Recorded Matters, and Rules and Regulations: The
Premises are to be used solely for the uses stated on Page 1 and for no other
uses or purposes without Landlord's prior written consent, which consent may be
given or withheld in Landlord's reasonable discretion. The use of the Premises
by Tenant and its employees, representatives, agents, invitees, licensees,
subtenants, customers or contractors (collectively, "Tenant's Representatives")
shall be subject to, and at all times in compliance with, (a) any and all
applicable laws, ordinances, statutes, orders and regulations as same exist from
time to time (collectively, the "Laws"), (b) any and all documents, matters or
instruments, including without limitation, any declarations of covenants,
conditions and restrictions, and any supplements thereto, each of which has been
or hereafter is recorded in any official or public records with respect to the
Premises, the Building, the Lot and/or the Park, or any portion thereof
(collectively, the "Recorded Matters"), and (c) any and all rules and
regulations set forth in Exhibit C, attached to and made a part of this Lease,
and any other reasonable rules and regulations promulgated by Landlord now or
hereafter enacted relating to parking and the operation of the Premises, the
Building and the Park (collectively, the "Rules and Regulations"). Tenant agrees
to, and does hereby, assume full and complete responsibility to ensure that the
Premises are adequate to fully meet the needs and requirements of Tenant's
intended operations of its business within the Premises, and Tenant's use of the
Premises and that same are in compliance with all applicable Laws.
9.2 Prohibition on Use: Tenant shall not use the Premises or permit
anything to be done in or about the Premises nor keep or bring anything therein
which will in any way conflict with any of the requirements of the Board of Fire
Underwriters or similar body now or hereafter constituted or in any way increase
the existing rate of or affect any policy of fire or other insurance upon the
Building or any of its contents, or cause a cancellation of any insurance
policy. No auctions may be held or otherwise conducted in, on or about the
Premises, the Building the Lot without Landlord's written consent thereto, which
consent may be given or withheld in Landlord's sole discretion. Tenant shall not
do or permit anything to be done in or about the Premises which will in any way
obstruct or interfere with the rights of Landlord, other tenants or occupants of
the Building, other buildings in the Park, or other persons or businesses in the
area, or injure or annoy other tenants or use or allow the Premises to be used
for any unlawful or objectionable purpose, as determined by Landlord, in its
reasonable discretion, for the benefit, quiet enjoyment and use by Landlord and
all other tenants or occupants of the Building or other buildings in the Park;
nor shall Tenant cause, maintain or permit any private or public nuisance in, on
or about the Premises, Building, Park and/or the Common Area, including, but not
limited to, any offensive odors, noises, fumes or vibrations. Tenant shall not
damage or deface or otherwise commit or suffer to be committed any waste in,
upon or about the Premises. Tenant shall not place or store, nor permit any
other person or entity to place or store, any property, equipment, materials,
supplies, personal property or any other items or goods outside of the Premises
for any period of time. Tenant shall not permit any animals, including, but not
limited to,
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any household pets, to be brought or kept in or about the Premises. Tenant shall
place no loads upon the floors, walls, or ceilings in excess of the maximum
designed load permitted by the applicable Uniform Building Code or which may
damage the Building or outside areas; nor place any harmful liquids in the
drainage systems; nor dump or store waste materials, refuse or other such
materials, or allow such to remain outside the Building area, except in refuse
dumpsters or in any enclosed trash areas provided. Tenant shall honor the terms
of all Recorded Matters relating to the Premises, the Building, the Lot and/or
the Park. Tenant shall honor the Rules and Regulations.
10. Alterations and Additions; and Surrender of Premises:
10.1 Alterations and Additions: Tenant shall not install any signs,
fixtures, improvements, nor make or permit any other alterations or additions to
the Premises without the prior written consent of Landlord, provided that
Landlord's prior written consent shall not be required for alterations and
additions that are less then $2,000 per event, up to an aggregate of $15,000
through the first sixty (60) months of the lease, and $2,000 per event, up to an
aggregate of $15,000 from months sixty one (61) through the end of the Lease
term, exclusive of the option to extend. If any such alteration or addition is
expressly permitted by Landlord, or even if no Landlord consent is required,
Tenant shall deliver at least twenty (20) days prior notice to Landlord, from
the date Tenant intends to commence construction, sufficient to enable Landlord
to post a Notice of Non-Responsibility. In all events, Tenant shall obtain all
permits or other governmental approvals prior to commencing any of such work and
deliver a copy of same to Landlord. All alterations and additions shall be
installed by a licensed contractor approved by Landlord, at Tenant's sole
expense in compliance with all applicable laws (including, but not limited to,
the ADA as defined herein), Recorded Matters, and Rules and Regulations. Tenant
shall keep the Premises and the property on which the Premises are situated free
from any liens arising out of any work performed, materials furnished or
obligations incurred by or on behalf of Tenant. In addition, Tenant shall be
required to furnish Landlord with suitable plans (as determined by Landlord),
permits and a detailed scope of work.
10.2 Surrender of Premises: Upon the termination of this Lease, whether by
forfeiture, lapse of time or otherwise, or upon the termination of Tenant's
right to possession of the Premises, Tenant will at once surrender and deliver
up the Premises, together with the fixtures, additions and improvements which
Landlord has notified Tenant, in writing, that Landlord will require Tenant not
to remove, to Landlord in good condition and repair including, but not limited
to, replacing all light bulbs and ballasts not in good working condition,
excepting for reasonable wear and tear. Reasonable wear and tear shall not
include any damage or deterioration that would have been prevented by proper
maintenance by Tenant or Tenant otherwise performing all of its obligations
under this Lease. Exclusive of the Tenant Improvements agreed to in Exhibit B of
this Lease, upon such termination of this Lease, Tenant shall remove all tenant
signage, trade fixtures, furniture, furnishings, personal property, additions,
and other improvements unless Landlord requests, in writing, that Tenant not
remove some or all of such trade fixtures, furniture, furnishings, additions or
improvements installed by, or on behalf of Tenant or situated in or about the
Premises. By the date which is one hundred eighty (180) days prior to such
termination of this Lease or upon construction of any such improvements,
Landlord shall notify Tenant in writing of those fixtures, alterations,
furniture, furnishings, trade fixtures, additions and other improvements which
Landlord shall require Tenant not to remove from the Premises. Tenant shall
repair any damage caused by the installation or removal of such signs, trade
fixtures, furniture, furnishings, fixtures, additions and improvements which are
to be removed from the Premises by Tenant hereunder. If Landlord fails to so
notify Tenant at least one hundred eighty (180) days prior to such termination
of this Lease, then Tenant shall not be required to remove any tenant signage,
fixtures, alterations, furniture, furnishings, trade fixtures, additions and
other improvements installed in or about the Premises by, or on behalf of
Tenant. Tenant shall ensure that the removal of such items and the repair of the
Premises will be completed prior to such termination of this Lease.
11. Repairs and Maintenance:
11.1 Tenant's Repairs and Maintenance Obligations: Except for those
portions of the Building to be maintained by Landlord, as provided in Section
11.2 below, Tenant shall, at Tenant's sole cost and expense, keep and maintain
the Premises and the adjacent areas (including, without limitation, any portion
of the Common Area used by Tenant or Tenant's Representatives) in good, clean
and safe condition and repair to the satisfaction of Landlord including, but not
limited to, repairing any damage caused by Tenant or Tenant's Representatives
and replacing any property so damaged by Tenant or Tenant's Representatives.
Without limiting the generality of the foregoing, Tenant shall be solely
responsible for maintaining, repairing and replacing (a) all plumbing,
electrical wiring and equipment serving the Premises, (b) all interior lighting
(including, without limitation, light bulbs and/or ballasts), (c) all glass,
windows, window frames, window casements, skylights, interior and exterior
doors, door frames and door closets, (d) all roll-up doors, ramps and dock
equipment including without limitation, dock bumpers, dock plates, dock seals,
dock levelers and dock lights, (e) all tenant signage, (f) lifts for disabled
persons serving the Premises, (g) all partitions, fixtures, equipment, interior
painting, and interior walls and floors of the Premises and every part thereof
(including, without limitation, any demising walls contiguous to any portion of
the Premises). Tenant's obligation to keep, maintain, preserve and repair the
Premises and the adjacent area shall specifically extend to the cleanup and
removal of any and all Hazardous Materials (hereafter defined) occurring in, on
or about the Premises as provided in Article 29 of this Lease.
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11.2 Reimbursable Repairs and Maintenance Obligations: Subject to the
provisions of Sections 6 and 9 of this Lease and except for (i) the obligations
of Tenant set forth in Section 11.1 above, and (ii) the repairs rendered
necessary by the intentional or negligent acts or omissions of Tenant or
Tenant's Representatives, Landlord agrees, at Landlord's expense, subject to
reimbursement pursuant to Section 6 above, to keep in good repair the plumbing
and mechanical systems (including HVAC) exterior to the Premises, fire sprinkler
systems and fire protection systems, any [strikeout]rail-spur[end strikeout] and
rail crossing, the roof, roof membranes, exterior walls of the Building, signage
(exclusive of tenant signage), and exterior electrical wiring and equipment,
exterior lighting, exterior glass, exterior doors and entrances, exterior window
casements, door closers, exterior painting of the Building (exclusive of the
Premises), and underground utility and sewer pipes outside the exterior walls of
the Building. For purposes of this Section 11.2, the term "exterior" shall mean
exterior to, and not serving the Premises. Unless otherwise notified by
Landlord, in writing, that Landlord has elected to procure and maintain the
following described contract(s), Tenant shall procure and maintain (a) the
heating, ventilation and air conditioning systems preventative maintenance and
repair contract(s); such contract(s) to be on a bi-monthly or quarterly basis,
as reasonably determined by Landlord, and (b) the fire and sprinkler protection
services and preventative maintenance and repair contract(s) (including, without
limitation, monitoring services); such contract(s) to be on a bi-monthly or
quarterly basis, as reasonably determined by Landlord. Landlord reserves the
right, but without the obligation to do so, to procure and maintain (i) the
heating, ventilation and air conditioning systems preventative maintenance and
repair contract(s), and/or (ii) the fire and sprinkler protection services and
preventative maintenance and repair contract(s) (including, without limitation,
monitoring services). If Landlord so elects to procure and maintain any such
contract(s), Tenant will reimburse Landlord for the cost thereof in accordance
with the provisions of Section 6 above. If Tenant procures and maintains any of
such contract(s), Tenant will promptly deliver to Landlord a true and complete
copy of each such contract and any and all renewals or extensions thereof, and
each service report or other summary received by Tenant pursuant to or in
connection with such contract(s).
11.3 Landlord's Repairs and Maintenance Obligations: Except for repairs
rendered necessary by the intentional or negligent acts or omissions of Tenant
or Tenant's Representatives, Landlord agrees, to (a) keep in good repair the
structural portions of the floors, foundations and exterior perimeter walls of
the Building (exclusive of glass and exterior doors), and (b) replace the
structural portions of the roof of the Building (excluding the roof membrane)
as, and when, Landlord determines such replacement to be necessary in Landlord's
sole discretion. Tenant's pro rata share of these costs may be passed through by
Landlord and amortized over the useful life, as determined by Landlord, and paid
by Tenant to Landlord as Additional Rent.
11.4 Tenant's Failure to Perform Repairs and Maintenance Obligations:
Tenant shall have no right of access to or right to install any device on the
roof of the Building nor make any penetrations of the roof of the Building
without the express prior written consent of Landlord. If Tenant refuses or
neglects to repair and maintain the Premises and the adjacent areas properly as
required herein and to the reasonable satisfaction of Landlord, Landlord may,
but without obligation to do so, at any time make such repairs and/or
maintenance without Landlord having any liability to Tenant for any loss or
damage that may accrue to Tenant's merchandise, fixtures or other property, or
to Tenant's business by reason thereof, except to the extent any damage is
caused by the willful misconduct or gross negligence of Landlord or its
authorized agents and representatives. In the event Landlord makes such repairs
and/or maintenance, upon completion thereof Tenant shall pay to Landlord, as
additional rent, the Landlord's costs for making such repairs and/or
maintenance, plus ten percent (10%) for overhead, upon presentation of a bill
therefor, plus any Enforcement Expenses. The obligations of Tenant hereunder
shall survive the expiration of the term of this Lease or the earlier
termination thereof. Tenant hereby waives any right to repair at the expense of
Landlord under any applicable Laws now or hereafter in effect respecting the
Premises.
12. Insurance:
12.1 Types of Insurance: Tenant shall maintain in full force and effect at
all times during the term of this Lease, at Tenant's sole cost and expense, for
the protection of Tenant and Landlord, as their interests may appear, policies
of insurance issued by a carrier or carriers acceptable to Landlord and its
lender(s) which afford the following coverages: (i) worker's compensation:
statutory limits; (ii) employer's liability, as required by law, with a minimum
limit of $100,000 per employee and $500,000 per occurrence; (iii) commercial
general liability insurance (occurrence form) providing coverage against any and
all claims for bodily injury and property damage occurring in, on or about the
Premises arising out of Tenant's and Tenant's Representatives' use and/or
occupancy of the Premises. Such insurance shall include coverage for blanket
contractual liability, fire damage, premises, personal injury, completed
operations, products liability, personal and advertising, and a plate-glass
rider to provide coverage for all glass in, on or about the Premises including,
without limitation, skylights, with deletion of the exclusion for operations
within fifty (50) feet of a railroad track (railroad protective liability), if
applicable. Such insurance shall have a combined single limit of not less than
One Million Dollars ($1,000,000) per occurrence with a Two Million Dollar
($2,000,000) aggregate limit that includes excess umbrella insurance. If Tenant
has other locations which it owns or leases, the policy shall include an
aggregate limit per location endorsement. If necessary, as reasonably determined
by Landlord, Tenant shall provide for restoration of the aggregate limit; (iv)
comprehensive automobile liability insurance: a combined single limit of not
less than $2,000,000 per occurrence and insuring Tenant against liability for
claims arising out of the ownership, maintenance, or use of any owned, hired or
non-owned automobiles; (v) "all risk" property insurance, including without
limitation, sprinkler leakage, boiler and machinery comprehensive form, if
applicable, covering damage to or loss of any
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personal property, trade fixtures, inventory, fixtures and equipment located in,
on or about the Premises, and in addition, coverage for flood, and business
interruption of Tenant, together with, if the property of Tenant's invitees is
to be kept in the Premises, warehouser's legal liability or bailee customers
insurance for the full replacement cost of the property belonging to invitees
and located in the Premises. Such insurance shall be written on a replacement
cost basis (without deduction for depreciation) in an amount equal to one
hundred percent (100%) of the full replacement value of the aggregate of the
items referred to in this subparagraph (v); and (vi) such other insurance as
Landlord deems necessary and prudent or as may otherwise be required by any of
Landlord's lenders or joint venture partners.
12.2 Insurance Policies: Insurance required to be maintained by Tenant
shall be written by companies (i) licensed to do business in the State of
California, (ii) domiciled in the United States of America, and (iii) having a
"General Policyholders Rating" of at least A:X (or such higher rating as may be
required by a lender having a lien on the Premises) as set forth in the most
current issue of "Best's Insurance Reports." Any deductible amounts under any of
the insurance policies required hereunder shall not exceed One Thousand Dollars
($1,000). Tenant shall deliver to Landlord certificates of insurance and true
and complete copies of any and all endorsements required herein for all
insurance required to be maintained by Tenant hereunder at the time of execution
of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to
expiration of each policy, furnish Landlord with certificates of renewal or
"binders" thereof. Each certificate shall expressly provide that such policies
shall not be cancelable or otherwise subject to modification except after thirty
(30) days prior written notice to the parties named as additional insureds as
required in this Lease (except for cancellation for nonpayment of premium, in
which event cancellation shall not take effect until at least ten (10) days'
notice has been given to Landlord). Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms of this
Lease under a blanket insurance policy, provided such blanket policy expressly
affords coverage for the Premises and for Landlord as required by this Lease.
12.3 Additional Insureds and Coverage: Landlord, any property management
company and/or agent of Landlord for the Premises, the Building, the Lot or the
Park, any lender(s) of Landlord having a lien against the Premises, the
Building, the Lot or the Park, and any joint venture partners of Landlord shall
be specifically named as additional insureds under all of the policies required
in Section 12.1(iii) above. Additionally, such policies shall provide for
severability of interest. All insurance to be maintained by Tenant shall, except
for workers' compensation and employer's liability insurance, be primary,
without right of contribution from insurance maintained by Landlord. Any
umbrella liability policy or excess liability policy (which shall be in
"following form") shall provide that if the underlying aggregate is exhausted,
the excess coverage will drop down as primary insurance. The limits of insurance
maintained by Tenant shall not limit Tenant's liability under this Lease. It is
the parties' intention that the insurance to be procured and maintained by
Tenant as required herein shall provide coverage for any and all damage or
injury arising from or related to Tenant's operations of its business and/or
Tenant's or Tenant's Representatives' use of the Premises and/or any of the
areas within the Park, whether such events occur within the Premises (as
described in Exhibit A hereto) or in any other areas of the Park. It is not
contemplated or anticipated by the parties that the aforementioned risks of loss
be borne by Landlord's insurance carriers, rather it is contemplated and
anticipated by Landlord and Tenant that such risks of loss be borne by Tenant's
insurance carriers pursuant to the insurance policies procured and maintained by
Tenant as required herein. In the event Landlord makes a claim against Tenant's
insurance as an additional insured, Tenant shall reimburse Landlord for the
amount of any deductible portion not paid to Landlord by the insurer.
12.4 Failure of Tenant to Purchase and Maintain Insurance: In the event
Tenant does not purchase the insurance required in this Lease or keep the same
in full force and effect throughout the term of this Lease (including any
renewals or extensions), Landlord may, but without obligation to do so, purchase
the necessary insurance and pay the premiums therefor. If Landlord so elects to
purchase such insurance, Tenant shall pay promptly to Landlord, as Additional
Rent, the amount so paid by Landlord, upon Landlord's demand therefor. In
addition, Landlord may recover from Tenant and Tenant agrees to pay, as
additional rent, any and all Enforcement Expenses and damages which Landlord may
sustain by reason of Tenant's failure to obtain and maintain such insurance. If
Tenant fails to maintain any insurance required in this Lease, Tenant shall be
liable for all losses, damages, costs resulting from such failure and be in
default of the Lease.
13. Waiver of Subrogation: Landlord and Tenant hereby mutually waive their
respective rights of recovery against each other for any loss of, or damage to,
either parties' property to the extent that such loss or damage is insured by an
insurance policy required to be in effect at the time of such loss or damage.
Each party shall obtain any special endorsements, if required by its insurer
whereby the insurer waives its rights of subrogation against the other party.
This provision is intended to waive fully, and for the benefit of the parties
hereto, any rights and/or claims which might give rise to a right of subrogation
in favor of any insurance carrier. The coverage obtained by Tenant pursuant to
Section 12 of this Lease shall include, without limitation, a waiver of
subrogation endorsement attached to the certificate of insurance. The provisions
of this Section 13 shall not apply in those instances in which such waiver of
subrogation would invalidate such insurance coverage or would cause either
party's insurance coverage to be voided or otherwise uncollectible.
14. Limitation of Liability and Indemnity: Except for damage resulting from the
[strikeout]sole[endstrikeout] active gross negligence or willful misconduct of
Landlord or its authorized representatives, Tenant agrees to protect, defend
(with counsel
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acceptable to Landlord) and hold Landlord and Landlord's lender(s), partners,
employees, representatives, legal representatives, successors and assigns
(collectively, the "Indemnitees") harmless and indemnify the Indemnitees from
and against all liabilities, damages, claims, losses, judgments, charges and
expenses (including reasonable attorneys' fees, costs of court and expenses
necessary in the prosecution or defense of any litigation including the
enforcement of this provision) arising from or in any way related to, directly
or indirectly, Tenant's or Tenant's Representatives' use of the Premises,
Building and/or the Park, or the conduct of Tenant's business, or from any
activity, work or thing done, permitted or suffered by Tenant in or about the
Premises, or in any way connected with the Premises or with the improvements or
personal property therein, including, but not limited to, any liability for
injury to person or property of Tenant, Tenant's Representatives, or third party
persons. Tenant agrees that the obligations of Tenant herein shall survive the
expiration or earlier termination of this Lease.
Except for damage resulting from the [strikeout]sole[endstrikeout] active
gross negligence or willful misconduct of Landlord or its authorized
representatives, Landlord shall not be liable to Tenant for any loss or damage
to Tenant or Tenant's property, for any injury to or loss of Tenant's business
or for any damage or injury to any person from any cause whatsoever, including,
but not limited to, any acts, errors or omissions by or on behalf of any other
tenants or occupants of the Building and/or the Park. Tenant shall not, in any
event or circumstance, be permitted to offset or otherwise credit against any
payments of Rent required herein for matters for which Landlord may be liable
hereunder. Landlord and its authorized representatives shall not be liable for
any interference with light or air, or for any latent defect in the Premises or
the Building. To the fullest extent permitted by law, Tenant agrees that neither
Landlord nor any of Landlord's lender(s), partners, employees, representatives,
legal representatives, successors and assigns shall at any time or to any extent
whatsoever be liable, responsible or in any way accountable for any loss,
liability, injury, death or damage to persons or property which at any time may
be suffered or sustained by Tenant or by any person(s) whomsoever who may at any
time be using, occupying or visiting the Premises, the Building or the Park.
15. Assignment and Subleasing:
15.1 Prohibition: Tenant shall not assign, mortgage, hypothecate,
encumber, grant any license or concession, pledge or otherwise transfer this
Lease (collectively, "assignment"), in whole or in part, whether voluntarily or
involuntarily or by operation of law, nor sublet or permit occupancy by any
person other than Tenant of all or any portion of the Premises without first
obtaining the prior written consent of Landlord, which consent shall not be
unreasonably withheld. Tenant hereby agrees that Landlord may withhold its
consent to any proposed sublease or assignment if the proposed sublessee or
assignee or its business is subject to compliance with additional requirements
of the ADA (defined below) beyond those requirements which are applicable to
Tenant, unless the proposed sublessee or assignee shall (a) first deliver plans
and specifications for complying with such additional requirements and obtain
Landlord's written consent thereto, and (b) comply with all Landlord's
conditions for or contained in such consent, including without limitation,
requirements for security to assure the lien-free completion of such
improvements. If Tenant seeks to sublet or assign all or any portion of the
Premises, Tenant shall deliver to Landlord the following: (i) the name of the
proposed assignee or sublessee; (ii) such information as to such assignee's or
sublessee's financial responsibility and standing as Landlord may reasonably
require; and (iii) the aforementioned plans and specifications, if any or (iv)
any other pertinent information regarding the proposed subtenant that is
reasonably requested by Landlord. Within ten (10) days after Landlord's receipt
of a written request from Tenant that Tenant seeks to sublet or assign all or
any portion of the Premises, Landlord shall deliver to Tenant a copy of
Landlord's consent to sublease or assignment form (as applicable), which
instrument shall be utilized for each proposed sublease or assignment (as
applicable), and such instrument shall include a provision whereby the assignee
or sublessee assumes all of Tenant's obligations hereunder and agrees to be
bound by the terms hereof. As Additional Rent hereunder, Tenant shall pay to
Landlord a fee in the amount of five hundred dollars ($500) plus Tenant shall
reimburse Landlord for actual legal and other expenses incurred by Landlord in
connection with any actual or proposed assignment or subletting. Upon Landlord's
approval of the proposed subtenant or assignee, which shall not be unreasonably
delayed or withheld, Tenant shall provide Landlord with a minimum of a thirty
(30) day notice indicating the proposed effective date of the sublease or
assignment ("Proposed Effective Date"). In the event the sublease (1) by itself
or taken together with prior sublease(s) covers or totals, as the case may be,
more than twenty-five percent (25%) of the rentable square feet of the Premises
or (2) is for a term which by itself or taken together with prior or other
subleases is greater than fifty percent (50%) of the period remaining in the
term of this Lease as of the time of the Proposed Effective Date, then Landlord
shall have the right, to be exercised by giving written notice to Tenant, to
recapture the space described in the sublease. If such recapture notice is
given, it shall serve to terminate this Lease with respect to the proposed
sublease space, or, if the proposed sublease space covers all the Premises, it
shall serve to terminate the entire term of this Lease in either case, as of the
Proposed Effective Date. However, no termination of this Lease with respect to
part or all of the Premises shall become effective without the prior written
consent, where necessary, of the holder of each deed of trust encumbering the
Premises or any part thereof. If this Lease is terminated pursuant to the
foregoing with respect to less than the entire Premises, the Rent shall be
adjusted on the basis of the proportion of square feet retained by Tenant to the
square feet originally demised and this Lease as so amended shall continue
thereafter in full force and effect. No termination will be considered by
Landlord unless Tenant is current in all of its Lease obligations and not in
default. Each permitted and approved assignee shall be 100% responsible for the
obligations defined in this Lease. Each permitted assignee shall assume and be
deemed to assume this Lease and shall be and remain liable jointly and severally
with Tenant for payment of Rent and for the due performance of, and compliance
with all the terms, covenants, conditions and agreements herein contained on
Tenant's
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part to be performed or complied with, for the term of this Lease. Landlord
shall have a right to approve the form of any sublease, which approval shall not
be unreasonably withheld. No assignment or subletting shall affect the
continuing primary liability of Tenant (which, following assignment, shall be
joint and several with the assignee), and Tenant shall not be released from
performing any of the terms, covenants and conditions of this Lease. Tenant
hereby acknowledges and agrees that it understands that Landlord's accounting
department may process and accept Rent payments without verifying that such
payments are being made by Tenant, a permitted sublessee or a permitted assignee
in accordance with the provisions of this Lease. Although such payments may be
processed and accepted by such accounting department personnel, any and all
actions or omissions by the personnel of Landlord's accounting department shall
not be considered as acceptance by Landlord of any proposed assignee or
sublessee nor shall such actions or omissions be deemed to be a substitute for
the requirement that Tenant obtain Landlord's prior written consent to any such
subletting or assignment, and any such actions or omissions by the personnel of
Landlord's accounting department shall not be considered as a voluntary
relinquishment by Landlord of any of its rights hereunder nor shall any
voluntary relinquishment of such rights be inferred therefrom. For purposes
hereof, in the event Tenant is a corporation, partnership, joint venture, trust
or other entity other than a natural person, any change in the direct or
indirect ownership of Tenant (whether pursuant to one or more transfers) which
results in a change of more than fifty percent (50%) in the direct or indirect
ownership of Tenant shall be deemed to be an assignment within the meaning of
this Section 15 and shall be subject to all the provisions hereof. Any and all
options, first rights of refusal, tenant improvement allowances and other
similar rights granted to Tenant in this Lease, if any, shall not be assignable
by Tenant unless expressly authorized in writing by Landlord.
15.2 Excess Sublease Rental or Assignment Consideration: In the event of
any sublease or assignment of all or any portion of the Premises where the rent
or other consideration provided for in the sublease or assignment either
initially or over the term of the sublease or assignment exceeds the Rent or pro
rata portion of the Rent, as the case may be, for such space reserved in the
Lease, Tenant shall pay the Landlord monthly, as additional rent, at the same
time as the monthly installments of Rent are payable hereunder, one hundred
percent (100%) of the excess of each such payment of rent or other consideration
in excess of the Rent called for hereunder.
15.3 Waiver: Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or failure by Landlord to take action against any assignee or
sublessee, Tenant waives notice of any default of any assignee or sublessee and
agrees that Landlord may, at its option, proceed against Tenant without having
taken action against or joined such assignee or sublessee, except that Tenant
shall have the benefit of any indulgences, waivers and extensions of time
granted to any such assignee or sublessee.
16. Ad Valorem Taxes: Tenant shall pay all taxes and assessments levied upon
trade fixtures, alterations, additions, improvements, inventories and personal
property located and/or installed on or in the Premises by, or on behalf of,
Tenant, prior to delinquency; and if requested by Landlord, Tenant shall
promptly deliver to Landlord copies of receipts for payment of all such taxes
and assessments. To the extent any such taxes are not separately assessed or
billed to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord.
17. Subordination: Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any bona fide mortgagee or deed of trust beneficiary
with a lien on all or any portion of the Premises or any ground lessor with
respect to the land of which the Premises are a part, the rights of Tenant under
this Lease and this Lease shall be subject and subordinate at all times to: (i)
all ground leases or underlying leases which may now exist or hereafter be
executed affecting the Building or the land upon which the Building is situated
or both, and (ii) the lien of any mortgage or deed of trust which may now exist
or hereafter be executed in any amount for which the Building, the Lot, ground
leases or underlying leases, or Landlord's interest or estate in any of said
items is specified as security. Notwithstanding the foregoing, Landlord or any
such ground lessor, mortgagee, or any beneficiary shall have the right to
subordinate or cause to be subordinated any such ground leases or underlying
leases or any such liens to this Lease. If any ground lease or underlying lease
terminates for any reason or any mortgage or deed of trust is foreclosed or a
conveyance in lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination, attorn to and become the Tenant of the
successor in interest to Landlord. Such successor in interest
[strikeout]will[endstrikeout] shall not disturb Tenant's use, occupancy or quiet
enjoyment of the Premises so long as Tenant is not in default of the terms and
provisions of this Lease beyond any applicable cure periods. The successor in
interest to Landlord following foreclosure, sale or deed in lieu thereof shall
not be (a) liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership; (b) subject to any offsets
or defenses which Tenant might have against any prior lessor; (c) bound by
prepayment of more than one (1) month's Rent; or (d) liable to Tenant for any
Security Deposit not actually received by such successor in interest to the
extent any portion or all of such Security Deposit has not already been
forfeited by, or refunded to, Tenant. Landlord shall be liable to Tenant for all
or any portion of the Security Deposit not forfeited by, or refunded to Tenant,
until and unless Landlord transfers such Security Deposit to the successor in
interest. Tenant covenants and agrees to execute (and acknowledge if required by
Landlord, any lender or ground lessor) and deliver, within ten (10) days of a
demand or request by Landlord and in the form reasonably requested by Landlord,
ground lessor, mortgagee or beneficiary, any additional reasonable documents
evidencing the priority or subordination of this Lease with respect to any such
ground leases or underlying leases or the lien of any such mortgage or deed of
trust, provided that such documents contain non-disturbance provisions
reasonably acceptable to Tenant. Tenant's failure to timely execute and deliver
such additional documents shall, at Landlord's
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option, constitute a default hereunder. It is further agreed that Tenant shall
be liable to Landlord, and shall indemnify Landlord from and against any loss,
cost, damage or expense, incidental, consequential, or otherwise, arising or
accruing directly or indirectly, from any failure of Tenant to execute or
deliver to Landlord any such additional documents, together with any and all
Enforcement Expenses.
18. Right of Entry: Tenant grants Landlord or its agents the right to enter the
Premises at all reasonable times for purposes of inspection, exhibition, posting
of notices, repair or alteration. It is further agreed that Landlord shall have
the right to use any and all means Landlord deems necessary to enter the
Premises in an emergency. Landlord shall also have the right to place "for rent"
and/or "available" signs on the outside of the Premises. Tenant hereby waives
any claim from damages or for any injury or inconvenience to or interference
with Tenant's business, or any other loss occasioned thereby except for any
claim for any of the foregoing arising out of the [strikeout]sole[endstrikeout]
active gross negligence or willful misconduct of Landlord or its authorized
representatives.
19. Estoppel Certificate: Tenant shall execute (and acknowledge if required by
any lender or ground lessor) and deliver to Landlord, within not less than five
(5) days after Landlord provides such to Tenant, a statement in writing
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification), the date to which the Rent
and other charges are paid in advance, if any, acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or
specifying such defaults as are claimed, and such other matters as Landlord may
reasonably require. Any such statement may be conclusively relied upon by
Landlord and any prospective purchaser or encumbrancer of the Premises. Tenant's
failure to deliver such statement within such time shall be conclusive upon the
Tenant that (a) this Lease is in full force and effect, without modification
except as may be represented by Landlord; (b) there are no uncured defaults in
Landlord's performance; and (c) not more than one month's Rent has been paid in
advance, except in those instances when Tenant pays Rent quarterly in advance
pursuant to Section 8 hereof, then not more than three month's Rent has been
paid in advance. Failure by Tenant to so deliver such certified estoppel
certificate shall be a default of the provisions of this Lease. Tenant shall be
liable to Landlord, and shall indemnify Landlord from and against any loss,
cost, damage or expense, incidental, consequential, or otherwise, arising or
accruing directly or indirectly, from any failure of Tenant to execute or
deliver to Landlord any such certified estoppel certificate, together with any
and all Enforcement Expenses.
20. Tenant's Default: The occurrence of any one or more of the following events
shall, at Landlord's option, constitute a default and breach of this Lease by
Tenant:
20.1 The vacation or abandonment of the Premises by Tenant for a period
of ten (10) consecutive days or the vacation of the Premises by Tenant which
would cause any insurance policy to be invalidated or otherwise lapse;
20.2 The failure by Tenant to make any payment of Rent, Additional Rent or
any other payment required hereunder on the date said payment is due;
20.3 The failure by Tenant to observe, perform or comply with any of the
conditions, covenants or provisions of this Lease (except failure to make any
payment of Rent and/or Additional Rent) and such failure is not cured within the
time period required under the provisions of this Lease. Tenant agrees: if such
failure is susceptible of cure but cannot reasonably be cured within the
aforementioned time period (if any), as determined reasonably by Landlord,
Tenant shall promptly commence the cure of such failure and thereafter
diligently prosecute such cure to completion within the time period specified by
Landlord in any written notice regarding such failure as may be delivered to
Tenant by Landlord. In no event or circumstance shall Tenant have more than
thirty (30) days to complete any such cure, unless otherwise expressly agreed to
in writing by Landlord;
20.4 The making of a general assignment by Tenant for the benefit of
creditors, the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation, or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing, the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold, Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due, any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking
any action toward the dissolution or winding up of Tenant's affairs, the
cessation or suspension of Tenant's use of the Premises, or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
20.5 The making of any material misrepresentation or omission included but
not limited to any financial information by Tenant in any materials delivered by
or on behalf of Tenant to Landlord pursuant to this Lease; or
20.6 A material adverse change in the financial condition of Tenant or an
affiliated entity of Tenant which may adversely affect Tenant's ability to
perform all or any portion of its obligations under this Lease.
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21. Remedies for Tenant's Default:
21.1 Landlord's Rights: In the event of Tenant's default or breach of the
Lease, Landlord may terminate Tenant's right to possession of the Premises by
any lawful means in which case upon delivery of written notice by Landlord this
Lease shall terminate on the date specified by Landlord in such notice and
Tenant shall immediately surrender possession of the Premises to Landlord. In
addition, the Landlord shall have the immediate right of re-entry whether or not
this Lease is terminated, and if this right of re-entry is exercised following
abandonment of the Premises by Tenant, Landlord may consider any personal
property belonging to Tenant and left on the Premises to also have been
abandoned. No re-entry or taking possession of the Premises by Landlord pursuant
to this Section 21 shall be construed as an election to terminate this Lease
unless a written notice of such intention is given to Tenant. If Landlord relets
the Premises or any portion thereof, (i) Tenant shall be liable immediately to
Landlord for all costs Landlord incurs in reletting the Premises or any part
thereof, including, without limitation, broker's commissions, expenses of
cleaning, redecorating, and further improving the Premises and other similar
costs (collectively, the "Reletting Costs"), and (ii) the rent received by
Landlord from such reletting shall be applied to the payment of, first, any
indebtedness from Tenant to Landlord other than Base Rent, Operating Expenses,
Tax Expenses, Administrative Expenses, Common Area Utility Costs, and Utility
Expenses; second, all costs including maintenance, incurred by Landlord in
reletting; and, third, Base Rent, Operating Expenses, Tax Expenses,
Administrative Expenses, Common Area Utility Costs, Utility Expenses, and all
other sums due under this Lease. Any and all of the Reletting Costs shall be
fully chargeable to Tenant and shall not be prorated or otherwise amortized in
relation to any new lease for the Premises or any portion thereof. After
deducting the payments referred to above, any sum remaining from the rental
Landlord receives from reletting shall be held by Landlord and applied in
payment of future Rent as Rent becomes due under this Lease. In no event shall
Tenant be entitled to any excess rent received by Landlord. Reletting may be for
a period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. So
long as this Lease is not terminated, Landlord shall have the right to remedy
any default of Tenant, to maintain or improve the Premises, to cause a receiver
to be appointed to administer the Premises and new or existing subleases and to
add to the Rent payable hereunder all of Landlord's reasonable costs in so
doing, with interest at the maximum rate permitted by law from the date of such
expenditure.
21.2 Damages Recoverable: If Tenant breaches this Lease and abandons the
Premises before the end of the term, or if Tenant's right to possession is
terminated by Landlord because of a breach or default of the Lease, then in
either such case, Landlord may recover from Tenant all damages suffered by
Landlord as a result of Tenant's failure to perform its obligations hereunder,
including, but not limited to, the cost of any tenant improvements constructed
by or on behalf of Tenant pursuant to Exhibit B hereto, the portion of any
broker's or leasing agent's commission incurred with respect to the leasing of
the Premises to Tenant for the balance of the term of the Lease remaining after
the date on which Tenant is in default of its obligations hereunder, and all
Reletting Costs, and the worth at the time of the award (computed in accordance
with paragraph (3) of Subdivision (a) of Section 1951.2 of the California Civil
Code) of the amount by which the Rent then unpaid hereunder for the balance of
the Lease term exceeds the amount of such loss of Rent for the same period which
Tenant proves could be reasonably avoided by Landlord and in such case, Landlord
prior to the award, may relet the Premises for the purpose of mitigating damages
suffered by Landlord because of Tenant's failure to perform its obligations
hereunder; provided, however, that even though Tenant has abandoned the Premises
following such breach, this Lease shall nevertheless continue in full force and
effect for as long as Landlord does not terminate Tenant's right of possession,
and until such termination, Landlord shall have the remedy described in Section
1951.4 of the California Civil Code (Landlord may continue this Lease in effect
after Tenant's breach and abandonment and recover Rent as it becomes due, if
Tenant has the right to sublet or assign, subject only to reasonable
limitations) and may enforce all its rights and remedies under this Lease,
including the right to recover the Rent from Tenant as it becomes due hereunder.
The "worth at the time of the award" within the meaning of Subparagraphs (a)(1)
and (a)(2) of Section 1951.2 of the California Civil Code shall be computed by
allowing interest at the rate of ten percent (10%) per annum. Tenant waives
redemption or relief from forfeiture under California Code of Civil Procedure
Sections 1174 and 1179, or under any other present or future law, in the event
Tenant is evicted or Landlord takes possession of the Premises by reason of any
default of Tenant hereunder.
21.3 Rights and Remedies Cumulative: The foregoing rights and remedies of
Landlord are not exclusive; they are cumulative in addition to any rights and
remedies now or hereafter existing at law, in equity by statute or otherwise, or
to any equitable remedies Landlord may have, and to any remedies Landlord may
have under bankruptcy laws or laws affecting creditor's rights generally. In
addition to all remedies set forth above, if Tenant defaults or otherwise
breaches this Lease, any and all Base Rent waived by Landlord under Section 3
above shall be immediately due and payable to Landlord and all options granted
to Tenant hereunder shall automatically terminate, unless otherwise expressly
agreed to in writing by Landlord.
21.4 Waiver of a Default: The waiver by Landlord of any default or breach
of any provision of this Lease shall not be deemed or construed a waiver of any
other breach or default by Tenant hereunder or of any subsequent breach or
default of this Lease, except for the default specified in the waiver.
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22. Holding Over: If Tenant holds possession of the Premises after the
expiration of the term of this Lease with Landlord's consent, Tenant shall
become a tenant from month-to-month upon the terms and provisions of this Lease
provided the monthly Base Rent during such hold over period shall be 150% of the
Base Rent due on the last month of the Lease term, payable in advance on or
before the first day of each month. Acceptance by Landlord of the monthly Base
Rent without the additional fifty percent (50%) increase of Base Rent shall not
be deemed or construed as a waiver by Landlord of any of its rights to collect
the increased amount of the Base Rent as provided herein at any time. Such
month-to-month tenancy shall not constitute a renewal or extension for any
further term. All options, if any, granted under the terms of this Lease shall
be deemed automatically terminated and be of no force or effect during said
month-to-month tenancy. Tenant shall continue in possession until such tenancy
shall be terminated by either Landlord or Tenant giving written notice of
termination to the other party at least thirty (30) days prior to the effective
date of termination. This paragraph shall not be construed as Landlord's
permission for Tenant to hold over. Acceptance of Base Rent by Landlord
following expiration or termination of this Lease shall not constitute a renewal
of this Lease.
23. Landlord's Default: Landlord shall not be deemed in breach or default of
this Lease unless Landlord fails within a reasonable time to perform an
obligation required to be performed by Landlord hereunder. For purposes of this
provision, a reasonable time shall at a minimum be thirty (30) days after
receipt by Landlord of written notice specifying the nature of the obligation
Landlord has not performed; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days, after receipt of written
notice, is reasonably necessary for its performance, then Landlord shall not be
in breach or default of this Lease if performance of such obligation is
commenced within such thirty (30) day period and thereafter diligently pursued
to completion.
24. Parking: Tenant shall have a license to use the number of undesignated and
nonexclusive parking spaces set forth on Page 1. Landlord shall not be obligated
or required to enforce Tenant's right to use the same.
25. Sale of Premises: In the event of any sale of the Premises by Landlord or
the cessation otherwise of Landlord's interest therein, Landlord shall be and is
hereby entirely released from any and all of its under this lease arising
thereafter, and the purchaser shall be deemed, at such sale or any subsequent
sale of the Premises shall be deemed, without any further agreement between the
parties or their successors in interest or between the parties and any such
purchaser, to have assumed and agreed to carry out any and all of the covenants
and obligations of the Landlord under this Lease. For purposes of this Section
25, the term "Landlord" means only the owner and/or agent of the owner as such
parties exist as of the date on which Tenant executes this Lease. A ground lease
or similar long term lease by Landlord of the entire Building, of which the
Premises is a part, shall be deemed a sale within the meaning of this Section
25. Tenant agrees to attorn to such new owner. The provisions of this Section 25
shall not release Landlord from any of its obligations under this Lease arising
prior to such sale or cessation of Landlord's interest
26. Waiver: No delay or omission in the exercise of any right or remedy of
Landlord on any default by Tenant shall impair such a right or remedy or be
construed as a waiver. The subsequent acceptance of Rent by Landlord after
breach by Tenant of any covenant or term of this Lease shall not be deemed a
waiver of such breach, other than a waiver of timely payment for the particular
Rent payment (or portion thereof) involved, and shall not prevent Landlord from
maintaining an unlawful detainer or other action based on such breach. No
payment by Tenant or receipt by Landlord of a lesser amount than the monthly
Rent and other sums due hereunder shall be deemed to be other than on account of
the earliest Rent or other sums due, nor shall any endorsement or statement on
any check or accompanying any check or payment be deemed an accord and
satisfaction; and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or other sum or pursue any
other remedy provided in this Lease. No failure, partial exercise or delay on
the part of the Landlord in exercising any right, power or privilege hereunder
shall operate as a waiver thereof.
27. Casualty Damage: If the Premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall give prompt written notice thereof to
Landlord. In case the Building shall be so damaged by fire or other casualty
that substantial alteration or reconstruction of the Building shall, in
Landlord's sole opinion, be required (whether or not the Premises shall have
been damaged by such fire or other casualty), Landlord may, at its option,
terminate this Lease by notifying Tenant in writing of such termination within
forty-five (45) days after the date of such damage, in which event the Rent
shall be abated as of the date of such damage. If Landlord does not elect to
terminate this Lease, and provided insurance proceeds and any contributions from
Tenant, if necessary, are available to fully repair the damage, Landlord shall
within ninety (90) days after the date of such damage commence to repair and
restore the Building and shall proceed with reasonable diligence to restore the
Building (except that Landlord shall not be responsible for delays outside its
control) to substantially the same condition in which it was immediately prior
to the happening of the casualty; provided, Landlord shall not be required to
rebuild, repair, or replace any part of Tenant's furniture, furnishings or
fixtures and equipment removable by Tenant or any improvements, alterations or
additions installed by or for the benefit of Tenant under the provisions of this
Lease. Landlord shall not in any event be required to spend for such work an
amount in excess of the insurance proceeds (excluding any deductible) and any
contributions from Tenant, if necessary,
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actually received by Landlord as a result of the fire or other casualty.
Landlord shall not be liable for any inconvenience or annoyance to Tenant,
injury to the business of Tenant, loss of use of any part of the Premises by the
Tenant or loss of Tenant's personal property resulting in any way from such
damage or the repair thereof, except that, subject to the provisions of the next
sentence, Landlord shall allow Tenant a fair diminution of Rent during the time
and to the extent the Premises are unfit for occupancy. If the Premises or any
other portion of the Building be damaged by fire or other casualty resulting
from the intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives, the Rent shall not be diminished during the repair of such
damage and Tenant shall be liable to Landlord for the cost and expense of the
repair and restoration of all or any portion of the Building caused thereby
(including, without limitation, any deductible) to the extent such cost and
expense is not covered by insurance proceeds. In the event the holder of any
indebtedness secured by the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination to Tenant within thirty
(30) days after the date of notice to Tenant of any such event, whereupon all
rights and obligations shall cease and terminate hereunder. Except as otherwise
provided in this Section 27, Tenant hereby waives the provisions of Sections
1932(2.), 1933(4.), 1941 and 1942 of the California Civil Code.
28. Condemnation: If twenty-five percent (25%) or more of the Premises is
condemned by eminent domain, inversely condemned or sold in lieu of condemnation
for any public or quasi-public use or purpose ("Condemned"), then Tenant or
Landlord may terminate this Lease as of the date when physical possession of the
Premises is taken and title is vested in such condemning authority, and Rent
shall be adjusted to the date of termination. Tenant shall not, because of such
condemnation, assert any claim against Landlord or the condemning authority for
any compensation because of such condemnation, and Landlord shall be entitled to
receive the entire amount of any award without deduction for any estate of
interest or other interest of Tenant. If a substantial portion of the Premises,
Building or the Lot is so Condemned, Landlord at its option may terminate this
Lease. If Landlord does not elect to terminate this Lease, Landlord shall, if
necessary, promptly proceed to restore the Premises or the Building to
substantially its same condition prior to such partial condemnation, allowing
for the reasonable effects of such partial condemnation, and a proportionate
allowance shall be made to Tenant, as solely determined by Landlord, for the
Rent corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of such partial condemnation and
restoration. Landlord shall not be required to spend funds for restoration in
excess of the amount received by Landlord as compensation awarded.
29. Environmental Matters/Hazardous Materials:
29.1 Hazardous Materials Disclosure Certificate: Prior to executing this
Lease, Tenant has completed, executed and delivered to Landlord the Hazardous
Materials Disclosure Certificate (the "HazMat Certificate"), a copy of which is
attached hereto as Exhibit E and incorporated herein by this reference. Tenant
covenants, represents and warrants to Landlord that the information on the
HazMat Certificate is true and correct and accurately describes the use(s) of
Hazardous Materials which will be made and/or used on the Premises by Tenant.
Tenant shall, commencing with the date which is one year from the Commencement
Date and continuing every year thereafter, complete, execute, and deliver to
Landlord, a HazMat Certificate describing Tenant's present use of Hazardous
Materials on the Premises, and any other reasonably necessary documents as
requested by Landlord. The HazMat Certificate required hereunder shall be in the
form as that which is attached hereto as Exhibit E.
29.2 Definition of Hazardous Materials: As used in this Lease, the term
Hazardous Materials shall mean and include (a) any hazardous or toxic wastes,
materials or substances, and other pollutants or contaminants, which are or
become regulated by any Environmental Laws; (b) petroleum, petroleum by
products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos
and asbestos containing material, in any form, whether friable or non-friable;
(d) polychlorinated biphenyls; (e) radioactive materials; (f) lead and
lead-containing materials; (g) any other material, waste or substance displaying
toxic, reactive, ignitable or corrosive characteristics, as all such terms are
used in their broadest sense, and are defined or become defined by any
Environmental Law (defined below); or (h) any materials which cause or threatens
to cause a nuisance upon or waste to any portion of the Premises, the Building,
the Lot, the Park or any surrounding property; or pose or threaten to pose a
hazard to the health and safety of persons on the Premises the Building, the
Lot, the Park or any surrounding property.
29.3 Prohibition; Environmental Laws: Tenant shall not be entitled to use
nor store any Hazardous Materials on, in, or about the Premises, the Building,
the Lot and the Park, or any portion of the foregoing, without, in each
instance, obtaining Landlord's prior written consent thereto. If Landlord
consents to any such usage or storage, then Tenant shall be permitted to use
and/or store only those Hazardous Materials that are necessary for Tenant's
business and to the extent disclosed in the HazMat Certificate and as expressly
approved by Landlord in writing, provided that such usage and storage is only to
the extent of the quantities of Hazardous Materials as specified in the then
applicable HazMat Certificate, as expressly approved by Landlord, and provided
further that such usage and storage is in full compliance with any and all
local, state and federal environmental, health and/or safety-related laws,
statutes, orders, standards, courts' decisions, ordinances, rules and
regulations (as interpreted by judicial and administrative decisions), decrees,
directives, guidelines, permits or permit conditions, currently existing and as
amended, enacted, issued or adopted in the future which are or become applicable
to Tenant to all or any portion of the Premises (collectively, the
"Environmental Laws"). Tenant agrees that any changes to the type and/or
quantities of Hazardous Materials specified in the most recent HazMat
Certificate may be implemented only with the prior written consent of Landlord,
which consent
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may be given or withheld in Landlord's sole discretion. Tenant shall not be
entitled nor permitted to install any tanks under, on or about the Premises for
the storage of Hazardous Materials without the express written consent of
Landlord, which may be given or withheld in Landlord's sole discretion. Landlord
shall have the right at all times during the term of this Lease to (i) inspect
the Premises, (ii) conduct tests and investigations to determine whether Tenant
is in compliance with the provisions of this Section 29, and (iii) request lists
of all Hazardous Materials used, stored or otherwise located on, under or about
the Premises, the Common Areas and/or the parking lots (to the extent the Common
Areas and/or the parking lots are not considered part of the Premises). The cost
of all such inspections, tests and investigations shall be borne solely by
Tenant, if Landlord reasonably believes they are necessary and such inspections,
tests, and investigations indicate that Tenant has contaminated the Premises.
The aforementioned rights granted herein to Landlord and its representatives
shall not create (a) a duty on Landlord's part to inspect, test, investigate,
monitor or otherwise observe the Premises or the activities of Tenant and
Tenant's Representatives with respect to Hazardous Materials, including without
limitation, Tenant's operation, use and any remediation related thereto, or (b)
liability on the part of Landlord and its representatives for Tenant's use,
storage, disposal or remediation of Hazardous Materials, it being understood
that Tenant shall be solely responsible for all liability in connection
therewith.
29.4 Tenant's Environmental Obligations: Tenant shall give to Landlord
immediate verbal and follow-up written notice of any spills, releases,
discharges, disposals, emissions, migrations, removals or transportation of
Hazardous Materials on, under or about the Premises, or in any Common Areas or
parking lots (to the extent such areas are not considered part of the Premises).
Tenant, at its sole cost and expense, covenants and warrants to promptly
investigate, clean up, remove, restore and otherwise remediate (including,
without limitation, preparation of any feasibility studies or reports and the
performance of any and all closures) any spill, release, discharge, disposal,
emission, migration or transportation of Hazardous Materials arising from or
related to the intentional or negligent acts or omissions of Tenant or Tenant's
Representatives such that the affected portions of the Park and any adjacent
property are returned to the condition existing prior to the appearance of such
Hazardous Materials. Any such investigation, clean up, removal, restoration and
other remediation shall only be performed after Tenant has obtained Landlord's
prior written consent, which consent shall not be unreasonably withheld so long
as such actions would not potentially have a material, adverse long-term or
short-term effect on the Premises, the Building, the Lot or the Park, or any
portion of any of the foregoing. Notwithstanding the foregoing, Tenant shall be
entitled to respond immediately to an emergency without first obtaining
Landlord's prior written consent. If Tenant is required under this Lease to
perform any remediation, Tenant, at its sole cost and expense, shall conduct and
perform, or cause to be conducted and performed, all closures as required by any
Environmental Laws or any agencies or other governmental authorities having
jurisdiction thereof. If Tenant fails to so promptly investigate, clean up,
remove, restore, provide closure or otherwise so remediate, Landlord may, but
without obligation to do so, take any and all steps necessary to rectify the
same and Tenant shall promptly reimburse Landlord, upon demand, for all costs
and expenses to Landlord of performing investigation, clean up, removal,
restoration, closure and remediation work. All such work undertaken by Tenant,
as required herein, shall be performed in such a manner so as to enable Landlord
to make full economic use of the Premises, the Building, the Lot and the Park
after the satisfactory completion of such work.
29.5 Environmental Indemnity: In addition to Tenant's obligations as set
forth hereinabove, Tenant and agrees to, and shall, protect, indemnify, defend
(with counsel reasonably acceptable to Landlord) and hold Landlord and
Landlord's lenders, partners, property management company (if other than
Landlord), agents, directors, officers, employees, representatives, contractors,
shareholders, successors and assigns and each of their respective partners,
directors, employees, representatives, agents, contractors, shareholders,
successors and assigns harmless from and against any and all claims, judgments,
damages, penalties, fines, liabilities, losses (including, without limitation,
diminution in value of the Premises, the Building, the Lot, the Park, or any
portion of any of the foregoing, damages for the loss of or restriction on the
use of rentable or usable space, and from any adverse impact of Landlord's
marketing of any space within the Building and/or Park), suits, administrative
proceedings and costs (including, but not limited to, attorneys' and consultant
fees and court costs) arising at any time during or after the term of this Lease
in connection with or related to, the use, presence, transportation, storage,
disposal, migration, removal, spill, release or discharge of Hazardous Materials
on, in or about the Premises, or in any Common Areas or parking lots (to the
extent such areas are not considered part of the Premises) as a result of the
intentional or negligent acts or omissions of Tenant or Tenant's
Representatives. Neither the written consent of Landlord to the presence, use or
storage of Hazardous Materials in, on, under or about any portion of the
Premises, the Building, the Lot and the Park, nor the strict compliance by
Tenant with all Environmental Laws shall excuse Tenant and Tenant's officers and
directors from its obligations of indemnification pursuant hereto. To the extent
Landlord is strictly liable under any Environmental Laws, Tenant's obligations
to Landlord under this Section 29 and the indemnity contained herein shall
likewise be without regard to fault on Tenant's part with respect to the
violation of any Environmental Law which results in liability to Landlord.
29.6 Survival: Tenant's obligations and liabilities pursuant to the
provisions of this Section 29 shall survive the expiration or early termination
of this Lease. If it is determined by Landlord that the condition of all or any
portion of the Premises, the Building, the Lot and/or the Park is not in
compliance with the provisions of this Lease with respect to Hazardous
Materials, including without limitation all Environmental Laws at the expiration
or earlier termination of this Lease, then at Landlord's sole option, Landlord
may require Tenant to hold over possession of the Premises until Tenant can
surrender the Premises to Landlord in the condition in which the Premises
existed as of the Commencement Date and prior to the appearance of such
Hazardous Materials except for reasonable wear and tear, including without
limitation, the conduct or performance of any closures as required by any
Environmental Laws. The burden of proof
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hereunder shall be upon Tenant. For purposes hereof, the term "reasonable wear
and tear" shall not include any deterioration in the condition or diminution of
the value of any portion of the Premises, the Building, the Lot and/or the Park
in any manner whatsoever related to directly, or indirectly, Hazardous
Materials. Any such holdover by Tenant will be with Landlord's consent, will not
be terminable by Tenant in any event or circumstance and will otherwise be
subject to the provisions of Section 22 of this Lease.
29.7 Landlord's Obligations:
29.7.1 Landlord has delivered to Tenant a copy of a Phase I Environmental
Site Assessment Report, dated May 1, 1996, prepared by Camp Dresser & McKee Inc.
(the "Phase I Report"). Tenant has reviewed the Phase I Report prior to
executing the Lease. Such review shall not constitute a waiver by Tenant of, or
otherwise affect or impair, any rights or remedies of Tenant under this Lease,
at law or in equity.
29.7.2 Landlord shall protect, indemnify, defend (with counsel reasonably
acceptable to Tenant) and hold harmless Tenant and Tenant's directors, officers,
employees, shareholders, successors and assigns from and against only those
costs, expenses, penalties, fines and reasonable attorney's and consultants'
fees incurred in connection with the investigation of site conditions or
cleanup, remediation or removal work (as required by law or by any governmental
entity) that is directly related to the Discharge of any Hazardous Materials at
the Premises, Building or Lot existing prior to the Commencement Date of the
Lease. ("Discharge" shall be defined as use, presence, transportation, storage,
disposal, migration, removal, spill, release or discharge.) For environmental
conditions covered by this Section 29.7.2, Landlord shall have the right to
retain, at Landlord's expense, any necessary consultants and contractors and
otherwise
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control any legally required investigation and cleanup or other remediation and
Landlord shall also, at Landlord's expense, cause to be performed necessary
restoration work to the Premises, Building and/or Lot.
29.7.3 The Provisions of Section 29.7.2 are not intended to be an
exclusive remedy for Tenant, but instead are cumulative as to any other rights
and remedies Tenant may have at law or in equity with respect to environmental
matters. Notwithstanding any terms to the contrary in this Lease, nothing in
this Lease shall constitute a waiver, release or relinquishment of any such
rights and remedies.
29.7.4 At no cost or expense to Tenant, Landlord shall utilize its best
efforts to obtain, as soon as reasonably possible, an environmental closure and
standard form closure letter from the County of Los Angeles Fire Department (or
other relevant environmental agency) with respect to the conditions discussed in
the Phase I Report (the "Closure").
29.7.5 Landlord represents and warrants to Tenant that, as of the
Commencement Date, there will be no asbestos or asbestos containing materials in
the Premises.
29.7.6 Excluding any costs, expenses and liabilities for which Tenant is
responsible pursuant to Section 29, no cost, expense or liability related to any
past, present of future Discharge of Hazardous Materials on, in or about the
Premises, the Building, the Lot or the Park shall be charged to Tenant pursuant
to Section 6 (entitled "Additional Rent") or any other provisions of this Lease.
29.7.7 Notwithstanding any terms to the contrary in the Lease, the
provisions of Section 31.4 (entitled "Landlord's Personal Liability") shall
apply as follows to Landlord's obligations and liabilities under this Section
29: (1) Prior to Landlord obtaining a Closure, Landlord's personal liabilities
shall be limited to the greater of (i) the purchase price paid by Landlord for
the Building or (ii) the fair market value of the Building at the time of a
breach by Landlord, irrespective of liens and encumbrances; (2) Upon and
following Landlord obtaining a Closure, Landlord's personal liability for its
obligations and liabilities under this Section 29 shall be limited to the
greater of (i) One Million Dollars ($1,000,000.00) or (ii) Landlord's "actual
interest" in the Premises and Building as set forth in Section 31.4; and (3) To
the extent that Landlord's "actual interest" in the Premises and Building is
insufficient to satisfy a judgment for Tenant related to Landlord's obligations
and liabilities under this Section 29, Tenant shall have a right to seek
recourse against other assets of Landlord.
29.7.8 Landlord's obligations and liabilities under this Section 29.7
shall survive the expiration or early termination of this Lease.
30. Financial Statements: Tenant, for the reliance of Landlord, any lender
holding or anticipated to acquire a lien upon the Premises, the Building or the
Park or any portion thereof, or any prospective purchaser of the Building or the
Park or any portion thereof, within ten (10) days after Landlord's request
therefor, but not more often than once annually so long as Tenant is not in
default of this Lease, shall deliver to Landlord the then current audited
financial statements of Tenant (including interim periods following the end of
the last fiscal year for which annual statements are available) which statements
shall be prepared or compiled by a certified public accountant and shall present
fairly the financial condition of Tenant at such dates and the result of its
operations and changes in its financial positions for the periods ended on such
dates. If an audited financial statement has not been prepared, Tenant shall
provide Landlord with an unaudited financial statement and/or such other
information, the type and form of which are acceptable to Landlord in Landlord's
reasonable discretion, which reflects the financial condition of Tenant. If
Landlord so requests, Tenant shall deliver to Landlord an opinion of a certified
public accountant, including a balance sheet and profit and loss statement for
the most recent prior year, all prepared in accordance with generally accepted
accounting principles consistently applied. Any and all financial statements and
credit applications shall be confidential for Landlord's and Landlord's
authorized representative's use. Any and all options granted to Tenant hereunder
shall be subject to and conditioned upon Landlord's reasonable approval of
Tenant's financial condition at the time of Tenant's exercise of any such
option. Any and all Financial statements and credit applications shall be
confidential for Landlord's and Landlord's authorized representative's use.
31. General Provisions:
31.1 Time. Time is of the essence in this Lease and with respect to each
and all of its provisions in which performance is a factor.
31.2 Successors and Assigns. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
31.3 Recordation. Tenant shall not record this Lease or a short form
memorandum hereof without the prior written consent of the Landlord.
31.4 Landlord's Personal Liability. The liability of Landlord (which, for
purposes of this Lease, shall include Landlord and the owner of the Building if
other than Landlord) to Tenant for any default by Landlord under the terms of
this Lease shall be limited to the actual interest of Landlord and its present
or future partners in the Premises or
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the Building, and Tenant agrees to look solely to the Premises for satisfaction
of any liability and shall not look to other assets of Landlord nor seek any
recourse against the assets of the individual partners, directors, officers,
shareholders, agents or employees of Landlord; it being intended that Landlord
and the individual partners, directors, officers, shareholders, agents or
employees of Landlord shall not be personally liable in any manner whatsoever
for any judgment or deficiency. The liability of Landlord under this Lease is
limited to its actual period of ownership of title to the Building, and Landlord
shall be automatically released from further performance under this Lease and
from all further liabilities and expenses hereunder upon transfer of Landlord's
interest in the Premises or the Building.
31.5 Separability. Any provisions of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provisions hereof and such other provision shall remain in full force and
effect.
31.6 Choice of Law. This Lease shall be governed by the laws of the State
of California.
31.7 Attorneys' Fees. In the event any dispute between the parties results
in litigation or other proceeding, the prevailing party shall be reimbursed by
the party not prevailing for all reasonable costs and expenses, including,
without limitation, reasonable attorneys' and experts' fees and costs incurred
by the prevailing party in connection with such litigation or other proceeding,
and any appeal thereof. Such costs, expenses and fees shall be included in and
made a part of the judgment recovered by the prevailing party, if any.
31.8 Entire Agreement. This Lease supersedes any prior agreements,
representations, negotiations or correspondence between the parties, and
contains the entire agreement of the parties on matters covered. No other
agreement, statement or promise made by any party, that is not in writing and
signed by all parties to this Lease, shall be binding.
31.9 Warranty of Authority. On the date that Tenant executes this Lease,
Tenant shall deliver to Landlord an original certificate of status for Tenant
issued by the California Secretary of State or statement of partnership for
Tenant recorded in the county in which the Premises are located, as applicable,
and such other documents as Landlord may reasonably request with regard to the
lawful existence of Tenant. Each person executing this Lease on behalf of a
party represents and warrants that (1) such person is duly and validly
authorized to do so on behalf of the entity it purports to so bind, and (2) if
such party is a partnership, corporation or trustee, that such partnership,
corporation or trustee has full right and authority to enter into this Lease and
perform all of its obligations hereunder.
31.10 Notices. Any and all notices and demands required or permitted to be
given hereunder to Landlord shall be in writing and shall be sent: (a) by United
States mail, certified and postage prepaid; or (b) by personal delivery; (c) by
overnight courier: (d) by facsimile, addressed to Landlord at 30 Executive Park,
Suite 100, Irvine, California 92614. Any and all notices and demands required or
permitted to be given hereunder to Tenant shall be in writing and shall be sent:
(i) by United States mail, certified and postage prepaid; or (ii) by personal
delivery to any employee or agent of Tenant over the age of eighteen (18) years
of age; or (iii) by overnight courier, all of which shall be addressed to Tenant
at the Premises; or (iv) by facsimile at the facsimile number at the Premises,
if any, as provided by Tenant on Page 1 of this Lease or otherwise provided to
Landlord. Notice and/or demand shall be deemed given upon the earlier of actual
receipt or the third day following deposit in the United States mail. Notice
and/or demand by facsimile shall be complete upon transmission over the
telephone line.
31.11 Joint and Several. If Tenant consists of more than one person or
entity, the obligations of all such persons or entities shall be joint and
several.
31.12 Covenants and Conditions. Each provision to be performed by Tenant
hereunder shall be deemed to be both a covenant and a condition.
31.13 Waiver of Jury Trial. The parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters whatsoever arising out of
or in any way related to this Lease, the relationship of Landlord and Tenant,
Tenant's use or occupancy of the Premises, the Building or the Park, and/or any
claim of injury, loss or damage.
31.14 Counterclaims. Intentionally omitted.
31.15 Underlining. The use of underlining within the Lease is for
Landlord's reference purposes only and no other meaning or emphasis is intended
by this use, nor should any be inferred.
32. Signs: All signs and graphics of every kind visible in or from public view
or corridors or the exterior of the Premises shall be subject to Landlord's
prior written approval and shall be subject to any applicable governmental laws,
ordinances, and regulations and in compliance with Landlord's Sign Criteria as
set forth in Exhibit H hereto and made a part hereof. Tenant shall remove all
such signs and graphics prior to the termination of this Lease. Such
installations and removals shall be made in a manner as to avoid damage or
defacement of the Premises; and Tenant shall repair any damage or defacement,
including without limitation, discoloration caused by such installation or
removal. Landlord shall have the right, at its option, to deduct from the
Security Deposit such sums as are reasonably necessary to remove such
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<PAGE>
signs, including; but not limited to, the costs and expenses associated with any
repairs necessitated by such removal. Notwithstanding the foregoing, in no event
shall any: (a) neon, flashing or moving sign(s) or (b) sign(s) which shall
interfere with the visibility of any sign, awning, canopy, advertising matter,
or decoration of any kind of any other business or occupant of the Building or
the Park be permitted hereunder. Tenant further agrees to maintain any such
sign, awning, canopy, advertising matter, lettering, decoration or other thing
as may be approved in good condition and repair at all times.
33. Mortgagee Protection: Upon any breach or default on the part of Landlord,
Tenant will give written notice b registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises
who has provided Tenant with notice of their interest together with a thirty
(30) day Tenant agrees that each lender to whom this Lease has been assigned by
Landlord is an express third party beneficiary hereof. Tenant shall not make any
prepayment of Rent more than one (1) month in advance without the prior written
consent of each such lender, except if Tenant is required to make quarterly
payments of Rent in advance pursuant to the provisions of Section 8 above.
Tenant waives the collection of any deposit from such lender(s) or any purchaser
at a foreclosure sale of such lender(s)' deed of trust unless the lender(s) or
such purchaser shall have actually received and not refunded the deposit. Tenant
agrees to make all payments under this Lease to the lender with the most senior
encumbrance upon receiving a direction, in writing, to pay said amounts to such
lender. Tenant shall comply with such written direction to pay without
determining whether an event of default exists under such lender's loan to
Landlord.
34. Quitclaim: Upon any termination of this Lease, Tenant shall, at Landlord's
request, execute, have acknowledged and deliver to Landlord a quitclaim deed of
Tenant's interest in and to the Premises. If Tenant fails to so deliver to
Landlord such a quitclaim deed, Tenant hereby agrees that Landlord shall have
the full authority and right to record such a quitclaim deed signed only by
Landlord and such quitclaim deed shall be deemed conclusive and binding upon
Tenant.
35. Modifications for Lender: If, in connection with obtaining financing for the
Premises or any portion thereof, Landlord's lender shall request reasonable
modification(s) to this Lease as a condition to such financing, Tenant shall not
unreasonably withhold, delay or defer its consent thereto, provided such
modifications do not materially adversely affect Tenant's rights hereunder or
the use, occupancy or quiet enjoyment of Tenant hereunder.
36. Warranties of Tenant: Tenant hereby warrants and represents to Landlord, for
the express benefit of Landlord, that Tenant has undertaken a complete and
independent evaluation of the risks inherent in the execution of this Lease and
the operation of the Premises for the use permitted hereby, and that, based upon
said independent evaluation, Tenant has elected to enter into this Lease and
hereby assumes all risks with respect thereto. Tenant hereby further warrants
and represents to Landlord, for the express benefit of Landlord, that in
entering into this Lease, Tenant has not relied upon any statement, fact,
promise or representation (whether express or implied, written or oral) not
specifically set forth herein in writing and that any statement, fact, promise
or representation (whether express or implied, written or oral) made at any time
to Tenant, which is not expressly incorporated herein in writing, is hereby
waived by Tenant.
37. Compliance with Americans with Disabilities Act: Landlord and Tenant hereby
agree and acknowledge that the Premises, the Building and/or the Park may be
subject to the requirements of the Americans with Disabilities Act, a federal
law codified at 42 U.S.C. 12101 et seq, including, but not limited to Title III
thereof, all regulations and guidelines related thereto, together with any and
all laws, rules, regulations, ordinances, codes and statutes now or hereafter
enacted by local or state agencies having jurisdiction thereof, including all
requirements of Title 24 of the State of California, as the same may be in
effect on the date of this Lease and may be hereafter modified, amended or
supplemented (collectively, the "ADA"). Any Tenant Improvements to be
constructed hereunder shall be in compliance with the requirements of the ADA,
and all costs incurred for purposes of compliance therewith shall be a part of
and included in the costs of the Tenant Improvements. Tenant shall be solely
responsible for conducting its own independent investigation of this matter and
for ensuring that the design of all Tenant Improvements strictly comply with all
requirements of the ADA. Subject to reimbursement pursuant to Section 6 of the
Lease, if any barrier removal work or other work is required to the Building,
the Common Area or the Park under the ADA, then such work shall be the
responsibility of Landlord; provided, if such work is required under the ADA as
a result of Tenant's use of the Premises or any work or alteration made to the
Premises by or on behalf of Tenant, then such work shall be performed by
Landlord at the sole cost and expense of Tenant. Except as otherwise expressly
provided in this provision, Tenant shall be responsible at its sole cost and
expense for fully and faithfully complying with all applicable requirements of
the ADA, including without limitation, not discriminating against any disabled
persons in the operation of Tenant's business in or about the Premises, and
offering or otherwise providing auxiliary aids and services as, and when,
required by the ADA. Within ten (10) days after receipt, Landlord and Tenant
shall advise the other party in writing, and provide the other with copies of
(as applicable), any notices alleging violation of the ADA relating to any
portion of the Premises or the Building; any claims made or threatened in
writing regarding noncompliance with the ADA and relating to any portion of the
Premises or the Building; or any governmental or regulatory actions or
investigations instituted or threatened regarding noncompliance with the ADA and
relating to any portion of the Premises or the Building. Tenant shall and hereby
agrees to protect, defend (with counsel acceptable to Landlord) and hold
Landlord and Landlord's lender(s), partners, employees, representatives, legal
representatives, successors and assigns (collectively, the "Indemnitees")
harmless and indemnify the Indemnitees from and against all liabilities,
damages, claims, losses, penalties, judgments, charges and expenses (including
reasonable attorneys' fees, costs of court and expenses necessary in the
prosecution or defense of any litigation including the enforcement of this
provision) arising from or in any way related, Tenant's or
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Tenant's Representatives' violation or alleged violation of the ADA. Tenant
agrees that the obligations of Tenant herein shall survive the expiration or
earlier termination of this Lease.
38. Brokerage Commission: Landlord and Tenant each represents and warrants for
the benefit of the other that it has had no dealings with any real estate
broker, agent or finder in connection with the Premises and/or the negotiation
of this Lease, except for the Broker(s) (as set forth on Page 1), and that it
knows of no other real estate broker, agent or finder who is or might be
entitled to a real estate brokerage commission or finder's fee in connection
with this Lease or otherwise based upon contacts between the claimant and
Tenant. Each party shall indemnify and hold harmless the other from and against
any and all liabilities or expenses arising out of claims made for a fee or
commission by any real estate broker, agent or finder in connection with the
Premises and this Lease other than Broker(s), if any, resulting from the actions
of the indemnifying party. Any real estate brokerage commission or finder's fee
payable to the Broker(s) in connection with this Lease shall only be payable and
applicable to the extent of the initial term of the Lease and to the extent of
the Premises as same exist as of the date on which Tenant executes this Lease.
Unless expressly agreed to in writing by Landlord and Broker(s), no real estate
brokerage commission or finder's fee shall be owed to, or otherwise payable to,
the Broker(s) for any renewals or other extensions of the initial term of this
Lease or for any additional space leased by Tenant other than the Premises as
same exists as of the date on which Tenant executes this Lease.
39. Quiet Enjoyment: Landlord covenants with Tenant, that (i) Tenant shall and
may peaceably and quietly hold, occupy and enjoy the Premises and the Common
Areas during the term of this Lease, and (ii) neither Landlord, nor any
successor or assign of Landlord, shall disturb Tenant's occupancy or enjoyment
of the Premises and the Common Areas.
40. Landlord's Ability to Perform Tenant's Unperformed Obligations:
Notwithstanding anything to the contrary contained in this Lease, if Tenant
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Tenant pursuant to this Lease, and/or if the
failure of Tenant relates to a matter which in Landlord's judgment reasonably
exercised is of an emergency nature and such failure shall remain uncured for a
period of time commensurate with such emergency, then Landlord may, at
Landlord's option without any obligation to do so, and in its sole discretion as
to the necessity therefor, perform any such term, provision, covenant, or
condition, or make any such payment and Landlord by reason of so doing shall not
be liable or responsible for any loss or damage thereby sustained by Tenant or
anyone holding under or through Tenant. If Landlord so performs any of Tenant's
obligations hereunder, the full amount of the cost and expense entailed or the
payment so made or the amount of the loss so sustained shall immediately be
owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon
demand, as Additional Rent, the full amount thereof with interest thereon from
the date of payment at the greater of (i) ten percent (10%) per annum, or (ii)
the highest rate permitted by applicable law and Enforcement Expenses.
IN WITNESS WHEREOF, this Lease is executed on the date and year first
written above.
LANDLORD:
LINCOLN-WHITEHALL PACIFIC, L.L.C.,
a Delaware limited liability company
By: Lincoln Property Company Management Services, Inc.,
as Agent and Manager for Landlord
By: /s/ Terry Thompson,
-------------------------------------------------
Terry Thompson, Vice President
Date: 8/27/96
-------------------------------------------------
TENANT:
NATROL, INC.,
a California Corporation
By: /s/ Elliott Balbert
-------------------------------------------------
Title: President
-------------------------------------------------
Date: August 26, 1996
-------------------------------------------------
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EXHIBIT A
[GRAPHIC OMITTED]
SITE PLAN
CHATSWORTH INDUSTRIAL PARK
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EXHIBIT B
A. TENANT IMPROVEMENTS
1. Tenant Improvements. Landlord agrees to allow Tenant to construct certain
improvements ("Tenant Improvements") in the Building of which the Premises
are a part pursuant to the terms of the Lease, including but not limited
to Article 10 and this Exhibit B.
2. Definition. "Tenant Improvements" as used in this Lease shall include only
those interior portions of the Building which are described herein below.
"Tenant Improvements" shall specifically not include any of Lessee's
personal property or trade fixtures. The Tenant Improvements shall include
any and all interior improvements to be made to the Premises as specified
and agreed to in this Exhibit B and as set forth in the Floor Plan ("Floor
Plan"), to be attached as Exhibit B1, and the Tenant Improvement scope of
work and specifications ("Specifications"), to be attached as Exhibit B2.
3. Tenant to Construct. Tenant shall complete construction of the Tenant
Improvements, in a good and workmanlike manner, and in accordance with all
applicable codes, regulations and ordinances, subject to the Lease.
Landlord reserves the right to approve of the Floor Plan and
Specifications which approval shall not be unreasonably withheld or
delayed.
Within ten (10) days of the Lease being executed and delivered, Tenant
shall provide Landlord with a draft floor plan and specifications for the
Landlord's review and approval. Landlord shall respond to Tenant's draft
floor plan and specifications within five (5) business days with any
questions and/or comments. If Landlord has no comments or Landlord's
comments are not made within the five (5) business day period, then the
draft floor plan and specifications shall become the final floor plan and
specifications. Any of Landlord's comments and/or questions shall be
responded to by Tenant and resolved by Landlord and Tenant within five (5)
business days. Landlord also reserves the right to approve of the Tenant's
designated contractor and review all bids received for the Tenant
Improvement work. The contractor must provide Landlord with an insurance
certificate with a minimum general liability coverage of $1,000,000 that
specifically names the Landlord and the Landlord's designated management
company as additional insureds. The designated contractor must also show
verified proof that they are properly licensed as a general contractor in
the State of California and provide a list of any and all subcontractors
that the Tenant's general contractor plans to hire.
4. Tenant Improvement Allowance.
a. Landlord shall provide an allowance for the construction of the
Tenant Improvements in an amount not to exceed Two Hundred Fifty
Thousand Dollars ($250,000) ("Tenant Improvement Allowance"). The
Tenant Improvement Allowance shall only be used for Tenant
Improvements defined in this Exhibit B. The Tenant Improvement
Allowance shall be the maximum contribution by Landlord to Tenant
for the Tenant Improvement Cost, as defined in Paragraph 5, below.
This Tenant Improvement Allowance must be used within six (6)
months of the Lease Commencement Date. This time frame excludes any
delays caused by weather, acts of God, strikes and government
(collectively "force majeure"). Any or all of the remaining Tenant
Improvement Allowance shall be null and void on the 1st day of the
7th month of the Lease Term.
b. The Landlord shall provide Tenant with progress payments of the
Tenant Improvement Allowance upon receiving the appropriate
conditional lien releases and certification from a licensed
architect that a progress payment can be released. Landlord shall
hold a ten percent (10%) retention until receiving verification that
the agreed upon Tenant Improvements have been 100% completed which
shall include the Tenant providing the following information to the
Landlord:
1. An original of the signed-off final permit card from the city.
2. All lien releases from the general contractor and any
subcontractors.
3. A plan size copy of the final as built drawings.
4. Written documentation from the Tenant's general contractor
that the Tenant Improvements have been substantially
completed.
Upon receiving this information, Landlord shall remit a check for
the total actual Tenant Improvement Cost not to exceed the Tenant
Improvement Allowance. The final retention check shall be remitted
to Tenant within ten (10) days of receiving all required
information.
5. Tenant Improvement Cost. The Tenant Improvement Cost ("Tenant Improvement
Cost") shall include the scope of work as reflected in the Floor Plan and
Specifications to be attached hereto and, to the extent not set forth
therein, shall also include:
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a. All costs of preliminary and final architectural and engineering
plans and specifications for the Tenant Improvements, and
engineering costs associated with completion of the State of
California energy utilization calculations under Title 24
legislation;
b. All costs of obtaining building permits and other necessary
authorizations from the city or other jurisdictions;
c All costs of design and finish schedule plans and specifications,
including as-built drawings;
d All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises, including, but
not limited to, the construction fee for overhead and profit and the
cost of all on-site supervisory and administrative staff, office,
equipment and temporary services rendered by Tenant's contractor in
connection with construction of the Tenant Improvements.
In no event shall the Tenant Improvement Cost include any costs of
procuring, constructing or installing in the Premises any of
Lessee's personal property or any trade fixtures.
6. Excess Tenant Improvement Cost. If the Tenant Improvement Cost exceeds the
maximum amount of the Tenant Improvement Allowance, then the difference
between the Tenant Improvement Cost and the Tenant Improvement Allowance
("Excess Tenant Improvement Cost") shall be paid directly by Tenant to the
Tenant's contractor.
7. Change Request. No revisions to the Tenant Improvements shall be made by
either Landlord or Tenant unless approved in writing by both parties. Tenant
agrees to make all changes (i) required by any public agency to conform with
governmental regulations, or (ii) requested in writing by Tenant and approved in
writing by Landlord, which approval shall not be unreasonably withheld. The
extension of the Commencement Date because of any change order that changes the
scope of Exhibit B shall not in any way deemed to be a forgiveness of Rent due
from Tenant beginning on the original Commencement Date of 8/27, 1996, pursuant
to Paragraph 3 of the Lease. Any costs related to such changes shall be added to
the Tenant Improvement Cost as set forth in Paragraph 5, above. Costs related to
changes shall include, without limitation, any architectural or design fees, and
the general contractor's price for effecting the change. Costs due to changes
pursuant to this Paragraph 7 will be paid out of the Tenant Improvement
Allowance only to the extent that the total Tenant Improvement Cost (exclusive
of changes) is less than the maximum amount of the Tenant Improvement Allowance;
any costs for said changes over and above the maximum amount of the Tenant
Improvement Allowance shall be deemed Excess Tenant Improvement Costs and
governed by Paragraph 6, above.
8. Termination.
a. If the Lease is terminated prior to the Commencement Date or prior
to the completion of the Tenant Improvements, for any reason other
than the default of Landlord under the Lease, in addition to any
other damages available to Landlord, Tenant shall be solely
responsible to pay its contractor, within five (5) days of receipt
of a statement thereof, all costs incurred by the contractor for the
Tenant Improvements through the date of termination in connection
with the Tenant Improvements.
b. In the event the Lease is terminated, by Landlord or by mutual
agreement of the parties, at any time subsequent to the Commencement
Date, but before the Expiration Date, the entire unpaid amount of
principal and interest calculated at twelve percent (12%) compounded
annually up to the time of the termination for the Tenant
Improvement Allowance expended pursuant to Paragraph 4, above, shall
become immediately due and payable to Landlord.
B. REPAIRS TO THE BUILDING
Separate from the Tenant Improvements as defined herein, the Landlord
hereby agrees to make, at Landlord's expense, within sixty (60) days after
Lease Commencement Date, those repairs to the Building as follows:
(i) Paint the entire interior and exterior of the Building using
Landlord's standard building paint;
(ii) Repair the existing roof using industry standard guidelines;
(iii) Remove existing interior non-structural walls and debris;
(iv) Repair base Building electrical service;
(v) Landlord shall upgrade the main entrance access to the Building to
meet existing ADA compliance guidelines.
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EXHIBIT C
RULES AND REGULATIONS
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the
Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or interfere
with other lessees or persons having business within the Project.
4. Lessee shall not keep animals or birds within the Project, and shall not
bring bicycles, motorcycles or other vehicles into areas not designated as
authorized for the same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Intentionally omitted.
7. Lessee shall be responsible for the inappropriate use of any toilet rooms,
plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
premises of the Project.
9. Lessee shall not suffer or permit any thing in or around the Premises or
Building that causes excessive vibration or floor loading in any part of
the Project.
10. Lessee shall return all keys at the termination of its tenancy and shall
be responsible for the cost of replacing any keys that are lost.
11. No window coverings, shades or awnings shall be installed or used by
Lessee, without Lessor's written prior consent.
12. No Lessee, employee or Invitee shall go upon the roof of the Building
without Lessor's written prior consent.
13. Lessee shall not suffer or permit smoking or carrying of lighted cigars or
cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
14. Lessee shall not use any method of heating or air conditioning other than
as provided by Lessor.
15. Intentionally omitted.
16. The Premises shall not be used for lodging, cooking or food preparation.
17. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
18. Lessor reserves the right to waive any one of these rules or regulations,
and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
19. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
20. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Project and its occupants. Lessee agrees to
abide by these and such rules and regulations.
PARKING RULES
1. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, or invitees to be loaded, unloaded, or parked in areas other
than those designated by Lessor for such activities.
2. Users of the parking area will obey all posted signs and park only in the
areas designated for vehicle parking.
3. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible
for any damage to vehicles, injury to persons or loss of property, all of
which risks are assumed by the party using the parking area.
4. The maintenance, washing, waxing or cleaning of vehicles in the Common
Area is prohibited.
5. Lessee shall be responsible for seeing that all of its employees, agents
and invitees comply with the applicable parking rules, regulations, laws
and agreements.
6. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
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EXHIBIT E
HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Lessor (identified below) to evaluate and finalize a lease agreement
with you as lessee. After a lease agreement is signed by you and the Lessor (the
"Lease Agreement"), on an annual basis in accordance with the provisions of
Paragraph 29 of the signed Lease Agreement, you are to provide an update to the
information initially provided by you in this certificate. The information
contained in the initial Hazardous Materials Disclosure Certificate and each
annual certificate provided by you thereafter will be maintained in
confidentiality by Lessor subject to release and disclosure as required by (i)
any lenders and owners and their respective environmental consultants, (ii) any
prospective purchaser(s) of all or any portion of the property on which the
Premises are located, (iii) Lessor to defend itself or its lenders, partners or
representatives against any claim or demand, and (iv) any laws, rules,
regulations, orders, decrees, or ordinances, including, without limitation,
court orders or subpoenas. Any and all capitalized terms used herein, which are
not otherwise defined herein, shall have the same meaning ascribed to such term
in the signed Lease Agreement. Any questions regarding this certificate should
be directed to, and when completed, the certificate should be delivered to:
Lessor: Lincoln-Whitehall Realty, L.L.C.,
a Delaware limited liability company
c/o Lincoln Property Company Management Services, Inc.
P.O. Box 19693
30 Executive Park, Suite 100
Irvine, California 92713-9693
Phone: (714) 261-2100
Name of Lessee: Natrol, Inc.,
a California Corporation
Mailing Address: 21411 Prairie Street
Chatsworth, California
Contact Person, Title and Telephone Number(s): Gary de Mello, Vice President
---------------------------------
818-701-9966
- --------------------------------------------------------------------------------
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s): Gary de Mello, Vice President 818-701-9966
-----------------------------------------------------------
Address of Premises: 21411 Prairie Street
Chatsworth, California
Length of Initial Term: One Hundred Twenty (120) months.
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about
the Premises, including, without limitation, principal products processed,
manufactured or assembled services and activities to be provided or
otherwise conducted. Existing lessees should describe any proposed changes
to on-going operations.
Nutritional Supplement Manufacturing
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Packaging, Distribution
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2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials be used, generated, stored or disposed
of in, on or about the Premises? Existing lessees should describe
any Hazardous Materials which continue to be used, generated, stored
or disposed of in, on or about the Premises.
Wastes Yes |_| No |X|
Chemical Products Yes |_| No |X|
Other Yes |_| No |X|
If Yes is marked, please explain:
----------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or
about the Premises, including the applicable hazard class and an
estimate of the quantities of such Hazardous Materials at any given
time; estimated annual throughput; the proposed location(s) and
method of storage (excluding nominal amounts of ordinary household
cleaners and janitorial supplies which are not regulated by any
Environmental Laws); and the proposed location(s)
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and method of disposal for each Hazardous Material, including, the
estimated frequency, and the proposed contractors or subcontractors.
Existing lessees should attach a list setting forth the information
requested above and such list should include actual data from
on-going operations and the identification of any variations in such
information from the prior year's certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel, petroleum,
or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing lessees should describe any such actual
or proposed activities.
Yes |_| No |X|
If Yes is marked, please explain:
----------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing lessees should describe any additional
identification numbers issued since the previous certificate.
Yes |_| No |X|
4.2 Has your company filed a biennial or quarterly reports as a
hazardous waste generator? Existing lessees should describe any new
reports filed.
Yes |_| No |X|
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
storm drain? sewer?
---- ----
surface water? X no wastewater or other wastes discharged.
---- ----
Existing lessees should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
--------------------------------------------------------------------
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5.2 Will any such wastewater or waste be treated before discharge?
Yes |_| No |X|
If yes, describe the type of treatment proposed to be conducted.
Existing lessees should describe the actual treatment conducted.
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6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing lessees should indicate whether or not there are any such
air filtration systems or stacks in use in, on or about the Premises
which discharge into the air and whether such air emissions are
being monitored.
Yes |_| No |X|
If yes, please describe:
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--------------------------------------------------------------------
6.2 Do you propose to operate any of the following types of equipment,
or any other equipment requiring an air emissions permit? Existing
lessees should specify any such equipment being operated in, on or
about the Premises.
Spray booth(s) Incinerator(s)
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Dip tank(s) Other (Please describe)
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Drying oven(s) X No Equipment Requiring Air Permits
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If yes, please describe:
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7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant to
Fire Department or other governmental or regulatory agencies'
requirements? Existing lessees should indicate whether or not a
Management Plan is required and has been prepared.
Yes |_| No |X|
If yes, attach a copy of the Management Plan. Existing lessees
should attach a copy of any required updates to the Management Plan.
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
regulated under Proposition 65? Existing lessees should indicate
whether or not there are any new Hazardous Materials being so used
which are regulated under Proposition 65.
Yes |_| No |X|
If yes, please explain:
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8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has
your company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company
received requests for information, notice or demand letters, or any
other inquiries regarding its operations? Existing lessees should
indicate whether or not any such actions, orders or decrees have
been, or are in the process of being, undertaken or if any such
requests have been received.
Yes |_| No |X|
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions, orders
or decrees and also describe any requests, notices or demands, and
attach a copy of all such documents. Existing lessees should
describe and attach a copy of any new actions, orders, decrees,
requests, notices or demands not already delivered to Lessor
pursuant to the provisions of Paragraph 29 of the signed Lease
Agreement.
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8.2 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
Yes |_| No |X|
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other documents
related thereto as requested by Lessor. Existing lessees should
describe and
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attach a copy of any new complaint(s), cross-complaint(s), pleadings
and other related documents not already delivered to Lessor pursuant
to the provisions of Paragraph 29 of the signed Lease Agreement.
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8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
lessees should indicate whether or not there have been any such
problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises.
Yes |_| No |X|
If yes, please describe. Existing lessees should describe any such
problems or complaints not already disclosed to Lessor under the
provisions of the signed Lease Agreement.
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9. PERMITS AND LICENSES
9.1 Attach copies of all Hazardous Materials permits and licenses issued
to your company with respect to its proposed operations in, on or
about the Premises, including, without limitation, any wastewater
discharge permits, air emissions permits, and use permits or
approvals. Existing lessees should attach copies of any new permits
and licenses as well as any renewals of permits or licenses
previously issued.
The undersigned hereby acknowledges and agrees that this Hazardous Materials
Disclosure Certificate is being delivered in connection with, and as required
by, Lessor in connection with the evaluation and finalization of a Lease
Agreement and will be attached thereto as an exhibit. The undersigned further
acknowledges and agrees that this Hazardous Materials Disclosure Certificate is
being delivered in accordance with, and as required by, the provisions of
Paragraph 29 of the Lease Agreement. The undersigned further acknowledges and
agrees that the Lessor and its partners, lenders and representatives may, and
will, rely upon the statements, representations, warranties, and certifications
made herein and the truthfulness thereof in entering into the Lease Agreement
and the continuance thereof throughout the term, and any renewals thereof, of
the Lease Agreement. I (print name) __________________________, acting with full
authority to bind the (proposed) Lessee and on behalf of the (proposed) Lessee,
certify, represent and warrant that the information contained in this
certificate is true and correct.
LESSEE:
NATROL, INC.
a California Corporation
By: /s/ Elliott Balbert
---------------------------------------
ELLIOTT BALBERT
Its: PRESIDENT
--------------------------------------
Date: August 26, 1996
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ADDENDUM I
OPTION TO EXTEND THE LEASE
Reference is made to that certain Lease Agreement dated for reference purposes
as of August 12, 1996 (the "Lease") by and between Lincoln-Whitehall Realty,
L.L.C., a Delaware limited liability company ("Landlord"), and Natrol, Inc., a
California corporation ("Tenant"), of approximately 80,012 rentable square feet
of space located at 21411 Prairie Street, Chatsworth, California (the
"Premises"). Any capitalized terms used herein and not otherwise defined herein
shall have the meaning ascribed to such terms as set forth in the Lease.
1. Grant of Option; Exercise. If Tenant has not been, during the initial term of
this Lease, or is not in default in the performance of any of its obligations
under this Lease at the time of delivery to Landlord of the Option Notice and
contingent upon review and approval of Tenant's then current financial condition
by Landlord, Tenant shall have the right as its option to extend the term of the
Lease for one (1) consecutive term of sixty (60) months (the "Extended Term").
The Lease of the Premises during the Extended Term shall be upon the same terms,
covenants and conditions as are set forth in this Lease, other than the monthly
Base Rent, the amount of the Security Deposit, this extension option and the
term of the Lease. If Landlord does not receive from Tenant written notice of
Tenant's exercise of this option by 5:00 p.m. Pacific Time on a date which is
not more than nine (9) months nor less than six (6) months prior to the end of
the term immediately preceding each option period (the "Option Notice"), all
rights under this option shall automatically lapse and terminate and shall be of
no further force and effect. Time is of the essence herein.
2. Initial Base Rent During Extended Term. In the event Tenant duly exercises
its rights under this option, the monthly Base Rent commencing on the first day
of the Extended Term shall be an amount which is the greater of (i) an amount
equal to 95% of the then current market rent for similar space (the "Fair Rental
Value") agreed upon solely by and between Landlord and Tenant and their agents
appointed for this purpose, or (ii) the monthly Base Rent in effect on the last
day of the initial term of the Lease. Neither Landlord nor Tenant shall have the
right to have a court establish the Fair Rental Value. If Landlord and Tenant
are unable to agree on the Fair Rental Value for the Extended Term within ten
(10) business days after receipt by Landlord of the Option Notice, Landlord and
Tenant being obligated only to act in good faith, then Landlord and Tenant shall
follow the procedures set forth in Section 3, below.
3. Determination of Fair Rental Value. The "Fair Rental Value" of the Premises
shall be defined to mean the fair market rental value of the Premises as of the
commencement of the Extended Term, taking into consideration all relevant
factors, including length of term, the uses permitted under the Lease, the
quality, size, design and location of the Premises, including the condition and
value of existing tenant improvements, and the monthly base rent paid by tenants
for premises comparable to the Premises, and located in the same market area as
the Premises. If the parties are unable to agree on the Fair Rental Value for
the Extended Term within ten (10) business days after receipt by Landlord of the
Option Notice, Landlord and Tenant each, at its cost and by giving notice to the
other party, shall appoint a competent and disinterested real estate appraiser
with at least five (5) years' full-time commercial appraisal experience in the
geographical area of the Premises to appraise and set the Fair Rental Value for
the Extended Term. If either Landlord or Tenant does not appoint an appraiser
within ten (10) days after the other party has given notice of the name of its
appraiser, the single appraiser appointed shall be the sole appraiser and shall
set the Fair Rental Value for the Extended Term. If two (2) appraisers are
appointed by Landlord and Tenant as stated in this paragraph, they shall meet
promptly and attempt to set the Fair Rental Value. If the two (2) appraisers are
unable to agree within ten (10) days after the second appraiser has been
appointed, they shall attempt to select a third appraiser meeting the
qualifications stated in this paragraph within ten (10) days after the last day
the two (2) appraisers are given to set the Fair Rental Value. If they are
unable to agree on the third appraiser, either Landlord or Tenant by giving ten
(10) days' notice to the other party, can apply to the Presiding Judge of the
Superior Court of the county in which the Premises is located for the selection
of a third appraiser who meets the qualifications stated in this paragraph.
Landlord and Tenant each shall bear one-half (1/2) of the cost of appointing the
third appraiser and of paying the third appraiser's fee. The third appraiser,
however selected, shall be a person who has not previously acted in any capacity
for either Landlord or Tenant. Within fifteen (15) days after the selection of
the third appraiser, the third appraiser shall select one of the two Fair Rental
Values submitted by the first two appraisers as the Fair Rental Value for the
Extended Term. If either of the first two appraisers fails to submit their
opinion of the Fair Rental Value, then the single Fair Rental Value submitted
shall automatically be the monthly Base Rent for the Extended Term.
4. Notwithstanding any provision to the contrary contained herein, in no event
shall the minimum monthly Base Rent for the Extended Term as determined pursuant
to this Addendum I, be less than the highest monthly Base Rent charged during
the initial term of the Lease. Upon determination of the monthly Base Rent for
the Extended Term, pursuant to the terms outlined above, Landlord and Tenant
shall promptly execute an amendment to the Lease stating the minimum monthly
Base Rent for the Extended Term, the amount of the Security Deposit for the
Extended Term, and confirming the expiration date of the Extended Term. Tenant
shall have no other right to extend the term of the Lease under this Addendum I
unless Landlord and Tenant otherwise agree in writing.
5. If Tenant duly and timely exercises this option in accordance with the terms
contained herein, the following shall apply: (a) Tenant shall accept the
Premises in its then "As-Is" condition and accordingly, Landlord shall not be
required to perform any additional improvements to the Premises; (b) Tenant
hereby agrees that it will solely be responsible for any and all brokerage
commissions and finder's fees payable to any broker in connection with the
option described herein, and Tenant hereby further agrees that Landlord shall in
no event or circumstance be responsible for the payment of any such commissions
and fees; and (c) Tenant shall deliver to Landlord, concurrently with the
delivery of the Option Notice, a non-refundable deposit in the amount of the
monthly Base Rent in effect as of the last month of the initial term of the
Lease (the "Option Deposit"). If, after the delivery to Landlord of the Option
Notice, Tenant fails to actually lease the Premises during the Extended Term,
then Landlord shall retain the Option Deposit. If, after the delivery to
Landlord of the Option Notice, Tenant does actually lease the Premises during
the Extended Term, then Landlord shall apply the Option Deposit against any
increase in the amount of the Security Deposit required during the Extended Term
and the
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<PAGE>
balance of the Option Deposit shall be applied against the monthly Base Rent
payable by Tenant during the first month of the Extended Term.
6. At Landlord's option, all rights of Tenant under this option shall terminate
and be of no force and effect if any of the following individual events occur or
any combination thereof occur: (1) Tenant has been at any time during the
initial term of the Lease, or is in default of any provision of the Lease beyond
any notice and cure period at the time of delivery to Landlord of the Option
Notice; and/or (2) Tenant's or Tenant's Affiliate's (as the case may be)
financial condition is unacceptable to Landlord at the time the Option Notice is
delivered to Landlord; and/or (3) Tenant has failed to exercise this option in a
timely manner in strict accordance with the provisions of this Addendum I;
and/or (4) Tenant or an Affiliate of Tenant no longer has possession of all or
any part of the Premises under the Lease, or if the Lease has been terminated
earlier, pursuant to the terms of the Lease.
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<PAGE>
ADDENDUM II
CPI Calculation and Adjustments
This Addendum II to Lease Agreement (the "Addendum") is made by and between
Lincoln-Whitehall Realty, L.L.C. ("Landlord"), and Natrol, Inc. for reference
purposes as of August 12, 1996, by and between Landlord and Tenant for the
leasing of certain premises (the "Premises") located at 21411 Prairie Street,
Chatsworth, California.
The terms and provisions of his Addendum shall be added to and incorporated in
the above-referenced Lease. Any capitalized terms used herein, and not otherwise
defined herein, shall have the meaning ascribed to such terms as set forth in
the Lease. In the event of any inconsistencies between the terms and provisions
of this Addendum II and the Lease, the terms and provisions of this Addendum
shall control.
The monthly Base Rent payable by Tenant to Landlord, as set forth in
Section 3 of this Lease, shall be adjusted on OCT. 27, 1999, OCT. 27, 2001, OCT.
27, 2003 and OCT. 27, 2005, compounded annually (the "Adjustment Dates") in
accordance with the percentage increase, if any, in the "Consumer Price Index
for All Urban Wage Consumers for Los Angeles-Anaheim-Riverside, California"
(Base: 1982-l984=100), as published by the United States Department of Labor,
Bureau of Labor Statistics ("Index").
The monthly Base Rent payable on the Adjustment Date shall be the product of the
monthly Base Rent in effect on the last day preceding the Adjustment Date of the
fraction described below. The denominator of such fraction shall be the Index in
effect on the first day of the initial term of the Lease ("Beginning Index").
The numerator of such fraction shall be the Index in effect on the last day of
the month preceding the Adjustment Date ("Adjustment Index").
In no event, however, shall the monthly Base Rent calculated as aforesaid be
more than 106% of the monthly Base Rent expressed on an annualized basis in
effect for the immediately preceding twenty-four (24) month period of the term
of the Lease.
Should said Bureau discontinue the publication of the above Index, or if the
compilation of the Index is materially altered or published less frequently, or
if the Bureau should vary the method of calculation of same or alter the same in
some other manner, then Landlord shall adopt, at its sole discretion, a
substitute index which is most nearly the same or substitute procedure which
reasonably reflects and monitors consumer prices, and such substitute shall be
used to make such calculation. If the Index is changed so that the base year
differs from that in effect when the term commences, the Index shall be
converted in accordance with the conversion factor published by the United
States Department of Labor, Bureau of Labor Statistics, or, if said Bureau shall
not publish the same, then with the use of such conversion factor formula or
table as may be published by Prentice Hall, Inc. or by any other nationally
recognized publisher of similar statistical information. In the event the
compilation and/or publication of the Index shall be discontinued or materially
altered, then the index most nearly the same as the Index shall be used to make
such calculation. In the event Landlord and Tenant cannot agree on such
alternative Index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of the said
Association and a decision of the arbitrators as to the applicable Index shall
be binding upon the parties. The cost of said arbitrator shall be paid equally
by the Landlord and Tenant.
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<PAGE>
ADDENDUM III TO LEASE
LEASE DATED: August 12, 1996
TENANT: NATROL, INC.,
a California Corporation
LANDLORD: LINCOLN-WHITEHALL REALTY, L.L.C.
FIRST RIGHT OF OFFER TO PURCHASE
"Offer to Purchase"
During the initial term of this Lease (exclusive of the option to extend),
Landlord shall, before entering into a contract to sell the Premises with anyone
else, notify Tenant of any bona-fide prospective buyer to which Landlord is
willing to sell the Premises. This Offer to Purchase only applies to new
prospective buyers. Provided Tenant gives written notice of its desire to
purchase the Premises within seven (7) after being notified by Landlord ("Notice
Period"), Tenant shall thereafter, for a period of five (5) days ("Acceptance
Period"), have the right to purchase the Premises, and Landlord and Tenant agree
to negotiate in good faith for such a purchase contract under similar terms and
conditions. If Tenant fails to respond to said notice within the Notice Period,
or after giving written notice of its exercise of its right of acceptance, if
Landlord and Tenant do not enter into a purchase and sale agreement within the
Acceptance Period, Tenant's opportunity under this Paragraph shall be deemed to
have been waived, and Landlord shall be free to sell the building to anyone "at
market". This Offer to Purchase shall be terminated during any period in which
Tenant is in default under any provision of this Lease that has not been cured
within the applicable cure period. The period of time within which the Offer to
Purchase may be exercised shall not be extended or enlarged by reason of
Tenant's inability to exercise such rights because of such default. If Tenant
fails to give written notice to exercise its Offer to Purchase in any instance
when such opportunity may arise prior to the expiration of the applicable time
period for the exercise of such Offer to Purchase, then Tenant's Offer to
Purchase in the instance in question shall be thereafter be deemed null and void
and of no further force or effect. Tenant's Offer to Purchase shall be a one
time offer to purchase the premises.
This Offer to Purchase is personal to Tenant and may not be assigned,
voluntarily or involuntarily, separate from or as a part of the Lease without
the prior written consent of Landlord.
Landlord's Initials: Tenant's Initials:
/s/ TT /s/ EB
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<PAGE>
Exhibit 10.4
INDEMNIFICATION AGREEMENT
This Indemnification Agreement made and entered into this 30th day of
September, 1996 ("Agreement"), by and between Natrol, Inc., a California
corporation (together with any successor or successors thereto, the "Company")
and Elliott Balbert ("Indemnitee"):
WHEREAS, it is essential to the Company that it be able to retain and
attract as directors the most capable persons available;
WHEREAS, increased corporate litigation has subjected directors to
litigation risks and expenses and the limitations on the availability of
directors and officers liability insurance have made it increasingly difficult
for the Company to attract and retain such persons;
WHEREAS, its by-laws permit the Company to indemnify its directors to the
fullest extent permitted by law and permit the Company to make other
indemnification arrangements and agreements;
WHEREAS, the Company desires to provide Indemnitee with specific
contractual assurance of Indemnitee's rights to full indemnification against
litigation risks and expenses (regardless, among other things, of any amendment
to or revocation of such by-laws or any change in the ownership of the Company
or the composition of its Board of Directors), which indemnification is intended
to be greater than that which is afforded by the Company's certificate of
incorporation, by-laws and, to the extent insurance is available, the coverage
of Indemnitee under the Company's directors and officers liability insurance
policies; and
WHEREAS, Indemnitee is relying upon the rights afforded under this
Agreement in continuing in Indemnitee's position as a director of the Company:
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. Definitions.
(a) "Corporate Status" describes the status of a person who is
serving or has served (i) as a director of the Company, (ii) in any
capacity with respect to any employee benefit plan of the Company,
or (iii) as a director, partner, trustee, officer, employee, or
agent of any other Entity at the request of the Company.
(b) "Entity" shall mean any corporation, partnership, joint venture,
trust, foundation, association, organization or other legal entity
and any group or division of the Company or any of its subsidiaries.
(c) "Expenses" shall mean all reasonable fees, costs and expenses
incurred in connection with any Proceeding (as defined below),
including, without limitation, attorneys' fees, disbursements and
retainers (including, without
<PAGE>
limitation, any such fees, disbursements and retainers incurred by
Indemnitee pursuant to Section 10 of this Agreement), fees and
disbursements of expert witnesses, private investigators and
professional advisors (including, without limitation, accountants
and investment bankers), court costs, transcript costs, fees of
experts, travel expenses, duplicating, printing and binding costs,
telephone and fax transmission charges, postage, delivery services,
secretarial services, and other disbursements and expenses.
(d) "Indemnifiable Expenses," "Indemnifiable Liabilities" and
"Indemnifiable Amounts" shall have the meanings ascribed to those
terms in Section 3(a) below.
(e) "Liabilities" shall mean judgments, damages, liabilities,
losses, penalties, excise taxes, fines and amounts paid in
settlement.
(f) "Proceeding" shall mean any threatened, pending or completed
claim, action, suit, arbitration, alternate dispute resolution
process, investigation, administrative hearing, appeal, or any other
proceeding, whether civil, criminal, administrative or
investigative, whether formal or informal, including a proceeding
initiated by Indemnitee pursuant to Section 10 of this Agreement to
enforce Indemnitee's rights hereunder.
2. Services of Indemnitee. In consideration of the Company's covenants and
commitments hereunder, Indemnitee agrees to serve or continue to serve as a
director of the Company. However, this Agreement shall not impose any obligation
on Indemnitee or the Company to continue Indemnitee's service to the Company
beyond any period otherwise required by law or by other agreements or
commitments of the parties, if any.
3. Agreement to Indemnify. The Company agrees to indemnify Indemnitee as
follows:
(a) Subject to the exceptions contained in Section 4(a) below, if
Indemnitee was or is a party or is threatened to be made a party to
any Proceeding (other than an action by or in the right of the
Company) by reason of Indemnitee's Corporate Status, Indemnitee
shall be indemnified by the Company against all Expenses and
Liabilities incurred or paid by Indemnitee in connection with such
Proceeding (referred to herein as "Indemnifiable Expenses" and
"Indemnifiable Liabilities," respectively, and collectively as
"Indemnifiable Amounts").
(b) Subject to the exceptions contained in Section 4(b) below, if
Indemnitee was or is a party or is threatened to be made a party to
any Proceeding by or in the right of the Company to procure a
judgment in its favor by reason of Indemnitee's Corporate Status,
Indemnitee shall be indemnified by the Company against all
Indemnifiable Expenses.
2
<PAGE>
4. Exceptions to Indemnification. Indemnitee shall be entitled to
indemnification under Sections 3(a) and 3(b) above in all circumstances other
than the following:
(a) If indemnification is requested under Section 3(a) and it has
been adjudicated finally by a court of competent jurisdiction that,
in connection with the subject of the Proceeding out of which the
claim for indemnification has arisen, Indemnitee failed to act in
good faith and in a manner Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company or, with respect
to any criminal action or proceeding, Indemnitee had reasonable
cause to believe that Indemnitee's conduct was unlawful, Indemnitee
shall not be entitled to payment of Indemnifiable Amounts hereunder.
(b) If indemnification is requested under Section 3(b) and
(i) it has been adjudicated finally by a court of
competent jurisdiction that, in connection with the
subject of the Proceeding out of which the claim for
indemnification has arisen, Indemnitee failed to act in
good faith and in a manner Indemnitee reasonably
believed to be in or not opposed to the best interests
of the Company, Indemnitee shall not be entitled to
payment of Indemnifiable Expenses hereunder; or
(ii) it has been adjudicated finally by a court of
competent jurisdiction that Indemnitee is liable to the
Company with respect to any claim, issue or matter
involved in the Proceeding out of which the claim for
indemnification has arisen, including, without
limitation, a claim that Indemnitee received an improper
personal benefit, no Indemnifiable Expenses shall be
paid with respect to such claim, issue or matter unless
the Court of Chancery or another court in which such
Proceeding was brought shall determine upon application
that, despite the adjudication of liability, but in view
of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such
Indemnifiable Expenses which such court shall deem
proper.
5. Procedure for Payment of Indemnifiable Amounts. Indemnitee shall submit
to the Company a written request specifying the Indemnifiable Amounts for which
Indemnitee seeks payment under Section 3 of this Agreement and the basis for the
claim. The Company shall pay such Indemnifiable Amounts to Indemnitee within
twenty (20) calendar days of receipt of the request. At the request of the
Company, Indemnitee shall furnish such documentation and information as are
reasonably available to Indemnitee and necessary to establish that Indemnitee is
entitled to indemnification hereunder.
3
<PAGE>
6. Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provision of this Agreement, and without
limiting any such provision, to the extent that Indemnitee is, by reason of
Indemnitee's Corporate Status, a party to and is successful, on the merits or
otherwise, in any Proceeding, Indemnitee shall be indemnified against all
Expenses reasonably incurred by Indemnitee or on Indemnitee's behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses reasonably incurred by Indemnitee or on
Indemnitee's behalf in connection with each successfully resolved claim, issue
or matter. For purposes of this Agreement, the termination of any claim, issue
or matter in such a Proceeding by dismissal, with or without prejudice, shall be
deemed to be a successful result as to such claim, issue or matter.
7. Effect of Certain Resolutions. Neither the settlement or termination of
any Proceeding nor the failure of the Company to award indemnification or to
determine that indemnification is payable shall create an adverse presumption
that Indemnitee is not entitled to indemnification hereunder. In addition, the
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent shall not create a presumption
that Indemnitee did not act in good faith and in a manner which Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal action or proceeding, had reasonable cause to
believe that Indemnitee's action was unlawful.
8. Agreement to Advance Interim Expenses; Conditions. The Company shall
pay to Indemnitee all Indemnifiable Expenses incurred by Indemnitee in
connection with any Proceeding, including a Proceeding by or in the right of the
Company, in advance of the final disposition of such Proceeding, if Indemnitee
furnishes the Company with a written undertaking to repay the amount of such
Indemnifiable Expenses advanced to Indemnitee if it is finally determined by a
court of competent jurisdiction that Indemnitee is not entitled under this
Agreement to indemnification with respect to such Expenses. Such undertaking
shall be an unlimited general obligation of Indemnitee, shall be accepted by the
Company without regard to the financial ability of Indemnitee to make repayment,
and in no event shall be required to be secured.
9. Procedure for Payment of Interim Expenses. Indemnitee shall submit to
the Company a written request specifying the Indemnifiable Expenses for which
Indemnitee seeks an advancement under Section 8 of this Agreement, together with
documentation evidencing that Indemnitee has incurred such Indemnifiable
Expenses. Payment of Indemnifiable Expenses under Section 8 shall be made no
later than twenty (20) calendar days after the Company's receipt of such request
and the undertaking required by Section 8.
4
<PAGE>
10. Remedies of Indemnitee.
(a) Right to Petition Court. In the event that Indemnitee makes a
request for payment of Indemnifiable Amounts under Sections 3 and 5
above or a request for an advancement of Indemnifiable Expenses
under Sections 8 and 9 above and the Company fails to make such
payment or advancement in a timely manner pursuant to the terms of
this Agreement, Indemnitee may petition the appropriate judicial
authority to enforce the Company's obligations under this Agreement.
(b) Burden of Proof. In any judicial proceeding brought under
Section 10(a) above, the Company shall have the burden of proving
that Indemnitee is not entitled to payment of Indemnifiable Amounts
hereunder.
(c) Expenses. The Company agrees to reimburse Indemnitee in full for
any Expenses incurred by Indemnitee in connection with
investigating, preparing for, litigating, defending or settling any
action brought by Indemnitee under Section 10(a) above, or in
connection with any claim or counterclaim brought by the Company in
connection therewith.
(d) Validity of Agreement. The Company shall be precluded from
asserting in any Proceeding, including, without limitation, an
action under Section 10(a) above, that the provisions of this
Agreement are not valid, binding and enforceable or that there is
insufficient consideration for this Agreement and shall stipulate in
court that the Company is bound by all the provisions of this
Agreement.
(e) Failure to Act Not a Defense. The failure of the Company
(including its Board of Directors or any committee thereof,
independent legal counsel, or stockholders) to make a determination
concerning the permissibility of the payment of Indemnifiable
Amounts or the advancement of Indemnifiable Expenses under this
Agreement shall not be a defense in any action brought under Section
10(a) above, and shall not create a presumption that such payment or
advancement is not permissible.
11. Representations and Warranties of the Company. The Company hereby
represents and warrants to Indemnitee as follows:
(a) Authority. The Company has all necessary power and authority to
enter into, and be bound by the terms of, this Agreement, and the
execution, delivery and performance of the undertakings contemplated
by this Agreement have been duly authorized by the Company.
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<PAGE>
(b) Enforceability. This Agreement, when executed and delivered by
the Company in accordance with the provisions hereof, shall be a
legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws affecting the enforcement
of creditors' rights generally.
12. Insurance. The Company will use its commercially reasonable efforts to
obtain and maintain a policy or policies of insurance with reputable insurance
companies providing the Indemnitee with coverage for losses from wrongful acts,
and to ensure the Company's performance of its indemnification obligations under
this Agreement. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee at least the same rights and benefits as are accorded to the most
favorably insured of the Company's officers and directors. Notwithstanding the
foregoing, if the Company, after employing commercially reasonable efforts as
provided in this section, determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, or if the coverage provided
by such insurance is limited by exclusions so as to provide an insufficient
benefit the Company shall use its commercially reasonable efforts to obtain and
maintain a policy or policies of insurance with coverage having features as
similar as practicable to those described above.
13. Contract Rights Not Exclusive. The rights to payment of Indemnifiable
Amounts and advancement of Indemnifiable Expenses provided by this Agreement
shall be in addition to, but not exclusive of, any other rights which Indemnitee
may have at any time under applicable law, the Company's by-laws or certificate
of incorporation, or any other agreement, vote of stockholders or directors, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in any other capacity as a result of Indemnitee's serving as a director of the
Company.
14. Successors. This Agreement shall be (a) binding upon all successors
and assigns of the Company (including any transferee of all or a substantial
portion of the business, stock and/or assets of the Company and any direct or
indirect successor by merger or consolidation or otherwise by operation of law)
and (b) binding on and shall inure to the benefit of the heirs, personal
representatives, executors and administrators of Indemnitee. This Agreement
shall continue for the benefit of Indemnitee and such heirs, personal
representatives, executors and administrators after Indemnitee has ceased to
have Corporate Status.
15. Subrogation. In the event of any payment of Indemnifiable Amounts
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of contribution or recovery of Indemnitee against
other persons, and Indemnitee shall take, at the request of the Company, all
reasonable action necessary to secure such rights, including the
6
<PAGE>
execution of such documents as are necessary to enable the Company to bring suit
to enforce such rights.
16. Change in Law. To the extent that a change in applicable law (whether
by statute or judicial decision) shall permit broader indemnification than is
provided under the terms of the by-laws of the Company and this Agreement,
Indemnitee shall be entitled to such broader indemnification and this Agreement
shall be deemed to be amended to such extent.
17. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement, or any clause thereof,
shall be determined by a court of competent jurisdiction to be illegal, invalid
or unenforceable, in whole or in part, such provision or clause shall be limited
or modified in its application to the minimum extent necessary to make such
provision or clause valid, legal and enforceable, and the remaining provisions
and clauses of this Agreement shall remain fully enforceable and binding on the
parties.
18. Indemnitee as Plaintiff. Except as provided in Section 10(c) of this
Agreement and in the next sentence, Indemnitee shall not be entitled to payment
of Indemnifiable Amounts or advancement of Indemnifiable Expenses with respect
to any Proceeding brought by Indemnitee against the Company, any Entity which it
controls, any director or officer thereof, or any third party, unless the
Company has consented to the initiation of such Proceeding. This Section shall
not apply to counterclaims or affirmative defenses asserted by Indemnitee in an
action brought against Indemnitee.
19. Joint and Several Liability. The obligations of the Company hereunder
shall be joint and several.
20. Modifications and Waiver. Except as provided in Section 16 above with
respect to changes in applicable law which broaden the right of Indemnitee to be
indemnified by the Company, no supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by each of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions of this Agreement (whether or
not similar), nor shall such waiver constitute a continuing waiver.
21. General Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (a) when delivered by hand, (b) when transmitted by facsimile and
receipt is acknowledged, or (c) if mailed by certified or registered mail with
postage prepaid, on the third business day after the date on which it is so
mailed:
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<PAGE>
(i) If to Indemnitee, to:
Elliott Balbert
(ii) If to the Company, to:
Natrol, Inc.
20731 Marilla Street
Chatsworth, CA 91311-4408
or to such other address as may have been furnished in the same manner by any
party to the others.
23. Governing Law. This Agreement shall be governed by and construed and
enforced under the laws of the jurisdiction in which the Company or its
successor or successors are incorporated from time to time (the "Jurisdiction")
without giving effect to the provisions thereof relating to conflicts of law.
Upon the re-incorporation of the Company in Delaware, this Agreement shall be
amended to allow Indemnitee to petition the Court of Chancery upon any failure
by the Company to perform under this Agreement.
24. Consent to Jurisdiction. The Company hereby irrevocably and
unconditionally consents to the jurisdiction of the courts of the Jurisdiction
and the United States District Court in the Jurisdiction. The Company hereby
irrevocably and unconditionally waives any objection to the laying of venue of
any Proceeding arising out of or relating to this Agreement in the courts of the
Jurisdiction or the United States District Court in the Jurisdiction, and hereby
irrevocably and unconditionally waives and agrees not to plead or claim that any
such Proceeding brought in any such court has been brought in an inconvenient
forum.
25. Agreement Governs. This Agreement is to be deemed consistent wherever
possible with relevant provisions of the Company's by-laws and certificate of
incorporation; however, in the event of a conflict between this Agreement and
such provisions, the provisions of this Agreement shall control.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NATROL, INC.
By: /s/ Dennis R. Jolicoeur
----------------------------------
Name: Dennis R. Jolicoeur
Title: Executive Vice President and Chief
Financial Officer
INDEMNITEE
/s/ Elliott Balbert
----------------------------------
Name: Elliott Balbert
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<PAGE>
Exhibit 10.5
Restricted Stock Agreement
under the Natrol, Inc.
1996 Stock Option and Grant Plan
Name of Grantee: Dennis Jolicoeur
Class of Shares: Common Stock
No. of Shares: 30,000 Grant Date: November 14, 1996
Per Share Purchase Price: $18.76
Pursuant to the Natrol, Inc. 1996 Stock Option and Grant Plan (the
"Plan"), Natrol Inc., a California corporation (together with its successors and
assigns, the "Company"), hereby grants, sells and issues to the person named
above (the "Grantee"), who is an officer or full-time employee of the Company or
any of the Subsidiaries (as defined below) of the Company, the number of shares
of Common Stock, par value $0.01 per share ("Common Stock"), of the Company
indicated above (subject to the provisions below, the "Shares"), for the per
share purchase price specified above, subject to the terms and conditions set
forth herein and in the Plan. The Grantee agrees to the provisions set forth
herein and acknowledges that each such provision is a material condition of the
Company's agreement to issue and sell the Shares to him. The Company hereby
acknowledges receipt of $562,800 in full payment for the Shares. All references
to share prices and amounts herein shall be equitably adjusted to reflect stock
splits, stock dividends, reverse stock splits, mergers, reorganizations,
recapitalizations and similar changes affecting the capital stock of the
Company, and any shares of capital stock of the Company received on or in
respect of Shares in connection with any such event (including any shares of
capital stock or any right, option or warrant to receive the same or any
security convertible into or exchangeable for any such shares or received upon
conversion of any such shares) shall be subject to this Agreement on the same
basis and extent at the relevant time as the Shares in respect of which they
were issued, and shall be deemed Shares as if and to the same extent they were
issued at the date hereof. Upon the reincorporation of the Company under the
laws of the State of Delaware, the resulting Delaware company shall assume all
of the rights and obligations of the Company with respect to 3,000 shares of
common stock of the resulting Delaware company.
Section 1. Definitions. For the purposes of this Agreement, the following
terms shall have the following respective meanings:
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Bankruptcy" means (i) the filing of a voluntary petition under any
bankruptcy or insolvency law, or a petition for the appointment of a receiver or
the making of an assignment for the benefit of creditors, with respect to the
Grantee or any Permitted Transferee, or (ii) the Grantee or any Permitted
Transferee being subjected involuntarily to
<PAGE>
such a petition or assignment or to an attachment or other legal or equitable
interest with respect to his assets, which involuntary petition or assignment or
attachment is not discharged within 60 days after its date, and (iii) the
Grantee or any Permitted Transferee being subject to a transfer of Restricted
Shares by operation of law, except by reason of death.
"Common Stock" shall mean the Company's Common Stock, par value
$0.01 per share, together with any shares into which Common Stock may be
converted or exchanged.
"Initial Public Offering" shall mean the consummation of the first
fully underwritten, firm commitment public offering pursuant to an effective
registration statement under the Act, other than on Forms S-4, S-8, S-14 or S-15
or their then equivalents, covering the offer and sale by the Company of its
equity securities; or such other event as a result of or following which its
Common Stock shall be publicly traded.
"Permitted Transferees" shall mean any of the following to whom the
Grantee may transfer Shares hereunder: the Grantee's spouse, parents, children
(natural or adopted), stepchildren or grandchildren or a trust for their sole
benefit of which the Grantor is the settlor; provided, however, that any such
trust does not require or permit distribution of any Shares during the term of
this Agreement unless subject to its terms.
"Restricted Shares" shall initially mean all of the Shares being
purchased by the Grantee on the date hereof, provided that on the last day of
each calendar period listed below prior to any Termination Event, the respective
numbers of Shares indicated below shall become Vested Shares.
<TABLE>
<CAPTION>
Incremental/Aggregate
Vesting Date Number of Vested Shares*
------------ ------------------------
<S> <C>
July 1, 1997 6,000/6,000
October 1, 1997 1,500/7,500
January 1, 1998 1,500/9,000
April 1, 1998 1,500/10,500
July 1, 1998 1,500/12,000
October 1, 1998 1,500/13,500
January 1, 1999 1,500/15,000
April 1, 1999 1,500/16,500
July 1, 1999 1,500/18,000
October 1, 1999 1,500/19,500
January 1, 2000 1,500/21,000
April 1, 2000 1,500/22,500
July 1, 2000 1,500/24,000
October 1, 2000 1,500/25,500
January 1, 2001 1,500/27,000
April 1, 2001 1,500/28,500
</TABLE>
2
<PAGE>
July 1, 2001 1,500/30,000
- ----------
* Subject to stock splits, stock dividends, reverse stock splits,
recapitalizations and similar changes, as provided above.
Notwithstanding the foregoing, as of the effective date of any Sale Event, one
half of each quarterly tranche of the Shares listed above, i.e., 750 Shares per
tranche (subject to adjustment as provided in (*) above), which is then unvested
shall vest and be deemed Vested Shares.
"Sale Event" shall mean any of the following transactions: (a) the
dissolution or liquidation of the Company; (b) the sale of all or substantially
all of the assets of the Company and its Subsidiaries to another person or
entity; (c) a merger, reorganization or consolidation in which the holders of
the Company's outstanding voting power immediately prior to such transaction do
not own a majority of the outstanding voting power of the surviving or resulting
entity immediately upon completion of such transaction; (d) the sale of all of
the outstanding stock of the Company to an unrelated person or entity; or (e)
any other transaction where the owners of the Company's outstanding voting power
prior to such transaction do not own at least a majority of the outstanding
voting power of the relevant entity after the transaction.
"Shares" shall mean the number of shares of Common Stock being
purchased by the Grantee on the date hereof and any additional shares of Common
Stock or other securities received as a dividend on, or otherwise on account of,
the Shares, as contemplated by the first paragraph of this Agreement.
"Subsidiary" shall mean any corporation or partnership of which
stock or other equity interests possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock or other equity interests is
owned directly or indirectly by the Company.
"Termination Event" shall mean the termination of the Grantee's
employment with the Company and its subsidiaries for any reason whatsoever,
regardless of the circumstances thereof, and including without limitation upon
death, disability, retirement or discharge or resignation for any reason,
whether voluntary or involuntary.
"Vested Shares" shall mean all Shares which are not Restricted
Shares.
Section 2. Purchase and Sale of Shares; Investment Representations.
2.1. Purchase and Sale. On the date hereof, the Company hereby sells to
the Grantee, and the Grantee hereby purchases from the Company, the number of
Shares set forth above for the purchase price per share set forth above.
3
<PAGE>
2.2. Investment Representations. In connection with the purchase and sale
of the Shares contemplated by Section 2.1 above, the Grantee hereby represents
and warrants to the Company as follows:
(a) The Grantee is purchasing the Shares for his own account for
investment only, and not for resale or with a view to the distribution thereof.
(b) The Grantee has had such an opportunity as he has deemed
adequate to obtain from the Company such information as is necessary to permit
him to evaluate the merits and risks of his investment in the Company and has
consulted with his own advisers with respect to his investment in the Company.
(c) The Grantee has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.
(d) The Grantee is an "accredited investor" as that term is defined
in Rule 501 promulgated under the Act.
(e) The Grantee can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for an
indefinite period.
(f) The Grantee understands that the Shares are not registered under
the Act (it being understood that the Shares are being issued and sold in
reliance on the exemption provided in Rule 701 thereunder) or any applicable
state securities or "blue sky" laws and may not be sold or otherwise transferred
or disposed of in the absence of an effective registration statement under the
Act and under any applicable state securities or "blue sky" laws (or exemptions
from the registration requirements thereof). The Grantee further acknowledges
that certificates representing the Shares will bear restrictive legends
reflecting the foregoing.
Section 3. Repurchase of Shares.
3.1 Repurchase. The purchase and sale arrangements contemplated by this
Section 3 are referred to herein as the "Repurchase."
3.2. Repurchase of Restricted Shares. Upon the occurrence of a Termination
Event or the Bankruptcy of the Grantee, the Company or its assigns shall have
the right to repurchase all or any portion of the Restricted Shares held by the
Grantee or any Permitted Transferee as of the date of such Termination Event or
Bankruptcy at the per share purchase price specified in the introduction to this
Agreement, subject to adjustment as provided above. In addition, upon the
Bankruptcy of any of the Grantee's Permitted Transferees, the Company or its
assigns shall have the right to repurchase all or any portion of the Restricted
Shares held by such Permitted Transferee as of the date of such Bankruptcy at a
price equal to the per share purchase price set forth above, also subject to
such adjustment.
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<PAGE>
3.3. Repurchase of Vested Shares. Upon the occurrence of a Termination
Event or the Bankruptcy of the Grantee prior to an Initial Public Offering, the
Company or its assigns shall have the right and option to repurchase all or any
portion of the Vested Shares held by the Grantee or any Permitted Transferee as
of the date of such Termination Event or Bankruptcy at a price equal to the fair
market value per share as determined by an appraiser, investment banker or other
entity reasonably acceptable to both the Company and the Grantee, or the per
share purchase price specified above, subject to adjustment, if greater. In
addition, upon the Bankruptcy of any of the Grantee's Permitted Transferees
prior to an Initial Public Offering, the Company or its assigns shall have the
right and option to repurchase all or any portion of the Vested Shares held by
such Permitted Transferee as of the date of such Bankruptcy at a price equal to
the fair market value per share, determined as set forth above, or the per share
purchase price specified above, subject to adjustment, if greater.
3.4. Closing Procedure. The Company or its assigns shall effect the
Repurchase by delivering or mailing to the Grantee (and/or, if applicable, his
Permitted Transferees) written notice within six (6) months after the
Termination Event or Bankruptcy, specifying a date within such six-month period
in which the Repurchase shall be effected. Upon such notification, the Grantee
and his Permitted Transferees shall promptly surrender to the Company any
certificates representing the Shares being purchased, together with a duly
executed stock power for the transfer of such Shares to the Company or the
Company's assignee or assignees (as contemplated by Section 6, if applicable).
Upon the Company's or its assignee's receipt of the certificates from the
Grantee or his Permitted Transferees, the Company or its assignee or assignees
shall deliver to him, her or them a check for the purchase price of the Shares
being purchased; provided, however, that the Company may pay the purchase price
for such Shares by offsetting and cancelling any indebtedness then owed by the
Grantee to the Company. At such time, the Grantee and/or any holder of the
Shares shall deliver to the Company the certificate or certificates representing
the Shares so repurchased, duly endorsed for transfer, free and clear of any
liens or encumbrances. The Repurchase obligation specified in Section 3.2 shall
survive and remain in effect as to Restricted Shares following and
notwithstanding any public offering by or Sale Event involving the Company and
certificates representing such Restricted Shares shall bear legends to such
effect, but the Repurchase shall no longer be applicable with respect to Vested
Shares from and after the closing date of an Initial Public Offering.
3.5 Sale Events. Upon the occurrence of a Sale Event in which the
Company's assets or stock is acquired for consideration other than stock, the
Company shall have the right, exercisable as of the closing of such Sale Event
or within 30 days thereafter, to acquire all Restricted Shares held by the
Grantee and any Permitted Transferees as of the effective date of such Sale
Event at the per share purchase price specified in the introduction to this
Agreement, subject to adjustment as provided above. In the event of a Sale Event
involving an exchange of stock of the Company for stock of another company, the
provisions of this Agreement, including the Repurchase and the vesting schedule
set forth above, shall remain applicable to the Shares held by the Grantee. The
Company shall have the right, exercisable in its discretion in connection with
any Sale Event or otherwise, not to acquire some or all of the
5
<PAGE>
Restricted Shares and/or to accelerate vesting with respect to some or all of
the Restricted Shares.
3.6. Remedy. Without limitation of any other provision of this Agreement
or other rights, in the event that the Grantee, his or her Permitted Transferees
or any other person or entity is required to sell his or her Shares pursuant to
the provisions of this Section 3 and in the further event that he or she refuses
or for any reason fails to deliver to the designated purchaser of such Shares
the certificate or certificates evidencing such Shares together with a related
stock power, such designated purchaser may deposit the purchase price for such
Shares with any bank doing business within fifty (50) miles of the Company's
principal office, or with the Company's independent public accounting firm, as
agent or trustee, or in escrow, for the Grantee, his or her Permitted
Transferees or other person or entity, to be held by such bank or accounting
firm for the benefit of and for delivery to him, them or it, and/or, in its
discretion, pay such purchase price by offsetting any indebtedness then owed by
the Grantee as provided above. Upon any such deposit and/or offset by the
designated purchaser of such amount and upon notice to the person or entity who
was required to sell the Shares to be sold pursuant to the provisions of this
Section 3, such Shares shall at such time be deemed to have been sold, assigned,
transferred and conveyed to such purchaser, the holder thereof shall have no
further rights thereto (other than the right to withdraw the payment thereof
held in escrow, if applicable), and the Company shall record such transfer in
its stock transfer book or in any appropriate manner.
Section 4. Restrictions on Transfer of Shares. (a) None of the Shares now
owned or hereafter acquired shall be sold, assigned, transferred, pledged,
hypothecated, given away or in any other manner disposed of or encumbered,
whether voluntarily or by operation of law, unless such transfer is in
compliance with all applicable securities laws (including, without limitation,
the Act), and such disposition is in accordance with the terms and conditions of
this Section 4. In connection with any transfer of Shares, the Company may
require the transferor to provide at his or her own expense an opinion of
counsel to the transferor, satisfactory to the Company, that such transfer is in
compliance with all foreign, federal and state securities laws (including,
without limitation, the Act). Any attempted disposition of Shares not in
accordance with the terms and conditions of this Section 4 shall be null and
void, and the Company shall not reflect on its records any change in record
ownership of any Shares as a result of any such disposition, shall otherwise
refuse to recognize any such disposition and shall not in any way give effect to
any such disposition of any Shares. Subject to the foregoing general provisions,
Shares may be transferred pursuant to the following specific terms and
conditions:
(b) Prior to an Initial Public Offering, the Grantee may sell,
assign, transfer or give away any or all of the Shares to Permitted Transferees
or in connection with a Sale Event as contemplated by Section 3.5, and the
Shares may be transferred by operation of law upon death to the estate, any
legal representatives, executors and administrators of the Grantee or any
Permitted Transferee, provided, however, that any such Permitted Transferee
shall agree, as a condition to such Transfer, to be subject to the provisions of
this Agreement (including without limitation Sections 3, 4 and 9.8) as if the
Shares were still held by him or
6
<PAGE>
her and shall deliver a written acknowledgment to such effect to the Company,
and all Shares shall remain subject to the Repurchase pursuant to Sections 3.2,
3.3 and 3.5 in the hands of any such transferee. Further, in the event (prior to
an Initial Public Offering) the Grantee or any Permitted Transferee holds Vested
Shares following a Termination Event and such Vested Shares are not purchased by
the Company or an assignee pursuant to Section 3.3 within the period
contemplated by Section 3.4, then such Vested Shares may be transferred to third
parties in bona fide sales for value following compliance with Section 4(d).
(c) Following an Initial Public Offering, Vested Shares may be
transferred freely provided that transfer complies with Section 4(a), but
Restricted Shares may be transferred only to Permitted Transferees or by
operation of law as and under the conditions contemplated by Section 4(b),
provided that such Restricted Shares shall in all events remain subject to the
Repurchase.
(d) In the event following any Termination Event but prior to an
Initial Public Offering that the Grantee (or any Permitted Transferee holding
Shares subject to this Section 4(d)) desires to sell or otherwise transfer all
or any part of any Vested Shares which the Company and its assignees have not
purchased pursuant to Section 3.3, the Grantee or such Permitted Transferee
first shall give written notice to the Company of his intention to make such
transfer. Such notice shall state the number of Vested Shares which the Grantee
proposes to sell (the "Offered Shares"), the price and the terms at which the
proposed sale is to be made and the name and address of the proposed transferee.
At any time within 10 days after the receipt of such notice by the Company, the
Company or its assigns may elect to purchase all or any portion of the Offered
Shares at the price and on the terms offered by the proposed transferee and
specified in the notice. The Company or its assigns shall exercise this right by
mailing or delivering written notice to the Grantee within the foregoing 10-day
period. If the Company or its assigns elect to exercise its purchase rights of
this Section 4(d), the closing for such purchase shall, in any event, take place
within 30 days after the receipt by the Company of the initial notice from the
Grantee. In the event that the Company or its assigns do not elect to exercise
such purchase right, or in the event that the Company or its assigns do not pay
the full purchase price within such 30-day period, the transferor may, within 60
days thereafter, sell the Offered Shares to the proposed transferee and at the
same price and on the same terms as specified in his notice. Any Shares
purchased by such proposed transferee shall no longer be subject to the terms of
this Agreement, and this Section 4(d) shall terminate upon the closing of an
Initial Public Offering.
Section 5. Legend. Any certificate(s) representing the Shares shall carry
substantially the following legends:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the restrictions, terms and
conditions (including repurchase and restrictions against transfers)
contained in a certain Restricted Stock Agreement dated November 14,
1996 between the Company and the holder of this
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<PAGE>
certificate (a copy of which is available at the offices of the
Company for examination)."
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 or the securities laws
of any state. The shares may not be sold or transferred in the
absence of such registration or an exemption from registration."
Section 6. Escrow. In order to carry out the provisions of Sections 3 and
4 of this Agreement more effectively, the Company shall hold the Shares in
escrow together with separate stock powers executed by the Grantee in blank for
transfer, and any Permitted Transferee shall, as an additional condition to any
transfer of Shares, execute a like stock power as to such Shares. The Company
shall not dispose of the Shares except as otherwise provided in this Agreement.
In the event of any Repurchase, the Company is hereby authorized by the Grantee
and each Permitted Transferee, as the Grantee's and each such Permitted
Transferee's attorney-in-fact, to date and complete the stock powers necessary
for the transfer of the Shares being purchased and to transfer such Shares in
accordance with the terms hereof. At such time following an Initial Public
Offering as any Shares are no longer Restricted Shares or following compliance
with Section 4(d) in the case of Vested Shares, the Company shall, at the
written request of the Grantee, deliver to the Grantee (or the relevant
Permitted Transferee) a certificate representing such Shares with the balance of
the Shares, if any, to be held in escrow pursuant to this Section 6.
Section 7. Withholding Taxes. The Grantee acknowledges and agrees that the
Company or any of its Subsidiaries have the right to deduct from payments of any
kind otherwise due to the Grantee, or from the Shares held pursuant to Section 6
hereof, any federal, state or local taxes of any kind required by law to be
withheld with respect to the purchase of the Shares by the Grantee. In
furtherance of the foregoing the Grantee agrees to elect, in accordance with
Section 83(b) of the Internal Revenue Code of 1986, as amended, to recognize
ordinary income in the year of acquisition of the Shares, and to pay to the
Company all withholding taxes shown as due on his Section 83(b) election form,
or otherwise ultimately determined to be due with respect to such election,
based on the excess, if any, of the fair market value of such Shares as of the
date of the purchase of such Shares by the Grantee over the purchase price for
such Shares.
Section 8. Assignment. At the discretion of the Board of Directors of the
Company, the Company shall have the right to assign the right to exercise its
obligation and rights with respect to the Repurchase to any person or persons,
in whole or in part in any particular instance, upon the same terms and
conditions applicable to the exercise thereof by the Company, and such assignee
or assignees of the Company shall then take and hold any Shares so acquired
subject to such terms as may be specified by the Company in connection with any
such assignment.
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<PAGE>
Section 9. Miscellaneous Provisions.
9.1. Record Owner; Dividends. The Grantee and any Permitted Transferees,
during the duration of this Agreement, shall be considered the record owners of
and shall be entitled to vote the Shares. The Grantee and any Permitted
Transferees shall be entitled to receive all dividends and any other
distributions declared on the Shares; provided, however, that the Company is
under no duty to declare any such dividends or to make any such distribution.
9.2. Equitable Relief. The parties hereto agree and declare that legal
remedies are inadequate to enforce the provisions of this Agreement and that
equitable relief, including specific performance and injunctive relief, may be
used to enforce the provisions of this Agreement.
9.3. Change and Modifications. This Agreement may not be orally changed,
modified or terminated, nor shall any oral waiver of any of its terms be
effective. This Agreement may be changed, modified or terminated only by an
agreement in writing signed by the Company and the Grantee.
9.4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
9.5. Headings. The headings are intended only for convenience in finding
the subject matter and do not constitute part of the text of this Agreement and
shall not be considered in the interpretation of this Agreement.
9.6. Saving Clause. If any provision(s) of this Agreement shall be
determined to be illegal or unenforceable, such determination shall in no manner
affect the legality or enforceability of any other provision hereof.
9.7. Notices. All notices, requests, consents and other communications
shall be in writing and be deemed given when delivered personally, by telex or
facsimile transmission or when received if mailed by first class registered or
certified mail, postage prepaid. Notices to the Company or the Grantee shall be
addressed as set forth underneath their signatures below, or to such other
address or addresses as may have been furnished by such party in writing to the
other. Notices to any holder of the Shares other than the Grantee shall be
addressed to the address furnished by such holder to the Company.
9.8. Benefit and Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, their respective successors,
assigns, legal representatives, estates, executors, administrators and heirs;
without limitation of the foregoing upon any merger of the Company in which the
Company is not the surviving entity, shares of the Company's successor issued in
respect of the Shares (subject to the initial paragraph hereof) shall remain
subject to vesting and the Repurchase hereunder. The Company has the
9
<PAGE>
right to assign this Agreement, and such assignee shall become entitled to all
the rights of the Company hereunder to the extent of such assignment.
9.9. Counterparts. For the convenience of the parties and to facilitate
execution, this Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the
same document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
10
<PAGE>
IN WITNESS WHEREOF, the Company and the Grantee have executed this
Agreement as of the date first above written.
NATROL, INC.
By: /s/ Elliott Balbert
--------------------------------
Name: Elliott Balbert
Title: President
GRANTEE
/s/ Dennis R. Jolicoeur
------------------------------------
Dennis Jolicoeur
333 South Irving Blvd.
Los Angeles, CA 90020
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Restricted Stock Agreement
and understand the contents thereof.
/s/ Catherine H. Jolicoeur
- ---------------------------------------
11
<PAGE>
Exhibit 10.6
PROMISSORY NOTE
$562,500 Chatsworth, California
November 14, 1996
FOR VALUE RECEIVED, the undersigned ("Debtor") hereby promises to pay to
Natrol, Inc., a California corporation ("Payee"), at such place or places as may
be specified by Payee or any holder hereof, in legal tender of the United States
of America, the principal amount of $562,500 (the "Principal"), with interest at
the rate of 6.60% per annum, compounded annually, on the unpaid balance.
Interest shall be payable on each November 14 commencing November 14, 1997. The
Debtor shall pay to Payee, within ten (10) days after receipt thereof, the net
after-tax proceeds from all sales of the Debtor's shares of the Common Stock,
par value $.01 per share, of Natrol, Inc. in reduction of Principal until such
time as the Principal has been repaid in full, and in connection with each such
payment shall pay accrued but unpaid interest on the amount so prepaid. For
purposes hereof, net after-tax proceeds refers to the amount received by the
Debtor upon any sale of such shares, less brokerage commissions or underwriting
discounts, other expenses of every kind, including documentary, excise and other
taxes, if any, directly relating to the sale and an amount equal to the federal,
state and local taxes on any gain from such sale (as determined by multiplying
the amount of such gain by the combined maximum federal, state and local tax
rate applicable to the sale of such shares by the Debtor, taking into account
the holding period for such shares and any federal income tax deduction for
state and local income taxes). In any event, any principal then unpaid shall be
due and payable, with accrued interest thereon, on November 14, 2004 (the
"Repayment Date").
This Note is subject to the terms of and the payment hereof is secured by
a certain Pledge Agreement dated as of the date hereof by and between Debtor and
Payee (the "Pledge Agreement").
In case an Event of Default, as defined in the Pledge Agreement, shall
occur, the aggregate unpaid balance of Principal and accrued interest may be
declared to be due and payable in the manner and with the effect provided in the
Pledge Agreement. The obligation of the undersigned Debtor to pay the Recourse
Amount (as hereinafter defined) shall be absolute and unconditional, and the
Payee shall have full recourse against the Debtor's assets (including, but not
limited to, the collateral pledged pursuant to the Pledge Agreement) to recover
the Recourse Amount. The Recourse Amount as of any time shall mean $140,625
reduced by 25% of each payment of Principal made by or on behalf of the Debtor
from any source. Unless otherwise directed by the Debtor, all sums paid by the
Debtor or otherwise received by Payee on account of sums owing hereunder shall
first be applied to the Recourse Amount and only after the Recourse Amount is
paid in full, then to other sums owing
<PAGE>
hereunder. With respect to amounts due and payable hereunder in excess of the
Recourse Amount, the Payee shall have no recourse against the Debtor or any of
his assets other than the collateral pledged pursuant to the Pledge Agreement,
and Payee shall look only to its rights as provided in the Pledge Agreement for
the repayment of amounts in excess of the Recourse Amount.
Debtor may discharge the obligations undertaken hereby, at any time, by
repaying the outstanding principal balance, without penalty. Debtor may, without
penalty, make a partial prepayment of Principal and/or interest in any amount at
any time and may thereby reduce any required future payment hereunder by the
amount of such prepayment.
Debtor expressly waives presentment for payment, protest and demand,
notice of protest, demand and dishonor and expressly agrees that this Note may
be extended from time to time without in any way affecting the liability of
Debtor. No delay or omission on the part of Payee in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note.
This Note may from time to time be extended by Payee, with or without
notice to Debtor, and any related right may be waived, exchanged, surrendered or
otherwise dealt with, all without affecting the liability of Debtor, in each
case in the sole discretion of Payee.
This Note may not be changed, modified or terminated orally, but only by
an agreement in writing and signed by the Debtor and Payee. This Note shall be
governed by and construed in accordance with the laws of the State of
California, and shall be binding upon the successors and assigns of Debtor and
inure to the benefit of Payee and its heirs, successors, endorsees and assigns.
DEBTOR:
/s/ Dennis R. Jolicoeur
-------------------------------
Dennis Jolicoeur
2
<PAGE>
Exhibit 10.7
PLEDGE AGREEMENT
In consideration of Natrol, Inc., a California corporation (the
"Company"), having made a loan to Dennis Jolicoeur ("Borrower"), under the
Promissory Note dated November 14, 1996, and any renewals or extensions thereof
made in the sole discretion of the Company ("Note"), Borrower agrees as follows:
Section 1. Pledge. Borrower hereby pledges, assigns and transfers to the
Company, and grants to the Company a security interest in, the following
property ("Collateral"), to be held by the Company:
(a) The shares of Common Stock of the Company (each, a "Share") obtained
pursuant to a certain Restricted Stock Agreement dated as of the date hereof
between Borrower and the Company and held by Borrower or any Permitted
Transferee (as that term is defined in the Restricted Stock Agreement dated as
of the date hereof by and between Borrower and the Company (the "Restricted
Stock Agreement")), and any securities owned in respect thereof or in exchange
therefor.
(b) All other securities, instruments and other property issued or
accepted in substitution for or in addition to any of the foregoing.
(c) All proceeds of any and all of the Collateral.
Section 2. Obligations. This Agreement and the security interest granted
hereby secure the payment of all obligations of Borrower to the Company under
the Note ("Obligations"), and the Obligations of Borrower under this Agreement,
and any and all renewals or extensions thereof. So long as any of the
Obligations are outstanding, unless and until Borrower shall be in default
hereunder or there shall be any default of any of the Obligations, Borrower
shall retain all rights to dividends and distributions and voting rights, if
any, with respect to the Collateral. In the event the Obligations shall be in
default or in the event that Borrower shall be in default under the terms
hereof, the Company may, in its discretion, vote and exercise all of the powers
of an owner with respect to any of the relevant Collateral. Without limiting the
generality of the other remedies provided herein and in addition thereto, in the
event any of the Obligations shall be in default or upon any default by Borrower
hereunder, the Company after the occurrence of an Event of Default may take all
steps necessary to cause the Collateral to be transferred into the name of the
Company, including but not limited to taking steps necessary to comply with
restrictions on sale or transfer of the shares constituting such Collateral, and
in connection therewith Borrower appoints the Company such Borrower's
attorney-in-fact to execute and deliver such offers, tender offers,
certificates, documents or instruments of every nature or description required
for the purpose of the transfer of such shares into the name of the Company, or
any other person.
<PAGE>
If Borrower receives any cash distribution or dividend in respect of any
Collateral, Borrower may retain the such cash distribution or dividend as his
own property unless prior to such receipt an Event of Default has occurred, in
which event Borrower shall accept same in trust for the Company, and shall upon
request deliver same immediately to the Company in the form received, with
Borrower's endorsement and/or assignment when necessary, to be held by the
Company as Collateral.
If Borrower receives any stock certificate or option or deferred
compensation right, whether as an addition to, in substitution of, or in
exchange for, any Collateral, or otherwise, Borrower shall accept same in trust
for the Company, and shall upon request deliver same immediately to the Company
in the form received, with Borrower's endorsement and/or assignment when
necessary, to be held by the Company as Collateral.
Borrower is herewith delivering to the Company all certificates or
instruments representing or evidencing Collateral in suitable form for transfer
or delivery, or accompanied by duly executed instruments of transfer or
assignment to be held subject to the preceding paragraph.
Section 3. Release of Collateral. Upon the written request of Borrower,
the Company shall promptly release Collateral to Borrower or to any designee of
Borrower at any time and from time to time; provided, however, that the Company
shall retain an amount of Collateral with an Agreed Value (as defined below) at
least equal to the amount of the Obligations then outstanding.
(a) The "Agreed Value" of any Collateral consisting of Shares shall be the
original cost of such Shares as set forth in the Restricted Stock Agreement
($18.75 per Share), equitably adjusted for stock splits, stock dividends and
like transactions. The Agreed Value of any Collateral not consisting of Shares
shall be determined reasonably and in good faith by the mutual agreement of
Borrower and the Company.
(b) Borrower acknowledges that transfer of the Shares is subject to
certain restrictions under the Restricted Stock Agreement. The obligation of the
Company to release certificates representing Shares to Borrower or his designee
hereunder shall in any event be subject to the requirements of the Restricted
Stock Agreement. Subject to such requirements and the terms hereof, the Company
shall release Vested Shares or Restricted Shares (as those terms are defined in
the Restricted Stock Agreement) as designated by Borrower.
Section 4. Representations and Warranties. Borrower represents and
warrants to the Company as follows:
(a) Borrower is, and (as to any substitute or additional Collateral) shall
be, the sole owner of the Collateral pledged by Borrower, free and clear of any
lien, security interest, option or other charge or encumbrance, except for (i)
the security interest created by this Agreement, (ii) certain restrictions under
the Restricted Stock Agreement and (iii) restrictions imposed by applicable
laws, and, subject to the same exceptions, Borrower has and shall have
2
<PAGE>
the right to transfer such Collateral and to grant a security interest therein
to the Company as provided in this Agreement.
(b) No effective financing statement or similar notice covering any
Collateral pledged by Borrower is or shall be on file in any recording office,
and no other pledge or assignment thereof has been made, or shall have been
made, other than in favor of the Company, except as the Company may approve.
Section 5. Further Action by Borrower. Borrower shall, at the expense of
Borrower, promptly execute and deliver all further notices, instruments and
documents, including, without limitation, financing statements, and take all
such further action as may be reasonably necessary or reasonably advisable or as
the Company at any time may reasonably request, in order to perfect, preserve
and protect the security interest granted or purported to be granted hereby or
to enable the Company to exercise and enforce such rights, powers and remedies
with respect to Collateral.
Section 6. Preservation of Collateral.
(a) The Company shall give to the Collateral the same degree of care and
protection which it gives to its own property, provided, however, that the
Company shall have no liability to Borrower for any losses, costs, expenses or
damages due to any acts or omissions of third parties, or due to any acts of God
or other causes beyond its control. The Company shall have no duty to preserve
any rights with respect to any Collateral, including, without limitation, rights
against prior parties, or to take, or to notify Borrower of the need to take,
any action respecting any rights, privileges or options relating to any
Collateral. To replace any certificates, however, Borrower shall not be required
to supply any bond or other indemnity.
(b) Borrower shall furnish to the Company, promptly upon receipt thereof,
copies of all material notices, requests and other documents received by
Borrower relating to Collateral unless the same were sent by the Company.
(c) Borrower shall not (i) sell, assign, transfer or otherwise dispose of
any Collateral, or create or suffer to exist any lien, security interest,
assignment by operation of law or other charge or encumbrance on, or with
respect to, any Collateral, except for the security interest created by this
Agreement and the rights, remedies and restrictions imposed by the Restricted
Stock Agreement; or (ii) attempt any action prohibited by paragraph (c)(i) of
this Section 6. Notwithstanding the foregoing, Borrower may transfer Shares to
Permitted Transferees pursuant to the Restricted Stock Agreement; provided,
however, that the Shares so transferred shall remain subject to the security
interest created by this Agreement and any such Permitted Transferee(s) shall,
as a condition to any transfer, agree to be subject to the provisions of this
Agreement.
3
<PAGE>
Section 7. Defaults. A default (an "Event of Default") shall be deemed to
have occurred hereunder if (a) Borrower fails in any material respect to perform
any material obligation hereunder, if any material representation or warranty
hereunder was untrue in any material respect when made, or if any default or
Event of Default by Borrower occurs under the Note or any agreement evidencing,
or constituting or granting security for, the Obligations, provided the Company
is current in its obligation to pay certain bonuses on each day interest is due
on the Note, and (b) the Company gives to Borrower written notice thereof and
such default shall not have been cured within fourteen (14) days or such
additional time as may be required to effect such cure if diligently pursued.
Section 8. Remedies. Upon and after the occurrence of any Event of Default
which is then continuing or which has not been cured within the time period
given for such cure:
(a) The Company may exercise its rights with respect to the Collateral,
without regard to the existence of any other security or source of payment for
Obligations, including without limitation the rights set forth in Section 2, and
may demand, sue for collection or make any other compromise or settlement with
respect to other rights and remedies provided for herein or otherwise available
to it, and the Company shall have all of the rights and remedies of a secured
party in California under the Uniform Commercial Code.
(b) Except as specifically reserved herein, Borrower waives all suretyship
defenses at law and in equity, including waste and impairment of Collateral, and
further waives the requirement of any demand and presentment. Twenty-one (21)
days' prior notice to Borrower at the address provided below or at such other
address as Borrower shall provide to the Company in writing for such purpose, of
the time and place of any public sale of Collateral, or of the time after which
any private sale or any other intended disposition is to be made, shall
constitute reasonable notification.
(c) The Company is authorized at any such sale (including without
limitation any sale to itself or any affiliate of the Company, the same being
expressly authorized and contemplated herein), if the Company deems it advisable
to do so, in order to comply with any applicable securities laws, to restrict
the prospective bidders or purchasers to persons who will represent and agree
that they are purchasing the Collateral for their own account for investment,
and not with a view to the distribution or resale thereof. Sales made subject to
such restriction shall not, solely by reason thereof, be deemed not to have been
made in a commercially reasonable manner.
(d) The Company is specifically authorized, with respect to any Collateral
that consists of Shares, to acquire such Collateral itself or to transfer such
Collateral to any affiliate of the Company at a price equal to the Agreed Value
of such Shares, as defined in Section 3(a). Borrower expressly waives any
requirement that the Company conduct a public or private sale with respect to
such Shares and agrees that such a disposition is commercially reasonable.
4
<PAGE>
(e) In case of any sale of all or part of the Collateral on credit for
future delivery, the Collateral so sold shall be retained by the Company until
the purchase price is paid. The Company shall incur no liability in case of the
failure of the purchaser to pay for the Collateral as so sold if the Collateral
is recovered, or of the failure of the Company to make any sale of Collateral
after giving notice thereof, and in case of any such failure, such Collateral
may again be sold.
(f) All cash proceeds received by the Company in respect of any sale,
collection or other enforcement or disposition of Collateral shall be applied
(after deduction of any amounts payable to the Company for reasonable expenses
of the sale, collection or disposition of Collateral) against Obligations in
such order as the Company shall elect. Upon payment in full of all Obligations,
Borrower shall be entitled to the return of all Collateral pledged by him and
all proceeds thereof, which have not been used or applied toward the payment of
Obligations as herein authorized.
Section 9. Waivers and Remedies. Except as otherwise provided herein or by
law, Borrower waives presentment, demand, notice and protest, notice of
acceptance of this Agreement, and except as provided in Section 8(b) notice of
all action by the Company in reliance hereon. No failure by the Company to
exercise, no delay by the Company in exercising, and no single or partial
exercise of, any right, remedy or power hereunder or under any other agreement
relating to the Obligations or to Collateral shall operate as a waiver thereof,
or of any other right, remedy or power at any time. No amendment, modification
or waiver of any provision of this Agreement shall be effective unless contained
in a writing signed by the Company. Any such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. The rights, remedies and powers of the Company and Borrower, not only
hereunder, but also under any promissory note or notes of Borrower held by the
Company, any other agreements of Borrower with the Company and applicable law,
are cumulative and may be exercised successively, concurrently or alternatively.
Section 10. Term; Binding Effect. This Agreement shall remain in full
force and effect until payment and satisfaction in full of all Obligations,
shall be binding upon Borrower and the heirs, legatees, legal representatives
and assigns of Borrower, including Permitted Transferees, and shall inure to the
benefit of the Company and its successors and assigns. Notwithstanding the
foregoing, the Company may terminate this Agreement and release the Collateral,
or may accept substitute Collateral, at any time in its sole discretion without
in any way affecting the nonrecourse nature of a portion of the Obligations as
provided in the Note.
Section 11. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, except to the
extent that the perfection of the security interest granted hereby in respect of
any item of Collateral may be governed by the law of another jurisdiction.
Unless otherwise defined herein, all words and terms used in this Agreement
shall have the meanings provided in the California Uniform Commercial Code. If
5
<PAGE>
any provision of this Agreement, or the application thereof to any person or
circumstance, is held invalid, such provision shall be deemed to be modified to
comply with applicable law or if not able to be so modified, shall be deemed to
be severed from the Agreement, the remaining provisions of which to be valid and
enforceable.
Section 12. Signatures. This Agreement may be executed in counterparts.
Section 13. Headings. The captions in this Agreement have been included
for reference only and shall not define or limit the provisions hereof.
EXECUTED as of the date first set forth above.
BORROWER:
/s/ DENNIS JOLICOEUR
-----------------------------
Dennis Jolicoeur
Address: 333 South Irving Blvd.
Los Angeles, CA 90020
PLEDGEE:
NATROL, INC.
By: /s/ ELLIOTT BALBERT
---------------------------
Elliott Balbert
President
6
<PAGE>
SCHEDULE OF COLLATERAL
TO
PLEDGE AGREEMENT
QUANTITY DESCRIPTION OF SECURITY
30,000 Common Stock of Natrol, Inc.
7
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of
February 27, 1998, by and between NATROL, INC., a Delaware corporation
("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
This Agreement is entered into with reference to the following
facts:
A. Borrower and Bank previously executed and entered into a Credit
Agreement dated as of December 16, 1996 (as heretofore amended, the "Original
Credit Agreement").
B. Pursuant to the Original Credit Agreement, Borrower executed and
delivered to the order of Bank (i) that certain Revolving Line of Credit Note
dated December 16, 1996, in the original principal amount of up to $2,500,000.00
(the "Prior Line of Credit Note"), (ii) that certain Term Commitment Note A
dated December 16, 1996, in the original principal amount of up to $2,500,000.00
("Term Commitment Note A") and (iii) that certain Term Commitment Note B dated
December 16, 1996, in the original principal amount of up to $1,500,000.00
("Term Commitment Note B" and, together with Term Commitment Note A, the "Prior
Term Commitment Notes").
C. In addition to the Prior Line of Credit Note and the Prior Commitment
Notes, Borrower previously executed and delivered to the order of Bank (i) that
certain Term Note dated June 1, 1996 in the original principal amount of
$550,000.00 (the "$550K Term Note") and (ii) that certain Term Note dated
October 3, 1995 in the original principal amount of $200,000.00 (the "$200K
Note").
D. In connection with the credit accommodations made by Bank pursuant to
the Original Credit Agreement and the Prior Line of Credit Note, Prior Term
Commitment Notes, $550K Note and $200K Note, Borrower has executed and delivered
to Bank from time to time various other documents relating to its credit
relationships with Bank, including without limitation security agreements,
financing statements, letter of credit agreements and the like. Such documents,
together with the Original Credit Agreement and the various notes described
above, are collectively referred to herein as the "Original Loan Documents."
E. Borrower desires to acquire certain assets (the "Pure-Gar Assets") of
Pure-Gar, L.P., a Delaware limited partnership ("Pure-Gar."). In connection with
such asset purchase
-1-
<PAGE>
transaction, Borrower, as "Buyer," Pure-Gar, as "Seller," and BVP, Inc., a
Delaware corporation, and Basic Vegetable Products, L.P., a Delaware limited
partnership, as the general partner and limited partner of Pure-Gar,
respectively, have executed and entered into an Asset Purchase Agreement dated
as of February 27, 1998 (the "Asset Purchase Agreement").
F. To facilitate Borrower's purchase of the Pure-Gar Assets, Borrower has
requested a restructuring of the indebtedness evidenced by the Original Loan
Documents, as well as additional financing for such asset purchase.
G. This Agreement is intended by Borrower and Bank as an amendment and
restatement of the Original Credit Agreement as of the "Closing Date" (as
defined below). Amounts outstanding and committed under the Original Credit
Agreement and evidenced by the Prior Line of Credit Note, the Prior Term
Commitment Notes, the $550K Term Note and the $200K Term Note shall, upon the
effectiveness of this Agreement, be deemed outstanding and committed hereunder,
and evidenced by the "Line of Credit Note" (as defined below) and the "$9MM Term
Note" (as defined below), as applicable, subject, however, to all terms and
conditions hereunder and under the other "Loan Documents" (as defined below).
ARTICLE I
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including April 30, 2001, not to exceed at any time the aggregate
principal amount of Eight Million Dollars ($8,000,000.00) ("Line of Credit"),
the proceeds of which shall be used (i) to assist in the acquisition of the
Pure-Gar Assets and (ii) for other working capital purposes not otherwise
prohibited by this Agreement. Borrower's obligation to repay advances under the
Line of Credit shall be evidenced by a promissory note substantially in the form
of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference. The Line of Credit Note replaces and
supersedes in its entirety (without novation, however) the Prior Line of Credit
Note.
(b) Sight Commercial and Standby Letter of Credit Subfeature. As a
subfeature under the Line of Credit, Bank agrees from time to time during the
term thereof
-2-
<PAGE>
to issue sight commercial and standby letters of credit for the account of
Borrower to finance working capital requirements (each, a "Letter of Credit" and
collectively, "Letters of Credit"); provided however, that the form and
substance of each Letter of Credit shall be subject to approval by Bank, in its
sole discretion; and provided further, that the aggregate undrawn amount of all
outstanding Letters of Credit shall not at any time exceed Two Hundred Fifty
Thousand Dollars ($250,000.00). Each Letter of Credit shall be issued for a term
not to exceed ninety (90) days, as designated by Borrower; provided however,
that no Letter of Credit shall have an expiration date more than ninety (90)
days beyond the maturity date of the Line of Credit. The undrawn amount of all
Letters of Credit shall be reserved under the Line of Credit and shall not be
available for borrowings thereunder. Each Letter of Credit shall be subject to
the additional terms and conditions of the Letter of Credit Agreement and
related documents, if any, required by Bank in connection with the issuance
thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of
Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall be
deemed an advance under the Line of Credit and shall be repaid by Borrower in
accordance with the terms and conditions of this Agreement applicable to such
advances; provided however, that if advances under the Line of Credit are not
available, for any reason, at the time any draft is paid by Bank, then Borrower
shall immediately pay to Bank the full amount of such draft, together with
interest thereon from the date such amount is paid by Bank to the date such
amount is fully repaid by Borrower, at the rate of interest applicable to
advances under the Line of Credit. In such event Borrower agrees that Bank, in
its sole discretion, may debit any demand deposit account maintained by Borrower
with Bank for the amount of any such draft. As of the Closing Date, there are no
Letters of Credit outstanding.
Borrowing and Repayment. Borrower may from time to time during the term of
the Line of Credit borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions contained
herein or in the Line of Credit Note; provided however, that the total
outstanding borrowings under the Line of Credit shall not at any time exceed the
maximum principal amount available thereunder, as set forth above.
SECTION 1.2. $9MM TERM LOAN.
(a) $9MM Term Loan. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount
of Nine Million Dollars ($9,000,000.00) ("$9MM Term Loan"), the proceeds of
which shall be used by Borrower (i) to refinance the Prior Term Commitment
Notes, $550K Term Note and $200K Term Note (collectively, the "Prior Term
Notes") and (ii) to assist in the acquisition
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<PAGE>
of the Pure-Gar Assets. Borrower's obligation to repay the $9MM Term Loan shall
be evidenced by a promissory note substantially in the form of Exhibit B
attached hereto ("$9MM Term Note"), all terms of which are incorporated herein
by this reference. The $9MM Term Note consolidates, replaces and supersedes in
their entirety (without novation, however) the Prior Term Notes.
(b) Repayment. The principal amount of the $9MM Term Loan shall be
repaid in accordance with the provisions of the $9MM Term Note.
(c) Prepayment. Borrower may prepay principal on the $9MM Term Loan
solely in accordance with the provisions of the $9MM Term Note.
SECTION 1.3. INTEREST/FEES.
(a) Interest. The outstanding principal balances of the Line of
Credit and the $9MM Term Loan shall bear interest at the rates of interest set
forth in the Line of Credit Note and the $9MM Term Note (collectively, the
"Notes"), respectively.
(b) Computation and Payment. Interest shall be computed on the basis
of a 360-day year, actual days elapsed. Interest shall be payable at the times
and place set forth in the Notes.
(c) Commitment Fee. Borrower shall pay to Bank a non-refundable
commitment fee for the Line of Credit and the $9MM Term Loan equal to Twenty
Thousand Dollars ($20,000.00) which fee shall be due and payable in full upon
the Closing Date.
(d) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
one-quarter of one percent (0.25%) per annum (computed on the basis of a 360-day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit, which fee shall be calculated on a calendar quarter basis by Bank and
shall be due and payable by Borrower in arrears within ten (10) days after each
billing is sent by Bank.
(e) Letter of Credit Fees. Borrower shall pay to Bank fees upon the
issuance of each Letter of Credit, upon the payment or negotiation by Bank of
each draft under any Letter of Credit and upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation, the
transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank's standard fees and charges then in effect for such
activity.
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SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all principal, interest and fees due under any of the Loan Documents
by charging Borrower's demand deposit account number 4600-593230 with Bank,
or any other demand deposit account maintained by Borrower with Bank, for the
full amount thereof. Should there be insufficient funds in any such demand
deposit account to pay all such sums when due, the full amount of such
deficiency shall be immediately due and payable by Borrower.
SECTION 1.5. COLLATERAL.
As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority (except for
liens permitted hereunder) in all Borrower's accounts, accounts receivable,
rights to payment, general intangibles, investment property, chattel paper,
deposit accounts, instruments (including without limitation the Pure- Gar
Assets), documents, inventory, equipment, fixtures, trade fixtures and all
products and proceeds of the foregoing.
In addition to the foregoing, as security for all indebtedness of Borrower
to Bank subject hereto, Borrower shall cause each present and future
"Subsidiary" (as defined below) to grant to Bank security interests of first
priority (except for liens permitted hereunder) in all of such Subsidiary's
accounts, accounts receivable, rights to payment, general intangibles,
investment property, chattel paper, deposit accounts, instruments, documents,
inventory, equipment and all products and proceeds of the foregoing.
All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for
all costs and expenses incurred by Bank in connection with any of the foregoing
security, including without limitation, filing and recording fees and costs of
audits.
SECTION 1.6. GUARANTIES. All indebtedness of Borrower to Bank shall be
guaranteed by each Subsidiary of Borrower, in principal amounts as may be
required by Bank, as evidenced by and subject to the terms of guaranties (each,
a "Guaranty") in form and substance satisfactory to Bank.
SECTION 1.7. MANDATORY PREPAYMENTS. Not less than 150 days following the
fiscal year end of the Borrower, Borrower shall pay to the Bank, for the purpose
of reducing the outstanding principal amount of the loans hereunder, an amount
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equal to twenty-five percent (25%) of the annual Excess Cash Flow. "Excess Cash
Flow" is defined as net income after tax, plus depreciation expense and
amortization expense, minus any unfinanced portion of capital expenditures,
scheduled principal debt payments and scheduled capital lease payments. Payments
made to the Bank pursuant to this Section shall be applied first to payments due
under the $9MM Term Loan, in inverse order of maturity, second to accrued but
unpaid interest on the Line of Credit and third to the outstanding principal
balance on the Line of Credit; provided, that any such prepayments to be applied
in respect of amounts due and owing under the Notes which bear interest in
relation to LIBOR, shall be held by the Bank and applied at the end of the
applicable Fixed Rate Term (as defined in the Notes).
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this Agreement and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of Delaware, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
would be reasonably likely to have a material adverse effect on the business,
operations or condition (financial or otherwise) of Borrower or on Borrower's
ability to perform its obligations under the Loan Documents (any such effect
being referred to herein as a Material Adverse Effect). Set forth on Schedule
2.1 attached hereto, is a complete and accurate list of all the Subsidiaries of
Borrower as of the date of this Agreement, together with the ownership interest
of Borrower in each such Subsidiary as of the date of this Agreement. Each such
Subsidiary is duly organized and existing and in good standing under the laws of
the state of its formation (as set forth on Schedule 2.1), and is qualified or
licensed to do business, and is in good standing as a foreign entity, if
applicable, in all jurisdictions in which the failure to so qualify or to be so
licensed would be reasonably likely to have a Material Adverse Effect on such
Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean, as of any
date of determination and with respect to Borrower, any corporation, partnership
or limited liability company (whether or not, in any such case, characterized as
such or as a "joint venture"), whether now existing or hereafter organized or
acquired: (a) in the case of a corporation, of which a majority of the
securities having ordinary voting power for the election of directors or other
governing body (other
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than securities having such power only by reason of a happening of a
contingency) are at the time beneficially owned by Borrower and/or one or more
Subsidiaries of Borrower, or (b) in the case of a partnership or limited
liability company, of which a majority of the partnership or other ownership
interests are at the time beneficially owned by Borrower and/or one or more
Subsidiaries of Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and
each other document, contract and instrument required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the "Loan
Documents") have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound, except as would not be reasonably likely to have a
Material Adverse Effect. The execution, delivery and performance by each other
party (including, without limitation, the Subsidiaries) of each of the Loan
Documents to which it is a party do not violate any provision of any law or
regulation, or contravene any provision of any formation document of any such
party, or result in a breach of or constitute a default under any contract,
obligation, indenture, or other instrument to which any such party is a party or
by which any party may be bound except as would not be reasonably likely to have
a Material Adverse Effect.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which would be reasonably likely to have a Material
Adverse Effect on the Borrower or any Subsidiary other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement
of Borrower dated December 31, 1997, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower prior to its acquisition of
the Pure-Gar Assets, (b) discloses all liabilities of Borrower that are required
to be reflected or reserved against under generally accepted accounting
principles, whether liquidated or unliquidated,
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fixed or contingent, and (c) has been prepared in accordance with generally
accepted accounting principles consistently applied. Since the date of such
financial statement there has been no material adverse change in the financial
condition of Borrower, nor has Borrower or any of the Subsidiaries mortgaged,
pledged, granted a security interest in or otherwise encumbered any of its
assets or properties except in favor of Bank or as otherwise permitted
hereunder.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its or any Subsidiary's income tax payable with
respect to any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract
or instrument to which Borrower or any Subsidiary is a party or by which
Borrower or any Subsidiary may be bound that requires the subordination in right
of payment of any of Borrower's or any Subsidiary's obligations subject to this
Agreement to any other obligation of Borrower or any such Subsidiary.
SECTION 2.8. PERMITS, FRANCHISES. Borrower and the Subsidiaries possess,
and will hereafter possess, all permits, consents, approvals, franchises and
licenses required and rights to all trademarks, trade names, patents, and
fictitious names, if any, necessary to enable them to conduct the businesses in
which they are now engaged in compliance with applicable law.
SECTION 2.9. ERISA. Borrower and the Subsidiaries are in compliance in all
material respects with all applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended or recodified from time to time
("ERISA"); neither Borrower nor any Subsidiary has violated any provision of any
defined employee pension benefit plan (as defined in ERISA) maintained or
contributed to by Borrower and the Subsidiaries (each, a "Plan"); no Reportable
Event as defined in ERISA has occurred and is continuing with respect to any
Plan initiated by Borrower or any Subsidiary; Borrower and the Subsidiaries have
met their minimum funding requirements under ERISA with respect to each Plan;
and each Plan will be able to fulfill its benefit obligations as they come due
in accordance with the Plan documents and under generally accepted accounting
principles.
SECTION 2.10 OTHER OBLIGATIONS. Other than as would not be reasonably
likely to have a Material Adverse Effect on the Borrower or any Subsidiary,
neither Borrower nor any Subsidiary is in default on any obligation for borrowed
money, any purchase money obligation or any other material lease, commitment,
contract, instrument or obligation.
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SECTION 2.11 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower and the Subsidiaries are in
compliance in all material respects with all applicable federal or state
environmental, hazardous waste, health and safety statutes, and any rules or
regulations adopted pursuant thereto, which govern or affect any of Borrower's
or any such Subsidiary's operations and/or properties, including without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the
Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic
Substances Control Act, as any of the same may be amended, modified or
supplemented from time to time. None of the operations of Borrower or any of the
Subsidiaries is the subject of any federal or state investigation evaluating
whether any remedial action involving a material expenditure is needed to
respond to a release of any toxic or hazardous waste or substance into the
environment. Neither Borrower nor any of the Subsidiaries has any material
contingent liability in connection with any release of any toxic or hazardous
waste or substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1.CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of
Bank to make any loans or extend any credit hereunder is subject to the
fulfillment to Bank's satisfaction of all of the following conditions (the date
upon which all such conditions are satisfied or waived in writing by the Bank
being referred to herein as the "Closing Date"):
(a) Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.
(b) Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) A General Pledge Agreement from Borrower together
with the Collateral (as defined therein) accompanied by appropriate
stock powers and note endorsements executed in blank;
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(iii) Trademark Collateral Assignment Agreements from
Borrower and each currently existing Subsidiary.
(iv) Third Party Security Agreements covering Rights to
Payment, Inventory, Equipment and Fixtures from each currently
existing Subsidiary.
(v) Financing statements (Form UCC-1) or amendments to
financing statements from Borrower and each currently existing
Subsidiary as Bank may request.
(vi) A Guaranty from each currently existing Subsidiary.
(vii) A favorable written legal opinion of Goodwin,
Procter & Hoar LLP, counsel to Borrower and the Subsidiaries,
together with copies of all factual certificates and legal opinions
upon which its counsel has relied.
(viii) With respect to each of Borrower and the
Subsidiaries, such documentation as Bank may reasonably require to
establish the due organization, valid existence and good standing of
Borrower and each such Subsidiary, its qualification to engage in
business in each material jurisdiction in which it is engaged in
business or required to be so qualified, its authority to execute,
deliver and perform the Loan Documents to which it is a party, the
identity, authority and capacity of each responsible official
thereof authorized to act on its behalf, including, without
limitation, copies of its certificates or articles of incorporation
and amendments thereto certified by the applicable Secretary of
State (or equivalent government official), bylaws and amendments
thereto certified by a responsible official of such party,
certificates of good standing and/or qualifications to engage in
business, certified copies of corporate resolutions, incumbency
certificates, certificates of responsible officials and the like.
(ix) Such other documents as Bank may require under any
other Section of this Agreement.
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(c) Pure-Gar Asset Acquisition.
(i) Borrower shall have delivered to Bank a
fully-executed copy of the Asset Purchase Agreement, together with
all schedules, exhibits, amendments and modifications thereto and
all material agreements, instruments and other documents relating to
the Asset Purchase Agreement (collectively, together with the Asset
Purchase Agreement, the "Acquisition Documents").
(ii) The transactions described in the Acquisition
Documents shall be in a position to close and become effective
concurrently with the Closing Date, without waiver of any provisions
of the Acquisition Documents, except with the approval (exercised
reasonably) of Bank.
(d) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the consolidated financial condition or
business of Borrower and the Subsidiaries, nor any material decline, as
determined by Bank, in the market value of any collateral required hereunder or
a substantial or material portion of the assets of Borrower or any of its
Subsidiaries.
(e) Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks (including, without limitation, those described in Section 4.5
hereof) and issued by companies satisfactory to Bank, and where required by
Bank, with loss payable endorsements in favor of Bank.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) Compliance. Except for representations and warranties which
expressly relate to a particular date or are no longer true and correct as a
result of a change which is permitted by this Agreement, the representations and
warranties contained herein and in each of the other Loan Documents shall be
true on and as of the date of the signing of this Agreement and on the date of
each extension of credit by Bank pursuant hereto, with the same effect as though
such representations and warranties had been made on and as of each such date
and on each such date, no Event of Default as defined herein, and no condition,
event or act which with the giving of notice or the passage of time or both
would constitute such an Event of Default, shall have occurred and be continuing
or shall exist.
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(b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain, and cause each of the
Subsidiaries to maintain, adequate books and records in accordance with
generally accepted accounting principles consistently applied, and permit any
representative of Bank, at any reasonable time and upon reasonable notice
(provided, that such notice shall not be required during the continuation of an
Event of Default), to inspect, audit and examine such books and records, to make
copies of the same, and to inspect the properties of Borrower and the
Subsidiaries.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:
(a) Not later than 120 days after and as of the end of each fiscal
year, (i) a consolidated balance sheet of Borrower and its Subsidiaries as at
the end of such fiscal year and the consolidated statements of income and cash
flows, in each case of Borrower and its Subsidiaries for such fiscal year, and
(ii) consolidating balance sheets and statements of income and cash flows, in
each case as at the end of and for the fiscal year, all in reasonable detail.
Such consolidated balance sheet and consolidated statements shall be accompanied
by a report of independent public accountants of recognized standing selected by
Borrower and reasonably satisfactory to Bank, which report shall be prepared in
accordance with generally acceptable auditing standards as at such date, and
shall not be subject to any
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qualifications or exceptions as to the scope of the audit nor to any other
qualification or exception which are materially adverse to the interests of
Bank;
(b) Not later than 45 days after and as of the end of each fiscal
quarter, consolidated and consolidating financial statements of Borrower and its
Subsidiaries, prepared by Borrower or a certified public accountant reasonably
acceptable to Bank, in accordance with generally accepting accounting principles
consistently applied and otherwise consistent with Borrower's prior practices,
to include balance sheets and statements of income and cash flows;
(c) As soon as practicable and in any event within sixty days after
the last day of each fiscal year of Borrower, a plan and financial forecast for
Borrower's next succeeding two (2) fiscal years, including without limitation
(i) forecasted balance sheets and statements of income and cash flows for each
such fiscal year and (ii) forecasted balance sheets and statements of income and
cash flows for each fiscal month of each such fiscal year it being understood
that the projections provided pursuant to this Section 4.3(c) are estimates and
not guarantees of actual results;
(d) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of the president or chief
financial officer of Borrower that said financial statements are accurate in all
material respects and that there exists no Event of Default nor any condition,
act or event which with the giving of notice or the passage of time or both
would constitute an Event of Default; and
(e) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Except as would not be reasonably likely to have
a Material Adverse Effect, preserve and maintain, and cause each of the
Subsidiaries to preserve and maintain, all licenses, permits, governmental
approvals, rights, privileges and franchises necessary for the conduct of their
respective businesses; and comply with the provisions of all documents pursuant
to which Borrower or any Subsidiary is organized and/or which govern Borrower's
or such Subsidiary's continued existence and with the requirements of all laws,
rules, regulations and orders of any governmental authority applicable to
Borrower and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force, and cause each of the
Subsidiaries to maintain and keep in force, insurance of the types and in
amounts customarily carried in lines of business similar to that of Borrower or
such Subsidiary,
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including but not limited to products liability (in an amount not less than
$15,000,000), fire, extended coverage, public liability, flood, property damage
and workers' compensation, with all such insurance carried with companies and in
amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's
request schedules setting forth all insurance then in effect.
SECTION 4.6. FACILITIES. Keep, and cause each of the Subsidiaries to keep,
all properties useful or necessary to Borrower's or such Subsidiary's business
in generally good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge, and cause
each of the Subsidiaries to pay and discharge, when due any and all
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower or any such
Subsidiary may in good faith contest or as to which a bona fide dispute may
arise, and (b) for which Borrower or any such Subsidiary has made provision for
eventual payment thereof in the event Borrower or any such Subsidiary is
obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened in writing against Borrower or any Subsidiary
with a claim in excess of $50,000.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's consolidated
financial condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein), with compliance determined
commencing with Borrower's consolidated financial statements for the period
ending December 31, 1997:
(a) Tangible Net Worth (i) as of the Closing Date, not less than
$1,600,000 and (ii) subsequent to the Closing Date, not less than $1,600,000.00
plus an amount equal to one hundred percent (100%) of Borrower's consolidated
net income (after taxes and dividends) earned in each fiscal quarter ending
after December 31, 1997 (with no deduction for a net loss in any such fiscal
quarter), with "Tangible Net Worth" defined as the aggregate of total
stockholders' equity plus subordinated debt less any intangible assets of
Borrower and its Subsidiaries.
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(b) Free Cashflow Coverage Ratio not less than (i) 2.50 to 1.00 as
of the end of each fiscal quarter ending on or prior to December 30, 1999 and
(ii) 3.00:1.00 as of the end of each fiscal quarter thereafter, with "Free
Cashflow" defined as net profit before tax plus interest expense (net of
capitalized interest expense), depreciation expense and amortization expense,
minus, to the extent not subtracted for purposes of determining net income, (i)
capital expenditures (excluding the purchase of the Pure-Gar Assets in 1998),
(ii) dividends paid and (iii) and non-cash or extraordinary income statement
items) and with "Free Cashflow Coverage Ratio" defined as Free Cashflow for the
four fiscal quarter period ending as of the date of determination (the "Test
Period") divided by the aggregate of total interest expense paid during the Test
Period plus the current maturity of long-term debt and the current maturity of
subordinated debt paid during the Test Period.
(c) Annualized Funded Debt Ratio not at any time (i) greater than
2.00 to 1.00 from and after the Closing Date to and including December 30, 1999
and (ii) greater than 1.00 to 1.00 as of December 31, 1999 and any date
thereafter, with "Annualized Funded Debt Ratio" calculated as of the end of each
fiscal quarter and defined as the ratio of "Funded Debt" (as defined below) as
of such determination date, divided by EBITDA (as defined below) for the Test
Period ending as of such date. For purposes hereof, "Funded Debt" shall mean, as
of any date of determination, (i) all obligations of Borrower and the
Subsidiaries for borrowed money or for the deferred purchase price of property
or services and all obligations of Borrower and the Subsidiaries evidenced by
bonds, debentures, notes or other similar instruments, (ii) all obligations of
Borrower and its Subsidiaries under any conditional sale or other title
retention agreement relating to property purchased by Borrower or any
Subsidiary, (iii) all indebtedness secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured by)
any lien on any property owned by Borrower or any Subsidiary, whether or not
such indebtedness has been assumed by Borrower or such Subsidiary or is limited
in recourse, (iv) all capital and synthetic lease obligations of Borrower and
the Subsidiaries, (v) all obligations of Borrower and the Subsidiaries under
letters of credit issued for the account of Borrower or any such Subsidiary,
whether or not drawn, (vi) all obligations of Borrower and the Subsidiaries
under direct or indirect guaranties in respect of, and obligations (contingent
or otherwise) to purchase or otherwise acquire, or otherwise to ensure a
creditor against loss in respect of indebtedness or obligations of others of the
kinds referred to in clauses (i) through (v) above, and (vii) all current or
past due liabilities of Borrower and the Subsidiaries in respect of unfunded
vested benefits under Plans covered by Title IV of ERISA; and "EBITDA" shall
mean net profit before tax plus interest expense (net of capitalized interest
expense), depreciation expense and amortization expanse.
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SECTION 4.10 LANDLORD'S WAIVERS. Use commercially reasonable efforts to
deliver or cause to be delivered to Bank within sixty (60) days following the
Closing Date (and from time to time thereafter with respect to future premises),
a landlord waiver and consent substantially in the form of Exhibit C (each, a
"Landlord's Waiver") from each owner/lessor of any premises not owned by
Borrower or any Subsidiary at which collateral is now or hereafter located, for
the purpose of perfecting Bank's security interests as first priority security
interest in, and of providing access to, such collateral. In the event that,
after using commercially reasonable efforts, Borrower is unable to provide Bank
a Landlord's Waiver for any such location, Bank shall have the right, but not
the obligation, at Borrower's cost and expense, to attempt to obtain such
Landlord's Waiver from the applicable party and Borrower shall cooperate with
Bank in connection with any such attempt to obtain a Landlord's Waiver.
SECTION 4.11 NEW SUBSIDIARIES. Cause each entity that hereafter becomes a
Subsidiary to execute and deliver to Bank a Guaranty, Third Party Security
Agreement, Trademark Collateral Assignment Agreement and related financing
statements (Form UCC-1) as may be required by Bank and deliver to Bank
documents of the type described in Section 3.1(b)(x).
SECTION 4.12 ADDITIONAL SECURITY DOCUMENTATION. Borrower shall cause such
documents and instruments as may be requested by Bank from time to time to be
executed and delivered and do such further acts and things as reasonably may be
required in order for Bank to obtain a fully perfected lien on all collateral to
be provided hereunder. Without in any way limiting the foregoing, Borrower shall
pledge and deliver to Bank any and all future promissory notes executed by any
Subsidiary to the order of Borrower and deliver the same to Bank, with an
endorsement in blank, as pledged collateral.
SECTION 4.13 NOTICE TO BANK. Promptly (but in no event more than five (5)
days after the occurrence of each such event or matter) give written notice to
Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any
condition, event or act which with the giving of notice or the passage of time
or both would constitute an Event of Default; (b) any change in the name or the
organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property in
excess of an aggregate of $50,000.
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ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower, without Bank's prior written consent, will
not, and will not permit or cause any of the Subsidiaries to:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended
hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed
assets (a "Capital Expenditure") (other than Capital Expenditures made in
connection with the purchase of the Pure-Gar Assets) in excess of an aggregate
of $1,500,000 in any fiscal year; provided, that such amount for the fiscal year
commencing January 1, 1999 and each subsequent fiscal year shall be adjusted
upward as of the commencement of any such fiscal year by an amount equal to the
amount, if any, by which $1,500,000 (without giving effect to any adjustment
previously made in accordance with this proviso) exceeds Capital Expenditures
permitted by this Section 5.2 actually made by Borrower and its Subsidiaries
during the immediately preceding fiscal year.
SECTION 5.3. LEASE EXPENDITURES. Permit rentals due under leases of real
or personal property, other than capital lease obligations subject to Section
5.2 (collectively, "Lease Expenditures"), to exceed, in the aggregate, $250,000
in any fiscal year; provided, that such amount for the fiscal year commencing
January 1, 1999 and each subsequent fiscal year shall be adjusted upward as of
the commencement of any such fiscal year by an amount equal to the aggregate of
all Lease Expenditures permitted by this Section 5.3 which are due and owing
during such fiscal year as of such date.
SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower to Bank, (b)
indebtedness for personal property leases in accordance with the limitations,
terms and conditions set forth in Section 5.3, (c) indebtedness secured by liens
permitted under Section 5.8, (d) indebtedness in respect of final judgments for
the payments of money not in excess of $100,000 in the aggregate at any one time
outstanding (excluding same covered by insurance) which have been in force less
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than the applicable appeal period or sixty (60) days, whichever is sooner,
provided that such indebtedness may remain outstanding beyond such time period
if the Borrower shall in good faith be prosecuting an appeal or proceeding for
review and in respect of which, a stay shall have been issued pending such
appeal or review, and (d) any other liabilities of Borrower and the Subsidiaries
existing as of, and disclosed to Bank prior to, the date hereof.
SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity (other than the merger of any Subsidiary into
and with Borrower, with Borrower as the surviving corporation); make any
substantial change in the nature of Borrower's or any Subsidiary's business as
conducted as of the date hereof; acquire all or substantially all of the assets
of any other entity (other than the purchase of the Pure-Gar Assets); nor sell,
lease, transfer or otherwise dispose of all or a substantial or material portion
of Borrower's or any Subsidiary's assets except in the ordinary course of its
business.
SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower or any
Subsidiary as security for, any liabilities or obligations of any other person
or entity, except any of the foregoing in favor of Bank.
SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to
or investments in any person or entity, except (a) any of the foregoing existing
as of, and disclosed to Bank prior to, the date hereof, (b) loans or advances to
Subsidiaries, or investments in Subsidiaries, made by Borrower in the normal
course of business, provided that the aggregate amount of such loans, advances
or investments do not exceed $500,000 at any time outstanding, (c) loans or
advances made to employees of the Borrower or its Subsidiaries for travel
expenses in the normal course of business, provided that the aggregate amount of
such loans or advances does not exceed $250,000 at any time outstanding, and (d)
loans to employees of the Borrower and its Subsidiaries with respect to the
purchase of the capital stock of the Borrower or its Subsidiaries, provided that
the aggregate amount of such loans or advances does not exceed $250,000 at any
time outstanding.
SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist
a security interest in, or lien upon, all or any portion of Borrower's or any
Subsidiary's assets now owned or hereafter acquired, except any of the foregoing
in favor of Bank or which is existing as of, and disclosed to Bank in writing
prior to, the date hereof or any of the following:
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(a) zoning restrictions, subleases, easements, licenses,
reservations, restrictions on the use of real property or minor irregularities
incident thereto which do not in the aggregate materially detract from (i) the
value of the property or assets of, or (ii) the use of such property for the
purposes for which such property is held by, the Borrower or any of its
Subsidiaries taken as a whole;
(b) liens for taxes, assessments of governmental charges or levies
the payment of which is not at the time required or which are being contested in
good faith by appropriate proceedings provided adequate reserves are established
and provided enforcement of such liens has been stayed;
(c) liens of carriers, warehousemen, mechanics and materialmen and
other similar inchoate liens incurred in the ordinary course of business for
sums not yet due or being contested in good faith by appropriate proceedings;
(d) liens incurred or deposits made in the ordinary course of
business in connection with workmen's compensation, unemployment insurance and
other types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, performance and return of money
bonds and other similar obligations (exclusive of obligations for the payment of
borrowed money);
(e) liens securing permitted indebtedness outstanding on the date of
this Agreement as described on Schedule 5.8;
(f) any attachment or judgement lien, unless such attachment or
judgment shall not, within sixty (60) days after the issue or entry thereof,
have been released or discharged or execution thereof stayed pending appeal, or
shall not have been discharged within sixty (60) days after the expiration of
any such stay; and
(g) liens securing indebtedness incurred solely for the purpose of
acquiring personal property, other than inventory; provided, however, that no
such purchase money security interest shall extend to any property other than
the particular property so acquired and provided further that the amount of any
such purchase money indebtedness shall not exceed $250,000, nor the fair value
of such property at the time of acquisition, without the Bank's written consent.
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ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest,
fees or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in subsections (a) and (b) above), and
with respect to any such default which by its nature can be cured, such default
shall continue for a period of thirty (30) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or
any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower or any
Subsidiary has incurred any debt or other liability to any person or entity in
excess of $250,000, including Bank.
(e) The filing of a notice of judgment lien against Borrower or any
Subsidiary; or the recording of any abstract of judgment against Borrower or any
Subsidiary in any county in which Borrower or such Subsidiary has an interest in
real property; or the service of a notice of levy and/or of a writ of attachment
or execution, or other like process, against the assets of Borrower or any
Subsidiary; or the entry of a judgment against Borrower or any Subsidiary which
is not vacated or discharged within sixty (60) days.
(f) Borrower or any Subsidiary shall become insolvent, or shall
suffer or consent to or apply for the appointment of a receiver, trustee,
custodian or liquidator of itself or any of its property, or shall generally
fail to pay its debts as they become due, or shall make a general assignment for
the benefit of creditors; Borrower or any Subsidiary shall file a voluntary
petition in bankruptcy, or seeking reorganization, in order to effect a plan or
other arrangement with creditors or any other relief under the Bankruptcy Reform
Act, Title 11 of the United States Code, as amended or recodified from time to
time ("Bankruptcy Code"),
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or under any state or federal law granting relief to debtors, whether now or
hereafter in effect and any such petition or appointment shall remain unstayed
or undischarged for a period of sixty (60) days; or any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for debtors
is filed or commenced against Borrower or any Subsidiary, or Borrower or any
such Subsidiary shall file an answer admitting the jurisdiction of the court and
the material allegations of any involuntary petition; or Borrower or any such
Subsidiary shall be adjudicated a bankrupt, or an order for relief shall be
entered against Borrower or any such Subsidiary by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable state or federal
law relating to bankruptcy, reorganization or other relief for debtors and any
such proceeding shall remain undismissed or unstayed for a period of sixty (60)
days.
(g) There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the prospect
of payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The dissolution or liquidation of Borrower or any Subsidiary; or
Borrower or any such Subsidiary, or any of their directors, stockholders or
members, shall take action seeking to effect the dissolution or liquidation of
Borrower or such Subsidiary.
(i) Any change in ownership during the term of this Agreement which
has the effect of reducing the combined equity ownership of The Balbert Family
Trust, Dennis Jolicoeur, Advent VII L.P., Advent Atlantic and Pacific III L.P.,
Advent New York L.P. and TA Venture Investors L.P. or their affiliates below
fifty percent (50%).
(j) (i) The occurrence of an Event of Default under any document or
instrument relating to any indebtedness of Borrower or any Subsidiary that is
subordinated to the obligations of Borrower or such Subsidiary to Bank (any such
indebtedness being referred to as "Subordinated Debt"), or the occurrence of any
event which requires, or permits the holder of any such Subordinated Debt to
require, the redemption or purchase of such Subordinated Debt, (ii) any
determination is made by a court of competent jurisdiction that payment of
principal or interest or both is due to the holder of any Subordinated Debt that
would not be permitted by the terms of the subordination agreement entered into
with Bank, or (iii) a final judgment is entered by a court of competent
jurisdiction that any Subordinated Debt is not subordinated in accordance with
its terms to the obligations of Borrower and the Subsidiaries to Bank, or any
subordinated creditor purports to revoke, terminate or rescind any applicable
subordination agreement.
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SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and without notice
become immediately due and payable without presentment, demand, protest or
notice of dishonor, all of which are hereby expressly waived by each Borrower;
(b) the obligation, if any, of Bank to extend any further credit under any of
the Loan Documents shall immediately cease and terminate; and (c) Bank shall
have all rights, powers and remedies available under each of the Loan Documents,
or accorded by law, including without limitation the right to resort to any or
all security for any credit accommodation from Bank subject hereto and to
exercise any or all of the rights of a beneficiary or secured party pursuant to
applicable law. All rights, powers and remedies of Bank may be exercised at any
time by Bank and from time to time after the occurrence of an Event of Default,
are cumulative and not exclusive, and shall be in addition to any other rights,
powers or remedies provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: NATROL, INC.
21411 Prairie Street
Chatsworth, California 91311
Attention: Chief Financial Officer
Telephone: (818) 739-6000
Telecopier: (818) 739-6001
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BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
333 South Grand Avenue, 3rd Floor
Los Angeles, California 90071
Attention: Natrol Account Officer
Telephone: (213) 253-6208
Telecopier: (213) 687-3501
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
Agreement and the other Loan Documents (which costs shall not exceed $5,000) and
the preparation of any amendments and waivers hereto and thereto, (b) the
enforcement of Bank's rights and/or the collection of any amounts which become
due to Bank under any of the Loan Documents, and (c) the prosecution or defense
of any action in any way related to any of the Loan Documents, including without
limitation, any action for declaratory relief, whether incurred at the trial or
appellate level, in an arbitration proceeding or otherwise, and including any of
the foregoing incurred in connection with any bankruptcy proceeding (including
without limitation, any adversary proceeding, contested matter or motion brought
by Bank or any other person) relating to any Borrower or any other person or
entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith, Bank may
disclose all documents and information which Bank now has or may hereafter
acquire relating to any credit extended by Bank to Borrower, Borrower or its
business, any Subsidiary or the business of such Subsidiary, or any collateral
required hereunder.
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SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to any extension of credit by Bank subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof. This Agreement may be amended or modified only in
writing signed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. INDEMNITY BY BORROWER. Borrower agrees to indemnify, save
and hold harmless Bank and its directors, officers, agents, attorneys and
employees (collectively, the "Indemnitees") from and against: (a) Any and all
claims, demands, actions or causes of action that are asserted against any
Indemnitee if the claim, demand, action or cause of action arises out of or
relates to the relationship between Borrower and Bank under any of the Loan
Documents or the transactions contemplated thereby; (b) Any and all
administrative or investigative proceedings by any governmental agency or
authority arising out of or related to any claim, demand, action or cause of
action described in clause (a) above; and (c) Any and all liabilities, losses,
costs or expenses (including reasonable attorneys' fees and disbursements and
other professional services) that any Indemnitee suffers
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or incurs as a result of the assertion of any of the foregoing; provided that no
Indemnitee shall be entitled to indemnification for any loss caused by its own
or its employees' or agents' gross negligence or willful misconduct. Each
Indemnitee is authorized to employ counsel in enforcing its rights hereunder and
in defending against any claim, demand, action, cause of action or
administrative or investigative proceeding covered by this Section 7.11;
provided that the Indemnitees as a group may retain only one law firm to
represent them with respect to any such matter unless there is, under applicable
standards of professional conduct, conflict on any significant issue between the
positions of any two or more Indemnitees. Any obligation or liability of
Borrower to any Indemnitee under this Section 7.11 shall be and hereby is
covered and secured by the Loan Documents and the collateral referred to in
Section 1.5 and shall survive the expiration or termination of this Agreement
and the repayment of the Line of Credit and the payment and performance of all
other obligations owed to Bank.
SECTION 7.12. NONLIABILITY OF BANK. Borrower acknowledges and agrees that:
(a) Any inspections of collateral made by Bank are for purposes of
administration of the Line of Credit only and Borrower is not entitled to rely
upon the same;
(b) By accepting or approving anything required to be observed,
performed, fulfilled or given to Bank pursuant to the Loan Documents, including
any certificate, financial statement, insurance policy or other document, Bank
shall not be deemed to have warranted or represented the sufficiency, legality,
effectiveness or legal effect of the same, or of any term, provision or
condition thereof, and such acceptance or approval thereof shall not constitute
a warranty or representation to anyone with respect thereto by Bank;
(c) The relationship between Borrower and Bank in connection with
this Agreement and the other Loan Documents is, and shall at all times remain,
solely that of a borrower and lender; Bank shall not under any circumstance be
construed to be a partner or joint venturer of Borrower; Bank shall not under
any circumstances be deemed to be in a relationship of confidence or trust or a
fiduciary relationship with Borrower, or to owe any fiduciary duty to Borrower
as a result of the transactions arising under this Agreement and the other Loan
Documents; Bank does not undertake or assume any responsibility or duty to
Borrower to select, review, inspect, supervise, pass judgment upon or inform
Borrower of any matter in connection with its property, any collateral held by
Bank or the operations of Borrower; Borrower shall rely entirely upon its own
judgment with respect to such matters; and any review, inspection, supervision,
exercise of judgment or supply of information
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undertaken or assumed by Bank in connection with such matters is solely for the
protection of Bank and neither Borrower nor any other person or entity is
entitled to rely thereon; and
(d) Bank shall not be responsible or liable to any person or entity
for any loss, damage, liability or claim of any kind relating to injury or death
to persons or damage to property caused by the actions, inaction or negligence
of Borrower and Borrower hereby indemnifies and holds Bank harmless from any
such loss, damage, liability or claim; provided that the Bank shall not be
entitled to indemnification for any loss caused by its own gross negligence or
willful misconduct.
SECTION 7.13. FURTHER ASSURANCES. Borrower shall, at its expense and
without expense to Bank, do, execute and deliver such further acts and documents
as Bank from time to time reasonably requires for the assuring and confirming
unto Bank of the rights hereby created or intended now or hereafter so to be, or
for carrying out the intention or facilitating the performance of the terms of
any Loan Document, or for assuring the validity, perfection, priority or
enforceability of any lien or security interest under any Loan Document.
SECTION 7.14. CREDIT AGREEMENT GOVERNS. In the event of any actual
irreconcilable conflict between the provisions of this Agreement and those of
any other Loan Document, the provisions of this Agreement shall control and
govern; provided that the inclusion of supplemental rights or remedies in favor
of Bank in any other Loan Document shall not be deemed a conflict with this
Agreement.
SECTION 7.15. CONTINUED EFFECTIVENESS OF CERTAIN ORIGINAL LOAN DOCUMENTS.
Each of the Original Loan Documents (other than the Original Credit Agreement,
Prior Line of Credit Note, Prior Term Notes and any other Original Loan Document
that has been (or will be) expressly superseded, replaced or otherwise restated
by a "Loan Document" in connection herewith) shall continue in full force and
effect and shall, as of the Closing Date, be deemed to be a "Loan Document" as
such term is used and defined in this Agreement.
SECTION 7.16. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan
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Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party may
by summary proceedings bring an action in court to compel arbitration of a
Dispute. Any party who fails or refuses to submit to arbitration following a
lawful demand by any other party shall bear all costs and expenses incurred by
such other party in compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered
by the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. section 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must
be active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy
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or relief that a court of the state of California could order or grant within
the scope hereof and such ancillary relief as is necessary to make effective any
award, and (iii) shall have the power to award recovery of all costs and fees,
to impose sanctions and to take such other actions as they deem necessary to the
same extent a judge could pursuant to the Federal Rules of Civil Procedure, the
California Rules of Civil Procedure or other applicable law. Any Dispute in
which the amount in controversy is $5,000,000 or less shall be decided by a
single arbitrator who shall not render an award of greater than $5,000,000
(including damages, costs, fees and expenses). By submission to a single
arbitrator, each party expressly waives any right or claim to recover more than
$5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000
shall be decided by majority vote of a panel of three arbitrators; provided
however, that all three arbitrators must actively participate in all hearings
and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific, written
findings of fact and conclusions of law. In such arbitrations (i) the
arbitrators shall not have the power to make any award which is not supported by
substantial evidence or which is based on legal error, (ii) an award shall not
be binding upon the parties unless the findings of fact are supported by
substantial evidence and the conclusions of law are not erroneous under the
substantive law of the state of California, and (iii) the parties shall have in
addition to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether the
findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in such
a proceeding may be entered only if a court determines the award is supported by
substantial evidence and not based on legal error under the substantive law of
the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said
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Section 638. A referee with the qualifications required herein for arbitrators
shall be selected pursuant to the AAA's selection procedures. Judgment upon the
decision rendered by a referee shall be entered in the court in which such
proceeding was commenced in accordance with California Code of Civil Procedure
Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
NATROL, INC., a Delaware corporation WELLS FARGO BANK,
NATIONAL ASSOCIATION
By /s/ Elliott Balbert By /s/ Dan Pallares
-------------------------------- --------------------------------
Title President Title Vice President
---------------------------- ----------------------------
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SCHEDULE 2.1
SUBSIDIARIES
State Borrower's
Name Address Formation Interest
- ---- ------- --------- --------
Laci LeBeau, Inc. 21411 Prairie Street Delaware 100%
Chatsworth, CA 91311
Natrol Products, Inc. 21411 Prairie Street Delaware 100%
Chatsworth, CA 91311
Upon consummation of the Pur-Gar acquisition, Borrower and its
Subsidiaries will hold assets in the following locations:
1. 21411 Prairie Street
Chatsworth, CA 91311
2 10029 South Tacoma Way, Suites E-5 and E-6
Tacoma, WA 98499
3. 700 Airport Drive
King City, CA 93930
4. 100 Don Bates Way
East Ranch Warehouse
King City, CA 93930
-30-
<PAGE>
SCHEDULE 5.8
EXISTING LIENS
None
-31-
<PAGE>
Exhibit 10.9
Incentive Stock Option Agreement
under the Natrol, Inc.
1996 Stock Option and Grant Plan
Name of Optionee: Laura Moore
No./Class of Option Shares: 50 Shares of Common Stock
Grant Date: April 8, 1998
Expiration Date: April 8, 2008
Option Exercise Price/Share: $1040
Pursuant to the Natrol, Inc. 1996 Stock Option and Grant Plan, as amended
(the "Plan"), Natrol, Inc., a Delaware corporation (together with all successors
thereto, the "Company"), hereby grants to the person named above (the
"Optionee"), who is an officer or full-time employee of the Company or any of
its subsidiaries, an option (the "Stock Option") to purchase on or prior to the
expiration date specified above, or such earlier date as is specified herein,
all or any part of the number of shares of Common Stock, par value $0.01 per
share ("Common Stock"), of the Company indicated above (the "Option Shares"), at
the per share option exercise price specified above, subject to the terms and
conditions set forth in this Incentive Stock Option Agreement (the "Agreement")
and in the Plan. This Stock Option is intended to qualify as an "incentive stock
option" as defined in Section 422(b) of the Internal Revenue Code of 1986, as
amended from time to time (the "Code") to the extent permitted by applicable
law. To the extent that any portion of the Stock Option does not so qualify, it
shall be deemed a non-qualified stock option. All capitalized terms used herein
and not otherwise defined shall have the respective meanings set forth in the
Plan.
<PAGE>
1. Vesting and Exercisability.
(a) No portion of this Stock Option may be exercised until such
portion shall have vested.
(b) Except as set forth below and in Section 6, and subject to the
determination of the Compensation Committee of the Board of Directors of the
Company or the Board of Directors of the Company, as applicable (the
"Committee"), in its sole discretion to accelerate the vesting schedule
hereunder, this Stock Option shall be vested and exercisable with respect to the
following number of Option Shares on the respective dates indicated:
<TABLE>
<CAPTION>
Incremental/Aggregate Number
Of Option Shares Exercisable* Vesting Date
----------------------------- ------------
<S> <C>
10/10 April 8, 1999
10/20 April 8, 2000
10/30 April 8, 2001
10/40 April 8, 2002
10/50 April 8, 2003
</TABLE>
Notwithstanding the foregoing, as of the effective date of any Sale Event
(as defined in Section 6), one half of each annual tranche of the Option Shares
listed above, i.e. 5 Shares per tranche (subject to adjustment as set forth in
Section 5), which is then unvested shall vest and be deemed vested. Further,
notwithstanding anything herein to the contrary but without limitation of
Section 6, in the event that this Stock Option is assumed or continued by the
Company in the sole discretion of the parties to a Sale Event and thereafter
remains in effect
- ----------
* Subject to Section 5.
2
<PAGE>
following such Sale Event as contemplated by Section 6, then this Stock Option
shall be deemed vested and exercisable in full upon the date on which the
Optionee's employment with the Company and its subsidiaries or successor entity
terminates if (i) such termination occurs within eighteen (18) months of such
Sale Event and (ii) such termination is by the Company without Cause (as defined
in the Plan as in effect on the date hereof) or by the Optionee for Good Reason
(as defined in the Plan as in effect on the date hereof), subject, however, to
the following sentence. Notwithstanding the foregoing, in the event that the
Company receives written advice from its independent public accountants in
connection with any transaction constituting a Sale Event to the effect that
vesting of this Stock Option under the circumstances contemplated by the
preceding sentence would preclude or otherwise adversely affect the ability of
the Company or any other party to such transaction to account for the same as a
"pooling of interests" within the meaning of APB No. 16 (or any successor
provision), which transaction would otherwise qualify for such accounting
treatment, then vesting of this Stock Option shall not accelerate on a
subsequent termination of the Optionee's employment within 18 months following a
Sale Event as contemplated by the preceding sentence.
(c) In the event that the Optionee's Service Relationship (as
hereinafter defined) with the Company and its subsidiaries terminates for any
reason or under any circumstances, including the Optionee's resignation,
retirement or termination by the Company, upon the Optionee's death or
disability, or for any other reason, regardless of the circumstances thereof,
this Stock Option shall no longer vest or become exercisable with respect to any
Option Shares not vested (or which do not vest) as of the date of such
termination from and after the date of such termination, and this Stock Option
may thereafter
3
<PAGE>
be exercised, to the extent it was vested and exercisable on such date of such
termination, until the Expiration Date contemplated by Section 1(d), except as
the Committee may otherwise determine. For purposes hereof, a "Service
Relationship" shall mean any relationship as an employee, part-time employee or
consultant of the Company or any subsidiary of the Company such that, for
example, a Service Relationship shall be deemed to continue without interruption
in the event the Optionee's status changes from full-time employee to part-time
employee or consultant.
(d) Once any portion of this Stock Option becomes vested and
exercisable, it shall continue to be exercisable by the Optionee or his or her
successors as contemplated herein at any time or times prior to the earlier of
(i) the date which is twelve months following the date on which the Optionee's
Service Relationship with the Company and its subsidiaries terminates due to
death or disability (as defined in Section 422(c)(6) of the Code) or for 90 days
following the date on which the Optionee's Service Relationship with the Company
terminates if the termination is due to any other reason or (ii) April 8, 2008,
subject to the provisions hereof, including, without limitation, Section 6
hereof which provides for the termination of unexercised options upon completion
of certain transactions as described therein (the earliest to occur of such
dates being referred to as the "Expiration Date"). The Committee shall have sole
discretion to determine the reason for the termination of the Optionee's Service
Relationship with the Company and its subsidiaries.
(e) It is understood and intended that this Stock Option is intended
to qualify as an "incentive stock option" as defined in Section 422 of the Code
to the extent permitted under applicable law. Accordingly, the Optionee
understands that in order to obtain the
4
<PAGE>
benefits of an incentive stock option under Section 422 of the Code, no sale or
other disposition may be made of Option Shares for which incentive stock option
treatment is desired within the one-year period beginning on the day after the
day of the transfer of such Option Shares to him or her, nor within the two-year
period beginning on the day after the grant of this Stock Option and further
that this Stock Option must be exercised within three months after termination
of employment (or twelve months in the case of death or disability) to qualify
as an incentive stock option. If the Optionee disposes (whether by sale, gift,
transfer or otherwise) of any such Option Shares within either of these periods,
he or she will notify the Company within thirty (30) days after such
disposition. The Optionee also agrees to provide the Company with any
information concerning any such dispositions required by the Company for tax
purposes. Further, to the extent Option Shares and any other incentive stock
options of the Optionee having an aggregate exercise price in excess of $100,000
vest in any year, such options will not qualify as incentive stock options.
2. Exercise of Stock Option.
(a) The Optionee may exercise only vested portions of this Stock
Option and only in the following manner: Prior to the Expiration Date (subject
to Section 6), the Optionee may deliver a Stock Option Exercise Notice (an
"Exercise Notice") in the form of Appendix A hereto indicating his or her
election to purchase some or all of the Option Shares with respect to which this
Stock Option has vested at the time of such notice. Such notice shall specify
the number of Option Shares to be purchased.
Payment of the purchase price for the Option Shares may be made by one or
more (if applicable) of the following methods: (i) in cash, by certified or bank
check or other
5
<PAGE>
instrument acceptable to the Committee; or (ii) if the closing of the first
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock of the Company to the public has occurred, then (A) through the
delivery (or attestation to ownership) of shares of Common Stock that have been
purchased by the Optionee on the open market or that have been held by the
Optionee for at least six months and are not subject to restrictions under any
plan of the Company, (B) by the Optionee delivering to the Company a properly
executed Exercise Notice together with irrevocable instructions to a broker to
promptly deliver to the Company cash or a check payable and acceptable to the
Company to pay the option purchase price, provided that in the event the
Optionee chooses to pay the option purchase price as so provided, the Optionee
and the broker shall comply with such procedures and enter into such agreements
of indemnity and other agreements as the Committee shall prescribe as a
condition of such payment procedure, or (C) a combination of (i), (ii)(A) and
(ii)(B) above. Payment instruments will be received subject to collection.
(b) Certificates for the Option Shares so purchased will be issued
and delivered to the Optionee upon compliance to the satisfaction of the
Committee with all requirements under applicable laws or regulations in
connection with such issuance. Until the Optionee shall have complied with the
requirements hereof and of the Plan, the Company shall be under no obligation to
issue the Option Shares subject to this Stock Option, and the determination of
the Committee as to such compliance shall be final and binding on the Optionee.
The Optionee shall not be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares of stock subject to this Stock
Option unless and until
6
<PAGE>
this Stock Option shall have been exercised pursuant to the terms hereof, the
Company shall have issued and delivered the Option Shares to the Optionee, and
the Optionee's name shall have been entered as a stockholder of record on the
books of the Company. Thereupon, the Optionee shall have full dividend and other
ownership rights with respect to such Option Shares, subject to the terms of
this Agreement.
(c) Notwithstanding any other provision hereof or of the Plan, no
portion of this Stock Option shall be exercisable after the Expiration Date,
including such date as is contemplated by Section 6 hereof.
3. Incorporation of Plan. Notwithstanding anything herein to the contrary,
this Stock Option shall be subject to and governed by all the terms and
conditions of the Plan.
4. Transferability. This Agreement is personal to the Optionee and is not
transferable by the Optionee in any manner other than by will or by the laws of
descent and distribution. This Stock Option may be exercised during the
Optionee's lifetime only by the Optionee (or by the Optionee's guardian or
personal representative in the event of the Optionee's incapacity). The Optionee
may elect to designate a beneficiary by providing written notice of the name of
such beneficiary to the Company, and may revoke or change such designation at
any time by filing written notice of revocation or change with the Company; such
beneficiary may exercise the Optionee's Stock Option in the event of the
Optionee's death to the extent provided herein. If the Optionee does not
designate a beneficiary, or if the designated beneficiary predeceases the
Optionee, the personal representative of the Optionee may exercise this Stock
Option to the extent provided herein in the event of the Optionee's death.
7
<PAGE>
5. Adjustment Upon Changes in Capitalization. The shares of stock covered
by this Stock Option are shares of Common Stock of the Company. Subject to
Section 6 hereof, if the shares of Common Stock as a whole are increased,
decreased, changed or converted into or exchanged for a different number or kind
of shares or securities of the Company or any successor entity (or a parent or
subsidiary thereof), whether through merger or consolidation, sale of all or
substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, combination of
shares, exchange of shares, change in corporate structure or the like, an
appropriate and proportionate adjustment shall be made in the number and kind of
shares and in the per share exercise price of shares subject to any unexercised
portion of this Stock Option. In the event of any such adjustment in this Stock
Option, the Optionee thereafter shall have the right, subject to Section 6, to
purchase the number of shares under this Stock Option at the per share price, as
so adjusted, which the Optionee could purchase at the total purchase price
applicable to this Stock Option immediately prior to such adjustment, all
references herein to Common Stock shall be deemed to refer to the security that
is subject to acquisition upon exercise of this Stock Option and all references
to the Company shall be deemed to refer to the issuer of such security.
Adjustments under this Section 5 shall be determined by the Committee, whose
determination as to what adjustment shall be made, and the extent thereof, shall
be conclusive. No fractional shares of Common Stock shall be issued under the
Plan resulting from any such adjustment, but the Company in its discretion may
make a cash payment in lieu of fractional shares.
6. Effect of Certain Transactions. In the case of (a) the dissolution or
liquidation of the Company, (b) the sale of all or substantially all of the
assets of the Company on a
8
<PAGE>
consolidated basis to an another person or entity, (c) a merger, reorganization
or consolidation in which the holders of the Company's outstanding voting power
immediately prior to such transaction do not own a majority of the outstanding
voting power of the surviving or resulting entity immediately upon completion of
such transaction, (d) the sale of all of the outstanding stock of the Company to
an unrelated person or entity or (e) any other transaction where the owners of
the Company's outstanding voting power prior to such transaction do not own at
least a majority of the outstanding voting power of the relevant entity after
the transaction (in each case, a "Sale Event"), this Stock Option shall
terminate on the effective date of such transaction or event, unless provision
is made in such transaction in the sole discretion of the parties thereto for
the assumption or continuation by the Company of this Stock Option or the
substitution for this Stock Option of a new stock option of the successor person
or entity or a parent or subsidiary thereof, with appropriate adjustment as to
the number and kind of shares and the per share exercise price, as provided in
Section 5 of this Agreement. In the event of any transaction which will result
in such termination, the Company shall give to the Optionee written notice
thereof at least fifteen (15) days prior to the effective date of such
transaction. Until such effective date, the Optionee may exercise any portion of
this Stock Option which is or becomes vested as of such effective date (as
contemplated by Section 1(b)), but after such effective date, the Optionee may
not exercise this Stock Option unless it is assumed or substituted by the
successor entity (or a parent or subsidiary thereof) as provided above.
7. Withholding Taxes. The Optionee shall, not later than the date as of
which the exercise of this Stock Option becomes a taxable event for federal
income tax purposes, pay to the Company or make arrangements satisfactory to the
Committee for payment of any federal,
9
<PAGE>
state and local taxes required by law to be withheld on account of such taxable
event. Subject to approval by the Committee, the Optionee may elect to have such
tax withholding obligation satisfied, in whole or in part, by authorizing the
Company to withhold from shares of Common Stock to be issued or transferring to
the Company, a number of shares of Common Stock with an aggregate Fair Market
Value that would satisfy the withholding amount due. For purposes of this
Section 7 "Fair Market Value" on any given date means the last reported sale
price at which Common Stock is traded on such date or, if no Common Stock is
traded on such date, the next preceding date on which Common Stock was traded,
as reflected on the principal stock exchange or, if applicable, any other
national stock exchange on which the Common Stock is traded or admitted to
trading. The Optionee acknowledges and agrees that the Company or any subsidiary
of the Company has the right to deduct from payments of any kind otherwise due
to the Optionee, or from the Option Shares to be issued in respect of an
exercise of this Stock Option, any federal, state or local taxes of any kind
required by law to be withheld with respect to the issuance of Option Shares to
the Optionee.
8. Company's Right of Repurchase.
(a) Right of Repurchase. The Company shall have the right (the
"Repurchase Right") to repurchase some or all of the Option Shares which the
Optionee has elected to exercise from the Optionee, upon the occurrence of any
of the events specified in Section 8(b) below (the "Repurchase Event"). The
Repurchase Right may be exercised by the Company within 180 days following the
date of such event (the "Repurchase Period"). The Repurchase Right shall be
exercised by the Company by giving the holder written notice on or before the
last day of the Repurchase Period of its intention to exercise the Repurchase
Right,
10
<PAGE>
and, together with such notice, tendering to the holder an amount equal to the
greater of the option exercise price or the fair market value of the shares,
determined as provided in Section 8(c). The Company may assign the Repurchase
Right to one or more persons. Upon exercise of the Repurchase Right in the
manner provided in this Section 8(a), the Optionee shall deliver to the Company
the stock certificate or certificates representing the shares being repurchased,
duly endorsed and free and clear of any and all liens, charges and encumbrances.
If Option Shares are not purchased under the Repurchase Right, the
Optionee and his or her successor in interest, if any, will hold any such shares
in his or her possession subject to all of the provisions of this Section 8 and
Section 9 hereof.
(b) Company's Right to Exercise Repurchase Right. The Company shall
have the Repurchase Right in the event that any of the following events shall
occur:
(i) The termination of the Optionee's Service Relationship
with the Company and its subsidiaries for any reason
whatsoever, regardless of the circumstances thereof, and
including without limitation upon death, disability,
retirement, discharge or resignation for any reason,
whether voluntarily or involuntarily; or
(ii) The (x) filing of a voluntary petition under any
bankruptcy or insolvency law, or a petition for the
appointment of a receiver or the making an assignment
for the benefit of creditors, with respect to the
Optionee, or (y) the Optionee being subjected
involuntarily to a petition or assignment or to an
attachment or
11
<PAGE>
other legal or equitable interest with respect to his or
her assets, which involuntary petition or assignment or
attachment is not discharged within 60 days after its
date and (z) the Optionee being subject to a transfer of
Option Shares by operation of law, except by reason of
death.
(c) Determination of Fair Market Value. The fair market value of the
Option Shares shall be, for purposes of this Section 8, determined as of the
date of the Repurchase Event by an appraiser, investment banker or other entity
reasonably acceptable to both the Company and the Optionee.
(d) Expiration of Company's Repurchase Right. The Repurchase Right
shall remain in effect until the closing of the first public offering of the
Company's equity securities registered under the Securities Act of 1933, as
amended, or any successor statute, or such other event as a result of which
outstanding equity securities of the Company (or any successor entity) shall be
publicly traded (an "Initial Public Offering").
9. Company's Right of First Refusal.
(a) Exercise of Right. If the Company does not elect to purchase any
Option Shares within the period specified in Section 8(a) and thereafter the
Optionee desires to transfer all or any part of the Option Shares to any person
other than the Company (an "Offeror"), the Optionee shall: (i) obtain in writing
an irrevocable and unconditional bona fide offer (the "Offer") for the purchase
thereof from the Offeror; and (ii) give written notice (the "Option Notice") to
the Company setting forth the Optionee's desire to transfer such shares, which
Option Notice shall be accompanied by a photocopy of the Offer and shall set
forth the name
12
<PAGE>
and address of the Offeror and the price and terms of the Offer. Upon receipt of
the Option Notice, the Company shall have an assignable option to purchase any
or all of such Option Shares (the "Company Option Shares") specified in the
Option Notice, such option to be exercisable by giving, within 10 days after
receipt of the Option Notice, a written counter notice to the optionee. If the
Company elects to purchase any or all of such Company Option Shares, it shall be
obligated to purchase, and the Optionee shall be obligated to sell to the
Company, such Company Option Shares at the price and terms indicated in the
Offer within 30 days from the date of delivery by the Company of such counter
notice.
(b) Sale of Option Shares to Offeror. The Optionee may, for 60 days
after the expiration of the 10-day option period as set forth in Section 9(a),
sell to the Offeror, pursuant to the terms of the Offer, any or all of such
Company Option Shares not purchased or agreed to be purchased by the Company or
its assignee. If any or all of such Company Option Shares are not sold pursuant
to an Offer within the time permitted above, the unsold Company Option Shares
shall remain subject to the terms of this Section 9.
(c) Adjustments for Changes in Capital Structure. If there shall be
any change in the Common Stock of the Company through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, combination or
exchange of shares, or the like, the restrictions contained in this Section 9
shall apply with equal force to additional and/or substitute securities, if any,
received by the Optionee in exchange for, or by virtue of his or her ownership
of, Option Shares.
(d) Failure to Deliver Option Shares. If the Optionee fails or
refuses to deliver on a timely basis duly endorsed certificates representing
Company Option Shares to be
13
<PAGE>
sold to the Company or its assignee pursuant to this Section 9, the Company
shall have the right to deposit the purchase price for such Company Option
Shares in a special account with any bank or trust company, giving notice of
such deposit to the Optionee, whereupon such Company Option Shares shall be
deemed to have been purchased by the Company. All such monies shall be held by
the bank or trust company for the benefit of the Optionee. All monies deposited
with the bank or trust company but remaining unclaimed for two years after the
date of deposit shall be repaid by the bank or trust company to the Company on
demand, and the Optionee shall thereafter look only to the Company for payment.
The Company may place a legend on any certificate for Option Shares delivered to
the Optionee reflecting the restrictions on transfer provided in this Section 9.
(e) Expiration of Company's Right of First Refusal. The first
refusal rights of the Company set forth above shall remain in effect until the
closing of an Initial Public Offering.
10. Miscellaneous Provisions.
(a) Equitable Relief. The parties hereto agree and declare that
legal remedies may be inadequate to enforce the provisions of this Agreement and
that equitable relief, including specific performance and injunctive relief, may
be used to enforce the provisions of this Agreement.
(b) Change and Modifications. This Agreement may not be orally
changed, modified or terminated, nor shall any oral waiver of any of its terms
be effective. This Agreement may be changed, modified or terminated only by an
agreement in writing signed by the Company and the Optionee.
14
<PAGE>
(c) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
(d) Headings. The headings are intended only for convenience in
finding the subject matter and do not constitute part of the text of this
Agreement and shall not be considered in the interpretation of this Agreement.
(e) Saving Clause. If any provision(s) of this Agreement shall be
determined to be illegal or unenforceable, such determination shall in no manner
affect the legality or enforceability of any other provision hereof.
(f) Notices. All notices, requests, consents and other
communications shall be in writing and be deemed given when delivered
personally, by telex or facsimile transmission or when received if mailed by
first class registered or certified mail, postage prepaid. Notices to the
Company or the Optionee shall be addressed as set forth underneath their
signatures below, or to such other address or addresses as may have been
furnished by such party in writing to the other.
(g) Benefit and Binding Effect. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto, their respective
successors, permitted assigns, and legal representatives. The Company has the
right to assign this Agreement, and such assignee shall become entitled to all
the rights of the Company hereunder to the extent of such assignment.
(h) Counterparts. For the convenience of the parties and to
facilitate execution, this Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
15
<PAGE>
The foregoing Agreement is hereby accepted and the terms and conditions
thereof hereby agreed to by the undersigned.
Dated: April 8, 1998
NATROL, INC.
By: ---------------------------------
Name: Elliott Balbert
Title: President
Address: Natrol, Inc.
Attention: President
21411 Prairie Street
Chatsworth, CA 91311
The foregoing Agreement is hereby accepted and the terms and conditions
thereof hereby agreed to by the undersigned.
Dated: OPTIONEE:
-------------------------------------
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Incentive Stock Option Agreement
and understand the contents thereof.
- ------------------------------------
Optionee's Address:
-------------------------------------
-------------------------------------
<PAGE>
DESIGNATED BENEFICIARY:
-------------------------------------
Beneficiary's Address:
-------------------------------------
-------------------------------------
<PAGE>
Appendix A
STOCK OPTION EXERCISE NOTICE
Natrol, Inc.
Attention: Chief Financial Officer
21411 Prairie Street
Chatsworth, CA 91311
Dear Sirs:
Pursuant to the terms of my stock option agreement dated __________ (the
"Agreement") under the Natrol, Inc. 1996 Stock Option and Grant Plan, I, [Insert
Name] ________________, hereby [Circle One] partially/fully exercise such option
by including herein payment in the amount of $______ representing the purchase
price for [Fill in number of Option Shares] _______ option shares. I have chosen
the following form(s) of payment:
[ ] 1. Cash
[ ] 2. [Certified or Bank] Check payable to Natrol, Inc.
[ ] 3. Other (as described in the Agreement (please describe))
---------.
Sincerely yours,
-------------------------------------
Please Print Name:
<PAGE>
July 18, 1997
Mr. John Denis
210 East Pearson Street
Unit 4C
Chicago, Illinois 60611
Dear John,
What follows is a more formal summary of the agreement we negotiated. Needless
to say, all of us are looking forward to you joining us in early August.
1. Base pay
$22,500 per month/$270,000 per year.
2. Benefits
$6,000 per year car allowance
$10,000 allowance towards moving expenses
Full Health Coverage
401K participation, per terms of 401K plan
Vacation: 1 week first year, 2 weeks years 2 to 5,
3 weeks after 5 years
3. Incentive compensation, 1998 to 2000 (1997 prorated)
Achieve calendar year sales of $50 MM, $25,000 bonus
Achieve calendar year sales of $75 MM, $50,000 bonus
Achieve calendar year sales of $100 MM, $100,000 bonus
For purposes of this calculation, base sales from mergers and acquisition
will not be included in the gross sales calculation. To explain, if a
company with $20 million in sales is acquired, base level sales of $20
million would not be included in the calculation. Incremental sales above
$20 million generated from the acquired company would be included.
4. Profit sharing
.25 % of first 5 million in pre-tax profits after
other incentives.
.5% of pre-tax profits between $5 and $10 million after other
incentives.
.75% of pre tax profits between $10 and $15 million after other
incentives.
1% of pre-tax profits above $15 million after other incentives.
5. Stock options
10,000 shares at $25 per share vested over three years. One third
will be vested upon completion of one year of employment, another
third will be vested after completion of two years of employment and
the remainder to be vested after the completion of three years
employment.
<PAGE>
6. Severance
Except for the standard ethical exceptions--theft, drug, alcohol abuse or
some legal violation such as sexual misconduct, etc.--Natrol will
guarantee six months of severance through six months of employment and
three months thereafter. The guarantee will remain effective until the
date of your first stock option vesting. At that point, you will be
considered a part owner of the company, a partner, and an employee at
will.
With warmest regards,
/s/ ELLIOTT BALBERT
Elliott Balbert
President, Chairman of the Board
<PAGE>
Exhibit 21.1
Subsidiaries
Natrol Products, Inc., a Delaware corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 13, 1998 in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-52109) and related Prospectus of
Natrol, Inc. for the registration of 3,940,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
June 12, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 17, 1998 in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-52109) and related Prospectus of
Natrol, Inc. for the registration of 3,940,000 shares of its common stock.
/s/ FARBER & HASS LLP
Oxnard, California
June 12, 1998
