<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15701
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1007839
(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1185 LINDA VISTA DRIVE, SAN MARCOS, CALIFORNIA 92069
(Address of principal executive offices)
(Zip Code)
(760) 744-7340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
5,739,875
(Number of shares of common stock of the registrant outstanding,
net of treasury shares held, as of January 31,2000)
<PAGE> 2
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31 June 30
1999 1999
---------- --------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 440 $ 1,063
Accounts receivable - less allowance for doubtful accounts of
$323 at December 31, 1999 and $472 at June 30, 1999 7,252 7,515
Inventories, net 7,403 10,611
Income tax refund receivable 2,746 2,229
Notes receivable - current portion 739 127
Prepaid expenses 436 371
Deposits 726 530
Other current assets 168 794
-------- --------
Total current assets 19,910 23,240
Property and equipment, net 14,474 12,274
Deferred income taxes 1,979 1,979
Investments 196 195
Notes receivable, less current portion 478 401
Other noncurrent assets, net 147 507
-------- --------
Total assets 37,184 38,596
======== ========
Current Liabilities:
Accounts payable 5,140 8,305
Current installments of long-term debt 2,395 50
Accrued compensation and employee benefits 569 786
-------- --------
Total current liabilities 8,104 9,141
Deferred income taxes 593 593
Long-term debt, less current installments 3,053 927
Accrual for loss on lease obligation 2,434 2,434
Long-term pension liability 414 410
-------- --------
Total liabilities 14,598 13,505
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $.01 par value; 500,000 shares
authorized; none issued or outstanding -- --
Common stock; $.01 par value; 8,000,000 shares authorized;
issued and outstanding 6,002,375 at December 31, and
June 30, 1999 60 60
Additional paid-in capital 11,237 11,237
Retained earnings 12,646 14,970
Treasury stock, at cost, 262,500 shares at December
31, 1999 and 212,500 shares at June 30, 1999 (1,283) (1,116)
Accumulated other comprehensive loss (74) (60)
-------- --------
Total stockholders' equity 22,586 25,091
-------- --------
Total liabilities and stockholders' equity $ 37,184 $ 38,596
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
2
<PAGE> 3
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
(In thousands, except per-share information)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 31 December 31
-------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 12,064 $ 17,317 $ 27,328 $ 34,303
Cost of goods sold 10,586 14,052 22,661 26,383
Inventory write-off 2,000 -- 2,000 --
-------- -------- -------- --------
Total cost of goods sold 12,586 14,052 24,661 26,383
-------- -------- -------- --------
Gross profit (loss) (522) 3,265 2,667 7,920
Selling, general &
administrative expenses 3,219 2,641 6,054 4,815
-------- -------- -------- --------
Income (loss) from operations (3,741) 624 (3,387) 3,105
-------- -------- -------- --------
Other income (expense):
Interest income 17 38 45 97
Interest expense (75) (22) (105) (44)
Other, net (48) -- (56) --
-------- -------- -------- --------
(106) 16 (116) 53
-------- -------- -------- --------
Income (loss) before taxes (3,847) 640 (3,503) 3,158
Provision (benefit) for income taxes (1,436) 257 (1,179) 1,256
-------- -------- -------- --------
Net income (loss) ($2,411) $ 383 ($2,324) $ 1,902
======== ======== ======== ========
Net income (loss) per common share:
Basic $ (0.42) $ 0.06 $ (0.40) $ 0.32
======== ======== ======== ========
Diluted $ (0.42) $ 0.06 $ (0.40) $ 0.31
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
3
<PAGE> 4
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended December 31
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,324) $ 1,902
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Bad debt provision 180 155
Inventory write-off 2,000 --
Write-off of notes receivable 72 --
Tax benefit on option exercise -- 439
Depreciation and amortization 913 818
Other (16) (4)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 83 3,637
Inventories 1,208 2,494
Tax refund receivable (517) (171)
Prepaid expenses (65) (284)
Deposits (196) (29)
Other assets 986 (699)
(Decrease) increase in liabilities:
Accounts payable (3,160) (3,521)
Income taxes payable -- (378)
Accrued compensation and employee benefits (217) (195)
------- -------
Net cash provided by (used in) operating activities (1,053) 4,164
------- -------
Cash flows from investing activities:
Capital expenditures (3,113) (3,228)
Issuance of notes receivable (791) (22)
Repayment of notes receivable 30 39
------- -------
Net cash used in investing activities (3,874) (3,211)
------- -------
Cash flows from financing activities:
Borrowings on lines of credit 1,070 --
Proceeds from long-term debt financing 3,459 --
Payments on long-term debt and capital leases (58) (37)
Issuance of common stock -- 645
Payments to acquire treasury stock (167) (133)
------- -------
Net cash provided by financing activities 4,304 475
------- -------
Net increase (decrease) in cash and cash equivalents (623) 1,428
Cash and cash equivalents at beginning of period 1,063 4,714
------- -------
Cash and cash equivalents at end of period $ 440 $ 6,142
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the six months for:
Interest $ 79 $ 42
Income Taxes -- 1,196
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
4
<PAGE> 5
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
NOTE 1 - Interim Financial Information
The unaudited consolidated financial statements of Natural Alternatives
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles and with Article 10 of
the Securities and Exchange Commission's Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company's financial
information as of December 31, 1999 and 1998.
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make certain estimates
and assumptions that may affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting periods. Actual results may differ
from such estimates. The consolidated results of operations for the interim
periods ended December 31, 1999 and 1998 are not necessarily indicative of the
consolidated operating results for the full year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended June 30, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in prior periods' consolidated financial statements have been
reclassified to conform to the presentation for the quarter ended December 31,
1999.
NOTE 2 - Inventories
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31 June 30
1999 1999
----------- --------
<S> <C> <C>
Raw materials $ 4,484 $ 7,457
Work in progress 204 270
Finished goods 2,715 2,884
------- -------
$ 7,403 $10,611
======= =======
</TABLE>
The Company wrote-off inventory of $2.0 million, which included $735,000 for
deposits on inventory. The analysis of inventory balances and subsequent
write-off related primarily to the loss of a major customer in December 1999, a
decline in market share and continuing competitive pressures which caused the
Company to re-evaluate all product lines and reduce or slow production of
products with limited future sales potential.
5
<PAGE> 6
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
NOTE 3 - Comprehensive Net Income
Comprehensive net income is comprised of the following:
<TABLE>
<CAPTION>
For the three months For the six months
ended December 31 ended December 31
-------------------- ----------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net income (loss) ($2,411) $383 ($2,324) $ 1,902
Foreign currency translation adjustments 13 -- (15) --
Unrealized gain (loss) on investments 4 2 1 (6)
------- ---- ------- -------
Comprehensive income (loss) ($2,394) $385 ($2,338) $ 1,896
======= ==== ======= =======
</TABLE>
NOTE 4 - Cost Containment Program
In January 2000, the Company publicly announced a cost containment program
designed to reduce future operating expenses. The program initiated expense
control measures intended to counteract the loss of a major customer and
improving operating performance. The program included an immediate reduction of
approximately 27% in the Company workforce, consisting of both permanent and
temporary personnel. The reduction-in-force is not expected to result in
significant separation agreement and other termination costs.
NOTE 5 - Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share reflects the potential dilution that could
occur if stock options or other contracts to issue common stock were exercised
or converted into common stock. The computation of diluted net income (loss) per
share does not assume exercise or conversion of securities that would have an
anti-dilutive effect on net income (loss) per share. Basic and diluted net
income (loss) per share have been calculated as follows:
<TABLE>
<CAPTION>
For the three months For the six months
ended December 31 ended December 31
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) - Numerator for
basic and diluted income (loss) per
share - income (loss) available to
common shareholders ($2,411) $ 383 ($2,324) $ 1,902
=========== ========== =========== ==========
Denominator:
Denominator for basic
income (loss) per share - weighted
average shares 5,758,734 5,893,483 5,767,055 5,862,209
Effect of dilutive securities -
employee stock options -- 145,751 -- 261,091
Denominator for diluted income
(loss) per share - adjusted weighted
average shares and assumed
conversions 5,758,734 6,039,234 5,767,055 6,123,300
=========== ========== =========== ==========
Basic income (loss) per share ($0.42) $ 0.06 ($0.40) $ 0.32
Diluted income (loss) per share ($0.42) $ 0.06 ($0.40) $ 0.31
</TABLE>
6
<PAGE> 7
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
For the three and six months ended December 31, 1999, there were outstanding
options to purchase 366,500 shares of common stock that were not included in the
computation of diluted net loss per share as their effect would have been
anti-dilutive.
NOTE 6 - Major Customers
The Company had substantial sales to six separate customers during one or more
of the periods shown in the following table. The Company lost one of these major
customers during the quarter ended December 31, 1999 which resulted in a
material adverse impact on the Company's revenues and income. Sales by customer,
representing 10% or more of the respective period's total net sales, are shown
below.
<TABLE>
<CAPTION>
For the three months For the six months
ended December 31 ended December 31
---------------------------------- ------------------------------------
1999 1998 1999 1998
--------------- -------------- ---------------- ----------------
Sales by Sales by Sales by Sales by
Customer Customer %(a) Customer %(a) Customer %(a) Customer %(a)
-------- -------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customer 1 $3,661 30% $ 2,773 16% $ 8,616 32% $ 6,236 18%
Customer 2 1,999 17% (b) 4,642 17% (b)
Customer 3 (b) 6,349 37% 4,210 15% 11,316 33%
Customer 4 2,152 18% (b) 3,239 12% (b)
Customer 5 1,172 10% (b) (b) (b)
Customer 6 (b) 4,655 27% (b) 7,578 22%
------- -- ------- -- ------- -- ------- --
$8,984 74%(c) $13,777 80% $20,707 76% $25,130 73%
====== == ======= == ======= == ======= ==
</TABLE>
NOTE 7 - Related Party Transactions
The Company entered into an agreement with the father-in-law and mother-in-law
of the Chief Executive Officer of the Company in December 1991, which provides
commissions on sales to a particular customer. Effective January 1, 1993, the
commission is equal to 5% of sales and payable upon collection from the
customer, and capped at $25,000 per calendar quarter. Amounts paid under this
agreement were $50,000 for each of the six-month periods ended December 31, 1999
and 1998. There were no amounts owed under the agreement at December 31, 1999 or
1998. The agreement will expire in December 2001 or as defined in the agreement;
future commissions on sales are anticipated to decline or cease as no orders are
expected from the particular customer for the foreseeable future.
During the six months ended December 31, 1999 and 1998, the Company had sales of
$13,000 and $252,000, respectively, to a customer in which directors, officers
and employees previously had direct or indirect equity ownership. At December
31, and June 30, 1999, the net accounts receivable from this customer were $0
and $83,000, respectively. The Company recovered accounts receivable of $35,000
during the six months ended December 31, 1999 and $39,000 was written off. In
addition, at December 31, 1999 and June 30, 1999, the Company had notes
receivable, net, of $0 and $50,000, respectively. As of November 11, 1999 no
remaining directors, officers or employees of the Company had any direct or
indirect equity ownership in the customer.
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge, Inc., a privately held development stage company
based in San Diego, CA ("FitnessAge"). In connection therewith, on March 30,
1999 the Company purchased 300,000 shares of common stock of FitnessAge. On or
about the same date, the family limited partnership of the Chief Executive
Officer and the Secretary and Chairperson of the Board of Directors purchased
200,000 shares of Common Stock of FitnessAge for the same price per share.
7
<PAGE> 8
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share data)
NOTE 8 - Custom Nutrition Joint Venture Alliance with FitnessAge, Inc.
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge. In connection therewith, the Company purchased
300,000 shares of FitnessAge common stock for $150,000, on March 30, 1999.
On December 6, 1999, the Company and FitnessAge formalized the joint venture by
forming a new company named Custom Nutrition, LLC, a Delaware limited liability
company ("Custom Nutrition"). Custom Nutrition was formed for the purpose of
developing, merchandising, selling and distributing customized nutritional and
related products to health and fitness clubs, as well as over the internet.
Under terms of a 10-year Exclusive Manufacturing Agreement, the Company is the
exclusive manufacturer of all nutritional supplements for Custom Nutrition. In
addition, Custom Nutrition obtained an exclusive royalty free license to
FitnessAge's proprietary software technology, including their physical fitness
assessments known as the FitnessAge System, as well as, software under
development designed to provide customized nutritional assessments. In
accordance with its Operating Agreement, the Company is required to make an
initial capital contribution of $100,000, which has not been funded as of
December 31, 1999; income and losses and any additional capital contribution
requirements of Custom Nutrition will be allocated 60% to FitnessAge and 40% to
the Company. The Company is currently accounting for this investment under the
equity method of accounting. As of December 31, 1999, there were no sales or
expenses recorded by Custom Nutrition, which is expected to commence operations
during the first half of calendar year 2000.
In addition, in November and December, the Company provided FitnessAge a total
of $750,000 as part of a convertible secured loan made by the Company to
FitnessAge (the "Loan"). The Loan is collateralized by all of the assets of
FitnessAge and includes interest accruing at an annual rate of 12%. The
principal together with all accrued and unpaid interest is due November 10,
2000. The Company has the right at any time to convert all or any portion of the
amount due on the Loan into the common stock of FitnessAge at a conversion price
of $0.75 per share. As of December 31, 1999, the balance of the Loan was
$750,000 plus accrued interest, and the Company's direct aggregate investment in
FitnessAge was approximately $900,000. The Company is currently accounting for
this investment under the cost method of accounting.
In conjunction with the Loan, the Company received a three-year Warrant (the
"Warrant") to purchase up to 150,000 shares of Common Stock of FitnessAge for
$1.00 per share. The Company may exercise the Warrant at any time up to and
including November 1 2002. As of December 31, 1999, the Company had not
exercised any portion of this Warrant. The Company also obtained: the right to
designate one representative of the Company to be a member of FitnessAge's Board
of Directors, which consists of five board members; and registration rights and
certain other rights as defined by the loan documents and by an Investor Rights
Agreement. If the Company converted the Loan and exercised the Warrant, the
Company would own less than five percent, on an as converted basis, of
FitnessAge Common stock.
8
<PAGE> 9
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain Forward-Looking Information
Information provided in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 that are not historical facts and information. These
statements represent the Company's expectations or beliefs, including, but not
limited to, statements concerning future financial and operating results,
statements concerning industry performance, the Company's operations, economic
performance, financial condition, margins and growth in sales of the Company's
products, capital expenditures, financing needs, as well as assumptions related
to the foregoing. For this purpose, any statements contained in this Quarterly
Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are based on current expectations and involve
various risks and uncertainties that could cause actual results and outcomes for
future periods to differ materially from any forward-looking statement or views
expressed herein. The Company's financial performance and the forward-looking
statements contained herein are further qualified by other risks including those
set forth from time to time in the documents filed by the Company with the
Securities and Exchange Commission, including the Company's most recent Form
10-K.
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL 2000 AND 1999
Net sales decreased 30.3%, or approximately $5.3 million, to approximately $12.1
million for the quarter ended December 31, 1999, from approximately $17.3
million for the quarter ended December 31, 1998. The decrease was primarily due
to the loss of a major customer, Nu Skin Enterprises Inc., which accounted for
approximately 37% of net sales for the quarter ended December 31, 1998. Nu Skin
informed the Company that its production needs have been transitioned to other
vendors for the foreseeable future. As of December 31, 1999 the Company expects
no adverse impact from the settlement of outstanding receivables from Nu Skin.
Sales of products into domestic markets decreased approximately 21%, or $2.4
million, to approximately $9.1 million and sales into international markets
decreased approximately 50%, or $2.9 million, to $2.9 million, primarily as a
result of the loss of this major customer. Domestic sales growth was also
negatively impacted by the loss of customer sales for several herbal products.
Management continues to strategically focus its efforts for increasing sales
into diversifying and expanding geographic distribution channels. Industry
competition could adversely affect the Company's results of operations in any
given quarter and such adverse affects often cannot be anticipated.
For the quarter ended December 31, 1999, the Company experienced an increase in
cost of goods sold as a percentage of sales, excluding the inventory write-off
of $2.0 million, to 87.7% compared to 81.1% for the quarter ended December 31,
1998. The increase reflects reduced sales prices; increased manufacturing
overhead costs; and increased costs related to implementation of additional
quality control procedures to ensure continued product compliance with
established GMP specifications and standards. The Company wrote-off inventory of
$2.0 million, which included $735,000 for deposits on inventory. The analysis of
inventory balances and subsequent inventory write-off related primarily to the
loss of a major customer in December 1999, a decline in market share and
continuing competitive pressures which caused the Company to re-evaluate all
product lines and reduce or slow production of products with limited future
sales potential. The increase in cost of goods sold and the inventory write-off
resulted in a gross loss of approximately $0.5 million for the quarter ended
December 31, 1999 compared to a gross profit of approximately $3.3 million for
the quarter ended December 31, 1998.
Selling, general and administrative expenses increased as a percentage of net
sales to 26.7% for the quarter ended December 31, 1999 from 15.2% for the
quarter ended December 31, 1998. In absolute dollars, the expenses increased by
approximately $0.6 million to approximately $3.2 million for the quarter ended
December 31, 1999 from approximately $2.6 million for the quarter ended December
31, 1998. The
9
<PAGE> 10
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
percentage increase was due primarily to the fixed nature of selling, general
and administrative expenses and the decrease in net sales as noted above. The
increase in absolute dollars was primarily due to: the continued investment in
IT processes and technologies; abandoned facility lease costs; and increased
compensation and legal fees.
The Company's loss from operations was approximately $3.7 million for the
quarter ended December 31, 1999, compared to income of $0.6 million for the
quarter ended December 31, 1998. The decrease of approximately $4.3 million was
due to: a decrease of approximately $3.8 million in gross profit which included
the inventory write-off of $2.0 million; and approximately $0.6 million increase
in selling, general and administrative expenses.
The Company recorded a net loss for the quarter ended December 31, 1999 of
approximately $2.4 million compared to net income of approximately $0.4 million
for the quarter ended December 31, 1998. The decrease of approximately $2.8
million was due to the reasons described above. The income tax benefit of 37.3%
compares with a provision for taxes of 40.2% for the quarters ended December 31,
1999 and 1998, respectively. The lower percentage is the result of the
consolidation of a wholly owned subsidiary in Switzerland, which has a low
relative tax rate. Diluted net loss per common share was $0.42 for the quarter
ended December 31, 1999 compared to diluted net income per common share of $0.06
for the quarter ended December 31, 1998.
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net sales decreased 20.3% or approximately $7.0 million to approximately $27.3
million for the six months ended December 31, 1999, from approximately $34.3
million for the six months ended December 31, 1998. The decrease was primarily
due to the loss of a major customer, Nu Skin Enterprises Inc., which accounted
for approximately 15% and 33% of net sales for the six months ended December 31,
1999 and 1998, respectively. Nu Skin informed the Company that its production
needs have been transitioned to other vendors for the foreseeable future. As of
December 31, 1999, the Company expects no adverse impact from the settlement of
outstanding receivables from Nu Skin. Sales of products into domestic markets
decreased approximately 21%, or $5.1 million, to approximately $18.7 million and
sales into international markets decreased approximately 18%, or $1.9 million,
to $8.6 million, primarily as a result of the loss of this major customer.
Domestic sales growth was also negatively impacted by the loss of customer sales
for several herbal products. Management continues to strategically focus its
efforts for increasing sales into diversifying and expanding geographic
distribution channels. Industry competition could adversely affect the Company's
results of operations in any given period and such adverse affects often cannot
be anticipated.
For the six months ended December 31, 1999, the Company experienced an increase
in cost of goods sold as a percentage of sales, excluding the inventory
write-off of $2.0 million, to 82.9% compared to 76.9% for the six months ended
December 31, 1998. The increase reflects reduced sales prices; increased costs
related to implementation of additional quality control procedures to ensure
continued product compliance with established GMP specifications and standards;
and increased manufacturing overhead costs. The Company wrote-off inventory of
$2.0 million, which included $735,000 for deposits on inventory. The analysis of
inventory balances and subsequent write-off related primarily to the loss of a
major customer in December 1999, a decline in market share and continuing
competitive pressures which caused the Company to re-evaluate all product lines
and reduce or slow production of products with limited future sales potential.
The increase in cost of goods sold and the inventory write-off resulted in a
reduction of gross profit of $5.3 million to $2.7 million for the six months
ended December 31, 1999 compared to $7.9 million for the six months ended
December 31, 1998.
Selling, general and administrative expenses increased as a percentage of sales
to 22.2% for the six months ended December 31, 1999 from 14.0% for the six
months ending December 31, 1998. In absolute dollars, the expenses increased to
approximately $6.1 million for the six months ended December 31, 1999
10
<PAGE> 11
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
from approximately $4.8 million for the six months ended December 31, 1998. The
percentage increase was due primarily to the fixed nature of selling, general
and administrative expenses and the decrease in net sales as noted above. The
increase in absolute dollars was primarily due to: the continued investment in
IT processes and technologies; abandoned facility lease costs; and increased
compensation and legal fees.
The Company's loss from operations was approximately $3.4 million for the six
months ended December 31, 1999 compared to income of approximately $3.1 million
for the six months ended December 31, 1998. The decrease of approximately $6.5
million was due to: a decrease of approximately $5.3 million in gross profit
which included the inventory write-off of $2.0 million; and approximately $1.2
million increase in selling, general and administrative expenses.
The Company recorded a net loss for the six months ended December 31, 1999 of
approximately $2.3 million compared to net income of approximately $1.9 million
for the six months ended December 31, 1998. This decrease was due to the reasons
described above. The income tax benefit of 33.7% compares with a provision for
taxes of 39.8% for the quarters ended December 31, 1999 and 1998, respectively.
The lower percentage is the result of the consolidation of a wholly owned
subsidiary in Switzerland, which has a low relative tax rate. Diluted net loss
per common share was $.40 for the six months ended December 31, 1999 compared to
diluted net income per common share of $0.31 for the six months ended December
31, 1998.
COST CONTAINMENT PROGRAM
In January 2000, the Company publicly announced a cost containment program
designed to reduce future operating expenses. The program initiated expense
control measures intended to counteract the loss of a major customer and
improving operating performance. The program included an immediate reduction of
approximately 27% in the Company workforce, consisting of both permanent and
temporary personnel. The reduction-in-force is not expected to result in
significant separation agreement and other termination costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through product sales,
capital and operating lease transactions, working capital credit facility and
equipment financing arrangements.
For the six months ended December 31, 1999, net cash used in operating
activities was approximately $1.1 million compared to net cash provided of
approximately $4.2 million for the six months ended December 31, 1998. This
decrease of approximately $5.2 million was due primarily to the decrease in net
income of approximately $2.2 million, excluding the $2.0 million inventory
write-off in the current period, and approximately $3.6 million less for
accounts receivable collections.
Capital expenditures for the six months ended December 31, 1999 amounted to
approximately $3.1 million. These expenditures relate primarily to manufacturing
facility improvements for expanding and upgrading the Company's warehouse,
blending and encapsulation production operations. The Company anticipates
additional capital expenditures of approximately $2.3 million during fiscal year
2000 primarily to complete the manufacturing quality improvements purchased and
for the purchase of packaging equipment in its vertical integration initiative
in final product packaging and labeling operations, which are currently
outsourced. These expenditures are expected to be paid primarily from borrowings
under the Company's term note described below. If these financing alternatives
become unavailable, the Company may be required to defer or restrict certain
commercial activities or delay or eliminate expenditures for certain of its
potential products and/or markets.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
At December 31, 1999, the Company had working capital of approximately $11.8
million compared to approximately $14.1 million at June 30, 1999. The $2.3
million decrease in working capital resulted from an increase in current
installments of long-term debt of approximately $2.3 million used to finance
manufacturing facility improvements and expansion and decreases in inventories
of approximately $3.2 million, partially offset by a reduction in accounts
payable of approximately $3.2 million. Current maturities of long-term debt at
December 31, 1999 amounted to approximately $2.4 million.
On October 4, 1999, the Company replaced an existing $3.0 million revolving
working capital line of credit with $9.0 million in new financing, consisting of
a $5.0 million revolving working capital line of credit and a $4.0 million term
note. Borrowings under the revolving working capital line of credit are
collateralized by eligible accounts receivable and inventory, as defined in the
agreement; proceeds will be used to support ongoing operating requirements. As
of December 31, 1999, the Company was not in compliance with certain financial
covenant provisions of the line of credit agreement, which the financial
institution has waived through fiscal year 2000. The line of credit expires on
December 1, 2000; management expects this line to be renewed in the normal
course of business. Borrowings under the term note will be used for new
equipment purchases, as defined. The term note expires on April 1, 2000; the
loan will be converted to a five-year term loan provided that the Company is in
compliance with all terms and conditions, as defined. As of December 31, 1999,
amounts outstanding under the revolving line of credit and term note were
$100,000 and $958,000, respectively.
The Company's wholly owned subsidiary in Switzerland has a revolving line of
credit agreement permitting borrowings up to CHF 2.0 million, or approximately
$1.3 million at December 31, 1999. The line of credit expires on December 31,
2000; management expects this line to be renewed in the normal course of
business. The agreement contains no financial covenants As of December 31, 1999,
the Company converted approximately $1.0 million of the amounts outstanding to
term notes with payments starting in calendar year 2001. As of December 31,
1999, the Company is in compliance with all terms and conditions of the
revolving line of credit agreement.
On November 9, 1999, the Company entered into a term note agreement for $2.5
million, secured by equipment. The note has a five-year term that provides for
principal and interest payable in monthly installments of $52,000; proceeds will
be used to support working capital requirements. As of December 31, 1999,
$2,467,000 was outstanding under this term note. As of December 31, 1999, the
Company is in compliance with all terms and conditions of the term note.
The Company has funds available from existing credit facilities to support
future ongoing operating requirements and capital expenditures of approximately
$8.3 million, net of borrowings outstanding as of December 31, 1999 of
approximately $2.0 million. The Company believes that its available cash and
cash equivalents and existing credit facilities should be sufficient to fund
ongoing operating activities during fiscal year 2000. The Company's ability to
fund future operations and meet capital requirements will depend on many
factors, including: the effectiveness of the Company's diversified growth
strategy; the effectiveness of the cost containment program; vertical
integration of packaging operations; the expansion of Switzerland manufacturing
operations; the ability to establish additional alliances or changes to existing
alliances; and the ability to establish sub-lease arrangements for the abandoned
office and manufacturing facility. The Company may seek additional financing
sources, but there can be no assurance that such additional financing sources
will be available at acceptable terms, if any at all.
CUSTOM NUTRITION JOINT VENTURE ALLIANCE WITH FITNESSAGE, INC.
In March 1999, the Company entered into a letter of intent to form a joint
venture with FitnessAge, Inc., a privately held development stage company based
in San Diego, CA ("FitnessAge"). In connection therewith, the Company purchased
300,000 shares of FitnessAge common stock for $150,000, on March 30, 1999.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
On December 6, 1999, the Company and FitnessAge formalized the joint venture by
forming a new company named Custom Nutrition, LLC, a Delaware limited liability
company ("Custom Nutrition"). Custom Nutrition was formed for the purpose of
developing, merchandising, selling and distributing customized nutritional and
related products to health and fitness clubs, as well as over the internet.
Under terms of a 10-year Exclusive Manufacturing Agreement, the Company is the
exclusive manufacturer of all nutritional supplements for Custom Nutrition. In
addition, Custom Nutrition obtained an exclusive royalty free license to
FitnessAge's proprietary software technology, including their physical fitness
assessments known as the FitnessAge System, as well as, software under
development designed to provide customized nutritional assessments. In
accordance with its Operating Agreement, the Company is required to make an
initial capital contribution of $100,000, which has not been funded as of
December 31, 1999; income and losses and any additional capital contribution
requirements of Custom Nutrition will be allocated 60% to FitnessAge and 40% to
the Company. The Company is currently accounting for this investment under the
equity method of accounting. As of December 31, 1999, there were no sales or
expenses recorded by Custom Nutrition, which is expected to commence operations
during the first half of calendar year 2000.
In addition, in November and December, the Company provided FitnessAge a total
of $750,000 as part of a convertible secured loan made by the Company to
FitnessAge (the "Loan"). The Loan is collateralized by all of the assets of
FitnessAge and includes interest accruing at an annual rate of 12%. The
principal together with all accrued and unpaid interest is due November 10,
2000. The Company has the right at any time to convert all or any portion of the
amount due on the Loan into the common stock of FitnessAge at a conversion price
of $0.75 per share. As of December 31, 1999, the balance of the Loan was
$750,000 plus accrued interest, and the Company's direct aggregate investment in
FitnessAge was approximately $900,000. The Company is currently accounting for
this investment under the cost method of accounting.
In conjunction with the Loan, the Company received a three-year Warrant (the
"Warrant") to purchase up to 150,000 shares of Common Stock of FitnessAge for
$1.00 per share. The Company may exercise the Warrant at any time up to and
including November 1 2002. As of December 31, 1999, the Company had not
exercised any portion of this Warrant. The Company also obtained: the right to
designate one representative of the Company to be a member of FitnessAge's Board
of Directors, which consists of five board members; and registration rights and
certain other rights as defined by the loan documents and by an Investor Rights
Agreement. If the Company converted the Loan and exercised the Warrant, the
Company would own less the five percent, on an as converted basis, of FitnessAge
common stock.
YEAR 2000 ISSUES
As of the date of this filing, the Company has not experienced any significant
year 2000 problems with its internal systems or equipment, nor has the Company
detected any significant year 2000 problems affecting its customers or
suppliers.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in income unless specific hedge accounting criteria are
met. SFAS No. 133, as amended, is effective for fiscal years beginning after
June 15, 2000. The adoption of this Statement will not have a material effect on
the Company's consolidated financial statements as the Company does not
currently hold any derivative or hedging instruments.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
RISK FACTORS THAT MAY AFFECT
FUTURE OPERATING RESULTS
In addition to the other information included in this Report, the following
factors should be considered in evaluating the Company's business and future
prospects. The Company's business and results of operations could be seriously
harmed by any of the following risks. In addition, the market price of our
common stock could decline due to any of these risks.
CURRENT LOSSES AND EXPECTED FUTURE LOSSES; DECLINING SALES
The Company incurred a net loss of approximately $2.9 million for the fiscal
year ended June 30, 1999. Sales for the fiscal year ended June 30, 1999 declined
to approximately $57.0 million compared to approximately $68.0 million for the
fiscal year ended June 30, 1998. Sales for the six months ended December 31,
1999 were approximately $27.3 million versus sales of approximately $34.3
million for the comparable period of 1998. The Company incurred a net loss of
approximately $2.3 million for the six months ended December 31, 1999, and
expects to incur a net loss for the fiscal year ended June 30, 2000. The Company
is expected to continue to incur significant marketing and general and
administrative expenses during fiscal year 2000. There can be no assurance the
Company will achieve profitability in 2001 or thereafter.
STOCK PRICE VOLATILITY
The Company's stock price has experienced significant volatility at times during
the past two years. In view of the Company's current losses and expected losses
through June 30, 2000, and the fact there can be no assurances losses will not
continue, it is expected that volatility in the stock price will continue.
Market conditions in the vitamin and nutritional supplement industry such as
increased price competition, consolidation, oversupply of vitamin and supplement
products, operating results of competitors, adverse publicity and other factors
such as customer and product announcements by the Company and operating results
which are lower than the expectations of analysts and our investors, may have a
significant adverse effect on the price of the Company's stock.
LOSS OF MAJOR CUSTOMER
During the quarter ended December 31, 1999, one of the Company's major
customers, NuSkin Enterprises, Inc. ("NuSkin"), advised the Company it would
stop purchasing products from the Company, and no longer purchases any Company
products. For the fiscal year ended June 30, 1999, NuSkin accounted for
approximately $18.4 million or approximately 32% of the Company's sales, and for
the six months ended December 31, 1999, NuSkin accounted for approximately $4.2
million or 15% of the Company's sales. The loss of NuSkin as a customer is
expected to have a material adverse impact on the revenues of the Company.
LONG-TERM LEASE COMMITMENT FOR ABANDONED FACILITY
The Company has a 15-year lease commitment for an approximately 82,500 square
foot build-to-suit office and manufacturing facility in Carlsbad, California
that the Company has determined not to occupy. The monthly lease payments, which
commenced in November, 1998, are currently in excess of $105,000 and are subject
to annual inflation adjustments through the remainder of the lease term. The
Company is attempting to sublease the partially completed facility. The Company
believes it will be required to expend significant sums for commissions, tenant
improvements and other sublease expenses in the event it is successful in
subleasing all or any portion of the property. If the Company is not able to
sublease the property at terms consistent with those used when the Company
accrued for the loss on the sublease, it is expected to continue to have a
material adverse impact on the operations and financial condition of the
Company.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
RELIANCE ON LIMITED NUMBER OF CUSTOMERS FOR MAJORITY OF REVENUE
For the fiscal year ended June 30, 1999, the Company had three major customers,
which together accounted for approximately 71% of the Company's net sales. For
the six months ended December 31, 1999, there were four major customers who each
accounted for 10% or more of the Company's net sales, which together accounted
for 76% of the Company's net sales. The Company lost one of these major
customers, NuSkin, during the quarter ended December 31, 1999, as a customer.
The loss of any additional major customers, or any of these customers
substantially reducing their purchases from the Company, could have a material
adverse impact on the business, operations and financial condition of the
Company.
LAWSUIT BY FORMER PRESIDENT, DIRECTOR AND CHIEF FINANCIAL OFFICER
A lawsuit has been filed against the Company by its former President, Director
and Chief Financial Officer, William P. Spencer. The complaint was filed on
January 14, 2000 in the California Superior Court for the County of San Diego,
North County Branch. The complaint, which has not yet been served upon the
Company as of the date of this filing, alleges damages for wrongful termination,
breach of option contract, conversion, breach of employment contract,
discriminatory and retaliatory discharge, workplace harassment and slander. The
complaint seeks damages in an amount to be proved at trial and alleges damages
in excess of six million dollars. The former officer and director was terminated
for cause in January of 1999. Management believes the lawsuit is without merit.
The Company intends to vigorously defend itself in the event it is served with
the complaint. In the event a judgment was obtained in the amount of the damages
alleged in the complaint or any significant portion thereof, it would have a
material adverse impact upon the financial condition of the Company.
POTENTIAL FOR INCREASED COMPETITION
The market for the Company's products is highly competitive. The Company
competes with other dietary supplement products and over-the-counter
pharmaceutical manufacturers. Among other factors, competition among these
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's business,
operations and financial condition could be adversely affected. Many of the
Company's competitors, particularly manufacturers of nationally advertised brand
name products, are larger and have resources substantially greater than those of
the Company. There has also recently been speculation about the potential for
increased participation in these markets by major international pharmaceutical
companies. In the future, one or more of these companies could seek to compete
more directly with the Company by manufacturing and distributing their own or
others products, or by significantly lowering the prices of existing national
brand products. The Company sells substantially all of its supplement products
to customers who re-sell and distribute the products. Although the Company does
not currently participate significantly in other channels such as health food
stores, direct mail, internet sales and direct sales, the Company may expand its
operations and its products may face competition from such alternative channels
as more customers utilize these channels of distribution to obtain similar
products.
RELIANCE ON LIMITED NUMBER OF SUPPLIERS; AVAILABILITY AND COST OF PURCHASED
MATERIALS
The Company purchases from a limited number of raw material suppliers certain
products the Company does not manufacture. No supplier represented more than 10%
of total raw material purchases for the fiscal year ended June 30, 1999 or for
the six month period ended December 31, 1999. Although the Company currently has
supply arrangements with several suppliers of these raw materials, and such
materials are generally available from numerous sources, the termination of the
supply relationship by any material supplier or an unexpected interruption of
supply could materially adversely affect the Company's business, operations and
financial condition.
EFFECT OF ADVERSE PUBLICITY
The Company's products consist primarily of dietary supplements (vitamins,
minerals, herbs and other ingredients). The Company regards these products as
safe when taken as suggested by the Company. In
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
addition, various scientific studies have suggested the ingredients in some of
the Company's products may involve health benefits. The Company believes the
growth in the dietary supplements business of the last several years may in part
be based on material media attention and various scientific research suggesting
potential health benefits for the consumption of certain vitamin products. The
Company is indirectly dependent upon its customers' consumers' perception of the
overall integrity of its business, as well as the safety and quality of its
products and similar products distributed by other companies which may not
adhere to the same quality standards as the Company. The business, operations
and financial condition of the Company could be adversely affected if any of the
Company's products or any similar products distributed by other companies should
prove or be asserted to be harmful to consumers, or should scientific studies
provide unfavorable findings regarding the effect of products similar to those
produced by the Company.
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company, like other retailers, distributors and manufacturers of products
that are ingested, faces a risk of exposure to product liability claims in the
event that, among other things, the use of its products result in injury. The
Company maintains product liability insurance coverage, including primary
product liability and excess liability coverage. There can be no assurance
product liability insurance will continue to be available at an economically
reasonable cost or that the Company's insurance will be adequate to cover any
liability the Company incurs in respect to all possible product liability
claims.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company's growth may be dependent in part upon its ability to expand its
operations and those of its customers into new markets, including international
markets. For the fiscal year ended June 30, 1999 and six months ended December
31, 1999, the percentage of the Company's net sales by customers into
international markets were 30.8% and 31.5%, respectively. The Company also has a
manufacturing facility in Switzerland, which is designed to increase sales of
the Company's products overseas. The Company may experience difficulty entering
new international markets due to regulatory barriers, the necessity of adapting
to new regulatory systems and problems related to entering new markets with
different cultural bases and political systems. Operating in international
markets exposes the Company to certain risks, including, among other things, (1)
changes in or interpretations of foreign import, currency transfer and other
restrictions and regulations that among other things may limit the Company's
ability to sell certain products or repatriate profits to the United States, (2)
exposure to currency fluctuations, (3) the potential imposition of trade or
foreign exchange restrictions or increased tariffs, and (4) economic and
political instability. As the Company continues to expand its international
operations, these and other risks associated with international operations are
likely to increase.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by one or more federal
agencies, including the United States Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Postal Service, the
United States Environmental Protection Agency and the Occupational Safety and
Health Administration. The Company's activities are also regulated by various
agencies of the states and localities in which the Company's products are sold.
In particular, the FDA regulates the safety, labeling and distribution of
dietary supplements, including vitamins, minerals, herbs food, OTC and
prescription drugs and cosmetics. In addition, the FTC has overlapping
jurisdiction with the FDA to regulate the labeling, promotion and advertising of
vitamins, over-the-counter drugs, cosmetics and foods.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by
defining dietary supplements which include vitamins, minerals, nutritional
supplements and herbs, as a new category of food separate from conventional
food. DSHEA provides a regulatory framework to ensure safe, quality dietary
supplements and the dissemination of accurate information about such products.
Under DSHEA, the FDA is generally prohibited from regulating the active
ingredients in dietary supplements as drugs unless product claims,
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
such as claims that a product may heal, mitigate, cure or prevent an illness,
disease or malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements. DSHEA permits substantiated, truthful and non-misleading statements
of nutritional support to be made in labeling, such as statements describing
general well being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining a structure
or function of the body. The Company anticipates the FDA will finalize
manufacturing process regulations that are specific to dietary supplements and
require at least some of the quality control provisions for drugs. The Company
currently manufactures its vitamins and nutritional supplement products in
compliance with good manufacturing processes.
The FDA is developing additional regulations to implement DSHEA. Labeling
regulations may require expanded or different labeling for the Company's vitamin
and nutritional products. The Company cannot determine what effect such
regulations, when fully implemented, will have on its business in the future.
Such regulations could, among other things, require the recall, reformulation or
discontinuance of certain products, additional recordkeeping, warnings,
notification procedures and expanded documentation of the properties of certain
products or scientific substantiation regarding ingredients, product claims,
safety or efficacy. Failure to comply with applicable FDA requirements could
result in sanctions being imposed on the Company or the manufacturers of its
products, including warning letters, fines, product recalls and seizures.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into a market or prevent or
delay the introduction, or require the reformulation of, certain of the
Company's products. In addition, the Company cannot predict whether new domestic
or foreign legislation regulating its activities will be enacted. Such new
legislation could have a material adverse effect on the business, operations and
financial condition of the Company.
DISTRIBUTION AND MANAGEMENT OF OPERATIONS
In fiscal 1999, the Company leased and completed development of two additional
facilities. One new facility, comprising 74,000 square feet in Vista,
California, is used as warehousing, mixing, blending and packaging facility. The
Company also owns a Swiss subsidiary that leased and developed a 18,000 square
foot manufacturing facility in Lugano, Switzerland. During fiscal 1999, the
Company also implemented an entirely new software system to manage its materials
and manufacturing operations. While the Company believes these activities will
increase the Company's manufacturing and distribution capabilities, there can be
no assurance the expected operating improvements will be realized, or these new
facilities will result in improved sales, profit margins or earnings. A
significant, unexpected disruption of these systems and facilities could have a
material adverse effect on the Company's results of operations.
FAILURE TO ATTRACT AND RETAIN MANAGEMENT COULD HARM OUR ABILITY TO ACHIEVE
PROFITABILITY AND GAIN
We believe our success is dependent in large part upon our continued ability to
identify, hire, retain and motivate highly skilled management employees. These
types of qualified individuals are currently in great demand in the marketplace.
Competition for these employees is intense and we may not be able to hire
additional qualified personnel in a timely manner and on reasonable terms. The
majority of our Officers began their employment with the Company in late fiscal
year 1998 and 1999. The loss of any one of them could adversely affect our
ability to execute our business strategy.
CENTRALIZED LOCATION OF MANUFACTURING OPERATIONS
The Company currently manufactures the vast majority of its products at its
manufacturing facilities in San Marcos, California. Accordingly, any event
resulting in the slowdown or stoppage of the Company's manufacturing operations
or distribution facilities in San Marcos could have a material adverse effect on
the Company. The Company maintains business interruption insurance. There can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost or, if available, will be
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
adequate to cover any losses that may be incurred from an interruption in the
Company's manufacturing and distribution operations.
CONCENTRATION OF OWNERSHIP; CERTAIN ANTI-TAKEOVER CONSIDERATION
The Company's directors and executive officers beneficially own in excess of 27%
of the outstanding Common Stock as of June 30, 1999. Accordingly, these
shareholders will continue to have the ability to substantially influence the
management, policies and business operations of the Company. The Company's Board
of Directors has the authority to approve the issuance of 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the Company's shareholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. Certain provisions of Delaware
law, as well as the issuance of preferred stock, and other "anti-takeover"
provisions in the Company's Articles and Bylaws, could delay or inhibit the
removal of incumbent directors and could delay, defer, make more difficult or
prevent a merger, tender offer or proxy content, or any change in control
involving the Company, as well as the removal of management, even if such events
would be beneficial to the interests of the Company's shareholders, and may
limit the price certain investors may be willing to pay in the future for shares
of Common Stock.
RESTRICTIVE FINANCING COVENANTS.
One or more of the Company's loan agreements contain a number of covenants that
restrict the operations of the Company. Such restriction includes requiring the
Company to comply with specified financial ratios and tests, including minimum
tangible net worth requirements, maximum leverage ratios, debt coverage ratios
and minimum EBITDA to cash interest expense ratios. The Company was not in
compliance with certain of these ratios at December 31, 1999 which the financial
institution has agreed to waive through fiscal year 2000. There can be no
assurance the Company will be able to comply with such covenants or restrictions
in the future years. The Company's ability to comply with such covenants and
other restrictions may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants or restrictions could result in a default under the various loan
agreements that would permit the lenders thereunder to declare all amounts
outstanding thereunder to be immediately due and payable, together with accrued
and unpaid interest, and terminate their commitments to make further extensions
of credit thereunder.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks which arise in the normal course of
business from changes in interest rates, foreign currency exchange rates and
stock market fluctuations. At December 31, 1999, the Company maintains a portion
of its cash and cash equivalents in financial instruments with original
maturities of six months or less. These financial instruments, principally
comprised of government backed money market funds, are subject to interest rate
risk and will decline in value if interest rates increase. The Company also
maintains a short-term investment portfolio containing common stocks that are
subject to market risk. The Company has not used derivative financial
instruments in its investment portfolio and believes that its investment in
market-risk-sensitive instruments is not material. Based upon our overall
currency rate exposure at December 31, 1999, we do not believe that our exposure
to currency rate fluctuations will have a material impact on our consolidated
financial position or consolidated results of operations.
Market rate risk related to Long Term Debt is diminimus due to the fixed
interest rate and fixed payment structure of the debt.
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit has been filed against the Company by its former President, Director
and Chief Financial Officer, William P. Spencer. The complaint was filed on
January 14, 2000 in the California Superior Court for the County of San Diego,
North County Branch. The complaint, which has not yet been served upon the
Company as of the date of this filing, alleges damages for wrongful termination,
breach of option contract, conversion, breach of employment contract,
discriminatory and retaliatory discharge, workplace harassment and slander. The
complaint seeks damages in an amount to be proved at trial and alleges damages
in excess of six million dollars. The former officer and director was terminated
for cause in January of 1999. Management believes the lawsuit is without merit.
The Company intends to vigorously defend itself in the event it is served with
the complaint. In the event a judgment was obtained in the amount of the damages
alleged in the complaint or any significant portion thereof, it would have a
material adverse impact upon the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
During the six month period ending December 31, 1999, 50,000 common shares were
repurchased pursuant to the Board of Directors approved repurchase program of up
to 500,000 shares of the Company's common stock. As of December 31, 1999,
249,500 shares had been repurchased under this repurchase program.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 6, 1999, at the Company's annual meeting, the shareholders elected
each of the following three directors with the following votes:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
- ---- --------- --------------
<S> <C> <C>
Marie A. LeDoux 5,213,568 251,537
Lee G. Weldon 5,218,768 246,337
J. Scott Schmidt 5,218,738 246,307
</TABLE>
The shareholders also approved a second proposal to adopt the Omnibus Equity
Incentive Plan (the "Omnibus Plan"). The Board of Directors reserved 500,000
shares of common stock, plus an annual increase as defined, for the Omnibus
Plan. The purpose of the Omnibus Plan is to promote the interests of the Company
through awards in the form of restricted shares, stock units, options and stock
appreciation rights. This second proposal received the following votes: for
2,728,647; against 1,048,965; broker non-votes 1,622,158; and abstain 25,335. In
addition, the shareholders approved the proposal to adopt the Company's Employee
Stock Purchase Plan (the "Stock Purchase Plan"). The Board of Directors reserved
150,000 shares of common stock for the Stock Purchase Plan, plus an annual
increase as defined, to be added on the first day of the Company's fiscal year
beginning July 1, 2000. The Stock Purchase Plan provides eligible employees of
the Company with a means to purchase, through payroll deductions, shares of
Common Stock at a discount consistent with the provisions of the Internal
Revenue Code of 1986, as amended. This third proposal received the following
votes: for 3,340,994; against 484,327; and abstain 20,285. Finally, the
shareholders approved a fourth proposal to ratify the appointment of KPMG LLP as
independent auditors for the fiscal year ending June 30, 2000. This fourth
proposal received the following votes: for 5,430,897; against 19,427; and
abstain 14,781.
19
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NATURAL ALTERNATIVES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed herewith:
10.1 Operating Agreement of Custom Nutrition, LLC between FitnessAge Inc. and
Natural Alternatives International, Inc. dated December 6, 1999.
10.2 Exclusive Manufacturing Agreement between Natural Alternatives
International, Inc. and Custom Nutrition, LLC dated December 6, 1999.
10.3 Loan Agreement by and between FitnessAge, Inc. and Natural Alternatives
International, Inc. dated November 11, 1999.
10.4 First Amendment to Loan Agreement and Security Agreement by and between
FitnessAge, Inc. and Natural Alternatives International, Inc. dated
December 6, 1999.
10.5 FitnessAge, Inc. Convertible Secured Promissory Note dated November 11,
1999.
10.6 FitnessAge, Inc. Convertible Secured Promissory Note dated December 6,
1999.
10.7 Security Agreement between Natural Alternatives International, Inc. and
FitnessAge, Inc. dated November 11, 1999.
10.8 Warrant dated November 11, 1999.
10.9 Investor Rights Agreement by and among FitnessAge, Inc. and Natural
Alternatives International, Inc. dated November 11, 1999.
10.10 Executive Employment Agreement between Mark A. LeDoux and Natural
Alternatives International, Inc. beginning October 1, 1999.
10.11 Executive Employment Agreement between David Lough and Natural
Alternatives International, Inc. beginning October 1, 1999.
10.12 Executive Employment Agreement between Peter C. Wulff and Natural
Alternatives International, Inc. beginning October 25, 1999.
10.13 Executive Employment Agreement between Douglas E. Flaker and Natural
Alternatives International, Inc. beginning October 1, 1999.
10.14 Executive Employment Agreement between David K. Shunick and Natural
Alternatives International, Inc. beginning October 1, 1999.
27.0 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
PETER C. WULFF Date: February 14, 2000
- ---------------
Peter C. Wulff
Chief Financial Officer
and Treasurer
21
<PAGE> 1
EXHIBIT 10.1
OPERATING AGREEMENT
OF
CUSTOM NUTRITION, LLC
A DELAWARE LIMITED LIABILITY COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Definitions.......................................................... 1
2. The Company.......................................................... 5
3. Capital and Capital Contributions.................................... 6
4. Allocations and Distributions........................................ 8
5. Management........................................................... 13
6. Accounts and Accounting.............................................. 15
7. Membership-Meetings, Voting and Indemnity............................ 17
8. Transfers of Membership Interests.................................... 19
9. Dissolution and Winding Up........................................... 23
10. Noncompetition, Confidentiality and Intellectual Property............ 24
11. Indemnification and Arbitration...................................... 25
12. Attorney-in-Fact and Agent........................................... 27
13. General Provisions................................................... 27
</TABLE>
i
<PAGE> 3
OPERATING AGREEMENT
FOR
CUSTOM NUTRITION, LLC
This Agreement is made as effective as of the sixth day of December,
1999 by and among FitnessAge Incorporated, a Nevada corporation ("FitnessAge")
as one member, and Natural Alternatives International, Inc., a Delaware
corporation ("NAI") as the only other member. FitnessAge and NAI at times are
referred to hereafter as the "Parties." Both FitnessAge and NAI agree by
execution of this Agreement to form a limited liability company pursuant to the
provisions of this Agreement and the Delaware Limited Liability Company Act (the
"Act") (Del. Gen. Corp. Laws Ch. 18 et. seq.).
A. The Parties have formed a limited liability company under the
Delaware Limited Liability Company Act. The Parties have caused a Certificate of
Formation to be filed with the Delaware Secretary of State on November 12, 1999
and the Certificate of Formation is hereby adopted and approved by the Parties.
B. The Parties are entering into this Agreement to provide for the
governance of the limited liability company and the conduct of its business, and
to specify their relative rights and obligations.
NOW THEREFORE, the Members agree as follows:
ARTICLE I: DEFINITIONS
Capitalized terms used in this Agreement have the meanings specified in
this Article or elsewhere in this Agreement and when not so defined shall have
the meanings set forth in the Delaware General Corporations Law Chapter 18 et
seq.
1.1 "ACT" means the Delaware Limited Liability Company Act (Del. Gen.
Corp. Laws Ch. 18 et. seq.)., including amendments from time to time.
1.2 "ADJUSTED CAPITAL CONTRIBUTION" is defined in Article IV, Section
4.6(a).
1.3 "ADJUSTED CAPITAL ACCOUNT DEFICIT" is defined in Article IV, Section
4.3(a).
1.4 "AFFILIATE" of a Member means any Person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or under common
control with the Member. The term "control" (including the terms "controlled by"
and "under common control with") means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of a
Person, whether through membership, ownership of voting securities, by contract,
or otherwise.
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1.5 "AGREEMENT" means this operating agreement, as originally executed
and as amended from time to time.
1.6 "ASSIGNEE" means a person who has acquired a Member's Economic
Interest in the Company, by way of a Transfer in accordance with the terms of
this Agreement, but who has not become a Member.
1.7 "ASSIGNING MEMBER" means a Member who by means of a Transfer has
transferred an Economic Interest in the Company to an Assignee.
1.8 "AVAILABLE CASH" means all gross revenues from the Company's
operations, including gross proceeds from all sales, financings, and other
dispositions of Company property less only: (i) payments made to NAI pursuant to
the Exclusive Manufacturing Agreement of even date herewith; (ii) all amounts
paid to FitnessAge Affiliates, licensees, franchisees, distributors and dealers
as commission or other compensation specifically attributable to sales of
nutrition products purchased from and manufactured by NAI or others; and (iii)
amounts paid pursuant to the approved budget of general and administrative
expenses of the Company as shown in Exhibit "B" attached hereto and incorporated
herein by this reference.
1.9 "BOOK DEPRECIATION" is defined in Article IV, Section 4.3(b).
1.10 "BUDGET" means the annual operating budget of the Company as
provided for herein. The Budget for the current fiscal year shall constitute
Exhibit B to the Agreement and shall be deemed incorporated herein.
1.11 "CAPITAL ACCOUNT" means, with respect to any Member, the account
reflecting the capital interest of the Member in the Company, consisting of the
Member's initial Capital Contribution maintained and adjusted in accordance with
Article III, Section 3.4.
1.12 "CAPITAL CONTRIBUTION(S)" means, with respect to any Member, the
amount of the money and the Fair Market Value of any property (other than money)
contributed to the Company (net of liabilities secured by such contributed
property that the Company is considered to assume or take "subject to" under IRC
section 752) in consideration of a Percentage Interest held by such Member. A
loan to the Company from a Member or its Affiliate shall not be deemed a Capital
Contribution, and a Capital Contribution shall not be deemed a loan.
1.13 "CAPITAL EVENT" means a sale or disposition of any of the Company's
capital assets, the receipt of insurance and other proceeds derived from the
involuntary conversion of Company property, the receipt of proceeds from a
refinancing of Company property, or a similar event with respect to Company
property or capital assets.
1.14 "CERTIFICATE OF FORMATION" is defined in Corporations Law section
18-201, as applied to this Company.
2
<PAGE> 5
1.15 "CODE" or "IRC" means the Internal Revenue Code of 1986, as
amended, and any successor statutory provisions.
1.16 "COMPANY" means the company named in Article II, Section 2.1 of
this Agreement.
1.17 "COMPANY MINIMUM GAIN" is defined in Article IV, Section 4.3(c).
1.18 "CONFIDENTIAL INFORMATION" is defined in Article X, Section 10.3.
1.19 "CORPORATIONS LAW" ("CORP. LAW") means the Delaware General
Corporations Law.
1.20 "ECONOMIC INTEREST" means a Person's right to share in the income,
gains, losses, deductions, credit or similar items of, and to receive
distributions from, the Company, but does not include any other rights of a
Member, including the right to vote or to participate in management.
1.21 "ENCUMBER" means the act of creating or purporting to create an
Encumbrance, whether or not perfected under applicable law.
1.22 "ENCUMBRANCE" means, with respect to any Membership Interest, or
any element thereof, a mortgage, pledge, security interest, lien, proxy coupled
with an interest (other than as contemplated in this Agreement), option, or
preferential right to purchase.
1.23 "GENERAL MANAGER" means the Person appointed as the General Manager
by the Members as set forth in Article II or the Persons who from time to time
succeed any Person as the General Manager and who, in either case, is serving at
the relevant time as the General Manager.
1.24 "GROSS ASSET VALUE" means, with respect to any item of property of
the Company, the item's adjusted basis for federal income tax purposes, except
as follows:
(a) The initial Gross Asset Value of any item of property
contributed by a Member to the Company shall be the fair market value of such
property, as mutually agreed by the contributing Member and the Company;
(b) The Gross Asset Value of any item of Company property
distributed to any Member shall be the fair market value of such item of
property on the date of distribution; and
(c) The Gross Asset Value of any item of Company property shall
be subject to the adjustments specified in Article IV, Section 4.11.
1.25 "INCOME" and "LOSSES" are defined in Article IV, Section 4.2.
1.26 "INVOLUNTARY TRANSFER" means, with respect to any Membership
Interest, or any element thereof, any Transfer or Encumbrance, whether by
operation of law, pursuant to court order, foreclosure of a security interest,
execution of a judgment or other legal process, or otherwise,
3
<PAGE> 6
including a purported transfer to or from a trustee in bankruptcy, receiver, or
assignee for the benefit of creditors.
1.27 "LOSSES." See Article IV, Section 4.2.
1.28 "MEMBER" means a Member, including the General Manager, admitted to
the Company or a Person who otherwise acquires a Membership Interest, as
permitted under this Agreement, and who remains a Member. A list of the names,
addresses, initial Capital Contribution and Percentage Interest of the Members
is set forth at Exhibit "A" attached hereto and made a part hereof. The initial
Members are FitnessAge and NAI.
1.29 "MEMBER APPROVAL" means the approval or consent of Member or
Members whose Percentage Interests represent the Percentage Interests of all the
Members required for a given action.
1.30 "MEMBER NONRECOURSE DEBT" is defined in Article IV, Section 4.3(d).
1.31 "MEMBER NONRECOURSE DEBT MINIMUM GAIN" is defined in Article IV,
Section 4.3(e).
1.32 "MEMBER NONRECOURSE DEDUCTIONS" is defined in Article IV, Section
4.3(f).
1.33 "MEMBERSHIP INTEREST(S)" means a Member's rights in the Company,
collectively, including the Member's Economic Interest, any right to vote or
participate in management, and any right to information concerning the business
and affairs of the Company.
1.34 "NONRECOURSE DEDUCTIONS" is defined in Article IV, Section 4.3(g).
1.35 "NONRECOURSE LIABILITY" is defined in Article IV, Section 4.3(h).
1.36 "NOTICE" means a written notice required or permitted under this
Agreement. A notice shall be deemed given or sent when personally delivered to
the recipient; or on the business day following the date it was deposited, for
overnight delivery, postage and fees prepaid, in the United States mail; or when
delivered to Federal Express, United Parcel Service, DHL WorldWide Express, or
Airborne Express, for overnight delivery, charges prepaid or charged to the
sender's account.
1.37 "NUTRITIONAL PRODUCT" or "PRODUCT" means any nutrition product,
nutritional or dietary supplement or related materials, nutritional food or
other nutritional products of any description, including but not limited to
nutritional products in the form of capsules, tablets, powders, liquids, bars
and other forms and whether packaged in any and all manners.
1.38 "PERCENT OF THE MEMBERS" means the specified total of Percentage
Interests of all the Members.
1.39 "PERCENTAGE INTEREST(S)" means the percentage interest set forth
opposite the Member's name at Exhibit "A" attached hereto.
4
<PAGE> 7
1.40 "PERSON" means an individual, partnership, limited partnership,
trust, estate, association, corporation, limited liability company, or other
entity, whether domestic or foreign.
1.41 "REGULATIONS" means the income tax regulations promulgated by the
United States Department of the Treasury and published in the Federal Register
for the purpose of interpreting and applying the provisions of the Code, as such
regulations may be amended from time to time, including corresponding provisions
of applicable successor regulations.
1.42 "RESERVES" means the aggregate of reserve accounts the Members
collectively deem necessary to meet accrued or contingent liabilities of the
Company, reasonably anticipated operating expenses, and working capital
requirements.
1.43 "SUCCESSOR IN INTEREST" means an Assignee, a successor of a Person
by merger or otherwise by operation of law, or a transferee of all or
substantially all of the business or assets of a Person.
1.44 "TAX ITEM" means each item of income, gain, loss, deduction, or
credit of the Company for federal income tax reporting purposes.
1.45 "TAX MATTERS MEMBER" means such Person as may be designated under
Article VI, Section 6.6.
1.46 "TRANSFER" means, with respect to a Membership Interest or any
element of a Membership Interest, any sale, assignment, gift, Involuntary
Transfer, Encumbrance, or other disposition of such Membership Interest or any
element of such Membership Interest, directly or indirectly, other than an
Encumbrance that is expressly permitted under this Agreement.
1.47 "TRIGGERING EVENT" is defined in Article VIII, Section 8.5.
1.48 "VOTE" means a written consent or approval, a ballot cast at a
meeting, or a voice vote taken at a meeting.
1.49 "VOTING INTEREST" means, with respect to a Member, the right to
Vote or participate in management and any right to information concerning the
business and affairs of the Company provided under the Act, except as limited by
the provisions of this Agreement. A Member's Voting Interest shall be equal to
that Member's Percentage Interest.
ARTICLE II: THE COMPANY
2.1 The name of the Company is CUSTOM NUTRITION, LLC.
2.2 The principal executive office of the Company shall be at 4250
Executive Square, Suite 101, La Jolla, California 92037, or such other place or
places as may be determined by the Members from time to time.
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<PAGE> 8
2.3 The initial agent for service of process on the Company shall be the
Corporation Trust Company, whose address is the Corporation Trust Company, 1209
Orange Street, Wilmington, Delaware 19801.
2.4 This Company has been formed for the purpose of developing,
merchandising, selling and distributing nutritional and related products
designed, manufactured and produced by NAI or others for sale by the Company
throughout the world, together with such other activities as may be necessary or
advisable in connection with the purposes set forth herein. The Members
understand and acknowledge that although FitnessAge shall be subject to the
covenants set forth in Article X hereinbelow and in the License Agreement by and
between Fitness Age and the Company, FitnessAge affiliates, licensees,
distributors, sales representatives or dealers are independent contractors, and
may choose to purchase or acquire nutritional and related products from
suppliers other than the Company.
2.5 The Members intend the Company to be a limited liability company
under the Act. No Member shall take any action inconsistent with the express
intent of this Agreement.
2.6 The term of existence of the Company shall commence on the effective
date of filing of the Certificate of Formation with the Delaware Secretary of
State, and shall continue until December 31, 2009, unless sooner terminated by
the provisions of this Agreement, extended by agreement of the Members, or as
provided by law.
2.7 APPOINTMENT OF GENERAL MANAGER: The Members may by mutual consent
appoint a person to act as the General Manager of the Company at any time or
from time to time. If there is no Person acting as the General Manager at any
time the business of the Company shall be managed by the Members acting jointly.
The Members hereby appoint FitnessAge to act as the General Manager only until
January 5, 2000. Thereafter, unless a successor General Manager is appointed by
the joint act of both Members, the business of the Company shall be managed by
the Members acting jointly.
ARTICLE III: CAPITAL AND CAPITAL CONTRIBUTIONS
3.1 Each Member shall contribute to the capital of the Company as the
Member's initial Capital Contribution the amounts specified in Exhibit "A"
attached hereto.
3.2 If either Member is at any time of the opinion that Capital
Contributions in addition to the Members' initial Capital Contributions are
needed to enable the Company to conduct its business, that Member shall give
notice to the other Member that it believes such funds are needed. The Members
shall meet and confer regarding the operating budget for the Company and the
need (if any) for additional Capital Contributions. If the Members agree upon
the need for and the amount of additional Capital Contributions required each
Member shall contribute additionally required capital to the Company in cash in
an amount equal to the Member's Percentage Interest of the total additional
capital that has been agreed to. No Member may voluntarily make any additional
Capital Contribution to the Company without the consent of the other Member.
6
<PAGE> 9
3.3 If a Member fails to make an additional Capital Contribution
required under Section 3.2 above within 30 days after it is required to be made
(a "Defaulting Member"), the other member (the "Nondefaulting Member") may make
an additional Capital Contribution up to the total amount required of the
Defaulting Member (the "Additional Capital Shortfall"). Any amount of Additional
Capital Shortfall, which a Nondefaulting Member so advances on behalf of a
Defaulting Member, shall become a loan due and owing from the Defaulting Member
of such Nondefaulting Member and shall bear interest at the rate of five percent
(5%) above the then current prime rate, as most recently reported by the Western
Edition of the Wall Street Journal, or the highest rate allowed by law,
whichever is less, compounded monthly. All distributions otherwise to be made to
the Defaulting Member under this Agreement shall instead be paid on behalf of
the Defaulting Member to the Nondefaulting Member until such advances and
interest thereon are paid in full. In any event, any such advances shall be due
and payable by the Defaulting Member one (1) year from the date that such
advance was made. Any amounts repaid shall first be applied to interest and
thereafter to principal. Each Defaulting Member grants to the Nondefaulting
Member who advances funds under this Section 3.3 a security interest in its
Membership Interest to secure its obligation to repay such advances and agrees
to execute and deliver a promissory note as described herein together with a
security agreement in a form reasonably acceptable to the Nondefaulting Member
and such UCC-1 financing statements and assignments of certificates of
membership (or other documents of transfer) as the Nondefaulting Member making
such advances may reasonably request.
3.4 An individual Capital Account for each Member shall be maintained in
accordance with the requirements of Regulations Section 1.704-1(b)(2)(iv) and
adjusted in accordance with the following provisions:
(a) A Member's Capital Account shall be increased by that
Member's Capital Contributions, that Member's share of profits, and any Tax
Items in the nature of income or gain that are specially allocated to that
Member pursuant to Article IV.
(b) A Member's Capital Account shall be increased by the amount
of any Company liabilities assumed by that Member subject to and in accordance
with the provisions of Regulations Section 1.704-1(b)(2)(iv)(c).
(c) A Member's Capital Account shall be decreased by (a) the
amount of cash distributed to that Member; (b) the Fair Market Value of any
property of the Company so distributed, net of liabilities secured by such
distributed property that the distributee Member is considered to assume or to
be subject to under IRC section 752; and (c) the amount of any items in the
nature of expenses or losses that are specially allocated to that Member
pursuant to Article IV.
(d) A Member's Capital Account shall be reduced by the Member's
share of any expenditures of the Company described in IRC section 705(a)(2)(B)
or which are treated as IRC section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i) (including syndication expenses and
losses nondeductible under IRC sections 267(a)(1) or 707(b)).
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<PAGE> 10
(e) If any Economic Interest (or portion thereof) is transferred
in conformance with and not otherwise in violation of this Agreement, the
transferee of such Economic Interest or portion shall succeed to the
transferor's Capital Account attributable to such interest or portion.
(f) The principal amount of a promissory note that is not readily
traded on an established securities market and that is contributed to the
Company by the maker of the note shall not be included in the Capital Account of
any Person until the Company makes a taxable disposition of the note or until
(and to the extent) principal payments are made on the note, all in accordance
with Regulations Section 1.704-1(b)(2)(iv)(d)(2).
(g) Each Member's Capital Account shall be increased or decreased
as necessary to reflect a revaluation of the Company's property assets in
accordance with the requirements of Regulations Section 1.704-1(b)(2)(iv)(f) and
1.704-1(b)(2)(iv)(g), including the special rules under Regulations Section
1.701-1(b)(4), as applicable. The provisions of this Agreement concerning the
maintenance of Capital Accounts are intended to comply with Regulations Section
1.704-1(b) and shall be interpreted and applied in a manner consistent with
those Regulations.
3.5 A Member shall not be entitled to withdraw any part of the Member's
Capital Contribution or to receive any distributions, whether of money or
property, from the Company except as provided in this Agreement.
3.6 No interest shall be paid on Capital Contributions or on the balance
of a Member's Capital Account.
3.7 A Member shall not be bound by, or be personally liable for, the
expenses, liabilities, or obligations of the Company except as otherwise
provided in the Act or in this Agreement.
3.8 Except as otherwise expressly provided in this Agreement, no Member
shall have priority over any other Member with respect to the return of a
Capital Contribution or distributions or allocations of income, gain, losses,
deductions, credits, or items thereof.
ARTICLE IV: ALLOCATIONS AND DISTRIBUTIONS
4.1 The Income and Losses of the Company and all items of Company
income, gain, loss, deduction, or credit shall be allocated, for Company book
purposes and for tax purposes, to a Member in accordance with the Member's
Percentage Interest.
4.2 As used in this Agreement, "Income and Losses" means, for each
fiscal year or other period specified in this Agreement, an amount equal to the
Company's taxable income or loss for such year or period, determined in
accordance with IRC section 703(a), including all Tax Items required to be
stated separately pursuant to IRC section 703(a)(1), with the following
adjustments:
(a) Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Income or Losses shall be
added to such taxable income or loss;
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<PAGE> 11
(b) Any expenditures of the Company described in IRC section
705(a)(2)(B) or treated as IRC section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into account in
computing Income or Losses shall be subtracted from such taxable income or shall
increase such loss; and
(c) Notwithstanding the foregoing provisions of this Section 4.2,
any items of income, gain, loss, or deduction that are specially allocated
hereafter shall not be taken into account in computing Income or Losses under
Section 4.1.
4.3 The following definitions shall apply with respect to this Article
IV.
(a) "Adjusted Capital Account Deficit" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the relevant fiscal year of the Company, after such Member's Capital
Account has been adjusted as follows: (1) the Member's Capital Account shall be
increased by the amount of such Member's share of Company Minimum Gain and
Member Nonrecourse Debt Minimum Gain; and (2) the Member's Capital Account shall
be decreased by the amount of the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5), and (6). This definition of Adjusted Capital
Account Deficit is intended to comply with the provisions of Regulations Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently with that Regulation.
(b) "Book Depreciation" means, with respect to any item of
Company property for a given fiscal year, a percentage of depreciation or other
cost recovery deduction allowable for federal income tax purposes for such item
during that fiscal year equal to the result (expressed as a percentage) obtained
by dividing (1) the Fair Market Value of that item at the beginning of the
fiscal year (or the acquisition date during the fiscal year), by (2) the federal
adjusted tax basis of the item at the beginning of the fiscal year (or the
acquisition date during the fiscal year). If the adjusted tax basis of an item
is zero, the Members by mutual consent may determine Book Depreciation.
(c) "Company Minimum Gain" has the meaning set forth in
Regulations Section 1.704-2(d)(1).
(d) "Member Nonrecourse Debt" is defined in Regulations Section
1.704-2(b)(4).
(e) "Member Nonrecourse Debt Minimum Gain" for a fiscal year of
the Company means the net increase in Minimum Gain attributable to Member
Nonrecourse Debt, determined as set forth in Regulations Section 1.704-2(i)(2).
(f) "Member Nonrecourse Deductions" has the meaning set forth in
Regulations Section 1.704-2(i)(2). For any fiscal year of the Company, the
amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse
Debt equals the net increase during that fiscal year in Member Nonrecourse Debt
Minimum Gain attributable to such Member Nonrecourse Debt during that fiscal
year, reduced (but not below zero) by the amount of any distributions during
such year to the Member bearing the economic risk of loss for such Member
Nonrecourse Debt if such distributions are both from the proceeds of such Member
Nonrecourse Debt and are allocable to an
9
<PAGE> 12
increase in Member Nonrecourse Debt Minimum Gain attributable to such Member
Nonrecourse Debt, all as determined according to the provisions of Regulations
Section 1.704-2(i)(2). In determining Member Nonrecourse Deductions, the
ordering rules of Regulations Section 1.704-2(j) shall be followed.
(g) "Nonrecourse Deductions" has the meaning set forth in
Regulations Section 1.704-2(c). The amount of Nonrecourse Deductions for a
Company fiscal year equals the net increase in the amount of Company Minimum
Gain during that fiscal year, reduced (but not below zero) by the aggregate
amount of any distributions during that fiscal year of proceeds of a Nonrecourse
Liability that are allocable to an increase in Company Minimum Gain.
(h) "Nonrecourse Liability" is defined in Regulations Section
1.752-1(a)(2).
4.4 The following special allocations shall be made in the following
order:
(a) Company Minimum Gain Chargeback. If there is a net decrease
in Company Minimum Gain during a fiscal year, each Member shall be allocated,
before any other allocation under this Section, items of Company income and gain
for such fiscal year equal to such Member's share of the net decrease in Company
Minimum Gain as determined in accordance with Regulations Section 1.704-2(g)(2).
(b) Member Nonrecourse Debt Minimum Gain Chargeback. If there is
a net decrease in Member Nonrecourse Debt Minimum Gain during a fiscal year, any
Member with a share of the Member Nonrecourse Debt Minimum Gain attributable to
such Member Nonrecourse Debt as of the beginning of such fiscal year shall be
allocated items of Company income and gain for such year (and, if necessary,
subsequent years) equal to that Member's share of the net decrease in Member
Nonrecourse Debt Minimum Gain. A Member's share of net decrease in Member
Nonrecourse Debt Minimum Gain shall be determined pursuant to Regulations
Section 1.704-2(g)(2). A Member shall not be subject to the foregoing chargeback
to the extent permitted under Regulations Section 1.704-2(i)(4).
(c) Qualified Income Offset. If any Member unexpectedly receives
an adjustment, allocation or distribution described in Regulation sections
1.704-1(b)(2)(ii)(d)(4), (5), or (6), such Member shall be allocated items of
Company income and gain (consisting of a pro rata portion of each item of
Company income, including gross income and gain for such fiscal year) in an
amount and manner sufficient to eliminate the Adjusted Capital Account Deficit
created by such adjustment, allocation, or distribution.
4.5 Member Nonrecourse Deductions for any fiscal year of the Company
shall be allocated to the Members in the same proportion as Income is allocated
under Section 4.1, provided that any Member Nonrecourse Deductions for any
fiscal year or other period shall be allocated to the Member who bears (or is
deemed to bear) the economic risk of loss with respect to the Member Nonrecourse
Debt to which such Member Nonrecourse Deductions are attributable in accordance
with Regulations Section 1.704-2(i)(2).
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4.6 In any fiscal year of the Company, Income in excess of Losses of the
Company resulting from a Capital Event in that Fiscal Year shall be allocated to
the Members in the following order:
(a) To Members whose Adjusted Capital Contributions are in excess
of their Capital Accounts, in proportion to those excesses, until all of those
excesses have been eliminated. "Adjusted Capital Contributions" means, with
respect to each Member, the excess of such Member's contribution to the capital
of the Company over all prior distributions to the Member that have resulted
from Capital Events.
(b) Among the Members in the proportion that the Capital
Contribution of each Member bears to the total Capital Contributions of all
Members.
4.7 In any fiscal year of the Company, Losses in excess of Income of the
Company, resulting from a Capital Event in that fiscal year, shall be allocated
to the Members with positive Capital Accounts, in proportion to their positive
Capital Account balances, until no Member has a positive Capital Account. For
this purpose, Capital Accounts shall be reduced by the adjustments set forth in
Regulation sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6).
4.8 Any unrealized appreciation or unrealized depreciation in the values
of Company property distributed in kind to Members shall be deemed to be Income
or Losses realized by the Company immediately prior to the distribution of the
property and such Income or Losses shall be allocated to the Capital Accounts in
the same proportions as Income are allocated under Section 4.1. Any property so
distributed shall be treated as a distribution to the Members to the extent of
the Fair Market Value of the property, less the amount of any liability secured
by and related to the property. Nothing contained in this Agreement is intended
to treat or cause such distributions to be treated as sales for value. For the
purposes of this Section 4.8, "unrealized appreciation" or "unrealized
depreciation" shall mean the difference between the Fair Market Value of such
property and the Company's federal adjusted tax basis for such property.
4.9 Any item of income, gain, loss, or deduction with respect to any
property (other than cash) that has been contributed by a Member to the capital
of the Company, or that has been revalued pursuant to the provisions of Article
III, Section 3.4(g), and that is required or permitted to be allocated to such
Member for income tax purposes under IRC section 704(c) in order to take into
account the variation between the tax basis of such property and its Fair Market
Value at the time of its contribution, shall be allocated solely for income tax
purposes in the manner required or permitted under IRC section 704(c) using the
"traditional" method described in Regulations Section 1.704-3(b), except that
any other method allowable under applicable Regulations may be used for any
contribution of property with respect to which there is agreement among the
contributing Member and the other Member.
4.10 In the case of a Transfer of an Economic Interest during any fiscal
year of the Company, the Assigning Member and Assignee shall each be allocated
Income or Losses based on the number of days each held the Economic Interest
during that fiscal year. If the Assigning Member and Assignee agree to a
different proration and advise the General Manager (or if there is
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no General Manager, advise all the Members) of the agreed proration before the
date of the Transfer and the Transfer is made in conformance with and not
contrary to any provision of this Agreement, then Income or Losses from a
Capital Event during that fiscal year shall be allocated to the holder of the
Interest on the day such Capital Event occurred. If an Assignee makes a
subsequent Assignment, said Assignee shall be considered an "Assigning Member"
with respect to the subsequent Assignee for purposes of the aforesaid
allocations.
4.11 (a) The Gross Asset Value of all Company property shall be adjusted
as of the following times: (1) the acquisition of an interest or additional
interest in the Company by any new or existing Member in exchange for more than
a de minimis Capital Contribution; (2) the distribution of money or other
property (other than a de minimis amount) by the Company to a Member as
consideration for an Economic Interest in the Company, and (3) the liquidation
of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g);
provided, however, that adjustments under clauses (1) and (2) above shall be
made only in the event of a revaluation of Company property under Article III,
Section 3.4(g) in accordance with Regulations Section 1.704- 1(b)(2)(iv)(f);
(b) The Gross Asset Value of Company property shall be increased
or decreased to reflect adjustments to the adjusted tax basis of such property
pursuant to IRC section 732, IRC section 733, or IRC section 743, subject to the
limitations imposed by IRC section 755 and Regulations Section
1.704-1(b)(2)(iv)(m); and
(c) If the Gross Asset Value of an item of property has been
determined or adjusted pursuant to Article I, Section 1.22 or Paragraph (a) or
(b) of this Section 4.11, such Gross Asset Value shall be adjusted by the Book
Depreciation, if any, taken into account with respect to such property for
purposes of computing Income and Losses.
4.12 It is the intent of the Members that each Member's allocated share
of Company Tax Items be determined in accordance with this Agreement to the
fullest extent permitted by IRC sections 704(b) and 704(c). Notwithstanding
anything to the contrary contained in this Agreement, if the Company is advised
that, as a result of the adoption of new or amended regulations pursuant to IRC
sections 704(b) and 704(c), or the issuance of authorized interpretations, the
allocations provided in this Agreement are unlikely to be respected for federal
income tax purposes, the General Manager (or if there is no General Manager the
Members' by mutual determination) are granted the power to amend the allocation
provisions of this Agreement, on advice of accountants and legal counsel, to the
minimum extent necessary to cause such allocation provisions to be respected for
federal income tax purposes.
4.13 All Available Cash, including revenues or proceeds from a Capital
Event or the dissolution of the Company, shall be distributed among the Members
in proportion to the Members' Percentage Interest. The parties intend that
Available Cash shall be distributed as soon as practicable following the General
Manager's determination (or if there is no General Manager the Members' mutual
determination) that such cash is available for distribution. The parties
acknowledge no assurances can be given with respect to when or whether said cash
will be available for distribution to the Members.
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4.14 If the proceeds from a sale or other disposition of an item of
Company property consist of property other than cash, the value of that property
shall be as determined by the agreement of the Members. If such noncash proceeds
are subsequently reduced to cash, such cash shall be taken into account by the
General Manager (or if there is no General Manager by the Members' mutual
determination) in determining Available Cash.
4.15 Notwithstanding any other provisions of this Agreement to the
contrary, when there is a distribution in liquidation of the Company, or when
any Member's interest is liquidated, all items of income and loss first shall be
allocated to the Members' Capital Accounts under this Article IV, and other
credits and deductions to the Members' Capital Accounts shall be made before the
final distribution is made. The final distribution to the Members shall be made
as provided in Article IX, Section 9.2(e) of this Agreement. The provisions of
this Section 4.15 and Article IX, Section 9.2(e) shall be construed in
accordance with the requirements of Regulations Section 1.704-1(b)(2)(ii)(b)(2).
ARTICLE V: MANAGEMENT
5.1 The business of the Company shall be managed by the General Manager
(or if there is no General Manager by the Members' acting jointly) or any
successors, selected as provided in Section 5.2. Except as otherwise provided in
this Agreement, all decisions concerning the management of the Company's
business shall be made by the General Manager, who shall have all power and
authority to act on behalf of the Company and manage its business (or if there
is no General Manager such decisions shall be made by the Members' mutual
determination) .
5.2 The General Manager (or if there is no General Manager by the
Members' mutual determination) shall serve until the earlier of: (1) the term of
the General Manager's appointment set by the Members mutual determination at any
time; (2) the General Manager's resignation, retirement, death, dissolution,
bankruptcy or disability; or (3) the General Manager's removal by the Members. A
substitute General Manager may be appointed by the unanimous approval of the
Members on the occurrence of any of the foregoing events.
5.3 A General Manager may be removed with or without cause at any time
by action of Members holding at least 67% of Membership Interests.
5.4 The General Manager shall not take any of the following actions on
behalf of the Company without the consent of all of the Members.
(a) The imposition of additional Capital Contributions on the
Members;
(b) Any action that would exceed the Budget or any line item in
the Budget by more than fifteen percent (15%);
(c) Develop or sell any new or materially modified Nutritional
Product;
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(d) Any act that would make it impossible to carry on the
ordinary business of the Company;
(e) Any confession of a judgment against the Company;
(f) The dissolution of the Company except as provided for herein;
(g) The disposition of all or a substantial part of the Company's
assets not in the ordinary course of business;
(h) The transfer of an Economic Interest or a Membership Interest
and the admission of an Assignee as a Member of the Company;
(i) The entering into, on behalf of the Company, of any
transaction constituting a reorganization;
(j) Change the Company's auditor; and
(i) Make any amendment of the Certificate of Formation or this
Agreement.
5.5 The General Manager will be entitled to such compensation for acting
as the General Manager as the Members may mutually determine.
5.6 The General Manager shall be reimbursed for all expenses reasonably
incurred by him/her in connection with his/her management duties, provided that
such expense would qualify pursuant to the Code as an item of deduction from
gross revenue of the Company in computing the Company's taxable income, if such
expense were incurred directly by the Company.
5.7 The General Manager shall cause all assets of the Company, whether
real or personal, to be held in the name of the Company.
5.8 All funds of the Company shall be deposited in one or more accounts
with one or more recognized financial institutions in the name of the Company,
at such locations located in the United States as shall be mutually determined
by the Members. Withdrawal from such accounts shall require only the signature
of the General Manager or such other person or persons as the Members may
mutually designate.
5.9 Prior to the execution of this Agreement, and at least sixty (60)
days prior to the end of each fiscal year of the Company, the Members shall meet
and confer to develop, document and approve a detailed operating Budget for the
Company for the remainder of the initial fiscal year and the next succeeding
fiscal year of the Company. The Members may meet and confer and approve
modifications to the Budget from time to time in their respective discretion.
The General Manager shall operate the Company in accordance with the Budget for
the fiscal year.
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The approved Budget for the current fiscal year shall constitute
Exhibit B to this Agreement and shall be incorporated herein without further
action.
ARTICLE VI: ACCOUNTS AND ACCOUNTING
6.1 Complete books of account of the Company's business, in which each
Company transaction shall be fully and accurately entered, shall be kept at the
Company's principal executive office and at such other locations as the Members
may mutually determine from time to time and shall be open to inspection and
copying on reasonable Notice by any Member or the Member's authorized
representatives during normal business hours. The costs of such inspection and
copying shall be borne by the Member.
6.2 Financial books and records of the Company shall be kept on the
accrual method of accounting, which shall be the method of accounting followed
by the Company for federal income tax purposes. The financial statements of the
Company shall be prepared in accordance with generally accepted accounting
principles and shall be appropriate and adequate for the Company's business and
for carrying out the provisions of this Agreement. The fiscal year of the
Company shall be January 1 through December 31.
6.3 At all times during the term of existence of the Company, and beyond
that term if the Members deem it necessary, the General Manager (or if there is
no General Manager the Members) shall keep or cause to be kept the books of
account referred to in Section 6.2, together with:
(a) A current list of the full name and last known business or
residence address of each Member, together with the Capital Contribution and the
share in Income and Losses of each Member;
(b) A current list of the full name and business or residence
address of the General Manager;
(c) A copy of the Certificate of Formation, as amended;
(d) Copies of the Company's federal, state, and local income tax
or information returns and reports, if any, for the six most recent taxable
years;
(e) An original executed copy or counterparts of this Agreement,
as amended;
(f) Any powers of attorney under which the Certificate of
Formation or any amendments to said articles were executed;
(g) Financial statements of the Company for the six most recent
fiscal years;
(h) The books and Records of the Company as they relate to the
Company's internal affairs for the current and past four fiscal years; and
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(i) The Approved Budget for the current fiscal year as amended to
date, and each Approved Budget and approved amended budget for the previous four
(4) fiscal years.
If the General Manager deems (or if there is no General Manager the
Members' mutual determine) that any of the foregoing items shall be kept beyond
the term of existence of the Company, the repository of said items shall be as
designated by the General Manager (or if there is no General Manager by the
Members' mutual determination).
6.4 At the end of each fiscal year the books of the Company shall be
closed and examined and statements reflecting the financial condition of the
Company and its Income or Losses shall be prepared, and an audit report thereon
shall be issued by the Company's auditor who shall be one of the ten largest
international firms of certified public accountants. The initial auditor for the
Company shall be Ernst & Young. Copies of the financial statements shall be
given to all Members. In addition, all Members shall receive not less frequently
than 30 days after the end of each month, copies of such financial statements
regarding the previous month, as may be prepared in the ordinary course of
business, by the General Manager or accountants selected by the General Manager
(or if there is no General Manager by the Members' mutual determination) . The
General Manager shall deliver to each Member, within 75 days after the end of
the fiscal year of the Company, an audited financial statement that shall
include:
(a) A balance sheet and income statement, and a statement of
changes in the financial position of the Company as of the close of the fiscal
year;
(b) A statement showing the Capital Account of each Member as of
the close of the fiscal year and the distributions, if any, made to each Member
during the fiscal year.
6.5 Within 75 days after the end of each taxable year of the Company the
General Manager shall send to each of the Members all information necessary for
the Members to complete their federal and state income tax or information
returns and a copy of the Company's federal, state, and local income tax or
information returns for such year.
6.6 FitnessAge shall act as Tax Matters Member ("Partner") of the
Company pursuant to IRC section 6231(a)(7).
6.7 The Tax Matters Member ("Partner") is hereby authorized to do the
following:
(a) Keep the Members informed of administrative and judicial
proceedings for the adjustment of Company items (as defined in IRC section
6231(a)(3)) at the Company level, as required under IRC section 6223(g) and the
implementing Regulations;
(b) Enter into settlement agreements under IRC section 6224(c)(3)
and applicable Regulations with the Internal Revenue Service or the Secretary of
the Treasury (the Secretary) with respect to any tax audit or judicial review,
in which agreement the Tax Matters Member may expressly state that such
agreement shall bind the other Members, except that such settlement agreement
shall not bind any Member who (within the time prescribed under the Code and
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Regulations) files a statement with the Secretary providing that the Tax Matters
Member shall not have the authority to enter into a settlement agreement on
behalf of such Member;
(c) On receipt of a notice of a final Company administrative
adjustment, to file a petition for readjustment of the Company items with the
Tax Court, the District Court of the United States for the district in which the
Company's principal place of business is located, or the United States Court of
Federal Claims, all as contemplated under IRC section 6226(a) and applicable
Regulations;
(d) File requests for administrative adjustment of Company items
on Company tax returns under IRC section 6227(b) and applicable Regulations;
and, to the extent such requests are not allowed in full, file a petition for
adjustment with the Tax Court, the District Court of the United States for the
district in which the Company's principal place of business is located, or the
United States Court of Federal Claims, all as contemplated under IRC section
6228(a); and
(e) To take any other action on behalf of the Members or the
Company in connection with any administrative or judicial tax proceeding to the
extent permitted by law or regulations, including retaining tax advisers (at the
expense of the Company) to whom the Tax Matters Member may delegate such rights
and duties as deemed necessary and appropriate.
ARTICLE VII: MEMBERSHIP MEETINGS,
VOTING AND INDEMNITY
7.1 There shall be only one class of membership and no Member shall have
any rights or preferences in addition to or different from those possessed by
any other Member. Members shall agree on matters with respect to which this
Agreement or the Act requires or permits Member Approval. Each Member shall Vote
in proportion to the Member's Percentage Interest as of the governing record
date, determined in accordance with Section 7.2. If a Member with the consent of
the other Member(s) has assigned all or part of the Member's Economic Interest
to a person who has not been admitted as a Member, the Assigning Member shall
Vote in proportion to the Percentage Interest that the Assigning Member would
have had, if the assignment had not been made.
7.2 The record date for determining the Members entitled to receive
Notice of any meeting, to Vote, to receive any distribution, or to exercise any
right in respect of any other lawful action, shall be the date set by the
General Manager (or if there is no General Manager by the Members' mutual
determination), provided that such record date shall not be more than 60, or
less than ten calendar days prior to the date of the meeting and not more than
60 calendar days prior to any other action.
7.3 Meetings of the Members may be called at any time by the General
Manager, or by Members representing more than 30% of the Membership Interests
for the purpose of addressing any matters on which the Members may Vote. If a
meeting of the Members is called by the Members, Notice of the call shall be
delivered to the General Manager. Meetings may be held at the principal
executive office of the Company or at such other location as may be designated
by the General
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Manager. Following the call of a meeting, the General Manager shall give Notice
of the meeting not less than ten, or more than 60 calendar days prior to the
date of the meeting to all Members entitled to Vote at the meeting. The Notice
shall state the place, date, and hour of the meeting and the general nature of
business to be transacted. No other business may be transacted at the meeting. A
quorum at any meeting of Members shall consist of no less than 67% of the
Percentage Interests of all Members, represented in person or by Proxy. The
Members present at a duly called or held meeting at which a quorum is present
may continue to transact business until adjournment, notwithstanding the
withdrawal of a sufficient number of Members to leave less than a quorum, if the
action taken, other than adjournment, is approved by the requisite percentage of
Membership Interests as specified in this Agreement or if not specified in this
Agreement as specified in the Act.
7.4 A meeting of Members at which a quorum is present may be adjourned
to another time or place and any business which might have been transacted at
the original meeting may be transacted at the adjourned meeting. If a quorum is
not present at an original meeting, that meeting may be adjourned by the Vote of
a majority of Membership Interests represented either in person or by proxy.
Notice of the adjourned meeting need not be given to Members entitled to Notice
if the time and place of the adjourned meeting are announced at the meeting at
which the adjournment is taken, unless (a) the adjournment is for more than 45
days, or (b) after the adjournment, a new record date is fixed for the adjourned
meeting. In the situations described in clauses (a) and (b), Notice of the
adjourned meeting shall be given to each Member of record entitled to Vote at
the adjourned meeting.
7.5 The transactions of any meeting of Members, however called and
noticed, and wherever held, shall be as valid as though consummated at a meeting
duly held after regular call and notice, if (a) a quorum is present at that
meeting, either in person or by Proxy, and (b) either before or after the
meeting, each of the persons entitled to Vote, not present in person or by
Proxy, signs either a written waiver of notice, a consent to the holding of the
meeting, or an approval of the minutes of the meeting. Attendance of a Member at
a meeting shall constitute waiver of notice, unless that Member objects, at the
beginning of the meeting, to the transaction of any business on the ground that
the meeting was not lawfully called or convened. Attendance at a meeting is not
a waiver of any right to object to the consideration of matters required to be
described in the notice of the meeting and not so included, if the objection is
expressly made at the meeting.
7.6 At all meetings of Members, a Member may Vote in person or by Proxy.
Such Proxy shall be filed with the General Manager (or if there is no General
Manager with each Member) before or at the time of the meeting, and may be filed
by facsimile transmission to the General Manager at the principal executive
office of the Company at their principal place of business (or if there is no
General Manager to each Member) or such other address as may be given by the
General Manager to the Members for such purposes.
7.7 Members may participate in a meeting through use of conference
telephone or similar communications equipment, provided that all Members
participating in such meeting can hear one another. Such participation shall be
deemed attendance at the meeting.
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7.8 Any action that may be taken at any meeting of the Members may be
taken without a meeting if a consent in writing, setting forth the action so
taken, is signed by Members holding at least the required percentage of the
Membership Interests that would be required for such action if taken at a
meeting of the Members. If the Members are requested to consent to a matter
without a meeting, each Member shall be given notice of the matter to be voted
upon in the manner described in Section 7.4.
7.9 No Member acting solely in the capacity of a Member is an agent of
the Company, nor can any Member acting solely in the capacity of a Member bind
the Company or execute any instrument on behalf of the Company. Accordingly,
each Member shall indemnify, defend, and save harmless each other Member and the
Company from and against any and all loss, cost, expense, liability or damage
arising from or out of any claim based upon any action by such Member in
contravention of the first sentence of this Section 7.9.
ARTICLE VIII: TRANSFERS OF MEMBERSHIP INTERESTS
8.1 A Member may not withdraw from the Company without the written
consents of the remaining Members. Withdrawal shall not release a Member from
any obligations and liabilities under this Agreement accrued or incurred prior
to the effective date of withdrawal. A withdrawing Member shall have only the
rights of a holder of an Economic Interest in the Company in respect of the
Member's Membership Interest in the Company. Unless all remaining Members
consent to such withdrawal, the withdrawing Member shall not be entitled to a
distribution of its Economic Interest until the dissolution and liquidation of
the Company. For purposes of this Section 8.1, the term "Economic Interest"
shall not mean or include any right to share in the income, gains, losses,
deductions, credits, or similar items of the Company attributable to any period
following withdrawal, or any right to information concerning the business and
affairs of the Company.
8.2 In the event that FitnessAge is acquired through a sale of its
shares or substantially all of its assets to another person or entity (the
"Acquiring Entity"), NAI shall have the right to put its percentage interest in
the Company to FitnessAge. The purchase price for NAI's interest shall be based
on that amount that the Acquiring Entity is paying to FitnessAge for its
interest in the Company. If an Acquiring Entity acquires FitnessAge, FitnessAge
shall notify NAI of such acquisition. Thereafter, NAI shall have thirty (30)
days to inform FitnessAge whether it elects to retain its interest in the
Company or to sell such interest to FitnessAge. If NAI and FitnessAge cannot
agree upon an appropriate price for NAI's interest in the Company, the matter
shall be resolved through dispute resolution as provided for in Section 11.2
below.
8.3 Except as expressly provided for in this Agreement, a Member shall
not transfer any part of the Member's Membership Interest in the Company,
whether now owned or later acquired, unless (a) the other Members unanimously
approve the transfer, and the transferee's admission to the Company as a Member
upon such Transfer and (b) the Membership Interest to be transferred, when added
to the total of all other Membership Interests transferred in the preceding 12
months, will not cause the termination of the Company under the Code. No Member
may Encumber or permit or suffer any Encumbrance of all or any part of the
Member's Membership Interest in the Company unless such Encumbrance has been
approved in writing by all Members. Any Transfer
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or Encumbrance of a Membership Interest without such approval shall be void.
Notwithstanding any other provision of this Agreement to the contrary, a Member
who is a natural person may transfer all or any portion of his or her Membership
Interest to any revocable trust created for the benefit of the Member, or any
combination between or among the Member, the Member's spouse, and the Member's
issue; provided that the Member retains a beneficial interest in the trust and
all of the Voting Interest included in such Membership Interest. A Transfer of
an individual Member's beneficial interest in such trust, or failure to retain
such Voting Interest, shall be deemed a Transfer of a Membership Interest. No
transfer of the stock or equity interest of the Member shall constitute a
transfer of the Member's Membership Interest in the Company.
8.4 Subject to the conditions set forth in Sections 8.2 and 8.3, if a
Member wishes to transfer any or all of the Member's Membership Interest in the
Company pursuant to a Bona Fide Offer (as defined below), the Member shall give
Notice to all other Members at least 30 days in advance of the proposed sale or
Transfer, indicating the terms of the Bona Fide Offer and the identity of the
offeror. The Company and the other Members shall have the option to purchase the
Membership Interest proposed to be transferred at the price and on the terms
provided in this Agreement. If the price for the Membership Interest is other
than cash, the fair value in dollars of the price shall be as established in
good faith by the Company. For purposes of this Agreement, "Bona Fide Offer"
means an offer in writing setting forth all relevant terms and conditions of
purchase from an offeror who is ready, willing, and able to consummate the
purchase and who is not an Affiliate of the selling Member. For 30 days after
the Notice is given, the Company shall have the right to purchase the Membership
Interest offered, on the terms stated in the Notice, for the lesser of (a) the
price stated in the Notice (or the price plus the dollar value of noncash
consideration, as the case may be) and (b) the price determined under the
appraisal procedures set forth in Section 8.8.
If the Company does not exercise the right to purchase all of the
Membership Interest, then, with respect to the portion of the Membership
Interest that the Company does not elect to purchase, that right shall be given
to the other Members for an additional 30-day period, beginning on the day that
the Company's right to purchase expires. Each of the other Members shall have
the right to purchase, on the same terms, a part of the interest of the offering
Member in the proportion that the Member's Percentage Interest bears to the
total Percentage Interests of all of the Members who choose to participate in
the purchase; provided, however, that the Company and the participating Members
may not, in the aggregate, purchase less than the entire interest to be sold by
the offering Member.
If the Company and the other Members do not exercise their rights to
purchase all of the Membership Interest, the offering Member may, within 90 days
from the date the Notice is given and on the terms and conditions stated in the
Notice, sell or exchange that Membership Interest to the offeror named in the
Notice on the terms set forth therein. Unless the requirements of Section 8.3
are met, the offeror under this section shall become an Assignee, and shall be
entitled to receive only the share of Income or other compensation by way of
income and the return of Capital Contribution to which the assigning Member
would have been entitled.
Any transfer of a Membership Interest when added to the total of all
other Membership Interests transferred in the preceding 12 months shall be void
ab initio.
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8.5 On the happening of any of the following events ("Triggering
Events") with respect to a Member, the Company and the other Members shall have
the option to purchase the Membership Interest in the Company of such Member
(Selling Member) at the price and on the terms provided in Section 8.8 of this
Agreement:
(a) The death, bankruptcy, or withdrawal of a Member, or the
winding up and dissolution of a corporate Member.
(b) The failure of a Member to make the Member's Capital
Contribution pursuant to the provisions of Article III of this Agreement.
(c) The occurrence of any other event that is, or that would
cause, a Transfer in contravention of this Agreement.
Each Member agrees to promptly give Notice of a Triggering Event to all
other Members.
8.6 On the receipt of Notice by the General Manager or another Member as
contemplated by Sections 8.1 and 8.4, and on receipt of actual notice of any
Triggering Event as determined in good faith by the General Manager (or if there
is no General Manager by the Members' mutual determination) (the date of such
receipt is hereinafter referred to as the "Option Date"), the General Manager
(or if there is no General Manager, the Member providing the notice) shall
promptly cause a Notice of the occurrence of such a Triggering Event to be sent
to all Members, and the Company shall have the option, for a period ending 30
calendar days following the determination of the purchase price as provided in
Section 8.8, to purchase the Membership Interest in the Company to which the
option relates, at the price and on the terms set forth in Section 8.8 of this
Agreement, and the other Members, pro rata in accordance with their prior
Membership Interests in the Company, shall then have the option, for a period of
30 days thereafter, to purchase the Membership Interest in the Company not
purchased by the Company, on the same terms and conditions as apply to the
Company. If all other Members do not elect to purchase the entire remaining
Membership Interest in the Company, then the Members electing to purchase shall
have the right, pro rata in accordance with their prior Membership Interest in
the Company, to purchase the additional Membership Interest in the Company
available for purchase. The transferee of the Membership Interest in the Company
that is not purchased shall hold such Membership Interest in the Company subject
to all of the provisions of this Agreement.
8.7 Neither the Member whose interest is subject to purchase under this
Article, nor such Member's Affiliate, shall participate in any Vote or
discussion of any matter pertaining to the disposition of the Member's
Membership Interest in the Company under this Agreement.
8.8 The purchase price of the Membership Interest that is the subject of
an option under Section 8.6 shall be the "Fair Option Price" of the interest as
determined under this Section 8.8. "Fair Option Price" means the cash price that
a willing buyer would pay to a willing seller when neither is acting under
compulsion and when both have reasonable knowledge of the relevant facts on the
Option Date. Each of the selling and purchasing parties shall use his, her, or
its best efforts to
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mutually agree upon the Fair Option Price. If the parties are unable to so agree
within 30 days of the Option Date, the selling party shall appoint, within 40
days of the Option Date, one appraiser, and the purchasing party shall appoint
within 40 days of the Option Date, one appraiser. The two appraisers shall
within a period of five additional days, agree upon and appoint an additional
appraiser. The three appraisers shall, within 60 days after the appointment of
the third appraiser, determine the Fair Option Price of the Membership Interest
in writing and submit their report to all the parties.
The Fair Option Price shall be determined by disregarding the
appraiser's valuation that diverges the greatest from each of the other two
appraisers' valuations, and the arithmetic mean of the remaining two appraisers'
valuations shall be the Fair Option Price. Each purchasing party shall pay for
the services of the appraiser selected by it, plus one half of the fee charged
by the third appraiser, and one half of all other costs relating to the
determination of Fair Option Price. The Fair Option Price as so determined shall
be payable in cash.
8.9 Except as expressly permitted under Section 8.3, a prospective
transferee (other than an existing Member) of a Membership Interest may be
admitted as a Member with respect to such Membership Interest (Substituted
Member) only (a) on the unanimous Vote of the other Members in favor of the
prospective transferee's admission as a Member, and (b) on such prospective
transferee executing a counterpart of this Agreement as a party hereto. Any
prospective transferee of a Membership Interest shall be deemed an Assignee,
and, therefore, the owner of only an Economic Interest until such prospective
transferee has been admitted as a Substituted Member. Except as otherwise
permitted in the Act, any such Assignee shall be entitled only to receive
allocations and distributions under this Agreement with respect to such
Membership Interest and shall have no right to Vote or exercise any rights of a
Member until such Assignee has been admitted as a Substituted Member. Until the
Assignee becomes a Substituted Member, the Assigning Member will continue to be
a Member and to have the power to exercise any rights and powers of a Member
under this Agreement, including the right to Vote in proportion to the
Percentage Interest that the Assigning Member would have had in the event that
the assignment had not been made.
8.10 Any person admitted to the Company as a Substituted Member shall be
subject to all the provisions of this Agreement that apply to the Member from
whom the Membership Interest was assigned, provided, however, that the assigning
Member shall not be released from liabilities as a Member solely as a result of
the assignment, both with respect to obligations to the Company and to third
parties, incurred prior to the assignment.
8.11 The initial sale of Membership Interests in the Company to the
Initial Members has not been qualified or registered under the securities laws
of any state, including California, or registered under the Securities Act of
1933, in reliance upon exemptions from the registration provisions of those
laws. Notwithstanding any other provision of this Agreement, Membership
Interests may not be Transferred unless registered or qualified under applicable
state and federal securities law unless, in the opinion of legal counsel
satisfactory to the Company, such qualification or registration is not required.
The Member who desires to transfer a Membership Interest shall be responsible
for all legal fees incurred in connection with said opinion.
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<PAGE> 25
ARTICLE IX: DISSOLUTION AND WINDING UP
9.1 The Company shall be dissolved upon the first to occur of the
following events:
(a) The death, bankruptcy, retirement, resignation, expulsion, or
dissolution of a Member, provided, however, that the remaining Members may by
the Vote of all of the remaining Members, within 60 days of the happening of
that event Vote to continue the business of the Company, in which case, the
Company shall not dissolve. If the remaining Members fail to so Vote, the
remaining Members shall wind up the Company. For purposes of this Paragraph (a),
in determining the outcome of the Vote of Members, the Percentage Interest of
the Member who has died, become bankrupt, retired, resigned, been expelled, or
dissolved shall not be taken into account.
(b) The expiration of the term of existence of the Company.
(c) The written agreement of Members holding more than 67% of the
Membership Interest to dissolve the Company.
(d) The sale or other disposition of substantially all of the
Company's assets.
(e) Entry of a decree of judicial dissolution under Corporations
Law section 18-802.
(f) At the discretion of the non-breaching Members, following the
material breach of any term of this Agreement or the Exclusive Manufacturing
Agreement of even date herewith. Dissolution under this Section 9.1, Paragraph
(f) shall occur if agreed to by Members holding at least 51% of Membership
Interests, not counting the Membership Interest of the Member in breach. Any
dispute as to the occurrence of a material breach by a Member shall be resolved
pursuant to section 11.2 hereinbelow.
(g) The Company ceases to purchase at least 50% of all
encapsulated and tableted Products from NAI pursuant to the terms and conditions
of the Exclusive Manufacturing Agreement.
9.2 On the dissolution of the Company, the Company shall engage in no
further business other than that necessary to wind up the business and affairs
of the Company. The General Manager or, if there is no General Manager, the
Members, shall wind up the affairs of the Company. The Persons winding up the
affairs of the Company shall give Notice of the commencement of winding up by
mail to all known creditors and claimants against the Company whose addresses
appear in the records of the Company. After paying or adequately providing for
the payment of all known debts of the Company (except debts owing to Members),
the remaining assets of the Company shall be distributed or applied in the
following order:
(a) To pay the expenses of liquidation.
(b) To the establishment of reasonable reserves for contingent
liabilities or obligations of the Company. Upon the General Manager's or
Member's determination that such reserves are no longer necessary, said reserves
shall be distributed as provided in this Section 9.2.
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<PAGE> 26
(c) To repay outstanding loans from Members to the Company. If
there are insufficient funds to pay such loans in full, each Member shall be
repaid in the ratio that the Member's loan, together with interest accrued and
unpaid thereon, bears to the total of all such loans from Members, including all
interest accrued and unpaid thereon. Such repayment shall first be credited to
unpaid principal and the remainder shall be credited to accrued and unpaid
interest.
(d) Among the Members as provided in Article IV, Section 4.6 and
then to Members with Positive Capital Account Balances until such Capital
Accounts equal zero.
(e) Thereafter, to Members according to their Percentage
Interests.
9.3 Each Member shall look solely to the assets of the Company for the
return of the Member's investment, and if the Company property remaining after
the payment or discharge of the debts and liabilities of the Company is
insufficient to return the investment of each Member, such Member shall have no
recourse against any other Members for indemnification, contribution, or
reimbursement, except as specifically provided in this Agreement, the License
Agreement by and between FitnessAge and the Company ("License Agreement"), and
the Exclusive Manufacturing Agreement by and between NAI and the Company.
ARTICLE X: NONCOMPETITION,
CONFIDENTIALITY AND INTELLECTUAL PROPERTY
10.1 During the term of Company's existence, each Member hereby
covenants with the Company and each other Member that the Member will not
directly or indirectly, through one or more affiliates or otherwise, engage in
any business or transaction which competes with the Company in its sale of
custom nutritional supplement products in the health club and fitness
environment except as may be provided for in the License Agreement by and
between Fitness Age and the Company. There shall be no restrictions or
limitations on the business activities of the Members beyond the limited scope
set forth in this Section 10.1.
10.2 "Confidential Information" means all trade secrets, "know-how,"
customer lists, pricing policies, operational methods, fitness or other
programs, computer software and hardware codes and configurations, and other
business information of the Company or any Member which is created, developed,
produced, or otherwise arises at any time.
10.3 Each Member hereby stipulates that a breach of the provisions of
this Article X will result in irreparable damage and injury to the Company for
which no money damages could adequately compensate it. If the Member breaches
the provisions of this Agreement, in addition to all other remedies to which the
Company may be entitled, and notwithstanding the provisions of Article XI,
Section 11.2, the Company shall be entitled to an injunction to enforce the
provisions of this Agreement, to be issued by any court of competent
jurisdiction, to enjoin and restrain the Member and each and every Person
concerned or acting in concert with the Member from the continuance of such
breach. Each Member expressly waives any claim or defense that an adequate
remedy at law might exist for any such breach. Each Member expressly agrees that
the terms of this Section 10.3, and the remedies provided for herein, are
equally exercisable and available to any
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<PAGE> 27
Member who seeks to prevent the disclosure of its Confidential Information or
unauthorized use of its Member Intellectual Property (as defined below).
10.4 If the provisions contained herein shall be deemed to exceed the
time or geographic limits or any other limitation imposed by applicable law in
any jurisdiction, then such provision shall be deemed reformed in such
jurisdiction to the maximum extent permitted by applicable law.
10.5 Each Member shall retain all right, title, and interest in and to
any intellectual property that it developed, owned, held or adopted either prior
to the execution of this Agreement or independent of such Member's participation
in the Company, including but not limited to all trade names, trademarks, logos,
symbols, patents, copyrights and trade secrets ("Member Intellectual Property").
Neither the Company, nor any Member, shall use, copy or display any Member
Intellectual Property without the express written consent of the Member who owns
such Member Intellectual Property and then only pursuant to the strict terms and
conditions of such written consent. Except as otherwise provided in the License
Agreement, in the event, that any Member withdraws, resigns or otherwise
discontinues its membership or participation in the Company, whether voluntarily
or involuntarily, the Company shall immediately cease and desist any further use
or display of the Member's Member Intellectual Property unless otherwise
specifically agreed upon in writing.
10.6 The Company shall own all right, title and interest in and to any
intellectual property that is developed, created or adopted by or on behalf of
the Company ("Company Intellectual Property"). No Member shall be permitted to
use, reveal, sell or otherwise exploit the Company Intellectual Property without
the consent of the Company. The General Manager shall have the right to
prosecute, formalize and protect such Company Intellectual Property by whatever
means and in whatever forum the General Manager deems in its reasonable
discretion to be appropriate. All Members shall comply with all reasonable
requests by the General Manager to support the prosecution, formalization and
protection of the Company Intellectual Property, including the execution of any
documents the General Manager deems necessary for such tasks. If there is no
General Manager, the Members shall cooperate to protect such Company
Intellectual Property and shall comply with all reasonable requests made by any
Member to support such activities.
10.7 In the event that the Company is dissolved, or otherwise
terminated, all Company Intellectual Property shall be jointly owned by both
Members, without compensation to the Company or the other Member. Each Member
agrees to execute any and all necessary documents to effectuate such joint
ownership. At dissolution, each Member shall retain all right, title, ownership
and interest in its Member Intellectual Property.
ARTICLE XI: INDEMNIFICATION AND ARBITRATION
11.1 The Company shall have the power to indemnify any Person who was or
is a party, or who is threatened to be made a party, to any Proceeding by reason
of the fact that such Person was or is a Member, Manager, officer, employee, or
other agent of the Company, or was or is serving at the request of the Company
as a director, officer, employee, or other Agent of another limited liability
company, corporation, partnership, joint venture, trust, or other enterprise,
against expenses,
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<PAGE> 28
judgments, fines, settlements, and other amounts actually and reasonably
incurred by such Person in connection with such proceeding, if such Person acted
in good faith and in a manner that such Person reasonably believed to be in the
best interests of the Company, and, in the case of a criminal proceeding, such
Person had no reasonable cause to believe that the Person's conduct was
unlawful. The termination of any 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 that such Person reasonably believed to be in the best interests of the
Company, or that the Person had reasonable cause to believe that the Person's
conduct was unlawful.
To the extent that an agent of the Company has been successful on the
merits in defense of any Proceeding, or in defense of any claim, issue, or
matter in any such Proceeding, the agent shall be indemnified against expenses
actually and reasonably incurred in connection with the Proceeding. In all other
cases, indemnification shall be provided by the Company only if authorized in
the specific case by holders of at least 67% of Membership Interests.
"Agent," as used in this Section 11.1, shall include a trustee or other
fiduciary of a plan, trust, or other entity or arrangement.
"Proceeding," as used in this Section 11.1, means any threatened,
pending, or completed action or proceeding, whether civil, criminal,
administrative, or investigative.
Expenses of each Person indemnified under this Agreement actually and
reasonably incurred in connection with the defense or settlement of a proceeding
may be paid by the Company in advance of the final disposition of such
proceeding, as authorized by the General Manager, if it is not seeking
indemnification or, by the holders of at least 67% of Membership Interests upon
receipt of an undertaking by such Person to repay such amount unless it shall
ultimately be determined that such Person is entitled to be indemnified by the
Company. "Expenses," as used in this Section 11.1, includes, without limitation,
attorney fees and expenses of establishing a right to indemnification, if any,
under this Section 11.1.
11.2 Any dispute, controversy or claim arising from, out of or in
connection with, or relating to, this Agreement or any breach or alleged breach
of this Agreement, except allegations of violations of Federal or State
securities laws or as otherwise provided for in this Agreement, will upon the
request of any Member involved be submitted to the Judicial Arbitration and
Mediation Service in San Diego, California, or any other private arbitration
service utilizing former judges as mediators and approved by the Members
involved in the dispute. The dispute once submitted shall initially be submitted
to mediation within twenty-one (21) days of submission. If mediation does not
resolve the dispute, such dispute shall be resolved by arbitration in the County
of San Diego, California (or at any other place or under any other form of
arbitration mutually acceptable to the Members involved). The arbitrator shall
follow and apply the California Evidence Code in the conduct of the arbitration,
and the parties shall be entitled to discovery in accordance with the provisions
of the California Code of Civil Procedure. Any award rendered shall be final,
binding and conclusive upon the parties and shall be non-appealable, and a
judgment thereon may be entered in the highest State or Federal court of the
forum, having jurisdiction. The expenses of the mediation and arbitration shall
be borne equally by the parties to the arbitration, provided that each party
shall
26
<PAGE> 29
pay for and bear the cost of its own experts, evidence and attorneys' fees,
except that in the event of arbitration and at the discretion of the arbitrator,
any arbitration award may include the costs, fees and expenses of a party's
attorneys. Any Member may commence the dispute resolution process by sending a
written demand for mediation and/or arbitration to the other Member(s). Such
demand shall set forth the nature of the matter to be resolved. The place of
mediation and/or arbitration shall be determined in accordance with Section
13.14 hereinbelow. The substantive law of the State of Delaware shall be applied
by the arbitrator to the resolution of the dispute. The prevailing party shall
be entitled to reimbursement of attorney fees, costs, and expenses incurred in
connection with the arbitration. All decisions of the arbitrator shall be final,
binding, and conclusive on all parties. Judgment may be entered upon any such
decision in accordance with applicable law in any court having jurisdiction
thereof. The arbitrator (if permitted under applicable law) or such court may
issue a writ of execution to enforce the arbitrator's decision. Neither this
Section 11.2 nor this arbitration provision shall preclude any Member from
seeking and obtaining enforcement of this arbitration provision from a court of
competent jurisdiction or from seeking and obtaining equitable relief, including
injunctive relief, to enforce the terms and conditions of the sections of this
Agreement which relate to Confidentiality (Sections 10.3 through 10.5),
protection of intellectual property (Sections 10.6 through 10.8), and Indemnity
(Section 11.1).
ARTICLE XII: ATTORNEY-IN-FACT AND AGENT
12.1 Each Member, by execution of this Agreement, irrevocably
constitutes and appoints the General Manager as such Member's true and lawful
attorney-in-fact and agent, with full power and authority in such Member's name,
place, and stead to execute, acknowledge, and deliver, and to file or record in
any appropriate public office: (a) any certificate or other instrument that may
be necessary, desirable, or appropriate to qualify the Company as a limited
liability company or to transact business as such in any jurisdiction in which
the Company conducts business; (b) any certificate or amendment to the Company's
Certificate of Formation or to any certificate or other instrument that may be
necessary, desirable, or appropriate to reflect an amendment approved by the
Members in accordance with the provisions of this Agreement; (c) any
certificates or instruments that may be necessary, desirable, or appropriate to
reflect the dissolution and winding up of the Company; and (d) any certificates
necessary to comply with the provisions of this Agreement. This power of
attorney will be deemed to be coupled with an interest and will survive the
Transfer of the Member's Economic Interest. Notwithstanding the existence of
this power of attorney, each Member agrees to join in the execution,
acknowledgment, and delivery of the instruments referred to above if requested
to do so by the General Manager. This power of attorney is a limited power of
attorney and does not authorize the General Manager to act on behalf of a Member
except as described in this Article XII.
ARTICLE XIII: GENERAL PROVISIONS
13.1 This Agreement, together with the Exclusive Manufacturing Agreement
by and between the Company and NAI and the License Agreement, constitutes the
whole and entire agreement of the parties with respect to the subject matter of
this Agreement, and it shall not be modified or amended in any respect except by
a written instrument executed by all the parties. This
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<PAGE> 30
Agreement replaces and supersedes all prior written and oral agreements by and
among the Members and Manager or any of them.
13.2 This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
13.3 If any provision of this Agreement is determined by any court of
competent jurisdiction or arbitrator to be invalid, illegal, or unenforceable to
any extent, that provision shall, if possible, be construed as though more
narrowly drawn, if a narrower construction would avoid such invalidity,
illegality, or unenforceability or, if that is not possible, such provision
shall, to the extent of such invalidity, illegality, or unenforceability, be
severed, and the remaining provisions of this Agreement shall remain in effect.
13.4 This Agreement shall be binding on and inure to the benefit of the
parties and their heirs, personal representatives, and permitted successors and
assigns.
13.5 Whenever used in this Agreement, the singular shall include the
plural and the plural shall include the singular, and the neuter gender shall
include the male and female as well as a trust, firm, company, or corporation,
all as the context and meaning of this Agreement may require.
13.6 The parties to this Agreement shall promptly execute and deliver
any and all additional documents, instruments, notices, and other assurances,
and shall do any and all other acts and things, reasonably necessary in
connection with the performance of their respective obligations under this
Agreement and to carry out the intent of the parties.
13.7 Except as provided in this Agreement, no provision of this
Agreement shall be construed to limit in any manner the Members in the carrying
on of their own respective businesses or activities.
13.8 Except as specifically provided in this Agreement, no provision of
this Agreement shall be construed to constitute a Member, in the Member's
capacity as such, the agent of any other Member.
13.9 Each Member represents and warrants to the other Members that the
Member has the capacity and authority to enter into this Agreement.
13.10 The article, section, and paragraph titles and headings contained
in this Agreement are inserted as matter of convenience and for ease of
reference only and shall be disregarded for all other purposes, including the
construction or enforcement of this Agreement or any of its provisions.
13.11 This Agreement may be altered, amended, or repealed only by a
writing signed by all of the Members.
13.12 Time is of the essence of every provision of this Agreement that
specifies a time for performance.
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<PAGE> 31
13.13 This Agreement is made solely for the benefit of the parties to
this Agreement and their respective permitted successors and assigns, and no
other person or entity shall have or acquire any right by virtue of this
Agreement.
13.14 This Agreement and all amendments hereto shall be governed by the
laws of the State of Delaware. Subject to the obligation to arbitrate disputes
set forth herein any action or proceeding seeking to enforce any provision of,
or based on any right arising out of, this Agreement may be brought against any
of the Parties only in the courts of the State of California, or, if it has or
can acquire jurisdiction, in the appropriate United States District Court for
the Southern District of California, and each of the Parties consents to such
venue and to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on any Party anywhere in the world.
13.15 Each Party agrees to do any thing and sign any documents which are
necessary and desirable to accomplish any of the goals, terms or conditions of
this Agreement.
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Agreement on the day and year first above written.
FITNESSAGE INCORPORATED
a Nevada corporation
By: /s/ Michael L. Jeub
---------------------------------------
Michael L. Jeub, President
NATURAL ALTERNATIVES
INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
---------------------------------------
Mark A. LeDoux, Chief Executive Officer
29
<PAGE> 32
EXHIBIT "A"
SCHEDULE OF MEMBERS
<TABLE>
<CAPTION>
Member Name & Address Original Capital Investment Percentage Interest
- --------------------- --------------------------- -------------------
<S> <C> <C>
FITNESSAGE INCORPORATED $150,000 60%
4250 EXECUTIVE SQUARE, STE. 101
LA JOLLA, CA 92037
NATURAL ALTERNATIVES INTERNATIONAL, INC. $100,000 40%
1185 LINDA VISTA DRIVE
SAN MARCOS, CA 92069
</TABLE>
<PAGE> 33
EXHIBIT "B"
CURRENT FISCAL YEARS
APPROVED BUDGET OF
CUSTOM NUTRITION, LLC
<PAGE> 1
EXHIBIT 10.2
EXCLUSIVE MANUFACTURING AGREEMENT
This EXCLUSIVE MANUFACTURING AGREEMENT is made effective as of December
6, 1999, between Natural Alternatives International, Inc., a Delaware
corporation, with offices at 1185 Linda Vista Drive, San Marcos, California
92069 ("NAI") and Custom Nutrition, LLC, a Delaware limited liability company
with offices at 4250 Executive Square, Suite 101, La Jolla, CA 92037 (the
"Company"). NAI and the Company may hereinafter be referred to as the "Parties."
W I T N E S S E T H :
WHEREAS, on March 17, 1999, NAI and FitnessAge Incorporated, Inc.
("FitnessAge") executed a letter or intent which contemplated the formation of a
strategic alliance, including further definitive agreements, including this
Agreement, to carry out the transactions proposed in the letter of intent;
WHEREAS, substantially concurrently herewith, NAI and FitnessAge have
executed documentation to create and operate the Company; and
WHEREAS, NAI has agreed to develop and manufacture for the Company
nutritional products as developed from time to time for promotion and resale by
the Company.
NOW, THEREFORE, in consideration of these recitals and the agreements
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. Definitions
1.1 "FDCA" means the Federal Food, Drug and Cosmetic Act, as amended
from time to time, together with all regulations issued by the Food and Drug
Administration and other governmental agencies pursuant thereto.
1.2 "FTCA" means the Federal Trade Commission Act, as amended from time
to time, together with all regulations issued by the Federal Trade Commission
and other governmental agencies pursuant thereto.
1.3 "Plant" means NAI's production facilities wherever located.
1.4 "Product" or "Products" means nutritional products, nutritional and
dietary supplements and related materials or products of any description,
including but not limited to capsules, tablets, powders, liquids, bars and other
forms packaged in any and all manners and intended to be distributed by,
through, or for the benefit of the Company.
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<PAGE> 2
1.5 "Specifications" means such specifications and quality control
requirements for the Products and for any ingredients and packaging materials as
determined by the Company from time to time.
1.6 "Technical Information" means all customer and business information
and all formulae, quality control data, test data and all other scientific and
technical data and information relating to the Products which are now owned or
controlled by the Parties or which may hereafter be developed by any Party in
connection with the Products.
1.7 "Product Cost." The cost of Products developed and manufactured for
the Company by NAI shall be as defined in Section 6.1 hereinbelow.
2. Product Development
2.1 Initial Development and Formulation. The Company will develop the
types of Products the Company wishes to sell and distribute directly or for its
benefit, all of which shall be subject to this Agreement, and shall establish
the Specifications therefore. NAI will assist the Company in the design and
formulation of the Products as requested by the Company. NAI shall manufacture
and package the Products, as more specifically provided for herein.
2.2 Packaging and Labels. The Company and NAI shall collaborate and
cooperate in the design and development of the Products and the marketing plans
therefore, including the Specifications, packaging and labeling of the Products.
2.3 Ownership of Formulae. It is expressly agreed by the Parties that
the formulae relating to the Products that are the subject of this Agreement,
whether developed by NAI or the Company, shall be and become the sole and
exclusive property of the Company, and NAI agrees to deliver copies of all
formulations to the Company at the time of their initial development or when the
Products are modified according to new formulae developed pursuant to this
Agreement.
3. Production, Purchase Orders, Rolling Forecast, Inventory, Storage,
Shipping and Reports
3.1 Production. NAI shall manufacture and package Products in quantities
ordered by the Company in accordance with the Specifications, and the terms and
conditions set forth in this Agreement. NAI shall manufacture all Products it
sells to the Company and shall not purchase such Products from other sources for
resale to the Company unless agreed to by the Company in writing and at the
Company's sole discretion. NAI may develop for its own use in manufacturing the
Products such specifications and quality control parameters as it may deem
appropriate, provided they do not contradict the Specifications. The Parties
agree NAI may supplement or otherwise modify such parameters at any time and
from time to time provided they are in conformance with the Specifications or,
if not within those Specifications, are subject to the Company's prior written
approval which shall be granted or declined within ten (10) business days of a
request therefore. The Company's failure to
2 of 19
<PAGE> 3
provide written approval to such modifications within the ten (10) business days
shall be deemed a denial of NAI's right to deviate from the Specifications.
3.2 Purchase Orders. The Company has provided NAI with its initial
purchase order. On or before January 10, 2000, and on or before the tenth day of
each March, June, September and December thereafter, the Company shall provide
NAI with a purchase order covering all Company projected Product requirements
for the calendar quarter commencing on the first day of the following month.
Such production/purchase orders shall be firm on submission and shall be filled
by NAI in conformance with NAI's reasonable and customary procedures, and in
accordance with this Agreement.
3.3 On-Line Ordering. NAI or its designee shall design, develop and
establish an Internet based ordering system which will permit NAI to receive,
process and fulfill orders from the Company, its distributors and customers via
the world wide web. The Company shall design, develop and establish an Internet
based order placing software that will interface with NAI's Internet based order
processing system and allow the Company, its distributors and customers to place
orders to NAI via the world wide web. The Company and NAI shall meet, confer and
agree upon the structure and operation of the on-line ordering system.
3.4 Rolling Forecast. On or before January 15, 2000, the Company shall
provide NAI with its forecast of Product requirements for the twelve (12) months
January through December 2000. On or before the tenth day of each March, June,
September and December following the date of the first forecast, the Company
shall provide NAI with production forecast updates covering the following twelve
(12) months commencing on the first day of the following month. Such forecasts
provided by the Company shall be for the convenience of NAI only, and shall not
be binding nor constitute purchase orders.
3.5 Inventory. NAI shall order and maintain an inventory of raw
materials and packaging materials sufficient to meet the Company's production
needs as determined by the purchase orders provided by it under this Section 3
and NAI's reasonable estimation of its own production needs. NAI shall not be
required to maintain such inventory in excess of a rolling ninety (90) day
supply.
3.6 Storage and Shipment. NAI shall provide suitable storage and
warehousing space for all Products for the time and to the extent required for
NAI to perform its obligations under this Agreement, which time shall not exceed
fifteen (15) days from the originally scheduled shipping date set forth in the
applicable purchase order for the Products. Products are to be stored in clean
space suitable for storage of food and protection of its contents with respect
to integrity and quality, in compliance with good commercial practice and all
applicable laws, rules and regulations, including, without limitation, FDCA
regulations. Charges, if any, for such storage and warehousing for Products will
be paid by NAI and shall be considered a part of the actual cost of production
and shall be charged to the Company as a part thereof pursuant to Section 6. NAI
shall load Products onto such carriers as it may determine. All Products are
delivered F.O.B. NAI's dock and all risk of loss of the Products shall remain
with NAI until loaded onto such carriers unless the Company and NAI otherwise
mutually agree. The carrier selection, shipment and payment procedures and bill
of lading requirements shall be subject to the Company's
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<PAGE> 4
approval which approval shall not be unreasonably withheld, and shall be in
accordance with any reasonable instructions issued by the Company. Products are
to be shipped via clean trucks and trailers suitable for transportation of food
and protection of its contents with respect to integrity and quality, in
compliance with good commercial practice and all applicable laws, rules and
regulations, including, without limitation, Department of Transportation
regulations. NAI is responsible for shipping all Products in accordance with
this Agreement. Shipping charges shall be considered a part of the actual cost
of production and shall be charged to the Company as a part thereof under
Section 6 below.
3.7 Shipping Instructions. NAI shall prepare the Products for shipment
to the Company or its designees in quantities and on dates designated by the
Company. The Company shall send shipping instructions via facsimile to NAI at
least three weeks before the shipment date designated by the Company. NAI shall
use its best efforts to accommodate any adjustments to shipping instructions the
Company wishes to make; however, adjustments to shipping instructions made less
than three weeks prior to the requested shipping date may delay shipping dates,
or otherwise be made only upon the mutual agreement of the Company and NAI.
3.8 Production and Shipping Reports. NAI shall regularly provide the
Company with production reports and shipment of finished goods reports, in such
form as the Company reasonably requests. Reports from NAI's facilities shall be
sent to the Company by facsimile in the manner set forth in Section 17.1.
3.9 Inventory Reports. NAI shall provide the Company with regular
periodic reports of NAI's inventories of finished Products and raw materials.
The report shall be delivered by facsimile in the manner set forth in Section
17.1.
4. NAI's Exclusive Status
4.1 Exclusive Supplier. Except as provided for herein, the Company
agrees to order and purchase all requirements it may have, from time to time,
for all Products from NAI. The Company may enter into other agreements for the
purchase or manufacture of Products during the term of this Agreement without
the prior written consent of NAI if any of the following occur:
(a) NAI does not currently directly manufacture or produce the
Products that the Company requires or desires and declines to commence
manufacturing or producing them within 15 days of request by the Company;
(b) The Company can acquire the Products from other supplier(s)
on substantially identical terms as provided in this Agreement and at a lower
cost than that charged by NAI and NAI fails or refuses to meet such price; or
(c) Any other failed conditions as set forth in Section 4.2 below
occurs.
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4.2 Failed Conditions. In connection with the Products referenced
herein, if following diligent investigation, inquiry and conference with NAI,
the Company in good faith does not believe NAI satisfies any one or more of the
conditions contained herein or any Products are not being manufactured in
accordance with the Specifications, or that NAI is unable to provide the
Products required, the Company shall give NAI written notice of such
determination. Such notice shall state in detail the condition(s) NAI does not
satisfy, the reasons the Company believes NAI does not satisfy the stated
condition(s), and a detailed statement of facts that would have to exist for NAI
to satisfy the failed condition(s). NAI shall have fourteen (14) days following
receipt of the written notice referenced in this Section to cure any inability
or failure to satisfy any condition(s) listed in a notice from the Company. In
the event such failure cannot be reasonably cured within fourteen (14) days, NAI
may request from the Company whatever longer period is reasonably required,
provided NAI commences such cure within seven (7) days of receipt of a notice
from the Company and thereafter diligently pursues the cure to completion. The
Company shall not unreasonably withhold its consent to such an additional cure
period.
4.3 Effect of Failed Condition. In the event NAI does not cure its
inability to satisfy the conditions contained in a notice received from the
Company pursuant to Section 4.2 within the time periods set forth therein, then
the Company may, upon the earlier to occur of: (i) expiration of such time
periods; or (ii) receipt of NAI's written notice it will not cure such
conditions, enter into a manufacturing, supply or similar agreement provided the
agreement is with an independent third party to purchase the Products that are
the subject of the failed condition.
4.4 Alternative Source for Products. The Company may investigate
alternative suppliers of the Products in order to (i) determine whether there
are Products which the Company may desire to purchase that are not directly
manufactured or produced by NAI; (ii) determine whether the Products that the
Company is purchasing from NAI are being offered at the lowest available price;
and/or (iii) to determine the availability of an alternative source for Products
should NAI be unable or unwilling to supply such Products as provided for
herein. The Company reserves the right to enter into Agreements and/or purchase
Products from such alternative sources on terms and conditions substantially
identical to the terms and conditions of this Agreement. NAI shall assist in the
investigation and may recommend possible alternative sources of Products, but
the Company reserves the right to approve any such alternative sources.
5. Means of Production. NAI shall furnish and maintain, at its own cost and
expense, all equipment or resources necessary to manufacture and package the
Product in accordance with the Specifications and in compliance with federal,
state and local laws, rules and regulations.
6. Compensation, Payment, Materials and Title
6.1 Compensation. As full and complete compensation for all services
performed and Products sold hereunder, NAI shall be entitled to receive
compensation on a per Product basis at a price set forth in the then current,
approved price schedule for all Products. From time to time, upon a change in
costs, modification of a Product or development of a new Product, NAI shall
deliver a revised price schedule along with the underlying documentation or
explanation for the price change(s), to the
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Company for the Company's approval, which approval shall not be unreasonably
withheld. Prices for all Products shall not exceed the Company's fully burdened
actual cost of producing the Products, including but not limited to materials,
testing, capitalized equipment costs, labor, capitalized leasehold improvements,
storage, shipping, general and administrative costs. It is the intent of the
Parties that NAI shall charge the Company the full cost of the Products as
determined by Generally Accepted Accounting Principles prior to any profit. The
price paid by the Company to NAI shall include all federal, state and local
taxes that may be imposed on the sale or manufacture of the Products. In no
event, however, shall the price paid by the Company to NAI exceed the price for
which the Company could obtain the same Products from an alternative source on
substantially identical terms as this Agreement. The price to the consumer for
each Product will be established by the Company at the time of establishment of
the Specifications and all subsequent changes thereto shall be made only with
the approval of the Company.
6.2 Costs. NAI shall to use its best efforts to contain costs by
obtaining competitive prices on raw materials and packaging materials and by
continually reviewing and adjusting its operations in the manner deemed
desirable by NAI to maintain the quality of the Products at the lowest
reasonable cost to the Company, and otherwise to operate efficiently. The
Company shall be entitled, at any reasonable time following advance notice to
NAI, to audit any underlying documents relating to ingredients, packaging
materials and other costs used by NAI to determine the price for Products.
6.3 Research. The Parties agree that from time to time, the other may
suggest research, development, testing, and studies concerning the Products.
Prior to commencement of such research, the Parties will meet, confer and
cooperate in an effort to determine how to conduct, direct, control, and fund
such research. The conduct of all studies shall be approved by the Company. The
cost of any such research, development, testing and studies will be borne by the
Company, unless otherwise agreed. This Section 6.3 shall not apply to NAI's
testing or development of Products in the ordinary course of NAI's performance
of its obligations under the terms of this Agreement.
6.4 Invoices. Invoices for Products shall be sent to the Company at the
time of shipment. Payment in full shall be due within thirty (30) days after
receipt by the Company of invoice. A late charge of 1.5% shall be paid by the
Company for every 30-day period, or part thereof, any invoice remains unpaid
after 30 days.
6.5 Production, Inventory and Audits. The Company and its agents shall
have access to NAI's production plants once each calendar quarter, or otherwise
following reasonable notice, for the purpose of performing production and
inventory audits pertaining to this Agreement. NAI shall be notified in advance
of the names of all visiting personnel or agents and their intended dates and
times of arrival.
6.6 Title. Title to all Products shall be and remain in NAI until
shipped, at which time title shall transfer to the Company, unless the Parties
otherwise mutually agree.
7. Quality Control, Testing
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7.1 Specifications. NAI shall manufacture the Products strictly in
accordance with all applicable laws, rules and regulations, and the
Specifications.
7.2 Raw Materials. NAI shall store all raw materials, packaging
materials and finished Products in a clean, dry area, free from insects and
rodents, in a manner to prevent entry of foreign materials. Storage and handling
shall be strictly in accordance with the provisions of all applicable laws,
rules, regulations and the Specifications and any reasonable written
instructions issued by the Company.
7.3 Quality of Materials. NAI shall have each shipment of raw materials
and packaging materials, analyzed for such matters as it may reasonably elect
before any said materials can be used in making and packaging the Product. Such
analysis will be in the nature of quality control and may be conducted in-house
or by an outside laboratory of NAI's choosing. Outside lab tests are intended as
an exception and expenses of the same will be considered a part of the actual
cost of production and shall be charged to the Company as a part thereof. Prior
to the retention of an outside lab, NAI shall notify the Company of its
intention to retain such lab and the reasons therefore. If the Company objects
to paying the cost of the use of an outside lab to perform the tests, NAI will
proceed with the retention and use of such lab at its own risk. All unresolved
disputes related to this issues shall be resolved pursuant to Section 16.3
hereto. All test results are to be documented and copies provided to the Company
at its request and expense.
7.4 Production Quality. NAI shall perform all in-process and finished
Product checks necessary to assure Product quality. These tests are to be
undertaken as a routine part of the manufacturing process, the cost of which
will be included in the actual costs of production and shall be charged to the
Company as a part thereof. All test results shall be documented and summarized
by NAI.
7.5 Product Release. A Product shall not be released for shipment unless
it strictly complies with the Specifications and all applicable laws, rules and
regulations. NAI shall place any noncomplying Products on hold. Products that do
not strictly comply shall be put on hold and may be released only with the prior
approval of the Company.
7.6 Rejected Products. All rejected Products will be disposed of in a
manner consistent with the law and as approved by all Parties to this Agreement.
Approval thereof shall be provided within two (2) business days of request
therefor, and shall not be unreasonably withheld. The Company shall not be
charged for the cost of such rejected Products.
7.7 Codes. Production codes for Products will be maintained in
accordance with NAI's existing policies as of the date hereof. NAI shall
maintain detailed records on raw and packaging materials usage, finished Product
production by code date and shipping of Products, so that Products can be traced
in case of a recall. Unless necessary to prevent serious injury or death, NAI
cannot initiate a recall or withdrawal of the Products ordered by or shipped to
the Company without the consent of the Company. If a recall or withdrawal must
be initiated before consent of the Company can be obtained, in order to prevent
serious injury or death, notice to the Company must be provided as soon as is
reasonably feasible.
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<PAGE> 8
7.8 FDCA Standards. NAI's Premises shall be kept and maintained in
conformity with all applicable FDCA requirements and all Products shall be
manufactured consistently with all applicable FDCA requirements.
8. Plant Inspections, Regulatory Action
8.1 Plant Inspection. NAI's plant shall meet all requirements
established by state, local or federal regulations including, but not limited
to, Good Manufacturing Practices, Hazard Analysis Critical Control Points
programs and EPA requirements, rules and regulations. The Company and its agents
shall have access to NAI's plant at any reasonable time and all reasonable times
while Products are in process for the purpose of conducting inspections and
performing quality control audits, and shall have access to the results of any
test performed by NAI or at NAI's direction.
8.2 Regulatory Action. If the Food and Drug Administration or any other
federal, state or local government agency gives notice of or makes an inspection
at any party's premises, seizes any Products or requests a recall, directs any
party to this Agreement to take or cease taking any action, the other Parties
shall be notified immediately, but in no event later than the next business day.
Duplicates of any samples of Products taken by such agency shall be sent to the
other party promptly. In the event of any action described in this Section, the
Parties shall cooperate in determining the response, if any, to be made to such
action and each party agrees to cooperate with, assist and allow NAI to be the
primary spokesperson in responding to any communication or inquiry, and/or
attempting to resolve any such action, and to refrain from any activity with
respect to such action which is not previously approved by NAI, unless otherwise
required by law.
9. Samples. At its own cost and expense, NAI shall collect and keep
retention samples in accordance with reasonable manufacturer's general practices
for similar products.
10. Warranty and Inspection
10.1 Warranty. The Products furnished to the Company or its customers
under this Agreement shall be in conformance with Specifications and free from
adulteration, and NAI does hereby warrant and guarantee to the Company that at
the time of delivery the Products shall: (i) comply with all applicable federal,
state and local laws and regulations, including, without limitation, the FDCA
and the FTCA, including any and all laws, rules and regulations regarding the
labeling, warning and instructions to be placed upon or included with the
Products; (ii) not be adulterated or misbranded within the meaning of the FDCA;
(iii) not be an article which, under the provisions of Section 404 and 505 of
the FDCA, may not be introduced into interstate commerce; (iv) not be in
violation of the provisions of the Food Additives Amendment of 1958; and (v) be
in full compliance with California's Safe Drinking Water and Toxic Enforcement
Act of 1986, as amended from time to time, and all regulations promulgated
thereunder, and are Products which do not require any form of warning under such
act.
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10.2 Inspection of Products. The Company shall inspect all of the
Products shipped to it promptly upon receipt thereof, and in no event later than
fifteen (15) days after receipt thereof. NAI warrants that the Products: (i)
will, when delivered, conform to the description on the face of the purchase
order relating to such Products; (ii) will be free of defects in materials and
workmanship; and (iii) will meet the Specifications. NAI shall, at the Company's
option, replace (F.O.B. the Company's point of destination) or issue a credit or
refund to the Company for any nonconforming Products provided, however, that the
Company furnishes to NAI written notice, in reasonable detail, of the
nonconformity of the Products within fifteen (15) days after the receipt thereof
by the Company, and the Company provides NAI with a reasonable opportunity to
inspect such goods and offers to return such goods to NAI at NAI's cost.
10.3 Limitation. The warranty set forth in Section 10.1 hereof shall not
extend to the Company's customers or their customers, if any. NAI shall
indemnify, defend and hold the Company and its employees, agents,
representatives, directors, officers, members and shareholders harmless for,
from and against all liabilities, suits, actions, proceedings, claims, demands,
losses, damages, fees, taxes, costs, penalties and expenses including, but not
limited to, reasonable attorneys' and accountants' fees caused by, arising out
of or otherwise related to any defective Products or product liability claims
brought by any person or entity with respect to any Products manufactured for
the Company by NAI. NAI agrees to name the Company as an additional insured on
NAI's current insurance policy and maintain product liability coverage in an
amount of no less than Ten Million Dollars ($10,000,000), and NAI shall maintain
an additional Ten Million Dollars ($10,000,000) in excess product liability
coverage for the entire term of this Agreement.
10.4 Standards. In connection with orders of Products hereunder, NAI
will formulate, manufacture and package the Products for the Company of the same
quality and with the same care as it uses for Products it produces for its
valued customers. NAI will not change the packaging or shipping of Products
hereunder without the Company's prior written consent except for minimum
deviations that do not affect the quality of the Products or legal compliance of
the labels, packaging and Product documentation.
10.5 NO ADDITIONAL WARRANTIES. THE WARRANTIES SET FORTH HEREIN, AND ANY
ADDITIONAL WARRANTY EXPRESSLY STATED TO BE A WARRANTY AND SET FORTH IN WRITING
AS PART OF THESE TERMS HEREIN ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
10.6 NO CONSEQUENTIAL DAMAGES. UNDER NO CIRCUMSTANCES SHALL NAI OR ANY
AFFILIATE OF NAI HAVE ANY LIABILITY WHATSOEVER FOR INCIDENTAL OR CONSEQUENTIAL
DAMAGES, such as, but not limited to, loss of profit or revenue; loss of use of
the Products; cost of capital; or claims resulting from contracts between the
Company, its customers and/or suppliers. Unless expressly provided for herein,
in no event shall NAI or any affiliate of NAI assume responsibility or liability
for (i) penalties, penalty clauses or liquidated damages clauses of any
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description, or (ii) indemnification of the Company or others for costs, damages
or expenses arising out of or related to the actions of the Company or its
distributors, agents, licensees, or customers.
10.7 Labor Laws. NAI warrants and represents that NAI will comply with
all applicable labor and employment laws, including, without limitation, all
laws and regulations under the federal Occupational Safety Hazards Act (OSHA),
as amended.
10.8 Cumulative Rights. The foregoing provisions are in addition to and
are not intended to limit or replace any of the Company's rights or NAI's duties
and obligations arising out of any other provision of this Agreement or any
other applicable law.
11. Trademark: Proprietary Information
11.1 Proprietary Assets. During the course of its performance of this
Agreement, NAI may, employing artwork, mechanical and packaging cylinders
furnished by the Company or FitnessAge, and in compliance with all applicable
laws, cause to be printed on the packaging materials and shipping containers of
the Products those trademarks and/or trade names that the Company or FitnessAge
may designate in writing from time to time. NAI will not use in any way, and
will not remove, alter or change in any way, any trademark, trade name, logo or
other commercial symbol of the Company or FitnessAge, without the prior
permission of the Company or FitnessAge. NAI agrees to execute any and all
consents or other documents that the Company or FitnessAge may deem reasonably
required in relation to NAI's use, display or reproduction of any trademark,
trade name, logo or other commercial symbol or designation belonging to the
Company or Fitness Age.
11.2 Limited Use. Nothing set forth in this Agreement shall be construed
to grant to NAI any right to or interest in any trademark, trade name,
copyright, patent or know-how owned or asserted to be owned by FitnessAge or any
of its affiliates. NAI's use of such trademarks, trade names, copyrights,
patents or know-how shall be limited exclusively to its performance of this
Agreement and in accordance with any written consent reasonably required by the
Company and/or FitnessAge. NAI will exercise due care to protect the trade name,
trademarks and general goodwill of FitnessAge and refrain from any activities
detrimental thereto. NAI shall immediately cease any further use or display of
any intellectual property owned by the Company or FitnessAge if this Agreement
is terminated (even if such termination is determined to be wrongful) or the
owner of the intellectual property withdraws, resigns, or otherwise terminates
its relationship with the Company or with NAI. NAI recognizes that money damages
are not adequate to compensate Company or FitnessAge for any unauthorized use of
the intellectual property in violation of this Section 11, and consents to the
imposition of injunctive relief by any court or administrative body, including
without limitation, temporary protective orders, preliminary injunctions and
permanent injunctions, to prevent NAI from so using the intellectual property in
a manner contrary to the provisions of this Agreement.
12. Indemnification, Insurance
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12.1 Indemnification NAI. NAI shall provide all proper safeguards and
shall assume all risks in its performance of this Agreement and shall indemnify
and save the Company (including its employees, agents, representatives,
directors, officers, members and shareholders) harmless from and against any and
all loss, liability, damages, claims for damages, suits, recoveries, judgements
or executions, including costs, expenses and reasonable attorneys' fees, that
may be claimed asserted or recovered against the Company by any person, firm or
corporation whatsoever or whomsoever, on account of any actual or alleged injury
to person or property or death occurring to any person whatsoever and arising
out of: (i) any obligation of NAI under this Agreement; (ii) any possession, use
of, or consumption by, any person of the Products supplied by NAI to the Company
under this Agreement; (iii) any actual or alleged injury to person or property
or death occurring to any of NAI's employees, agents or any individual on NAI's
premises; or (iv) any damages or loss caused by NAI's breach of any warranties
or representations made herein or any provision of this Agreement. In no event
shall NAI be required to indemnify the Company or any other person (other than
NAI) for any liability arising solely as a result of any statement or claim made
by such person with respect to Products.
12.2 Indemnification Company. The Company shall provide all proper
safeguards and shall assume all risks in its performance of this Agreement and
shall indemnify, defend and hold harmless NAI, its subsidiaries, affiliated
and/or controlled companies and all sublicensees, as well as their respective
officers, directors, agents and employees, harmless from and against any and all
damage, loss, expense (including reasonable attorneys' fees and costs), award,
settlement or other obligation arising out of any claims, demands, actions,
suits or prosecutions that may be made or instituted against them or any of
them, arising out of: (i) any alleged breach of the Company's warranties as set
forth herein; (ii) any injury or death caused by the Company's breach of any
provision of this Agreement; and (iii) any misrepresentations or warranties
beyond those provided for herein made by the Company related to the marketing,
distribution, promotion, sale or use of Products.
12.3 Insurance. NAI shall carry with companies reasonably satisfactory
to the Company: (i) Workers' Compensation and Employee's Liability Insurance;
(ii) Standard Form Fire and Extended Coverage Insurance for the full replacement
value of any of the Product or any premiums or packaging materials; and (iii)
Comprehensive General Liability Insurance including Contractual Liability and
Products Liability Coverage (with Broad Form Vendor's Endorsement naming the
Company and its authorized distributors, licensees and agents as additional
insureds) with a combined single limit of not less than Ten Million Dollars
($10,000,000). NAI shall submit policies and/or certificates of insurance
evidencing the above coverage (which shall include an agreement by the insurer
not to cancel or materially alter its coverage except upon thirty (30) days
prior written notice to the Company) to the Company within five (5) days after
execution of this Agreement. Products Liability Insurance shall continue in
effect for the Company's benefit for a period of one (1) year from the date of
the last delivery of Products to the Company. In case of NAI's failure to carry
said policies and/or furnish certificates of insurance or upon cancellation of
any required insurance, the Company may, at its option, immediately terminate
this Agreement unless (in the case of cancellation) NAI has obtained substitute
insurance coverage before such insurance becomes canceled and provides the
Company with satisfactory evidence thereof or the Company, at its option,
obtains equivalent insurance at a reasonable rate, the premiums for which will
be charged to NAI.
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13. Relationship of the Parties. NAI shall be deemed an independent
contractor with respect to the terms and provisions of this Agreement and it
shall not in any respect act as an agent, employee, partner or joint venturer of
the Company or of FitnessAge, except as specifically set forth in the Operating
Agreement of the Company. All persons employed in connection with the
manufacture and/or supply of the Products shall be employees or agents of NAI
and under no circumstances shall NAI or any of its employees or agents be deemed
to be employees or agents of the Company or of FitnessAge.
14. Term of Agreement
14.1 Term. This Agreement shall remain in effect for a period of ten
(10) years unless earlier terminated in accordance with this Section. Upon
expiration of the initial term, the term of this Agreement will automatically be
extended for successive one (1) year periods unless terminated by either party
by written notice delivered at least ninety (90) days prior to the expiration of
any such period in accordance with Section 17.1.
14.2 Termination for Non-compliance. Either party may terminate this
Agreement prior to the end of its term only after notice to the other and only
if the other materially fails to comply with any covenant in this Agreement and
such failure continues for more than thirty (30) days after written notice
thereof from the other party, unless such failure cannot be cured within thirty
(30) days then only if the defaulting party fails to commence such cure within
thirty (30) days and diligently thereafter prosecute such cure to completion.
This paragraph 14.2 shall not affect the rights and obligations of the Parties
as set forth in Paragraph 4.2 above.
14.3 Termination on Other Specific Events. Either party may terminate
this Agreement immediately only if:
14.3.1 The other party dissolves, suspends or discontinues its
business operations, makes any assignment for the benefit of its creditors,
commences voluntary proceedings for liquidation in bankruptcy, admits in writing
its inability to pay its debts generally as they become due or consents to the
appointment of a receiver, trustee or liquidator of the other party or of all or
any material part of its property, or if there is an execution which applies to
a material portion of its assets.
14.3.2 The other party shall commence any case, proceeding or
other action under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors
seeking to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debts.
14.3.3 (A) There shall be commenced against the other party any
case, proceeding or other action of a nature referred to in clause 14.3.2 above
which results in the entry of an order for relief or any such adjudication or
appointment or remains undismissed, undischarged, unstayed or unbonded for
period of ninety (90) days; or (B) there shall be commenced against the other
party any case,
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proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its assets, which results in the entry of an order for any such relief which
shall not have been vacated, discharged or stayed or bonded pending appeal
within ninety (90) days from the entry thereof; or (C) the other party shall
take any action in furtherance of, or indicating its consent to, approval of or
acquiescence in, any of the acts set forth in clause (A) or (B) above.
14.3.4 A party to this Agreement assigns its rights to an
unrelated third person who is at the time of transfer involved as an adverse
party in material and adverse litigation against the other party to this
Agreement or its Affiliate.
14.3.5 A party to this Agreement is in substantial breach of the
terms and conditions of this Agreement, including the expiration of any cure
period provided for herein.
14.4 Duties on Termination. Upon termination of this Agreement, copies
of all records related to the Company shall be kept by NAI for a minimum of
three (3) years following production. In addition, NAI shall complete all work
in process in a timely fashion and deliver the same to the Company as provided
herein against payment as provided herein. The Parties shall cooperate and
utilize their best efforts to prepare such final reconciliations of Products and
amounts to be provided as between them in connection with such termination. Upon
termination of this Agreement, NAI shall immediately return to the Company and
FitnessAge all of such party's artwork and other materials containing such
party's trademarks, trade names, logos, brands, slogans, trade dress or other
intellectual property, and thereafter cease any further use thereof. The
obligations of the Parties with respect to Intellectual Property (Section 11),
Indemnity and Insurance (Section 12) and Confidentiality (Section 15) shall
survive the termination of this Agreement and remain fully enforceable.
15. Confidentiality
15.1 Duty to Protect Confidential Information. Any confidential
information disclosed or conveyed by any party to another in connection with its
business by written communication and marked as confidential, or by oral
communication and confirmed in writing to be confidential within thirty (30)
working days of oral disclosure, shall be treated by the receiving party as a
trade secret of the disclosing party and as confidential proprietary
information. The information disclosed shall be held in trust by the receiving
party for the benefit of the disclosing party. The receiving party shall treat
such information as confidential proprietary and/or trade secret information,
and shall take such steps to assure its continued confidentiality in like manner
as it would use to protect its own trade secrets or confidential information and
will not, except as required by law, disclose any such confidential information
received from the other party to any person unless such disclosure is approved
in writing by the disclosing party.
15.2 Means of Protecting Confidential Information. NAI and the Company
agree to take reasonable steps to ensure the proprietary and confidential nature
of one another's confidential information and of the Plants, Products,
Specifications and Technical Information in which confidential
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information is embodied or included and to protect the same form loss or theft
and agree to clearly mark such confidential information and properly indicate
its proprietary nature.
15.3 Terms of Agreement. The Parties agree that the terms contained in
this Agreement are proprietary and confidential, as is the existence of this
Agreement. Other than as required by law, including NAI's compliance with the
1934 U.S. Securities and Exchange Act, each party agrees to maintain the
existence of this Agreement and the terms and information contained herein
strictly confidential and will not disclose any such information to any person
who is not a party hereto without the prior written consent of all Parties,
which consent may be granted or withheld in the absolute discretion of each
party.
15.4 Plant, Products, Specifications and Technical Information. The
Parties agree that the Plant, Products, Specifications and Technical Information
pursuant to Sections 1.3, 1.4, 1.5 and 1.6 are proprietary and confidential and
are furnished only for the purpose of designing, researching, formulating,
developing, manufacturing and packaging the Nutritional Products for the
Company. Other than as required by law, including NAI's compliance with the 1934
U.S. Securities and Exchange Act, any other use of the information by the
Company is understood and agreed by the Parties to constitute a material breach
of this Agreement that cannot be cured.
15.5 Audits. The Parties agree the information arising, created,
compiled or developed in connection with inspections and audits permitted
pursuant to Sections 6.2, 6.5, 7.3 and 8.1 are proprietary and confidential, and
the information revealed therein is furnished only for the purpose of confirming
compliance with the terms of this Agreement. Any other use of the information
revealed by such inspections or audits is understood and agreed by the Parties
to constitute a material breach of this Agreement that cannot be cured.
15.6 Extended Term of Confidentiality. It is recognized by all Parties
that due to their respective positions of confidence giving rise to access to
confidential, proprietary information during the term of this Agreement, that
the provisions of this Section 15 apply during the term of this Agreement and
for a period of three (3) years thereafter.
15.7 Provisions Divisible. It is agreed by all Parties that the
foregoing covenants are appropriate and reasonable in light of the nature and
extent of the business conducted by the Parties and their respective
relationships. It is further agreed that the covenants set forth herein are
divisible in the event they are held to be invalid, unreasonable, arbitrary or
against public policy. Further, it is agreed by the Parties that if any court of
competent jurisdiction makes such a determination, the court may determine what
time period and geographical area are reasonably necessary to protect the
Parties' legitimate business interests and which are enforceable. Nothing
contained in this Agreement shall be construed or interpreted to prevent the
Parties hereto from using such confidential information in any dispute between
themselves, so long as reasonable care is taken to implement a protective order
to prevent such confidential information from being disclosed to unnecessary
third Parties.
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15.8 Irreparable Injury. Each party acknowledges that damages at law
will be an insufficient remedy for violation of the terms of this Article and
that the other Parties would suffer irreparable injury as a result of such
violation. Accordingly, it is agreed the Parties may obtain injunctive relief to
enforce the provisions of this Article of this Agreement, which injunctive
relief shall be in addition to any other rights or remedies available to it or
them.
16. Applicable Law
16.1 Law. This Agreement shall be construed in accordance with the laws
of the State of California, without regard to its rules on conflicts of law.
16.2 Venue. Subject to the obligation to arbitrate disputes set forth
herein any action or proceeding seeking to enforce any provision of, or based on
any right arising out of, this Agreement may be brought against any of the
Parties only in the courts of the State of California, County of San Diego, or,
if it has or can acquire jurisdiction, in the United States District Court for
the Southern District of California, and each of the Parties consents to such
venue and to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on any party anywhere in the world.
16.3 Arbitration. Any dispute, controversy or claim arising from, out of
or in connection with, or relating to, this Agreement or any breach or alleged
breach of this Agreement, except allegations of violations of Federal or State
securities laws, will upon the request of any party involved be submitted to the
Judicial Arbitration and Mediation Service or any other private arbitration
service utilizing former judges as mediators and approved by the Parties. The
dispute once submitted shall be resolved by arbitration in the County of San
Diego, California (or at any other place or under any other form of arbitration
mutually acceptable to Parties involved). The arbitrator shall follow and apply
the California Evidence Code in the conduct of the arbitration, and the Parties
shall be entitled to discovery in accordance with the provisions of the
California Code of Civil Procedure. Any award rendered shall be final, binding
and conclusive upon the Parties and shall be non-appealable, and a judgment
thereon may be entered in the highest State or Federal court of the forum,
having jurisdiction. The expenses of the arbitration shall be borne equally by
the Parties to the arbitration, provided that each party shall pay for and bear
the cost of its own experts, evidence and attorneys' fees, except that in the
discretion of the arbitrator, any award may include the costs, fees and expenses
of a party's attorneys. Neither this Section 16.3 nor this arbitration provision
shall preclude any party to this Agreement from seeking and obtaining
enforcement of this arbitration provision from a court of competent jurisdiction
or from seeking and obtaining equitable relief, including injunctive relief, to
enforce the terms and conditions of the sections of this Agreement which relate
to Intellectual Property (Section 11), Indemnity (Section 12) and
Confidentiality (Section 15).
16.4 Attorneys Fees. If any arbitration or legal proceeding is brought
for the enforcement of this Agreement, or because of an alleged breach, default
or misrepresentation in connection with any provision of this Agreement or other
dispute concerning this Agreement, the successful or prevailing
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party shall be entitled to recover reasonable attorneys fees incurred in
connection with such arbitration or legal proceeding. The term "prevailing
party" shall mean the party which is entitled to recover its costs in the
proceeding under applicable law, or the party designated as such by the court or
the arbitrator.
17. Notice; Designation
17.1 Notices. Unless otherwise indicated herein, all notices, requests,
demands or other communication sot the respective Parties hereto shall be deemed
to have been given or made when deposited in the mails, registered or certified
mail, return receipt requested, postage prepaid, or by means of overnight
delivery service when delivered to such service addressed to the respective
party at the following address:
If to NAI:
Natural Alternatives International, Inc.
1185 Linda Vista Drive
San Marcos, California 92069
Attention: Mark LeDoux, Chief Executive Officer
Telephone: (760) 744-7340
Facsimile: (760) 591-9637
with a copy to:
Natural Alternatives International, Inc.
1185 Linda Vista Drive
San Marcos, California 92069
Attention: David Lough, Executive Vice President
Telephone: (760) 744-7340
Facsimile: (760) 591-9637
and with an additional copy to:
Fisher Thurber LLP
4225 Executive Square, Suite 1600
La Jolla, California 92037
Attention: David A. Fisher
Telephone: (858) 535-9400
Facsimile: (858) 535-1616
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If to Company:
FitnessAge Nutrition, LLC
4250 Executive Square, Suite 101
La Jolla, CA 92037
Attention: Michael L. Jeub
Telephone: (858) 625-4222
Facsimile: (858) 625-4200
with a copy to:
Barnhorst, Schreiner & Goonan
550 West "C" Street, Suite 1350
San Diego, CA 92101
Telephone: (619) 544-0900
Facsimile: (619) 544-0703
Attention: Brian W. DeWitt, Esq.
17.2 Designated Contact. If a specific contact person is designated in a
provision, notice concerning the subject matter of such provision shall be
directed to such person. The address or the name of any party or contact person
may be changed by sending notice in the manner set forth above.
18. Successors, Assignment. This Agreement shall inure to the benefit of and
be binding upon the successors and permitted assigns of the Parties. NAI and the
Company may assign their rights and obligations under this Agreement to their
Affiliate. Any such assignment will not release or discharge them from any
liability or obligation hereunder. The rights and obligations of the Company and
NAI may only be assigned after first obtaining the other party's written
consent, which consent may not be unreasonably withheld. As used herein,
Affiliate shall refer to any person or entity that is under direct or indirect
control of the applicable party. The term "control" includes without limitation,
ownership of interest representing a majority of the total voting power in an
entity or the ability to manage or direct such entity.
19. Modification, Severability
19.1 Modification. Neither this Agreement nor any part hereof may be
changed, altered or amended orally. Any modification must be by written
instrument signed by the party against whom enforcement of the change,
alteration or amendment is sought.
19.2 Severability. If any provisions of the Agreement is held
ineffective for any reason, the other provisions shall remain effective.
20. Further Assurances. The Parties agree (a) to furnish upon request to
each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts
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and things, all as the other party may reasonably request for the purpose of
carrying out the intent of this Agreement and the documents referred to in this
Agreement.
21. Waiver. The rights and remedies of the Parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power or privilege, and no single or partial exercise of any such right, power
or privilege will preclude any other or further exercise of such right, power or
privilege or the exercise of any other right, power or privilege. To the maximum
extent permitted by applicable law, (a) no claim or right arising out of this
Agreement or the documents referred to in this Agreement can be discharged by
one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
22. Entire Agreement. This Agreement supersedes all prior agreements between
the Parties with respect to its subject matter and, together with the Operating
Agreement of the Company and its Exhibits, constitutes a complete and exclusive
statement of the terms of the agreement between the Parties with respect to its
subject matter.
23. Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
24. Time of Essence. With regard to all dates and time periods set forth or
referred to in this Agreement, time is of the essence.
25. Severability of Provisions. Each provision of this Agreement shall be
considered severable, and if for any reason any provision which is not essential
to effect the basic purposes of this Agreement is determined to be invalid and
contrary to any existing or future law, then such invalidity shall not impair
the operation of or affect those provisions of this Agreement which are valid.
26. Saving Clause. If and to the extent any provision of this Agreement is,
or is found by an arbitrator or court of competent jurisdiction to be,
prohibited under, contrary to or ineffective under any existing or future law,
this Agreement shall be considered amended to the smallest degree necessary to
make this Agreement conform to such law and effective thereunder.
27. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
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28. Conflicts. Each party represents and warrants to the other that neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereunder will violate or constitute a default under
any agreement or instrument previously entered into by any party by which any
party is bound.
29. Force Majeure. No party shall be liable to any other for its failure to
timely perform any such obligations such as a result of fire, flood, epidemic,
earthquake, explosion, accident, labor dispute or strike, an act of God or
public enemy, riot or civil disturbance, war (whether declared or undeclared) or
armed conflict, inability to obtain personnel or facilities, failure of common
carrier, any municipal ordinance, any state or federal law, governmental order
or regulation, or order of any court of competent jurisdiction, or any other
similar event or occurrence not within the control of the defaulting party, as
the case may be.
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Manufacturing Agreement as of the day and year first above written.
NATURAL ALTERNATIVES INTERNATIONAL, INC.,
a Delaware corporation
By: /s/ Mark LeDoux
------------------------------------
Mark LeDoux, Chief Executive Officer
CUSTOM NUTRITION, LLC, a Delaware limited liability company By its
Members:
FitnessAge Incorporated
a Nevada corporation
By: /s/ Michael L. Jeub
------------------------------------
Michael L. Jeub, President
NATURAL ALTERNATIVES INTERNATIONAL, INC.,
a Delaware corporation
By: /s/ Mark LeDoux
------------------------------------
Mark LeDoux, Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.3
LOAN AGREEMENT
This loan agreement ("Agreement") is entered into as of November 11,
1999, by and between FitnessAge, Inc., a Nevada corporation ("Corporation"), and
Natural Alternatives International, Inc., a Delaware corporation ("Lender").
Borrower and Lender agree as follows:
SECTION 1. LOAN TO THE CORPORATION
Subject to the terms and conditions of this Agreement and in reliance
upon the representations and warranties made in this Agreement by the
Corporation, the Lender agrees to lend to the Corporation the aggregate amount
of up to $750,000 consisting of $400,000 to be funded concurrently with the
execution hereof and $350,000 to be funded on or about November 23, 1999,
subject to the terms and conditions set forth herein. The loans made pursuant to
this Loan Agreement ("Loan") shall be evidenced by Convertible Secured
Promissory Notes in the form attached hereto and incorporated herein by this
reference ("Notes").
SECTION 2. SECURITY
As security for the performance and payment of all obligations and
indebtedness of the Corporation to the Lender, the Corporation agrees that at
all times prior to the performance and payment of all such obligations and
indebtedness, the Lender shall have a perfected security interest, superior to
all other liens in all the rights, title, and interest of the Corporation in
Custom Nutrition, LLC, a Delaware limited liability company, including, without
limitation, rights held by the Corporation as a member, manager or creditor of
Custom Nutrition, LLC, as well as the allocable interest of the Corporation in
any amount received by Custom Nutrition, LLC from Bally Total Fitness Holding
Corporation or its affiliates, whether such interests are now owned or hereafter
acquired and wherever the same may be located, and shall include the proceeds,
products, and accessories of any kind to any thereof. The interests described
above are referred to herein as the "Collateral". In this connection, the
Corporation has executed and delivered to the Lender concurrently herewith the
Security Agreement attached hereto and incorporated herein by this reference
("Security Agreement").
SECTION 3. THE BORROWING
3.1 Initial Loan Funding. Upon execution of this Agreement, the Note and
Security Agreement and receipt of signed Articles of Formation and authorization
to file for Custom Nutrition, LLC, Lender shall deliver to the Corporation funds
in the amount of $400,000.
3.2 Subsequent Loan Funding. Upon the later of (i) November 23, 1999 or
(ii) satisfaction or waiver by the Lender of each of the conditions set forth in
Section 9 of this Agreement, the Lender shall deliver to the Corporation funds
in the amount of $350,000, less expenses of Lender including its legal fees
incurred in connection herewith. If the conditions set forth in Section 9 of
this Agreement are not satisfied, or waived by Lender (in its sole discretion)
by
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December 1, 1999, the amounts due under the Note(s) shall be all due and payable
and the Corporation shall be in default of this Agreement.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
The Corporation represents and warrants to the Lender as follows:
4.1 Due Organization. The Corporation is a corporation duly organized,
legally existing, and in good standing under the laws of Nevada and is duly
qualified as a foreign corporation in all jurisdictions in which it is required
to be so qualified. The Corporation has no active subsidiaries.
4.2 Capital Stock. The outstanding Securities of the Corporation have
been duly authorized, validly issued, and are fully paid and nonassessable.
Except for 6,182,000 shares of Common Stock reserved for issuance to employees,
consultants and directors pursuant to outstanding options; 5,002,916 shares of
Common Stock are reserved for issuance to employees, consultants and directors
pursuant to outstanding warrants, 6,000,000 shares of Common Stock reserved for
issuance pursuant to the pending private placement of Common Stock at $0.75 per
share, and a proposed 1,000,000 share issuance pursuant to an asset purchase,
there are no existing warrants, options, conversion rights, calls, or
commitments of any character pursuant to which the Corporation is or may become
obligated to issue or repurchase any shares of capital stock or other securities
other than pursuant to the various transactions undertaken between the
Corporation and Lender of even date herewith. No shareholder of the Corporation
has any preemptive right to acquire any securities of the Corporation. The
Corporation has repurchased none of its outstanding capital stock.
4.3 Corporate Authorization. The Corporation is duly authorized and
empowered to create, issue, and deliver the Note, this Loan Agreement, and the
Security Agreement. The Corporation has all corporate authority necessary to
execute and deliver this Agreement and all other instruments referred to or
mentioned in this Agreement to which the Corporation is a party, and all
corporate action requisite for the due creation, issuance, and delivery of the
Note, the due execution and delivery of this Agreement and the Security
Agreement has been duly and effectively taken. This Agreement, the Note, the
Security Agreement, and all other instruments referred to or mentioned in this
Agreement or in the Note, or the Security Agreement to which the Corporation is
a party are, or when executed and delivered will be, the valid and binding
obligations of the Corporation enforceable in accordance with their terms. The
Loan is convertible into Common Stock in accordance with the terms of the Note,
and the shares of Common Stock initially issuable upon conversion of the Loan
have been, and any additional shares of Common Stock which hereafter may be so
issuable shall be, duly authorized and reserved for issuance upon such
conversion or exercise, are not and shall not be subject to preemptive rights,
and, when issued upon such conversion or exercise in accordance with the terms
of this Agreement or the Note, will be duly issued, fully paid, and
nonassessable.
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4.4 No Default. This Agreement, the Note, and the Security Agreement,
and the transactions contemplated under each, do not violate any provisions of
the Corporation's articles of incorporation or bylaws, or any contract,
agreement, law, or regulation to which the Corporation or any of its properties
is party or subject, and the same do not require the consent or approval of any
regulatory authority or governmental body of the United States or of any state
or subdivision thereof or of any other person, except as set forth in or
contemplated by this Agreement or the Security Agreement.
4.5 Litigation and Other Matters. As of the date of this Agreement,
there is no litigation or any other action or proceeding of any nature pending
or, to the knowledge of the Corporation, threatened against or affecting the
Corporation that involves the possibility of any judgment or liability not fully
covered by insurance, or that may adversely affect the business, financial
position, or assets of the Corporation or its ability to carry on business as
now conducted. The Corporation is not a party to any indenture, loan, or credit
agreement or any lease or other agreement or instrument or subject to any
charter or corporate restriction that could have a material adverse effect on
the business, financial condition, or assets of the Corporation, or on the
ability of the Corporation to carry out its obligations under this Agreement,
the Note, and the Security Agreement.
4.6 Title to Collateral. The Corporation has good and marketable title
to the Collateral, free and clear of all mortgages, liens, and encumbrances,
other than those created by the Security Agreement.
4.7 Compliance With Laws. The Corporation has substantially complied
with all laws, regulations, ordinances, franchises, licenses, and orders
applicable to the Corporation, its assets or its business as currently
conducted.
4.8 Governmental Licenses. The Corporation has all governmental
licenses, permits, and other governmental authorizations currently necessary for
the conduct of its business, and such licenses, permits, and authorizations are
in full force and effect and have been and are now being fully complied with by
the Corporation.
4.9 Security Interests. The Security Agreement creates and grants to the
Lender a legal, valid, and enforceable security interest in the Collateral. The
Collateral is not subject to any other liens or security interests whatsoever.
4.10 Reliance by the Lender. The foregoing representations and
warranties are made by the Corporation with the knowledge and understanding that
the Lender is placing complete reliance on such representations and warranties
and is thereby induced to enter into this Agreement and consummate the
transactions contemplated by this Agreement.
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SECTION 5. REPRESENTATIONS OF THE LENDER
5.1 Purchase for Investment. The Lender hereby represents and warrants
to and agrees with the Corporation that the Note is being acquired by the Lender
for its own account for investment and not with a view to, or for resale in
connection with, the distribution thereof, nor with any intention of
distributing or selling the Note, or the Common Stock into which the Loan is
convertible pursuant to the terms of the Note ("Conversion Shares"). If the
Lender should in the future decide to dispose of the Note, or any of the
Conversion Shares, the Lender understands and agrees that the Lender may do so
only in accordance with Rule 144 under the Securities Act of 1933 (Act) or
otherwise in compliance with the Act, as then in effect. If the Lender should
decide to dispose of the Note, or any of the Conversion Shares (other than
Conversion Shares that have been registered under the Act), the Lender will, at
the Lender's expense, designate counsel in connection with such disposition,
which may be the Corporation's outside counsel or other outside counsel of the
Lender reasonably acceptable to the Corporation, who shall provide an opinion to
the Corporation as to whether the proposed sale or other distribution of the
Note, or any of the Conversion Shares would require registration under the Act
as then in effect. If the opinion of such counsel is to the effect that the
proposed sale or other distribution does not require any registration under the
Act as then in effect, the Lender shall be entitled to complete such sale or
other disposition. If the opinion of such counsel is to the effect that the
proposed sale or other disposition requires registration, such sale or other
disposition may not be made unless such registration is duly completed in
accordance with the opinion of such counsel.
5.2 Accredited Investor. The Lender is an "accredited investor," as that
term is defined in Rule 501, Regulation D promulgated by the Securities and
Exchange Commission ("SEC") under the Act.
5.3 No Violations. This Agreement, the Note, and the Security Agreement
and the transactions contemplated under each do not violate any provisions of
the Lender's articles of incorporation or bylaws, or any contract, agreement,
law or regulation to which the Lender or any of its properties is party or
subject and the same do not require the consent or approval of any regulatory
authority or governmental body of the United States or of any state or
subdivision thereof or of any other person, except as set forth in or
contemplated by the Loan Agreement or the Security Agreement.
SECTION 6. AFFIRMATIVE COVENANTS
The Corporation covenants and agrees as set forth below until the
earlier of: (i) the principal and interest due on the Notes have been paid in
full; or (ii) the effective date of an initial public offering of its Common
Stock pursuant to a registration statement filed under the Securities Act of
1933.
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6.1 Financial Statements. The Corporation will promptly furnish to the
Lender from time to time upon request the following information regarding the
business affairs and financial condition of the Corporation:
6.1.1 Annual Statements. As soon as available and in any event
within 90 days after the end of each fiscal year of the Corporation
(being December 31 in each calendar year), balance sheets and statements
of income and cash flows of the Corporation and its consolidated
subsidiaries on a consolidated and consolidating basis, commencing with
the fiscal year 1999, such year-end financial reports to be prepared in
accordance with generally accepted accounting principles ("GAAP") and
audited and certified by independent public accountants.
6.1.2 Quarterly Statements. Within 45 days after the end of each
fiscal quarter, unaudited balance sheets and statements of income and
cash flows showing the financial condition and results of operations and
changes in financial position of the Corporation and its consolidated
subsidiaries on a consolidated basis as of the end of each such quarter,
together with an instrument executed by the Chief Financial Officer or
President of the Corporation certifying that such financial reports were
prepared in accordance with GAAP consistently applied with prior
practices for earlier periods (with the exception of footnotes that may
be required by GAAP) and fairly present the financial condition of the
Corporation and its results of operation for the periods specified,
subject to year-end adjustments.
6.1.3 Government Reports. Promptly after the same become publicly
available, copies of such registration statements, annual, periodic, and
other reports, and such proxy statements and other information, if any,
as shall be filed by the Corporation or any of its subsidiaries with the
SEC pursuant to the requirements of the Act or the Securities Exchange
Act of 1934, as amended, and within five days after the same are filed,
copies of all financial statements and material reports which the
Corporation and its subsidiaries may make to, or file with, any federal
or state authority; provided, that the Corporation shall consult with
the Lender prior to the filing of any report with the SEC that discloses
or describes the existence or terms of this Agreement or any other
agreement or instrument contemplated in this Agreement, and shall grant
the Lender a reasonable opportunity to review and comment on any such
report.
6.1.4 Asset Schedule. Within 90 days following the last day of
the Corporation's fiscal year, and at such other time as it may be
requested, a schedule of the Corporation's fixed assets and other major
assets delineated by major asset category, indicating cost, accumulated
depreciation, net depreciated value, and any mortgage, lien, or
encumbrance upon such property, the terms of repayment of any
indebtedness secured by such mortgage, lien or encumbrance, and all
other indebtedness of the Corporation and the name of any creditor to
whom repayment is to be made.
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6.1.5 Other Information. Such other information as the Lender may
reasonably request from time to time.
6.2 Taxes and Other Liens. The Corporation will comply with all statutes
and governmental regulations and will pay all taxes, assessments, governmental
charges, claims for labor, supplies, rent, and other obligations which if
unpaid, might become a lien against the property of the Corporation except
liabilities being contested in good faith and against which the Corporation will
set up and maintain reserves in accordance with generally acceptable accounting
principles.
6.3 Maintenance. The Corporation will maintain its corporate existence
and comply with all valid and applicable statutes, rules, and regulations, and
the Corporation will maintain or cause to be maintained without diminution
thereof, its rights and interests comprising the Collateral, as defined in the
Security Agreement.
6.4 Further Assurances. The Corporation promptly will cure any defects
in the execution and delivery of this Agreement and any other instrument or
instruments referred to or mentioned in this Agreement, and will immediately
execute and deliver to the Lender upon request any instrument required to
accomplish or satisfy the Corporation's covenants and agreements under this
Agreement or instruments referred to or mentioned in this Agreement.
6.5 Performance of Obligations. On each funding of the Loan, the
Corporation will pay the fees and expenses incurred by the Lender in connection
with this Agreement and all transactions pursuant to or leading to this
Agreement, such fees and expenses to be set forth in a schedule to be delivered
by the Lender to the Corporation concurrently with such funding and may be
withheld by Lender from funding. The Corporation will pay for all amounts
expended, advanced, or incurred by the Lender to satisfy any obligation of the
Corporation under this Agreement or the Security Agreement, or to protect the
properties, assets, or business of the Corporation, or to collect the Note, or
to enforce the rights of the Lender under this Agreement, the Security
Agreement, or any other instrument referred to or mentioned in this Agreement or
the Security Agreement or executed or to be executed in connection with such
agreements, which amounts will include all court costs, attorneys' fees, fees of
auditors and accountants, and investigation expenses reasonably incurred by the
Lender in connection with any such matters, together with interest at the rate
of 10% per annum on each such amount from the date that the same is expended,
advanced, or incurred by the Lender until the date it is repaid to the Lender.
6.6 Use of Funds. The Corporation shall use the proceeds of the Loan
only for those general corporate purposes that are not expressly prohibited
under this Agreement, to pay the fees and expenses of the Lender as provided by
Section 6.5 of this Agreement, which amount shall be paid on each funding date
out of the proceeds of the Loan. Upon funding of the loan amount described in
Section 3.2, not less than $150,000 of the proceeds thereof shall be delivered
to Custom Nutrition, LLC as a capital contribution on behalf of the Corporation.
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6.7 Director. Corporation shall cause to be elected to its Board of
Directors an individual designated by Lender in writing concurrently with the
execution hereof and shall maintain, at all times, such Director or a successor
as may be designated by Lender from time to time for the period of time equal to
the earlier of: (i) the Initial Offering of its Common Stock, or (ii) until no
amount remains outstanding under this Loan or the Notes. The Corporation shall
have the right to approve any individual designated by the Lender to be a member
of the Corporation's Board of Directors, and the Corporation's approval shall
not be unreasonably withheld.
6.8 Operation of Custom Nutrition, LLC. During the term of the Loan,
Corporation will take all action necessary or appropriate in connection with the
operation of Custom Nutrition, LLC to cause the treatment by Custom Nutrition,
LLC of 40% of all amounts received by Custom Nutrition, LLC from Bally Total
Fitness Holding Corporation or its affiliates to be paid to Lender as
consideration for its entering into the Loan. The Corporation agrees to cause
the remaining 60% of such payments to be deposited in an escrow account of
Custom Nutrition, LLC for the benefit of Lender to be held as additional
Collateral for the performance of the terms of this Agreement, the Security
Notes and the Security Agreement. Said 60% of such payments shall be remitted to
Corporation when the Loan is repaid.
SECTION 7. NEGATIVE COVENANTS
A deviation from the provisions of this Section 7 shall not constitute
an Event of Default under this Agreement if such deviation is consented to in
writing (in the manner hereinafter provided) by the Lender. In the absence of
such a written consent, so long as any part of the principal or interest on the
Notes shall remain unpaid or not converted, the Corporation will not undertake
any of the following actions:
7.1 Dividends. The Corporation will not declare or pay any dividend or
make any other distribution on account of the Common Stock or Preferred Stock of
the Corporation, or purchase, acquire, redeem, or retire any capital stock of
the Corporation, whether now or hereafter outstanding, other than as required by
the terms of the Preferred Stock currently issued and outstanding; provided,
that if no Event of Default has occurred and is continuing, then the Corporation
may declare and pay dividends and make distributions with respect to Preferred
Stock, whether now or hereafter outstanding; and provided, further, that if an
Event of Default has occurred and is continuing, then the Corporation (a) may
declare and pay dividends on Preferred Stock now issued and outstanding only in
shares of Common Stock, and may pay cash dividends only on such Preferred Stock
now issued and outstanding only if the holders thereof exercise their rights to
require cash dividends in accordance with the terms of such Preferred Stock and
(b) in addition to clause (a) above, may declare and pay dividends on Preferred
Stock now or hereafter issued and outstanding, in cash or in shares of Common
Stock, only if the Corporation has net earnings (as defined under generally
accepted accounting principles) at least equal to the value of such dividend.
7.2 Loans, Advances and Investments. Except for the transactions
contemplated hereby for Custom Nutrition LLC, and except where the Company will
be involved in transactions
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involving a simultaneous closing, wherein the Company receives more money from
an investment in the Company than it makes in the other party to the
transaction, Corporation will not make loans or advances to, or make any
investments in, any company, person, or entity except expense advances, and
special purpose loans to finance the exercise of stock options, made to
employees of the Corporation, and investments in and advances to wholly-owned
subsidiaries of the Corporation that guarantee the Corporation's obligations
hereunder to the extent of such investments and advances.
7.3 Mergers. The Corporation will not merge or consolidate with any
corporation.
7.4 Sale of Assets. The Corporation will not sell, transfer, or
otherwise dispose of all or substantially all of its assets.
SECTION 8. EVENTS OF DEFAULT
8.1 Events. Any of the following events shall be considered an Event of
Default as that term is used in this Agreement:
8.1.1 Note Payments. Default shall be made in the payment of any
installment of principal or interest on the Notes when due.
8.1.2 Failure of Condition Precedent. The failure of any
condition precedent set forth in Section 9 on or before November 23,
1999, or such extended date as the parties may agree upon in writing.
8.1.3 Other Indebtedness. Except for the $1.6 million
indebtedness to the Corporation's founders due December 31, 1999, and
indebtedness which in the aggregate does not exceed $100,000, default
shall be made in the payment when due, whether by acceleration or
otherwise, of all or any part of any other indebtedness of the
Corporation, or a nonpayment default shall be made with respect to any
other indebtedness of the Corporation (other than defaults that may
reasonably be expected to be cured within any applicable grace period
provided therefor) if the effect of any such default shall be to
accelerate, or to permit (with the giving of notice or the passage of
time or both) the holder or obligee of any indebtedness at its option,
to accelerate the maturity of such indebtedness.
8.1.4 Furnishing Information. The Corporation shall fail or
refuse, after being requested to do so by the Lender, for a period of 30
days to furnish to the Lender any information, data, certificate, or
other document required by this Agreement or the Security Agreement.
8.1.5 Other Defaults. Default shall be made in the due observance
or performance of any covenant or agreement or provision contained in
this Agreement, the Security Agreement or the Note to be performed by
the Corporation (other than with respect to
8
<PAGE> 9
payment on the Note) and such default shall be continuing for a period
of 10 days after notice by the Lender to the Corporation of such
default.
8.1.6 Representations and Warranties. Any representation or
warranty made by the Corporation in this Agreement or in the Security
Agreement proves to have been untrue in any material respect as of the
date thereof, or any representation, statement (including financial
statements), certificate, or data furnished or made by the Corporation
(or any officer, accountant, or attorney of the Corporation) under this
Agreement or under the Security Agreement proves to have been untrue in
any material respect, as of the date which the facts therein set forth
were stated or certified.
8.1.7 Financial Distress. The Corporation shall (a) discontinue
business; (b) make a general assignment for the benefit or creditors;
(c) apply for or consent to the appointment of a receiver, a trustee, or
liquidator of itself or of all or a substantial part of its assets; (d)
be adjudicated a bankrupt or insolvent; (e) file a voluntary petition in
bankruptcy or file a petition or answer seeking reorganization or an
arrangement with creditors or seeking to take advantage of any other law
(whether federal or state) relating to relief of debtors, or admit (by
answer by default or otherwise) the material allegations of a petition
filed against it in any bankruptcy, reorganization, arrangement,
insolvency, or other proceeding (whether federal or state) relating to
relief or debtors; (f) there shall have been entered any judgment,
decree, or order entered by a court of competent jurisdiction that
approves a petition seeking reorganization of the Corporation or
appoints a receiver, trustee, or liquidator of the Corporation or of all
or a substantial part of its assets; or (g) the Board of Director of the
Corporation takes or omits to take any action for the purpose or with
the result of effecting or permitting any of the foregoing.
8.2 Remedies.
8.2.1 General Remedies. Upon the happening of any Event of
Default specified in Section 8.1 (other than an event described in
Section 8.1.6), and at any time thereafter during the continuance of
such event, the Lender may, upon written notice to the Corporation (a)
declare the entire principal amount of the Note then outstanding and the
interest accrued thereon immediately due and payable in cash without
further notice and without presentment, demand, protest, notice of
protest, or other notice of default or dishonor of any kind, all of
which are expressly waived by the Corporation and (b) exercise any and
all such other rights of a secured creditor under Article 9 of the
Uniform Commercial Code with respect to the Collateral (as defined in
the Security Agreement) and all rights granted the Lender under the
Security Agreement.
8.2.2 Financial Distress. With respect to a default described in
Section 8.1.6 hereof, the Note and any unpaid accrued liabilities of the
Corporation owing to the Lender shall automatically become due and
payable, both as to principal and interest, without
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<PAGE> 10
presentment, demand, protest, or other notice of any kind, all of which
are hereby waived by the Corporation.
SECTION 9. CONDITIONS PRECEDENT TO THE LENDER'S SUBSEQUENT FUNDING OBLIGATIONS
The obligations of the Lender to loan $350,000 to the Corporation on
November 23, 1999, shall be subject to the satisfaction at or prior to the date
of such subsequent funding of the Loan of the following conditions:
9.1. Representations and Warranties True. The representations and
warranties made by the Corporation in this Agreement shall be true on and as of
such date with the same effect as though such representations and warranties had
been made or given on and as of such date.
9.2 Compliance With Agreement. The Corporation shall have performed and
complied with all of its obligations under this Agreement, the Note and the
Security Agreement, which are to be performed or complied with by the
Corporation prior to or on the date of such subsequent funding, and there shall
exist no condition or event constituting an Event of Default under this
Agreement or an event of default in any indebtedness of the Corporation or
which, after notice or lapse of time, or both would constitute such an event of
default.
9.3 No Litigation. No investigation, suit, action, or other proceeding
shall be threatened or pending before any court or governmental agency which, in
the opinion of counsel for the Lender, is likely to result in the restraint,
prohibition or the obtaining of damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated by this
Agreement, or in connection with any undisclosed claims against the Corporation.
9.4 Statutory Requirements. The issuance and delivery of the Note and
the Security Agreement in the manner contemplated by this Agreement shall have
been duly and validly authorized and approved by the Board of Directors of the
Corporation, and the Corporation shall have delivered to the Lender evidence of
such authorization and approval and of compliance with any other statutory
requirements for the valid consummation by Corporation of the transactions
contemplated by this Agreement.
9.5 Deliveries by the Corporation. The Corporation shall have delivered
to the Lender the following:
9.5.1 Note. The Note reflecting the initial funding of the Loan
in accordance with Section 1.1 of this Agreement.
9.5.2 Security Agreement. The Security Agreement in accordance
with Section 2 of this Agreement.
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<PAGE> 11
9.5.3 Articles of Formation. A filed copy of the Articles of
Formation of Custom Nutrition, LLC.
9.5.4 License Agreement. An executed License Agreement granting
to Custom Nutrition, LLC a world-wide, perpetual, royalty-free license to all
FitnessAge, Inc. intellectual property rights in connection with the sale of
nutrition products. The License Agreement shall be exclusive during the period
there is any amount remaining due under the Notes, and shall automatically
become non-exclusive thereafter. The License Agreement and related documents
shall be in a form and substance satisfactory to Lender, and provided there is
no default by the Corporation under this Agreement or the Notes, the License
Agreement shall provide a right to the Corporation to issue non-exclusive
licenses to any licensee or customer of the Corporation who wants to use the
licensed technology to sell nutritional products, and who does not wish to
purchase nutritional products from Custom Nutrition, LLC.
9.5.5 Operating Agreement. An executed Operating Agreement
governing the structure and operation of Custom Nutrition, LLC satisfactory to
the parties by and among Custom Nutrition, LLC, and Lender in the form and
substance satisfactory to Lender.
9.5.6 Manufacturing Agreement. An executed exclusive
manufacturing agreement satisfactory to the parties by and among Custom
Nutrition, LLC and Lender in the form and substance satisfactory to Lender.
9.5.7 Liens Subordinate to License. All parties holding any lien
encumbering the technology licensed as referenced in Section 9.5.4 above shall
enter into all documents reasonably required to insure the license is not
subject to any lien.
9.5.8 Senior Debt Modified. The approximate $1.6 million of debt
of the Company referred to in Section 3(a) of the Notes shall be modified so as
not to be in default at any time there are amounts remaining due under this Loan
and the Notes.
SECTION 10. INDEMNIFICATION
The Corporation agrees to indemnify and hold harmless the Lender from
and against, and to reimburse the Lender with respect to, any and all loss,
damage, liability, cost, and expense, including reasonable attorney's fees,
incurred by the Lender by reason of or arising out of or in connection with:
10.1 Breach of Representations and Warranties. A breach of any
representation or warranty contained in this Agreement or in any certificate
delivered to the Lender by the Corporation pursuant to the provisions of this
Agreement.
10.2 Breach of Obligations. The failure of the Corporation to perform
any covenant or agreement required by this Agreement to be performed by the
Corporation.
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<PAGE> 12
10.3 Third-Party Obligations. The alleged existence by any third party
of any liability, obligation, lease, agreement, contract, other commitment, or
state of facts that, if it existed, would constitute a breach of any
representation or warranty contained in this Agreement or in any certificate
delivered to the Lender pursuant to the provisions of this Agreement. The Lender
agrees to give prompt notice to the Corporation of the alleged existence by any
third party of any liability, obligation, lease, agreement, contract, other
commitment, or state of facts referred to in this Section 10.3, and the
Corporation shall have the right to participate in, and, with the consent of the
Lender, which consent shall not be unreasonably withheld, to control the contest
and defense of any such claim at its own cost and expense including the cost and
expense of attorney's fees in connection with such contest and defense. In the
event that the contest and defense of any such claim is so controlled by the
Corporation, the Corporation will not be liable to the Lender pursuant to the
provisions of this Section 10 for any legal or other expense incurred by the
Lender in connection with the defense thereof, other than reasonable costs of
investigations, subsequent to the control being so assumed.
SECTION 11. NATURE AND SURVIVAL OF REPRESENTATIONS
All statements contained in any certificate, instrument, or document
delivered by or on behalf of any of the parties pursuant to this Agreement and
the transactions contemplated by this Agreement shall be deemed representations
and warranties by the respective parties. All representations and warranties
made by the parties, each to the other, in or pursuant to this Agreement shall
survive the consummation of the transactions contemplated by this Agreement,
notwithstanding any investigation heretofore or hereafter made by either of the
parties or on behalf of either of them, and shall expire on the second
anniversary of the payment or conversion in full of the Notes.
SECTION 12. ASSIGNMENT
Neither this Agreement nor any right or obligation hereunder shall be
assigned by the Corporation without the prior written consent of the Lender. It
is expressly understood that there are no restrictions on the transfer or
assignment of this Agreement, the Note, the Warrant, or the Security Agreement
by the Lender.
SECTION 13. MISCELLANEOUS PROVISIONS
13.1 Further Assurances. The Corporation will, without cost or expense
to the Lender, execute and deliver or cause to be executed and delivered to the
Lender such further instruments of transfer and conveyance and will take such
other action as the Lender may reasonably request to more effectively consummate
the transactions contemplated by this Agreement.
13.2 Binding Effect. The provisions of this agreement shall be binding
upon and inure to the benefit of the successors and assigns of the parties.
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<PAGE> 13
13.3 Notice. Any notice or other communication required or permitted to
be given under this agreement shall be in writing and shall be mailed by
certified mail, return receipt requested, postage prepaid, addressed to the
parties at the following addresses.
Corporation:
Attention: Chief Financial Officer
FitnessAge, Inc.
4250 Executive Square, Suite 101
La Jolla, California 92037
Lender:
Natural Alternatives International, Inc.
1185 Linda Vista Drive
San Marcos, California 92069
Attention: Chief Financial Officer
with a copy to:
David A. Fisher
Fisher Thurber LLP
4225 Executive Square, Suite 1600
La Jolla, California 92037
All notices and other communications shall be deemed to be given at the
expiration of three days after the date of mailing. The address of a party to
which notices or other communications shall be mailed may be changed from time
to time by giving written notice to the other parties.
13.4 Litigation Expense. In the event of a default under this agreement,
the defaulting party shall reimburse the nondefaulting party or parties for all
costs and expenses reasonably incurred by the nondefaulting party or parties in
connection with the default, including, without limitation, attorney's fees.
Additionally, in the event a suit or action is filed to enforce this agreement
or with respect to this agreement, the prevailing party or parties shall be
reimbursed by the other party for all costs and expenses incurred in connection
with the suit or action, including, without limitation, reasonable attorney's
fees at the trial level and on appeal.
13.5 Waiver. No waiver of any provision of this agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
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<PAGE> 14
13.6 Applicable Law. This agreement shall be governed by and shall be
construed in accordance with the laws of the state of Delaware.
13.7 Entire Agreement. This Agreement, together with the Notes and the
Security Agreement constitute the entire agreement between the parties
pertaining to their subject matter, and supersede all prior contemporaneous
agreements, representations, and understandings of the parties. No supplement,
modification, or amendment of this Agreement shall be binding unless executed in
writing by all parties.
Corporation: Lender:
FitnessAge, Inc. Natural Alternatives International, Inc.
a Nevada corporation a Delaware corporation
By: /s/ David G. Forster By: /s/ Mark A. LeDoux
----------------------------- ------------------------------------
David G. Forster, Mark A. LeDoux,
Chief Financial Officer Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.4
FIRST AMENDMENT TO
LOAN AGREEMENT
AND SECURITY AGREEMENT
BY AND BETWEEN
FITNESSAGE, INC.
AND
NATURAL ALTERNATIVES INTERNATIONAL, INC.
<PAGE> 2
FIRST AMENDMENT
TO
LOAN AGREEMENT AND SECURITY AGREEMENT
This First Amendment to Loan Agreement and Security Agreement effective
this 6th day of December, 1999, amends that certain Loan Agreement and Security
Agreement dated November 11, 1999, by and between FitnessAge, Inc., a Nevada
corporation ("Corporation") and Natural Alternatives International, Inc. a
Delaware corporation ("Lender").
The parties to the Loan Agreement wish to amend Sections 2, 3.2 and 6.8
of the above referenced Loan Agreement to read as follows:
SECTION 2. SECURITY
As security for the performance and payment of all obligations and
indebtedness of the Corporation to the Lender, the Corporation agrees that at
all times prior to the performance and payment of all such obligations and
indebtedness, the Lender shall have a perfected security interest, superior to
all other liens in all the rights, title, and interest of the Corporation in
Custom Nutrition, LLC, a Delaware limited liability company, including, without
limitation, rights held by the Corporation as a member, manager or creditor of
Custom Nutrition, LLC, as well as the allocable interest of the Corporation in
any amount received by Custom Nutrition, LLC from the Corporation as
contribution to Custom Nutrition LLC by the Corporation of proceeds received by
the Corporation from Bally Total Fitness Holding Corporation or its affiliates
(Bally") pursuant to Section 6.8 hereinbelow, whether such interests are now
owned or hereafter acquired and wherever the same may be located, and shall
include the proceeds, products, and accessories of any kind to any thereof. The
interests described above are referred to herein as the "Collateral". In this
connection, the Corporation has executed and delivered to the Lender
concurrently herewith the Security Agreement attached hereto and incorporated
herein by this reference ("Security Agreement").
3.2 Subsequent Loan Funding. Upon the later of (i) November 23, 1999 or
(ii) satisfaction or waiver by the Lender of each of the conditions set forth in
Section 9 of this Agreement, the Lender shall deliver to the Corporation funds
in the amount of $350,000, less expenses of Lender including its legal fees
incurred in connection herewith. If the conditions set forth in Section 9 of
this Agreement are not satisfied, or waived by Lender (in its sole discretion)
by December 6, 1999, the amounts due under the Note(s) shall be all due and
payable and the Corporation shall be in default of this Agreement.
6.8 Operation of Custom Nutrition, LLC. During the term of the Loan and
as additional consideration for Lender entering into the Loan, Corporation shall
contribute to Custom Nutrition LLC all revenue Corporation receives from Bally
in connection with the distribution offer or sale by Bally of nutritional
products, and Corporation will take all action necessary or appropriate in
connection with the operation of Custom Nutrition, LLC to cause 40% of such
amounts to be
<PAGE> 3
distributed and paid to Lender. In addition Corporation agrees to take all
action necessary or appropriate in connection with the operation of Custom
Nutrition, LLC to cause the remaining 60% of such amounts to be deposited in an
escrow account of Custom Nutrition, LLC for the benefit of Lender to be held as
Collateral for the performance by the Corporation of its obligations pursuant to
the terms of this Agreement, the Notes and the Security Agreement. Upon payment
in full of all amounts due under the Loan Corporation and Lender shall take all
action necessary or appropriate in connection with the operation of Custom
Nutrition, LLC to cause any remaining portion of funds in the escrow to be
distributed and paid to Corporation.
The parties to the above referenced Security Agreement wish to amend
Section 1(i) to read as follows:
1. Definitions of Terms Used Herein.
(i) "Bally Proceeds" shall mean all of the gross receipts of the
Corporation from Bally Total Fitness Holding Corporation or its affiliates
("Bally") in connection with or resulting from the offer sale and distribution
by Bally of nutritional products, which amount Debtor has undertaken to cause to
be contributed and transferred to Custom Nutrition, LLC, and 60% of which funds
Debtor has undertaken to cause Custom Nutrition LLC to place in an escrow
account, the contents of which account are to be held as security for the
amounts to become due and owing on the Notes (as defined below) pursuant to this
Agreement and the Loan Agreement between Debtor and Secured Party dated November
11, 1999 (the "Loan Agreement"), a copy of which is incorporated herein by this
reference.
All remaining terms of both the Loan Agreement and the Security
Agreement remain in full force and effect.
Corporation: Lender:
FitnessAge, Inc. Natural Alternatives International, Inc.
a Nevada corporation a Delaware corporation
By: /s/ Michael L. Jeub By: /s/ Mark A. LeDoux
---------------------------- ------------------------------------
Michael L. Jeub, Mark A. LeDoux,
President Chief Executive Officer
<PAGE> 1
EXHIBIT 10.5
NEITHER THIS PROMISSORY NOTE NOR THE COMMON SHARES INTO WHICH IT IS CONVERTIBLE
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES
LAW. THE COMPANY WILL NOT TRANSFER THIS PROMISSORY NOTE OR THE UNDERLYING COMMON
SHARES UNLESS: (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH PROMISSORY
NOTE OR SUCH COMMON SHARES, AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF 1933
AND APPLICABLE STATE SECURITIES LAWS, OR (ii) IT FIRST RECEIVES A LETTER FROM AN
ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN
THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION
UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.
FITNESSAGE, INC.
CONVERTIBLE SECURED PROMISSORY NOTE
NOVEMBER 11, 1999
FOR VALUE RECEIVED, FitnessAge, Inc., a Nevada corporation ("Company"),
promises to pay to the order of Natural Alternatives International, Inc., a
Delaware corporation, or any subsequent holder of this Convertible Secured
Promissory Note ("Note") hereinafter collectively referred to as the "Holder,"
payable at the Holder's offices at 1185 Linda Vista Drive, San Marcos,
California 92069, or such other place as may be designated in writing by notice
to the Company from the Holder, the principal sum of $400,000.00 receipt of
which is acknowledged, with interest thereon during the period that any portion
of the principal balance due under this Note remains unpaid and outstanding at
the rate of Twelve Percent (12%) per annum, compounded monthly. The principal
hereof, together with all accrued and unpaid interest, shall be paid in full on
or before November 10, 2000.
1. WAIVER
The Company and any and each other person or entity liable for the
payment or collection of this Note expressly waives demand and presentment for
payment, notice of nonpayment, protest, notice of protest, notice of dishonor,
bringing of suit and diligence in taking any action to collect amounts called
for under this Note and in the handling of property at any time existing as
security in connection with this Note, and shall be directly and primarily
liable for the payment of all sums owing and to be owing on this Note,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for under this Note or in
connection with
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<PAGE> 2
any right, lien, interest or property at any and all times had or existing as
security for any amount called for under this Note.
2. COSTS OF COLLECTION
The Company agrees to pay all reasonable costs, including reasonable
attorneys' fees, incurred by the Holder in collecting or enforcing payment of
this Note in accordance with its terms.
3. NO SUBORDINATION
(a) This Note shall, to the extent and in the manner hereinafter set
forth be subject in all cases to the provisions of any subordination agreement
between the holder(s) of other indebtedness of the Company and the Holder, and
otherwise shall be of first priority and shall not at any time be subordinated
or subject in right of payment to the prior payment of any other indebtedness of
the Company, whether now existing or hereafter created, with the sole exception
of the $1.6 million in loans due in December 1999.
(b) No payment on account of principal, premium, if any, or interest on
any other indebtedness of the Company shall be made if, at the time of such
payment or immediately after giving effect thereto: (i) there shall exist a
default in the payment of principal, premium, if any, or interest with respect
to this Note, or (ii) there shall have occurred an event of default with respect
to any other indebtedness, or in the instrument under which the same is
outstanding, permitting the holders thereof to accelerate the maturity of such
other indebtedness, and such event of default shall not have been cured or
waived or shall not have ceased to exist.
(c) Upon: (i) any acceleration of the principal amount due on this Note;
or (ii) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all principal, premium, if any, and interest
due or to become due upon this Note shall first be paid in full, or payment
thereof provided for in money or money's worth, before any other creditor of the
Company shall be entitled to retain any assets so paid or distributed in respect
to such other debt (for principal, premium, if any, or interest); and upon any
such dissolution or winding up or liquidation or reorganization or any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, to which the holder of any other indebtedness
would be entitled, except for these provisions, shall be paid by the Company or
by any receiver, trustee in bankruptcy, liquidating trustee, agent or other
person making
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<PAGE> 3
such payment or distribution, or by such other creditor if received by it,
directly to the Holder(s) of this Note or their representatives, to the extent
necessary to pay this Note in full.
4. VOLUNTARY CONVERSION
(a) The Holder shall have the right, at the Holder's option exercisable
at any time to convert this Note into such number of fully paid and
nonassessable shares of Common Stock (subject to adjustment as set forth below)
as shall be obtained by dividing the principal amount outstanding hereunder,
plus any accrued but unpaid interest, by the Conversion Price (as hereinafter
defined). The Conversion Price shall be equal to the lesser of (i) $1.00 per
share or (ii) $0.25 above the purchase price of a share of Common Stock sold by
the Company in the aggregate amount of $500,000 provided such sale is on or
before January 31, 2000, or if the event described in this section 4(a)(ii) does
not occur then the Conversion Price shall be $0.75 per share.
(b) The Conversion Price shall be adjusted from time to time as follows:
(i) In case the Company shall hereafter (A) subdivide its
outstanding shares of Common Stock into a greater number of shares; (B)
combine its outstanding shares of Common Stock into a smaller number of
shares; or (C) issue by reclassification of its Common Stock any shares
of capital stock of the Company, the Conversion Price in effect
immediately prior to such action shall be adjusted so the Holder shall
be entitled to receive the number of shares of Common Stock or other
capital stock of the Company which it would have owned immediately
following such action had this Note been converted immediately prior
thereto. An adjustment made pursuant to this subsection (i) shall become
retroactively effective as of immediately after the record date in the
case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made
pursuant to this subsection (i), the Holder shall become entitled to
receive shares of two or more classes or series of capital stock, the
Board of Directors of the Company, in good faith (whose determination
shall be conclusive and shall be described in a notice given to the
Holder) shall determine for accounting purposes the allocation of the
adjusted Conversion Price between or among shares of such classes of
capital stock or shares of Common Stock and other capital stock.
(ii) In case the Company shall hereafter issue options, rights or
warrants to holders of its outstanding shares of Common Stock generally
entitling them (for a period expiring within 45 days after the record
date mentioned below) to subscribe for or purchase shares of Common
Stock at a price per share less than the Conversion Price on the record
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<PAGE> 4
date mentioned below, the Conversion Price shall be adjusted so that the
same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the date of issuance of such
options, rights or warrants by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding on the date of
issuance of such options, rights or warrants plus the number of shares
which the aggregate offering price of the total number of shares of
Common Stock offered pursuant to such options, rights or warrants would
purchase at such current Conversion Price per share of Common Stock, and
of which the denominator shall be the number of shares of Common Stock
outstanding on the date of issuance of such options, rights or warrants,
plus the number of additional shares of Common Stock offered for
subscription or purchase pursuant to such options, rights or warrants.
Such adjustment shall become retroactively effective as of immediately
after the record date for the determination of stockholders entitled to
receive such options, rights or warrants.
(iii) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least
1% of such price; provided, however, that any adjustments which by
reason of this subsection (iii) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations shall be made to the nearest cent or to the nearest 1/100th
of a share, as the case may be.
(iv) In the event that at any time as a result of an adjustment
made pursuant to subsection (i) above, the Holder shall become entitled
to receive any shares of the Company other than shares of Common Stock,
thereafter the Conversion Price of such other shares so receivable upon
conversion of this Note shall be subject to readjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provision with respect to Common Stock contained in this Note.
(v) No adjustment in the Conversion Price need be made under
subsection (ii), if the Company issues or distributes to the Holder the
shares, rights, options, or warrants referred to in such subsection that
the Holder would have been entitled to receive had the Note been
converted prior to the happening of such event or the record date with
respect thereto.
(c) If at any time the Company shall be recapitalized by reclassifying
its outstanding Common Stock into shares with a par value, if the Company or a
successor corporation shall consolidate or merge with or convey all or
substantially all of its or of any successor corporation's property and assets
to any other corporation or corporations, or if the Company or a successor
corporation shall distribute Common Stock or other assets pursuant to, without
limitation, any spin-off, split-off or other distribution of assets, the Holder
shall thereafter have the right to receive
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<PAGE> 5
upon the basis and on the terms and conditions specified in this Note in lieu of
the Common Stock theretofore issuable upon the conversion of this Note, such
shares, securities or assets as may be issued or payable with respect to, or in
exchange for, the number of shares of Common Stock theretofore issuable upon the
conversion of this Note had such conversion taken place immediately prior to
such recapitalization, consolidation, merger, conveyance or distribution.
(d) If at any time the Company shall dissolve, liquidate or wind up its
affairs, the Holder may thereafter receive upon conversion hereof in lieu of
each share of Common Stock that it would have been entitled to receive the same
kind and amount of any securities or assets as may be issuable, distributable or
payable upon any such dissolution, liquidation or winding up with respect to
each share of Common Stock.
(e) In the event (i) the Company shall issue any shares of Common Stock,
options or rights to subscribe for shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock, (ii) the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a dividend payable otherwise than in cash or any other
distribution in respect to the Common Stock pursuant to, without limitation, any
spin-off, split-off or distribution of the Company's assets, or (iii) the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to subscribe for or purchase any shares of any class or to
receive any other rights; or (iv) of any reclassification or other
reorganization or recapitalization of the shares which the Company is authorized
to issue, consolidation or merger of the Company with or into another
corporation, or conveyance of all of substantially all of the assets of the
Company; then, and in such event, the Company shall send to the Holder, at least
30 days prior thereto, a notice stating the date or expected date on which such
event is to take place. Such notice shall specify the date or expected date if
any is to be fixed, as of which holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation or merger,
as the case may be.
(f) The Company will at all times reserve and keep available out of its
authorized shares, solely for issuance upon the conversion of this Note, such
number of shares of Common Stock as from time to time shall be issuable upon the
conversion of this Note.
(g) In order to exercise the conversion privilege, the Holder shall
deliver this Note to the Company accompanied by a written request for conversion
executed by the Holder. Such conversion shall be deemed to have been effected
immediately prior to the close of business on the day on which such conversion
request and Note shall have been received by the Company, and at such time the
rights of the Holder to receive principal and interest shall cease, and the
Holder shall be treated for all purposes as the record holder of such Common
Stock at such time. As promptly as practicable after the receipt of such
conversion request and this Note, the Company shall cause to be issued and
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<PAGE> 6
delivered to the Holder a certificate or certificates for the number of shares
of Common Stock issuable upon conversion of this Note. Such certificate or
certificates shall bear such legends required, in the opinion of counsel for the
Company, under applicable securities law.
(h) It is specifically agreed that this Note may be converted in part
only by the Holder and upon such conversion in part, the Company will deliver to
the Holder another Note in this form for the proportionate part of this Note not
converted.
(i) No fractional shares of Common Stock will be issued in connection
with any conversion under this Note, but in lieu of such fractional shares, the
Company shall make a cash refund therefor equal in amount to the product of the
applicable fraction multiplied by the Conversion Price then in effect.
(j) The Holder and all holders of shares of Common Stock issued upon
conversion of this Note ("Conversion Shares") are entitled to certain rights to
registration of such Conversion Shares by the Company under an Investor Rights
Agreement. Reference is made to the Investor Rights Agreement for a more
complete statement of the registration rights of the Holder and the holders of
Conversion Shares. Copies of the Investor Rights Agreement are on file at the
office of the Company.
5. OPTIONAL PREPAYMENT
This Note is pre-payable at any time upon thirty (30) days written
notice, in whole or in part, by the Company without penalty provided, however,
that upon notice of prepayment by the Company, Natural Alternatives
International, Inc. or Holder shall have 30 days after the receipt of notice
herein, to exercise their conversion privileges as set forth herein, including
under the heading "Voluntary Conversion." Prepayments shall be applied first to
accrued but unpaid interest and then to principal.
6. AMENDMENT
This Note may not be amended in any respect except by a written
agreement executed by the person to be charged with the amendment.
7. SECURITY
This Note is secured by all of the rights title and interest of the
Company in Custom Nutrition, LLC, a Delaware limited liability company,
including without limitation any interest of the Company as a Manager, Member or
creditor of Custom Nutrition, LLC and the Company's allocable share of all gross
revenue received by Custom Nutrition, LLC from Bally Total Fitness
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Holding Corporation or its affiliates as set forth in the Loan Agreement between
the parties hereto, dated November 11, 1999, and shall include the proceeds,
products and accessories of any kind to any thereof, pursuant to and with the
priorities referenced in the Security Agreement executed by the Company of even
date herewith.
8. APPLICABLE LAW
This Note shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware. It is the intention of the Company and
Holder to conform strictly to the usury laws now in force in any the state whose
laws may apply to this transaction. Accordingly, notwithstanding anything to the
contrary in this Note or in any instrument securing the same, it is agreed that
if a court of competent jurisdiction applies the laws of any state other than
Delaware in construing this Note or the enforcement thereof, then in that event
the aggregate of all charges that constitute interest under the laws of that
state that are contracted for, chargeable or receivable under this Note or any
other such instrument shall under no circumstances exceed the maximum amount of
interest permitted by laws of that state, and any excess, whether occasioned by
acceleration of maturity of this Note or otherwise, shall be deemed a mistake in
calculation and canceled automatically and, if theretofore paid, shall be either
refunded to the Company or credited on the principal amount of this Note, at the
election of the Holder.
DATED: November 11, 1999 FitnessAge, Inc.,
a Nevada corporation
By: /s/ Michael L. Jeub
------------------------------------
Michael L. Jeub, President
By: /s/ David G. Forster
------------------------------------
David G. Forster, Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.6
NEITHER THIS PROMISSORY NOTE NOR THE COMMON SHARES INTO WHICH IT IS CONVERTIBLE
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES
LAW. THE COMPANY WILL NOT TRANSFER THIS PROMISSORY NOTE OR THE UNDERLYING COMMON
SHARES UNLESS: (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH PROMISSORY
NOTE OR SUCH COMMON SHARES, AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF 1933
AND APPLICABLE STATE SECURITIES LAWS, OR (ii) IT FIRST RECEIVES A LETTER FROM AN
ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN
THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION
UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.
FITNESSAGE, INC.
CONVERTIBLE SECURED PROMISSORY NOTE
DECEMBER 6, 1999
FOR VALUE RECEIVED, FitnessAge, Inc., a Nevada corporation ("Company"),
promises to pay to the order of Natural Alternatives International, Inc., a
Delaware corporation, or any subsequent holder of this Convertible Secured
Promissory Note ("Note") hereinafter collectively referred to as the "Holder,"
payable at the Holder's offices at 1185 Linda Vista Drive, San Marcos,
California 92069, or such other place as may be designated in writing by notice
to the Company from the Holder, the principal sum of $350,000.00 receipt of
which is acknowledged, with interest thereon during the period that any portion
of the principal balance due under this Note remains unpaid and outstanding at
the rate of Twelve Percent (12%) per annum, compounded monthly. The principal
hereof, together with all accrued and unpaid interest, shall be paid in full on
or before November 10, 2000.
1. WAIVER
The Company and any and each other person or entity liable for the
payment or collection of this Note expressly waives demand and presentment for
payment, notice of nonpayment, protest, notice of protest, notice of dishonor,
bringing of suit and diligence in taking any action to collect amounts called
for under this Note and in the handling of property at any time existing as
security in connection with this Note, and shall be directly and primarily
liable for the payment of all sums owing and to be owing on this Note,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for under this Note or in
connection with
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<PAGE> 2
any right, lien, interest or property at any and all times had or existing as
security for any amount called for under this Note.
2. COSTS OF COLLECTION
The Company agrees to pay all reasonable costs, including reasonable
attorneys' fees, incurred by the Holder in collecting or enforcing payment of
this Note in accordance with its terms.
3. NO SUBORDINATION
(a) This Note shall, to the extent and in the manner hereinafter set
forth be subject in all cases to the provisions of any subordination agreement
between the holder(s) of other indebtedness of the Company and the Holder, and
otherwise shall be of first priority and shall not at any time be subordinated
or subject in right of payment to the prior payment of any other indebtedness of
the Company, whether now existing or hereafter created, with the sole exception
of the $1.6 million in loans due in December 1999.
(b) No payment on account of principal, premium, if any, or interest on
any other indebtedness of the Company shall be made if, at the time of such
payment or immediately after giving effect thereto: (i) there shall exist a
default in the payment of principal, premium, if any, or interest with respect
to this Note, or (ii) there shall have occurred an event of default with respect
to any other indebtedness, or in the instrument under which the same is
outstanding, permitting the holders thereof to accelerate the maturity of such
other indebtedness, and such event of default shall not have been cured or
waived or shall not have ceased to exist.
(c) Upon: (i) any acceleration of the principal amount due on this Note;
or (ii) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all principal, premium, if any, and interest
due or to become due upon this Note shall first be paid in full, or payment
thereof provided for in money or money's worth, before any other creditor of the
Company shall be entitled to retain any assets so paid or distributed in respect
to such other debt (for principal, premium, if any, or interest); and upon any
such dissolution or winding up or liquidation or reorganization or any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, to which the holder of any other indebtedness
would be entitled, except for these provisions, shall be paid by the Company or
by any receiver, trustee in bankruptcy, liquidating trustee, agent or other
person making such payment or distribution, or by such other creditor if
received by it, directly to the Holder(s) of this Note or their representatives,
to the extent necessary to pay this Note in full.
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<PAGE> 3
4. VOLUNTARY CONVERSION
(a) The Holder shall have the right, at the Holder's option exercisable
at any time to convert this Note into such number of fully paid and
nonassessable shares of Common Stock (subject to adjustment as set forth below)
as shall be obtained by dividing the principal amount outstanding hereunder,
plus any accrued but unpaid interest, by the Conversion Price (as hereinafter
defined). The Conversion Price shall be equal to the lesser of (i) $1.00 per
share or (ii) $0.25 above the purchase price of a share of Common Stock sold by
the Company in the aggregate amount of $500,000 provided such sale is on or
before January 31, 2000, or if the event described in this section 4(a)(ii) does
not occur then the Conversion Price shall be $0.75 per share.
(b) The Conversion Price shall be adjusted from time to time as follows:
(i) In case the Company shall hereafter (A) subdivide its
outstanding shares of Common Stock into a greater number of shares; (B)
combine its outstanding shares of Common Stock into a smaller number of
shares; or (C) issue by reclassification of its Common Stock any shares
of capital stock of the Company, the Conversion Price in effect
immediately prior to such action shall be adjusted so the Holder shall
be entitled to receive the number of shares of Common Stock or other
capital stock of the Company which it would have owned immediately
following such action had this Note been converted immediately prior
thereto. An adjustment made pursuant to this subsection (i) shall become
retroactively effective as of immediately after the record date in the
case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made
pursuant to this subsection (i), the Holder shall become entitled to
receive shares of two or more classes or series of capital stock, the
Board of Directors of the Company, in good faith (whose determination
shall be conclusive and shall be described in a notice given to the
Holder) shall determine for accounting purposes the allocation of the
adjusted Conversion Price between or among shares of such classes of
capital stock or shares of Common Stock and other capital stock.
(ii) In case the Company shall hereafter issue options, rights or
warrants to holders of its outstanding shares of Common Stock generally
entitling them (for a period expiring within 45 days after the record
date mentioned below) to subscribe for or purchase shares of Common
Stock at a price per share less than the Conversion Price on the record
date mentioned below, the Conversion Price shall be adjusted so that the
same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the date of issuance of such
options, rights or warrants by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding on the date of
issuance of such options, rights or warrants plus the number of shares
which the aggregate offering price of
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<PAGE> 4
the total number of shares of Common Stock offered pursuant to such
options, rights or warrants would purchase at such current Conversion
Price per share of Common Stock, and of which the denominator shall be
the number of shares of Common Stock outstanding on the date of issuance
of such options, rights or warrants, plus the number of additional
shares of Common Stock offered for subscription or purchase pursuant to
such options, rights or warrants. Such adjustment shall become
retroactively effective as of immediately after the record date for the
determination of stockholders entitled to receive such options, rights
or warrants.
(iii) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least
1% of such price; provided, however, that any adjustments which by
reason of this subsection (iii) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations shall be made to the nearest cent or to the nearest 1/100th
of a share, as the case may be.
(iv) In the event that at any time as a result of an adjustment
made pursuant to subsection (i) above, the Holder shall become entitled
to receive any shares of the Company other than shares of Common Stock,
thereafter the Conversion Price of such other shares so receivable upon
conversion of this Note shall be subject to readjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provision with respect to Common Stock contained in this Note.
(v) No adjustment in the Conversion Price need be made under
subsection (ii), if the Company issues or distributes to the Holder the
shares, rights, options, or warrants referred to in such subsection that
the Holder would have been entitled to receive had the Note been
converted prior to the happening of such event or the record date with
respect thereto.
(c) If at any time the Company shall be recapitalized by reclassifying
its outstanding Common Stock into shares with a par value, if the Company or a
successor corporation shall consolidate or merge with or convey all or
substantially all of its or of any successor corporation's property and assets
to any other corporation or corporations, or if the Company or a successor
corporation shall distribute Common Stock or other assets pursuant to, without
limitation, any spin-off, split-off or other distribution of assets, the Holder
shall thereafter have the right to receive upon the basis and on the terms and
conditions specified in this Note in lieu of the Common Stock theretofore
issuable upon the conversion of this Note, such shares, securities or assets as
may be issued or payable with respect to, or in exchange for, the number of
shares of Common Stock theretofore issuable upon the conversion of this Note had
such conversion taken place immediately prior to such recapitalization,
consolidation, merger, conveyance or distribution.
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<PAGE> 5
(d) If at any time the Company shall dissolve, liquidate or wind up its
affairs, the Holder may thereafter receive upon conversion hereof in lieu of
each share of Common Stock that it would have been entitled to receive the same
kind and amount of any securities or assets as may be issuable, distributable or
payable upon any such dissolution, liquidation or winding up with respect to
each share of Common Stock.
(e) In the event (i) the Company shall issue any shares of Common Stock,
options or rights to subscribe for shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock, (ii) the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a dividend payable otherwise than in cash or any other
distribution in respect to the Common Stock pursuant to, without limitation, any
spin-off, split-off or distribution of the Company's assets, or (iii) the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to subscribe for or purchase any shares of any class or to
receive any other rights; or (iv) of any reclassification or other
reorganization or recapitalization of the shares which the Company is authorized
to issue, consolidation or merger of the Company with or into another
corporation, or conveyance of all of substantially all of the assets of the
Company; then, and in such event, the Company shall send to the Holder, at least
30 days prior thereto, a notice stating the date or expected date on which such
event is to take place. Such notice shall specify the date or expected date if
any is to be fixed, as of which holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation or merger,
as the case may be.
(f) The Company will at all times reserve and keep available out of its
authorized shares, solely for issuance upon the conversion of this Note, such
number of shares of Common Stock as from time to time shall be issuable upon the
conversion of this Note.
(g) In order to exercise the conversion privilege, the Holder shall
deliver this Note to the Company accompanied by a written request for conversion
executed by the Holder. Such conversion shall be deemed to have been effected
immediately prior to the close of business on the day on which such conversion
request and Note shall have been received by the Company, and at such time the
rights of the Holder to receive principal and interest shall cease, and the
Holder shall be treated for all purposes as the record holder of such Common
Stock at such time. As promptly as practicable after the receipt of such
conversion request and this Note, the Company shall cause to be issued and
delivered to the Holder a certificate or certificates for the number of shares
of Common Stock issuable upon conversion of this Note. Such certificate or
certificates shall bear such legends required, in the opinion of counsel for the
Company, under applicable securities law.
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(h) It is specifically agreed that this Note may be converted in part
only by the Holder and upon such conversion in part, the Company will deliver to
the Holder another Note in this form for the proportionate part of this Note not
converted.
(i) No fractional shares of Common Stock will be issued in connection
with any conversion under this Note, but in lieu of such fractional shares, the
Company shall make a cash refund therefor equal in amount to the product of the
applicable fraction multiplied by the Conversion Price then in effect.
(j) The Holder and all holders of shares of Common Stock issued upon
conversion of this Note ("Conversion Shares") are entitled to certain rights to
registration of such Conversion Shares by the Company under an Investor Rights
Agreement. Reference is made to the Investor Rights Agreement for a more
complete statement of the registration rights of the Holder and the holders of
Conversion Shares. Copies of the Investor Rights Agreement are on file at the
office of the Company.
5. OPTIONAL PREPAYMENT
This Note is pre-payable at any time upon thirty (30) days written
notice, in whole or in part, by the Company without penalty provided, however,
that upon notice of prepayment by the Company, Natural Alternatives
International, Inc. or Holder shall have 30 days after the receipt of notice
herein, to exercise their conversion privileges as set forth herein, including
under the heading "Voluntary Conversion." Prepayments shall be applied first to
accrued but unpaid interest and then to principal.
6. AMENDMENT
This Note may not be amended in any respect except by a written
agreement executed by the person to be charged with the amendment.
7. SECURITY
This Note is secured by all of the rights title and interest of the
Company in Custom Nutrition, LLC, a Delaware limited liability company,
including without limitation any interest of the Company as a Manager, Member or
creditor of Custom Nutrition, LLC and the Company's allocable share of all gross
revenue received by Custom Nutrition, LLC from Bally Total Fitness Holding
Corporation or its affiliates as set forth in the Loan Agreement between the
parties hereto, dated November 11, 1999, as amended December 6, 1999, and shall
include the proceeds, products and accessories of any kind to any thereof,
pursuant to and with the priorities referenced in the Security Agreement
executed by the Company of even date herewith.
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8. APPLICABLE LAW
This Note shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware. It is the intention of the Company and
Holder to conform strictly to the usury laws now in force in any the state whose
laws may apply to this transaction. Accordingly, notwithstanding anything to the
contrary in this Note or in any instrument securing the same, it is agreed that
if a court of competent jurisdiction applies the laws of any state other than
Delaware in construing this Note or the enforcement thereof, then in that event
the aggregate of all charges that constitute interest under the laws of that
state that are contracted for, chargeable or receivable under this Note or any
other such instrument shall under no circumstances exceed the maximum amount of
interest permitted by laws of that state, and any excess, whether occasioned by
acceleration of maturity of this Note or otherwise, shall be deemed a mistake in
calculation and canceled automatically and, if theretofore paid, shall be either
refunded to the Company or credited on the principal amount of this Note, at the
election of the Holder.
DATED: December 6, 1999 FitnessAge, Inc.,
a Nevada corporation
By: /s/ Michael L. Jeub
-------------------------------------
Michael L. Jeub, President
By: /s/ David G. Forster
-------------------------------------
David G. Forster, Chief Financial
Officer
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<PAGE> 1
EXHIBIT 10.7
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is made on November 11, 1999,
between Natural Alternatives International, Inc., a Delaware corporation
(referred to as "Secured Party") and FitnessAge, Inc., a Nevada corporation
(referred to as "Debtor").
NOW THEREFORE, the parties agree as follows:
1. Definitions of Terms Used Herein.
(i) "Bally Proceeds" shall mean sixty percent (60%) of the gross
receipts of Custom Nutrition, LLC from Bally Total Fitness Holding Corporation
or its affiliates ("Bally"), which amount Debtor has undertaken to cause to be
placed in an escrow account, the contents of which account are to be held as
security for the amounts to become due and owing on the Notes (as defined below)
pursuant to this Agreement and the Loan Agreement between Debtor and Secured
Party dated November 11, 1999 (the "Loan Agreement"), a copy of which is
attached hereto and incorporated herein by this reference.
(ii) "LLC Interest" shall mean all of the right title or interest
of Debtor in and to Custom Nutrition, LLC, a Delaware limited liability company
in whatever form such interest may take, including but not limited to any
interest now held or hereafter acquired by Debtor as a member, manager or
creditor of Custom Nutrition, LLC.
(iii) "Event of Default" shall mean a failure by Debtor to pay
principal or accrued interest when due under any of those certain Convertible
Secured Promissory Notes executed by Debtor in favor of Secured Party in the
form attached to the Loan Agreement and incorporated herein by reference
("Notes") or failure by Debtor to perform any of its obligations contained in
this Agreement, the Notes or the Loan Agreement.
(iv) "Collateral" shall mean (i) the LLC Interest; (ii) Bally
Proceeds; and (iii) Proceeds from either of the foregoing.
(v) "Liability" or "Liabilities" shall mean all indebtedness due
or to become due, of the Debtor to the Secured Party under the Notes.
(vi) "Proceeds" shall mean whatever is received, including cash,
negotiable instruments and other instruments for the payment of money, chattel
paper, security agreements or other documents, when any of the Collateral is
sold, exchanged, leased, collected or otherwise disposed of, and any
instruments, securities, contract rights, general intangibles, credits, claims,
dividends and any other property, rights and interest of Debtor.
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(vii) "Security Interest" shall mean a lien or other interest in
the Collateral which secures payment in full of a Liability or performance of
any obligation hereunder continuing in full force and effect until the payment
in full of all of the Liabilities.
2. Security Interest. As security for the payment of the Liabilities,
the Debtor hereby grants to the Secured Party a Security Interest in all the
Collateral and in all ledger sheets, files, records and documents relating to
the Collateral. Until payment in full of the Liabilities, the Security Interest
in all Collateral hereby shall continue in force and effect.
3. Taxes; Financing Statements. At its option, the Secured Party may
discharge taxes, liens or security interest or other encumbrances at any time
levied or placed on the Collateral, and may pay for the maintenance and
preservation thereof, and the Debtor agrees to reimburse the Secured Party on
demand for any payment made or any expense incurred by the Secured Party on
demand for any payment made or any expense incurred by the Secured Party
pursuant to the foregoing authorization. The Debtor hereby authorizes the
Secured Party to file a financing statement or financing statements on Form
UCC-1 and any amendments thereto without the signature of the Debtor. Such
authorization is limited to the Security Interest granted by this Security
Agreement.
4. Collections. Upon the occurrence of an Event of Default hereunder,
the Secured Party shall have the right to receive, endorse, assign and/or
deliver in its own name or the name of the Debtor any and all checks, drafts and
other instruments for the payment of money relating to the Collateral and the
Proceeds and the Debtor hereby waives notices of presentment, protest and
nonpayment of any instrument so endorsed. In furtherance of the foregoing, upon
the occurrence of an Event of Default hereunder, the Debtor hereby irrevocably
appoints the Secured Party its true and lawful agent, with power of substitution
for such Debtor's name or in the name of the Secured Party or otherwise, for the
use and benefit of the Secured Party: (a) To endorse the name of the Debtor upon
any notes, acceptances, checks, drafts, money orders or other evidences of
payment that may come into the possession of the Secured Party; (b) To commence
and prosecute any and all suits, actions or proceedings in law or in equity in
any court of competent jurisdiction to collect or otherwise realize on all or
any of the Collateral or the Proceeds or to enforce any rights in respect
thereof; (c) To settle, compromise, compound, adjust or defend any actions,
suits or proceedings relating to or pertaining to all or any of the Collateral;
and (d) Generally to sell, assign, transfer, pledge, make any agreement with
respect to or otherwise deal with all or any of the Collateral, and do all other
acts and things necessary to carry out this Security Agreement, as fully and
completely as though the Secured Party were the absolute owner thereof for all
purposes; provided, however, that, unless an Event of Default shall have
occurred, the Debtor may make collections and otherwise may deal with the
Collateral (including the Proceeds) in any lawful manner in the ordinary course
of its business. The Secured Party shall not be responsible nor liable for any
shortage, discrepancy, damage, loss or destruction of any part of the Collateral
wherever the same may be located regardless of the cause thereof unless the same
shall happen through the Secured Party's negligence or wilful misconduct. The
costs of collection, notification and enforcement, including counsel fees and
out-of-pocket expenses, shall be borne solely by the Debtor whether the same are
incurred by the Security Party or the Debtor.
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<PAGE> 3
5. Event of Default. If an Event of Default shall occur, the Secured
Party may take any or all of the following actions, at the same or different
times:
(i) declare any or all of the Liabilities immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the Notes to
the contrary notwithstanding;
(ii) with or without legal process and with or without previous
notice or demand for performance, enter any premises where the Collateral is
located and take possession of the same, together with anything therein, and
make disposition of, or proceed to enforce payment of, the Collateral subject to
any and all applicable provisions of law; and/or
(iii) exercise any and all rights and remedies afforded to it
under any and all applicable provisions of law or principles of equity.
If the Collateral is sold at public sale, the Secured Party may purchase
all or part of the Collateral at such sale. The Secured Party shall apply the
proceeds of any such sale as follows: first, to the extent the same have not
been paid within 30 days of the invoice therefor, to the payment of all costs
and expenses of the Secured Party incurred in connection with such sale or
otherwise in connection with this Agreement, the Loan Agreement or any of the
Notes including, but not limited to, the reasonable fees and expenses of its
agents, attorneys and counsel; second, upon three (3) business days' notice to
the Debtor of the Secured Party's intention to make such application, to the
payment or reduction of any principal of or interest on the Notes then due and
payable, whether at the stated maturity thereof, or by acceleration or
otherwise, and any remainder of the proceeds of such sale shall be paid over to
the Debtor.
6. Waiver. The Secured Party shall not be deemed to have waived any
rights hereunder under any other agreement, instrument or paper signed by the
Secured Party. No delay or omission on the part of the Secured Party in
exercising any right hereunder shall operate as a waiver thereof or of any other
right. A waiver upon any one occasion shall not be construed as a bar or a
waiver of any right or remedy on any future occasion. All of the rights and
remedies of the Secured Party, whether evidenced hereby or by any other
agreement, instrument or paper, shall be cumulative and may be exercised singly
or concurrently.
7. Governing Law. This Agreement shall be deemed to be a contract made
under the laws of the State of California and shall be construed in accordance
with and governed by the laws of said State.
8. Successors and Assigns. Whenever in this Agreement any of the parties
hereto is referred to, such reference shall be deemed to include the successors
and assigns of such party; and all covenants, promises and agreements by or on
behalf of the Secured Party in this Agreement shall bind and inure to the
benefit of the successors and assigns of the Secured Party.
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<PAGE> 4
9. Severability. If any part of this Agreement is contrary to,
prohibited by or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated thereby
and shall be given effect so far as possible.
10. Execution by the Secured Party. This Agreement shall take effect
immediately upon execution by the Debtor, and the execution hereof by the
Secured Party shall not be required as a condition to the effectiveness of the
Security Agreement. The provision for execution of this Agreement by the Secured
Party is only for purposes of filing this Agreement as a Security Agreement
under the Uniform Commercial Code, if execution hereof by the Secured Party is
required for purposes of such filings.
11. Headings. Sections headings have been inserted in this Agreement as
a matter of convenience of reference only, and it is agreed that such Section
headings are not a part of this Agreement and shall not be used in the
interpretation of any provision of this Agreement.
12. Jurisdiction; Service of Process. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties only in the courts of the
State of California, County of San Diego, or, if it has or can acquire
jurisdiction, in the United States District Court for the Southern District of
California, and each of the parties consents to the jurisdiction of such courts
(and of the appropriate appellate courts) in any such action or proceeding and
waives any objection to venue laid therein. Process in any action or proceeding
referred to in the proceeding sentence may be served on any party anywhere in
the world.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SECURED PARTY:
Natural Alternatives, International, Inc.,
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. LeDoux, Chief Executive Officer
DEBTOR:
FitnessAge, Inc.,
a Nevada corporation
By: /s/ David G. Forster
-----------------------------------------
David G. Forster, Chief Financial Officer
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<PAGE> 5
EXHIBIT "A"
FORM UCC-1
<PAGE> 1
EXHIBIT 10.8
WARRANT
To Purchase Shares of Common Stock of
FITNESSAGE, INC.
Dated as of November 11, 1999
Issuer: FitnessAge, Incorporated
To: Natural Alternatives International, Inc.
Warrant: Exercisable for 150,000 shares of Common Stock
Expiration Date: November 11, 2002
Issuance Date: November 11, 1999
THIS WARRANT CERTIFICATE certifies that Natural Alternatives
International, Inc., 1185 Linda Vista Drive, San Marcos, CA 92069, ("Holder"),
for the value received is entitled, subject to the terms following, to purchase
from FitnessAge, Inc, a Nevada Corporation (the "Company"), 150,000 (the
"Shares") fully paid common shares in the Company ("Common Stock") at an
exercise price ("Purchase Price") equal to the lesser of: (i) $1.00 per share;
or (ii) $0.25 above the purchase price of a share of Common Stock sold by the
Company in the aggregate amount of $500,000 when such sale is made on or before
January 31, 2000, or if the transaction in this (ii) does not occur, then the
Purchase Price shall be $0.75 per share. The exercise of this Warrant and the
payment of the Purchase Price therefor shall be made at any time up to and
including November 11, 2002. Such exercise of this Warrant becomes effective
upon surrender to the Company, at its principal office at 4250 Executive Square,
Ste. 101 La Jolla, Ca. 92037 89014, Attention: Treasurer (or at such other
location as the Company may advise in writing) of this Warrant properly endorsed
with the form of Subscription Agreement attached duly completed and signed with
payment in cash, cashiers check or cleared funds into the Company's bank of the
aggregate Purchase Price for the number of Shares for which the Warrant is being
exercised, or in accordance with the net issuance provisions provided at Section
1(d) herein.
The Purchase Price and the number of shares purchasable under this
Warrant are subject to adjustment as provided in Section 3 of this Warrant.
1. Exercise; Issue of Certificates; Payment for Shares
(a) Term and Record Owner. This Warrant is exercisable in the manner set
forth above at the option of Holder at any time up to and including November 11,
2002 for all or a portion of the Shares which may be purchased. The Company
agrees that the Shares purchased under this Warrant shall be and are deemed to
be issued to Holder as the record owner of such Shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for such Shares.
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<PAGE> 2
Subject to the provisions of Section 2, certificates for the Shares
purchased shall be delivered to Holder by the Company's transfer agent at the
Company's expense within ten (10) days after the rights represented by this
Warrant have been exercised. Each share certificate so delivered shall be in
such denominations of shares as requested by Holder and shall be registered in
the name of Holder or such other name as shall be designated by Holder, subject
to the limitations contained in Sections 1(b) and 2.
b) Compliance with Law. No Shares will be issued pursuant to the
exercise of this Warrant unless such issue and exercise complies with all
relevant provisions of the law and the requirements of any stock exchange or
automated quotation system upon which the Company's shares may then be listed.
Assuming such compliance, for income tax purposes, the Shares shall be
considered transferred to Holder on the date on which this Warrant is exercised.
c) Issuance of New Certificate. If less than all of the shares which may
be purchased under this Warrant are exercised at any time, the Company shall
issue, at its expense, a new warrant certificate evidencing the right to
purchase the remaining number of shares for which no exercise has been evidenced
by this Warrant.
d) Net Issue Election. Holder may elect to convert all or a portion
hereof into shares of Common Stock, without the payment of any additional
consideration, by the surrender of this Warrant or such portion to Company, with
the net issue election notice annexed hereto duly executed, at the principal
office of Company. Thereupon, Company shall issue to Holder such number of fully
paid and nonassessable shares of Common Stock as is computed using the following
formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the Holder
pursuant to this Section 1(d);
Y = Exercise Quantity;
A = the Fair Market Value of one share of Common Stock; and
B = the Purchase Price
e) Fair Market Value. "Fair Market Value" of a share of Common Stock as
of a particular date means: (a) if traded on an exchange or quoted on the NASDAQ
National Market System, then the average of the closing prices for the five (5)
days prior to the date of the Holder's notice of exercise, (b) if conversion or
exercise is on a date from the filing of, through to the effective date of, the
registration statement for an underwritten public offering registered under the
Securities Act, the initial public offering price (before deducting commissions,
discounts or expenses) per share sold in such offering, (c) if listed by the
National Daily Quotation Service "Pink Sheets," then the average of the
most-recently reported bid and ask prices for the ten (10) day period ending two
(2) days prior to the day the fair market value is being determined, and (d)
otherwise, the price, not less than book value, determined in good faith and in
such reasonable manner as prescribed by a majority of Company's Board of
Directors; provided, however, that (i) Company will notify Holder of such price
within ten business days after Holder provides the Company written notice of its
election; (ii) Holder will have ten business days after receipt of such notice
to dispute such price by written notice to Company; and (iii) Holder will
thereafter appoint an appraiser reasonably acceptable to Company to determine
Fair Market Value, the costs of which Company will bear if the appraisal is 110%
or more of that determined by the non-employee Directors of the Company.
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<PAGE> 3
2. Representations, Warranties and Covenants of the Company.
(a) Reservation of Common Stock. The Common Stock issuable upon exercise
of the Warrant has been duly and validly reserved and, when issued in accordance
with the provisions of this Warrant, will be validly issued, fully paid and
non-assessable, and will be free of any taxes, liens, charges or encumbrances of
any nature whatsoever; provided, however, that the Common Stock issuable
pursuant to this Warrant may be subject to restrictions on transfer under state
and/or Federal securities laws. The Company has made available to the
Warrantholder true, correct and complete copies of its Articles and Bylaws, as
amended. The issuance of certificates for shares of Common Stock upon exercise
of the Warrants shall be made without charge to the Warrantholder for any
issuance tax in respect hereof, or other cost incurred by the Company in
connection with such exercise. The Company shall not be required to pay any tax
which may be payable in respect of any transfer involved the issuance and
delivery of any certificate in a name other than that of the Warrant Holder.
(b) Due Authority. The execution and delivery by the Company of this
Warrant and the performance of all obligations of the Company hereunder,
including the issuance to Warrantholder of the right to acquire the shares of
Common Stock, have been duly authorized by all necessary corporate action on the
part of the Company, and this Warrant is not inconsistent with the Company's
Articles or Bylaws, does not contravene any law or governmental rule, regulation
or order applicable to it, does not and will not contravene any provision of, or
constitute a default under, any indenture, mortgage, contract or other
instrument to which it is a party or by which it is bound, and this Warrant
constitutes a legal, valid and binding agreement of the Company, enforceable in
accordance with its terms.
(c) Consents and Approvals. No consent or approval of giving of notice
to, registration with or taking of any other action in respect of any state,
Federal or other governmental authority or agency is required with respect to
the execution, delivery and performance by the Company of its obligations under
this Warrant, except for the filing of notices pursuant to Regulation D under
the 1933 Act and any filing required by applicable state securities law, which
filing will be effective by the time required thereby.
(d) Issued Securities. All issued and outstanding shares of Common
Stock, or any other securities of the Company have been duly authorized and
validly issued and are fully paid and nonassesable. All outstanding shares of
Common Stock and any other securities were issued in full compliance with all
Federal and state securities laws. In addition:
(i) The authorized capital of the Company consists of (A)
100,000,000 shares of Common Stock of which 30,206,657 shares are issued and
outstanding; and (B) 25,000,000 shares of preferred stock, of which 0 (zero)
shares are issued and outstanding.
(ii) The Company has previously reserved 6,182,000 million shares
of Common Stock for issuance to employees, consultants and directors pursuant to
outstanding options and has reserved 5,002,916 million shares of Common Stock
for issuance to employees, consultants and directors pursuant to outstanding
warrants. There are no other options, warrants, conversion privileges or other
rights presently outstanding to purchase or otherwise acquire any authorized but
unissued shares of the Company's capital stock or other securities of the
Company.
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<PAGE> 4
(iii) In accordance with the Company's Charter, no shareholder of
the Company has preemptive rights to purchase the Company's Common Stock subject
to this Warrant.
(e) Exempt Transaction. Based on the Warrantholder's representations set
forth in Section 4 hereof, the issuance of the Warrant and the Common Stock upon
exercise of this Warrant will constitute a transaction exempt from (i) the
registration requirements of Section 5 of the 1933 Act, in reliance upon Section
4(2) thereof, and (ii) the qualification requirements of the applicable state
securities laws.
(f) Compliance with Rule 144. At the written request of the
Warrantholder, who proposes to sell Common Stock issued upon the exercise of the
Warrant in compliance with the Rule 144 promulgated by the Securities and
Exchange Commission, the Company shall furnish to the Warrantholder, within ten
days after receipt of such request, a written statement confirming the Company's
compliance with the filing requirements of the Securities and Exchange
Commission as set forth in such Rule, as such may be amended from time to time.
3. Adjustment of Share Purchase Price and Number of Shares
The Purchase Price and the number of Shares purchasable upon the
exercise of this Warrant shall be subject to adjustment from time to time upon
the occurrence of certain events described as follows:
3.1 Subdivision or Combination of Shares
In case the Company at any time a) subdivides its shares on issue into a
greater number of shares, or b) pays a stock dividend or otherwise makes a
distribution or distributions on shares of its Common Stock or on any other
class of capital stock and not the Common Stock payable in shares of Common
Stock, the Purchase Price in effect immediately prior to each subdivision shall
be proportionately reduced and the number of shares issued upon exercise of this
Warrant shall be proportionately increased.
Conversely, in the case of the Company's shares on issue be combined
into a smaller number of shares, the Share Purchase Price in effect immediately
prior to such combination shall be proportionately increased and the number of
shares issued upon exercise of this Warrant shall be proportionately reduced.
In case of any reclassification of the Common Stock, any consolidation
or merger of the Company with or into another person, the sale or transfer of
all or substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property, then the Holder shall have the right thereafter to exercise
this Warrant only into the shares of stock and other securities and property
receivable upon or deemed to be held by holders of Common Stock following such
reclassification, consolidation, merger, sale, transfer or share exchange, and
the Holder shall be entitled upon such event to receive such amount of
securities or property equal to the amount of Common Stock such Holder would
have been entitled to had such Holder exercised this Warrant immediately prior
to such reclassification, consolidation, merger, sale, transfer or share
exchange. The terms of any such consolidation, merger, sale, transfer or share
exchange shall include such terms so as to continue to give to the Holder the
right to receive the securities or property set forth in this Section upon any
exercise following such consolidation, merger, sale, transfer, or share
exchange. This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
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<PAGE> 5
3.2 Notice of Adjustment
Promptly after the adjustment of the Purchase Price for any increase or
decrease in the number of Shares purchasable upon exercise of this Warrant, the
Company shall give written notice thereof, by first class mail, postage prepaid,
addressed to Holder at the address of Holder shown in the books of the Company.
The notice shall be signed by an authorized officer of the Company and shall
state the effective date of the adjustment and the new Purchase Price resulting
from such adjustment and the increase or decrease, if any, in the number of
shares purchasable at such price upon the exercise of this Warrant, setting
forth in reasonable details the method of calculation and the facts upon which
such calculation is based.
4. Investment Representations
By receipt of this Warrant, by its execution and by its exercise in
whole or in part, Holder represents to the Company the following:
(i) it is understood that this Warrant and any Shares purchased
upon its exercise are securities, the issue of which requires compliance with
federal and state securities laws;
(ii) Holder is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire such securities;
(iii) Holder is acquiring these securities for investment only
and does not have a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933, as
amended (the "Act"); and
(iv) Holder acknowledges and understands that the securities
constitute "restricted securities" under the Act and must be held indefinitely
unless they are subsequently registered under the Act or an exemption from such
registration is available.
5. Issue Tax
The issue of certificates for Shares upon the exercise of the Warrant
shall be made without charge to the holder of the Warrant for any issue tax in
respect thereof, provided however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the then holder of
the Warrant being exercised.
6. No Voting or Dividend Rights; Limitation of Liability
Nothing contained in this Warrant shall be construed as conferring upon
the Holder hereof the right to vote or to consent or to receive notice as a
shareholder in respect of meetings of shareholders for the election of directors
of the Company or any other matters or any rights whatsoever as a shareholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the shares purchasable hereunder until, and only to the extent
that, this Warrant shall have been exercised. No provisions hereof, in the
absence of affirmative action by the holder to purchase Shares, and no mere
enumeration herein of the rights or privileges of the holder hereof, shall give
rise to any liability of such
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<PAGE> 6
holder for the Purchase Price or as a shareholder of the Company whether such
liability is asserted by the Company or by its creditors.
7. Transfer and Registration of Securities
7.1 Warrants not Transferable
The Warrants are not transferable in the absence of a
registration statement made under the Act with respect to such Warrants, or an
exemption therefrom.
7.2 Shares Issued upon Exercise of Warrants Not Transferable
The Shares issued to Holder upon exercise of the Warrants shall
not be transferable until such time as there exists an effective registration
statement with respect to those Shares under the Act, or there exists an
exemption from registration.
7.3 Restrictive Legend on Shares Issued
In the absence of registration under the Act or an exemption
therefrom as contemplated by Section 7.2, each certificate representing the
Shares or any other securities issued in respect of the Shares, shall be stamped
or otherwise imprinted with a legend substantially in the following form (in
addition to any legend required under applicable state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY STATE SECURITIES LAWS
AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY, IN THE ABSENCE OF
REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SAID ACT OR SUCH LAWS, BE
TRANSFERRED.
7.4 Registration Rights
All shares of Common Stock issuable upon exercise of this Warrant
shall be "Registrable Securities" or such other definition of securities
entitled to registrable rights pursuant to the Investor Rights Agreement dated
November 11, 1999, by and among the Company and the Holder.
8. Modification and Waiver
This Warrant and any provision hereof may be changed, waived, discharged
or terminated only by an instrument in writing signed by the party against which
enforcement of the same is sought.
9. Notices
Any notice, request or other document required or permitted to be given
or delivered to the holder hereof or the Company shall be sent by certified or
registered mail, postage prepaid, to each such holder at the address shown in
the books of the Company or to the Company at the address indicated therefore in
the first paragraph of the Warrant Certificate.
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<PAGE> 7
10. Descriptive Headings and Governing Law
The descriptive headings of the several sections and paragraphs of this
Warrant are inserted for convenience only and do not constitute a part of this
Warrant. This Warrant shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the laws of the State of
California without reference to the principles of conflicts of laws.
11. Lost Warrants or Share Certificates
The Company represents and warrants to Holder that upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant or Share certificate representing the Warrant
Shares and in the case of any such loss, theft, destruction or mutilation, upon
receipt of an indemnity and, if requested, bond reasonably satisfactory to the
Company, or in the case of any such mutilation, upon surrender and cancellation
of such Warrant or share certificate, the Company at its expense will make and
deliver a new Warrant or Share certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or Share certificate.
12. Attorney's Fees
In any litigation, arbitration or court proceeding between the Company
and the Warrant Holder relating hereto, the prevailing party shall be entitled
to attorneys' fees and expenses and all costs of proceedings incurred in
enforcing this Warrant.
13. Counterparts
This Warrant may be executed in tow or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
14. Remedies
In the event of any default hereunder, the non-defaulting party may
proceed to protect and enforce its rights either by suit in equity an/or by
action at law, including but not limited to an action for damages as a result of
any such default, and/or an action for specific performance for any default
where Warrant Holder will not have an adequate remedy at law and where damages
will not be readily ascertainable.
15. Survival
The representations, warranties, covenants and conditions of the
respective parties contained herein or made pursuant to this Warrant shall
survive the execution and delivery of this Warrant.
16. Severability
In the event any one or more of the provisions of this Warrant shall for
any reason be held invalid, illegal or unenforceable, the remaining provisions
of this Warrant shall be unimpaired, and the invalid, illegal
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<PAGE> 8
or unenforceable provision shall be replaced by a mutually acceptable valid,
legal and enforceable provision, which comes closest to the intention of the
parties underlying the invalid, illegal or unenforceable provision.
17. No Impairment
Company will not, by amendment of its Articles or through any
reclassification, capital reorganization, consolidation, merger, sale or
conveyance of assets, dissolution, liquidation, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance of performance
of any of the terms of this Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such actions as
may be necessary or appropriate in order to protect the rights of Holders.
18. Warrant Holder Registry
The Company shall maintain a registry showing the name and address of
the registered holders of this Warrant.
IN WITNESS WHEREOF, the said corporation has caused this certificate to
be signed its duly authorized officers.
/s/ Michael L. Jeub /s/ David G. Forster
- --------------------------- ------------------------------------
Michael L. Jeub, President David G. Forster,
Chief Financial Officer
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<PAGE> 9
Warrant
Exercise Subscription Form
To be completed and submitted to FitnessAge to exercise the Warrant.
To: FitnessAge, Inc.
4250 Executive Square, Ste 101
La Jolla, Ca. 92037
USA
Attention: Secretary and Treasurer
Natural Alternatives International, Inc., the holder of a Warrant to purchase
150,000 shares of Common Stock, hereby irrevocably elects to exercise the
purchase right represented by such Warrant and therefore purchases
__________________ common shares of FitnessAge, Inc. (the "Company") at $_____
per share for a total consideration of
_____________________________________________ Dollars ($_______________).
<<Company>> requests that the certificates for the shares being acquired be
issued as follows:
Name on Certificate: _________________________________
Delivery address: _________________________________
_________________________________
_________________________________
_________________________________
If the exercise of this Warrant is not covered by a registration statement
effective under the Securities Act of 1933, as amended (the "Securities Act"),
Natural Alternatives International, Inc. represents that:
(i) Natural Alternatives International, Inc. is acquiring the Shares for
investment and is not acting as nominee or agent requiring the later
distribution of the Shares and Natural Alternatives International, Inc.
has not assigned or otherwise arranged for the selling, granting any
participation in or otherwise distributing the same;
(ii) Natural Alternatives International, Inc. has such knowledge and
experience in financial and business matters as to be capable of
evaluating the merits and risks of the investment in the Company's
shares;
(iii) Natural Alternatives International, Inc. has received all of the
information that was requested from the Company and considers it
necessary or appropriate for deciding whether to purchase the shares;
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<PAGE> 10
(iv) Natural Alternatives International, Inc. has the ability to bear the
economic risks of the prospective investment;
(v) Natural Alternatives International, Inc. is able, without material
financial impact, to hold the shares for an indefinite period of time
and can suffer complete loss of the investment;
(vi) Natural Alternatives International, Inc. understands and agrees that the
investment may not be able to be easily liquidated and the shares must
be held indefinitely unless a subsequent disposition thereof is
registered or qualified under the Securities Act and applicable state
securities or Blue Sky laws or is exempt from such registration or
qualification, and that the Company is not required to register the same
or to take any action or make such an exemption available except to the
extent provided by the Warrant.
(vii) Natural Alternatives International, Inc. is either (A) familiar with the
definition of and is an "accredited investor' within the meaning under
Rule 501 of Regulation D promulgated under the Securities Act, or (B) is
providing representations and warranties reasonably satisfactory to the
Company and its counsel, to the effect that the sale and issue of shares
upon exercise the Warrant may be made without registration under the
Securities Act or any applicable state securities and Blue Sky laws; and
(viii) the address set forth is the true and correct address of Natural
Alternatives International, Inc.
______________________________
DATED
______________________________
SIGNATURE
______________________________
NAME
______________________________
NAME OF OWNERSHIP ENTITY (if applicable)
NET ISSUE ELECTION NOTICE
To: ______________________ Date: _______________________
the undersigned hereby elects under Section 1(d) to surrender the right
to purchase ______ Warrant Shares pursuant to this Warrant. The certificate(s)
for such shares issuable upon such net issue election shall be issued in the
name of the undersigned or as otherwise indicated below:
______________________________________
Signature
______________________________________
Name for Registration
______________________________________
Mailing Address
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<PAGE> 11
TRANSFER NOTICE
(To transfer or assign the foregoing Warrant execute this form and
supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby transferred and assigned to__________________________________
____________________________________________________
(Please Print)
whose address is _______________________________________________________________
Dated: ______________________________________________
Holder's Signature: _________________________________
Holder's Address: ___________________________________
_____________________________________________________
Signature
Guaranteed:__________________________________________
NOTE: The signature to this Transfer Notice must correspond with the name as
it appears on the face of the Warrant, without alteration or enlargement
or any change whatever. Officers of corporations and those acting in a
fiduciary or other representative capacity should file proper evidence
of authority to assign the foregoing Warrant.
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<PAGE> 1
EXHIBIT 10.9
INVESTOR RIGHTS AGREEMENT
This INVESTOR RIGHTS AGREEMENT is made as of November 11, 1999, by and
among FitnessAge, Inc., a Nevada corporation (the "Company") and Natural
Alternatives International, Inc., a Delaware corporation (the "Investor").
RECITALS
WHEREAS, the Company proposes to borrow a total of $750,000 in two
tranches from the Investor pursuant to Convertible Promissory Notes ("Notes")
and Loan Agreement (collectively "Notes and Loan Agreement") of even date
herewith;
WHEREAS, the Company proposes to issue a Warrant to purchase 150,000
shares of common stock of the Company ("Warrant") to Investor in connection with
the Notes and Loan Agreement;
WHEREAS, as a condition of entering into the Notes and Loan Agreement,
the Investor has requested that the Company extend to it registration rights,
information rights and certain other rights as set forth below, and the Company
is willing to grant such rights to the Investor;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth herein and in
the Notes and Loan Agreement, the parties mutually agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"Act" means the Securities Act of 1933, as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Form S-3" means such form under the Act as in effect on the date
hereof or any registration form under the Act subsequently adopted by the SEC
that permits inclusion or incorporation of substantial information by reference
to other documents filed by the Company with the SEC.
"Holder" means any person owning or having the right to acquire
Registrable Securities or any assignee thereof in accordance with Section 2.12
hereof.
"Initial Offering" means the Company's initial public offering of
its Common Stock registered under the Act.
"Register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
<PAGE> 2
"Registrable Securities" means (i) the shares of Common Stock
issuable or issued upon conversion of the Notes (ii) the shares of Common Stock
issuable or issued upon exercise of the Warrant and (iii) any shares of Common
Stock of the Company issued (or issuable upon the conversion or exercise of any
warrant, right, the Notes, or other security which is issued) as a dividend or
other distribution with respect to, or in exchange for or in replacement of, the
shares referenced in (i) and/or (ii) above, excluding in all cases, however, any
Registrable Securities sold by a person in a private transaction in which the
transferor's rights under Section 2 are not assigned or assignable and any
Registrable Securities sold to the public pursuant to a registration statement
or Rule 144 promulgated under the Act. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Securities as is appropriate in order to prevent any
dilution of the rights granted herein.
"Registrable Securities then outstanding" means (i) the aggregate
number of shares of Common Stock outstanding and (ii) the number of shares of
Common Stock issuable pursuant to then exercisable or convertible securities,
that are Registrable Securities.
"SEC" means the Securities and Exchange Commission.
"Shares" means any shares of, or securities convertible into or
exercisable for any shares of, any class of the Company's capital stock.
2. REGISTRATION RIGHTS
2.1 Demand Registration.
(a) Subject to the conditions of this Section 2.1, if the Company
shall receive a written request from the Holders of a majority of the
Registrable Securities then outstanding (the "Initiating Holders") that the
Company file a registration statement under the Securities Act covering the
registration of Registrable Securities then outstanding, then the Company shall,
within thirty (30) days of the receipt thereof, give written notice of such
request to all Holders, and subject to the limitations of this Section 2.1, use
its best efforts to effect, as soon as practicable, the registration under the
Securities Act of all Registrable Securities that the Holders request to be
registered, provided, however, the rights in this Section 2.1(a) shall not be
exercisable until 60 days after the Initial Offering of the Company.
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 2.1 or any request pursuant to Section 2.2 and the Company shall
include such information in the written notice referred to in Section 2.1(a) or
Section 2.2(a), as applicable. In such event, the right of any Holder to include
its Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by a majority in interest of the
Initiating Holders, which underwriter or underwriters shall be reasonably
acceptable to the Company. Notwithstanding any other provision of this Section
2.1 or
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Section 2.2, if the underwriter advises the Company that marketing factors
require a limitation of the number of securities to be underwritten (including
Registrable Securities) then the Company shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares that may be included in the underwriting shall be
allocated to the Holders of such Registrable Securities on a pro rata basis
based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders). Any Registrable Securities excluded or
withdrawn from such underwriting shall be withdrawn from the registration.
(c) The Company shall not be required to effect a registration
pursuant to this Section 2.1:
(i) after the fifth anniversary of the date of the Loan
Agreement; or
(ii) after the Company has effected one (1) registration
pursuant to this Section 2.1, and such registration has been declared or ordered
effective; or
(iii) prior to sixty (60) days following the effective
date of a registration statement pertaining to the Initial Offering.
2.2 Piggyback Registrations.
(a) The Company shall notify all Holders of Registrable
Securities in writing at least thirty (30) days prior to the filing of any
registration statement under the Act for purposes of a public offering of
securities of the Company (including, but not limited to, registration
statements relating to the Initial Offering or secondary offerings of securities
of the Company, but excluding registration statements relating to employee
benefit plans or with respect to corporate reorganizations or other transactions
under Rule 145 of the Act) and will afford each such Holder an opportunity to
include in such registration statement all or part of the Registrable Securities
held by such Holder. Each Holder desiring to include in any such registration
statement all or any part of the Registrable Securities held by it shall, within
twenty (20) days after the above-described notice from the Company, so notify
the Company in writing. Such notice shall state the intended method of
disposition of the Registrable Securities by such Holder. If a Holder decides
not to include all of its Registrable Securities in any registration statement
thereafter filed by the Company, such Holder shall nevertheless continue to have
the right to include any Registrable Securities in any subsequent registration
statement or registration statements as may be filed by the Company with respect
to offerings of its securities, all upon the terms and conditions set forth
herein.
(b) Underwriting. If the registration statement under which the
Company gives notice under this Section 2.2 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 2.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated,
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first, to the Common Stock the Company proposes to sell; second, the Common
Stock the founders and Company executives propose to sell; and third, to any
stockholder of the Company and the Holders on a pro rata basis based on the
total number of Registrable Securities held by the Holders. If any Holder
disapproves of the terms of any such underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter,
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any Registrable Securities excluded or withdrawn from
such underwriting shall be excluded and withdrawn from the registration. For any
Holder which is a partnership or corporation, the partners, retired partner and
stockholders of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single "Holder," and any pro rate
reduction with respect to such "Holder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "Holder," as defined in this sentence.
2.3 Obligations of the Company. Whenever required under this
Section 2 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and keep such registration
statement effective for a period of up to one hundred eighty (180) days
provided, however, that (i) such 180-day period shall be extended for a period
of time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter of Common Stock
(or other securities) of the Company; and (ii) in the case of any registration
of Registrable Securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such 180-day period shall be extended, if
necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 415, or any successor rule
under the Act, permits an offering on a continuous or delayed basis, and
provided further that applicable rules under the Act governing the obligation to
file a post-effective amendment permit, in lieu of filing a post-effective
amendment that (I) includes any prospectus required by Section 10(a)(3) of the
Act or (II) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference of information required to be included in (I) and
(II) above to be contained in periodic reports filed pursuant to Section 13 or
15(d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions, including
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California, as shall be reasonably requested by the Holders and do any and all
other acts and things which may be necessary or advisable to enable the Holders
to consummate the public sale or other disposition in California and in such
jurisdiction where the securities are owned by such Holders; provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Act.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting also shall enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered
pursuant hereto to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereto and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
(i) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 2, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 2, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities, and (ii) a letter,
dated such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
2.4 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 2 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such
securities, as shall be required to effect the registration of such Holder's
Registrable Securities.
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2.5 Expenses of Company Registration. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 2.1 and Section 2.2 for each Holder, including (without
limitation) all registration, filing, qualification, printers' and accounting
fees, fees and disbursements of counsel for the Company (including fees and
disbursements of counsel for the Company in its capacity as counsel to the
selling Holders hereunder; if Company counsel does not make itself available for
this purpose, the Company will pay the reasonable fees and disbursements, not to
exceed fifteen thousand dollars ($15,000), of one counsel for the selling
Holders), but excluding underwriting discounts and commissions relating to
Registrable Securities.
2.6 Underwriting Requirements.
(a) In connection with any offering involving an
underwriting of Shares, the Company shall not be required under Section 2.1 or
2.2 to include any of the Registrable Securities in such underwriting unless the
Holders of a majority of the Registrable Securities that indicated interest in
including their Registrable Securities in the underwriting accept the terms of
the underwriting as agreed upon between the Company and the underwriters
selected by it (or by other persons entitled to select the underwriters), and
then only in such quantity as the underwriters determine, in their sole
discretion, will not jeopardize the success of the offering by the Company.
(b) If the total number of Shares, including Registrable
Securities, requested by shareholders to be included in such offering exceeds
the number of Shares to be sold (other than by the Company) that the
underwriters determine, in their sole discretion, will be compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of Shares, including Registrable Securities, that the
underwriters determine in their sole discretion will not jeopardize the success
of the offering.
With respect to a demand registration under Section 2.1, the
Shares held by selling shareholders to be included in such offering shall be
apportioned pro rata among the selling shareholders according to the total
number of Shares entitled to be included therein owned by each selling
shareholder or in such other proportions as they shall mutually agree, but in no
event shall (i) the number of Registrable Securities included in the offering be
reduced below fifty percent (50%) of the total number of Shares (including
Shares sold by the Company) included in such offering, unless such offering is
the Initial Offering in which case the selling shareholders may be excluded if
the underwriters make the determination described above and no other
shareholder's securities are included; or (ii) any shares being sold by a
shareholder exercising a demand registration right be excluded from such
offering, notwithstanding (i) above.
(c) In apportioning the Shares in accordance with
subsection 2.6(b), if a "selling shareholder" is a Holder of Registrable
Securities and a partnership or corporation, then the partners, retired partners
and shareholders of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons, shall be deemed to be a single "selling shareholder," and any
pro-rata reduction with respect to such "selling shareholder" shall be based
upon the aggregate number of shares having registration rights owned by all
entities and individuals deemed to be such "selling shareholder."
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2.7 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 2.
2.8 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 2:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Exchange Act, against any losses, claims,
damages or liabilities (joint or several) to which they may become subject under
the Act, the Exchange Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in any registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto; (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements made therein not misleading; or (iii) any violation or
alleged violation by the Company of the Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Act, and the
Company will pay to each such Holder, underwriter or controlling person, as
incurred, any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided; however, that the indemnity agreement contained in this
subsection 2.8(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation that occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder
will indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person or any such underwriter or Holder, against any losses, claims, damages or
liabilities (joint or several) to which any of the foregoing persons may become
subject, under the Act, the Exchange Act or other federal or state law, insofar
as such losses, claims, damages or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 2.8(b), in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
2.8(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided,
however, that in no event shall any indemnity under this subsection 2.8(b)
exceed the net proceeds from the offering received by such Holder.
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(c) Promptly after receipt by an indemnified party under
this Section 2.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly notified, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflicts
of interest between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
2.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 2.8.
(d) If the indemnification provided for in this Section
2.8 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with an underwritten public offering are in
conflict with the foregoing provisions, the provisions of the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 2.7 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 2, and otherwise.
2.9 Exchange Act Reports. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Act and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a registration on
Form S-3, the Company agrees to:
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(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety (90)
days after the effective date of the registration statement pertaining to the
Initial Offering;
(b) take such action, including the voluntary registration
of its Common Stock under Section 12 of the Exchange Act, as is necessary to
enable the Holders to use Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the first registration statement filed by the Company for the offering
of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, promptly upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act, and the Exchange Act (at
any time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies); (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company; and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
2.10 "Market Stand-Off" Agreement. Each Holder hereby agrees
that, during the period of duration specified by the Company and the managing
underwriter of the Initial Offering, it shall not, to the extent requested by
the Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except common stock included in such registration;
provided, however, that:
(a) such agreement shall be applicable only with respect
to the Initial Offering;
(b) all officers and directors of the Company, all other
persons with registration rights (whether or not pursuant to this Agreement) and
all shareholders who are required by the underwriter to execute lock-ups enter
into similar agreements;
(c) such market stand-off time period shall not exceed one
hundred eighty (180) days after the effective date of the registration statement
pertaining to the Initial Offering; and
(d) such agreement shall not apply to any Registrable
Securities included in the registration statement pertaining to the Initial
Offering.
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In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of the period.
Notwithstanding the foregoing, the obligations described in this
Section 2.10 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms that may be promulgated in the future.
2.11 Limitation on Subsequent Registration Rights. From and after
the date this Agreement is signed, the Company shall not enter into any
agreement granting any holder, or prospective holder of any securities of the
Company, registration rights with respect to such securities without the written
consent of the Holders of a majority of the Registrable Securities then
outstanding, unless: (i) such other registration rights are equal to or
subordinate to the registration rights granted to the Holders hereunder; and
(ii) the holders of such rights are subject to market standoff obligations no
more favorable to such persons than those contained herein.
2.12 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 2 may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(i) is a subsidiary, parent, affiliate, general partner, limited partner or
retired partner of a Holder, or (ii) is a Holder's family member or trust for
the benefit of an individual Holder. No assignment of Registrable Securities
pursuant to this Section 2.12 shall be effective unless (A) the transferor
shall, within ten (10) days after such transfer, furnish to the Company written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned and (B) such
transferee shall agree to be subject to all restrictions set forth in this
Agreement.
2.13 Termination of Registration Rights.
(a) No Holder shall be entitled to exercise any right
provided for in this Section 2 after five (5) years following the closing of the
Initial Offering.
(b) In addition, the right of any Holder to request
registration or inclusion in any registration pursuant to Section 2 shall
terminate on such date, after the closing of the Initial Offering, that all
shares of Registrable Securities held or entitled to be held upon conversion by
such Holder may immediately be sold under Rule 144 during any 90-day period;
provided, however, that the provisions of this Section 2.13(b) shall not apply
to any Holder who owns at least one percent (1%) of the Company's outstanding
stock.
3. COVENANTS OF THE COMPANY
3.1 Delivery of Financial Statements.
(a) The Company shall deliver to each Holder or instead,
to the Investor:
(i) as soon as practicable, but in any event within
ninety (90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance
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sheet of the Company and statement of shareholder's equity as of the end of such
year, and a statement of cash flows for such year, such year-end financial
reports to be prepared in accordance with generally accepted accounting
principles ("GAAP"), and audited and certified by independent public accountants
selected by the Company's Board of Directors; and
(ii) as soon as practicable, but in any event
within forty-five (45) days after the end of each of the first three (3)
quarters of each fiscal year of the Company, an unaudited profit or loss
statement, statement of cash flows for such fiscal quarter and an unaudited
balance sheet as of the end of such fiscal quarter, together with an instrument
executed by the Chief Financial Officer or President of the Company certifying
that such financial reports were prepared in accordance with GAAP consistently
applied with prior practices for earlier periods (with the exception of
footnotes that may be required by GAAP) and fairly present the financial
condition of the Company and its results of operation for the period specified,
subject to year-end audit adjustments.
(b) The Company shall deliver to each Holder who holds
Registrable Securities (or Common Stock issued or issuable upon exercise or
conversion thereof, as adjusted for stock splits, stock dividends and the like):
(i) as soon as practicable, but in any event thirty
(30) days prior to the end of each fiscal year, a budget and business plan for
the next fiscal year, prepared on at least a quarterly basis, including balance
sheets and statements of cash flows for such quarters or other such periods (the
"Annual Financial Plan"), and, as soon as prepared, any other budgets or revised
budgets prepared by the Company;
(ii) such other information relating to the
financial condition, business, prospects or corporate affairs of the Company as
any of such Holders or any assignee of any of such Holders may from time to time
reasonably request; provided, however, that the Company shall not be obligated
under this subsection 3.1(b)(ii) or any other subsection of Section 3.1 to
provide information that it deems in good faith to be a trade secret or similar
confidential information unless the Holder or Holders provide assurances in
writing to the Company that it will maintain the confidentiality of the
information.
3.2 Inspection. The Company shall permit each Holder, at such
Holder's expense, to visit and inspect the Company's properties, to examine its
books of account and records, and to discuss the Company's affairs, finances and
accounts with its officers, all at such reasonable times as may be requested by
such Holder; provided, however, that the Company shall not be obligated pursuant
to this Section 3.2 to provide access to any information that it reasonably
considers to be a trade secret or similar confidential information unless such
Holder provides assurances in writing to the Company that it will maintain the
confidentiality of the information.
3.3 Meeting of Directors, Committees and Appointment of Director
Rights. The Company shall:
(a) Hold meetings of the Board of Directors on not less
than a quarterly basis;
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(b) Permit the Investor to have one representative
nominated to the Board of Directors of the Company ("Board"). The Company shall
have the right to approve any individual requested by the Investor to be
nominated to be a member of the Board, which approval shall not be unreasonably
withheld. The Company shall take such actions as may be necessary to ensure that
such individual is duly appointed or elected as director of the Company and
remains a director until the earlier of (i) the Initial Offering; or (ii) there
is no amount remaining outstanding pursuant to this Loan or the Notes. In the
event Investor declines to nominate a representative as a member of the Board,
Investor shall have the right to have a representative attend all meetings in a
non-voting capacity;
(c) Send to such Investor representative the notice of the
time and place of each such meeting in the same manner and at the same time as
it shall send such notice to its directors or committee members; and
(d) Provide to such Investor representative copies of all
notices, reports, minutes and consents at the same time and in the same manner
as they are provided to the Board or any committee members; provided that
Company may require as a condition precedent to these rights that each person
proposing to attend any Board meeting and each person who will have access to
any of the information provided by Company to the Board, who is not a member of
the Board, shall agree to hold in confidence and trust, and to act in a
fiduciary manner with respect to, all such information received during such
meetings or otherwise; and provided further that Company reserves the right not
to provide information and to exclude such representative from any meeting or
portion of any meeting if delivery of the information or attendance at the
meeting or portion of such meeting by such representative would result in trade
secrets disclosure to such representative or would adversely affect the
attorney-client privilege between Company and its counsel or if such
representative is affiliated with a direct competitor of Company.
3.4 Expenses of Directors. Company shall promptly reimburse in
full the Investor representative for all reasonable out-of-pocket expenses
incurred in attending each meeting of the Board or any committee of the Board.
3.5 Indemnification. At all times, Company shall maintain
provisions in its articles of incorporation and bylaws exculpating and
indemnifying all directors from and against liability, to the maximum extent
permitted under the laws of the State of Nevada.
3.6 Records and Books of Account. Company shall keep adequate
records and books of account in which complete entries will be made in
accordance with GAAP, reflecting all financial transactions of Company, and in
which, for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in connection
with its business shall be made.
3.7 Certain Operating Covenants. Without the consent of the
Holders of a majority of the Registrable Securities, the Company shall not:
(d) declare or pay dividends on the Company's capital
stock;
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(e) make any loan or guarantee (excluding accounts
receivable) senior to the Notes and Loan Agreement;
3.8 Confidentiality and Employee Inventions Agreements. The
Company shall cause each of its officers, employees, consultants and independent
contractors to enter into a confidentiality and inventions agreement with the
Company that restricts the disclosure of the Company's proprietary information
to third parties and provides for assignment to the Company of all inventions
and intellectual property created and developed by such employees, consultants
and contractors in the course of their employment or engagement, as the case may
be, by the Company.
3.9 Termination of Covenants. The covenants set forth in this
Section 3 shall, except as otherwise specifically provided, terminate and be of
no further force or effect upon the earlier of:
(a) the effective date of the Registration Statement
pertaining to the Initial Offering;
(b) the closing date of (i) a sale, lease or other
disposition of all or substantially all of the Company's assets, or (ii) an
acquisition of the Company by another entity by stock purchase, consolidation,
merger or other reorganization in which the holders of the Company's outstanding
voting stock immediately prior to such transaction own, immediately after such
transaction, securities representing less than fifty percent (50%) of the voting
power of the entity surviving such transaction;
(c) when the Company first becomes subject to the periodic
reporting requirements of Section 15(d) of the Securities Exchange Act of 1934,
as amended; or
(d) repayment of the loan pursuant to the Notes and Loan
Agreement.
4. RIGHT OF CO-SALE
4.1 Right of Co-Sale. Each of Ross Lyndon-James and Brian
Harcourt (individually, a Founder," and collectively, the "Founders") grants the
Holders the right to participate in any sale, assignment, pledge or other
transfer ("Transfer") of any Shares owned by the Founders on the same terms and
conditions on which they, or any one of them, proposes to Transfer their Shares.
To the extent that the Holders exercise their right of co-sale as set forth
below, the number of Shares that the Founders, or any one of them, may Transfer
in a proposed the transaction shall be correspondingly reduced.
4.2 Exercise of Right. Each time a Founder proposes to Transfer
any Shares, he shall first notify the Investor as follows:
(a) The selling Founder shall deliver a notice
("Participation Notice") to the Holders stating (i) the Founder's bona fide
intention to Transfer his Shares, (ii) the number of such Shares to be
Transferred, and (iii) the price and other terms upon which he proposes to
Transfer his Shares.
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(b) By written notification to the selling Founder within
five (5) days after receiving the Participation Notice, the Holders may elect to
Transfer, at the price and on the terms specified in the Participation Notice,
up to that portion of such Shares that equals the proportion that the number of
shares of Common Stock issued and held, or issuable upon conversion of the Notes
and upon exercise of the Warrant then held by such Holder bears to the total
number of shares of Common Stock outstanding or issuable upon conversion of the
Notes and exercise of the Warrant.
(c) Each Holder shall effect its participation in the
Transfer by promptly delivering to the selling Founder, for transfer to the
prospective purchaser, one or more certificates, properly endorsed for transfer,
which represent (i) the type and number of Shares that the Holder elects to
Transfer; or (ii) that number of Shares that is at such time convertible into or
exercisable for the number of shares of Common Stock that such Holder elects to
sell; provided, however, that if the prospective purchaser objects to the
delivery of the Warrant in lieu of Common Stock, such Holder shall exercise such
Warrant for Common Stock and deliver Common Stock to the prospective purchaser.
The Company agrees to make any such conversion concurrent with the actual
transfer of such shares to the purchaser.
4.3 Obligation to Effect Transfer. The stock certificate or
certificates that the Holders deliver to the selling Founder pursuant to
paragraph 4.2(c) shall be transferred to the prospective purchaser upon
consummation of the Transfer of the Shares pursuant to the terms and conditions
specified in the Participation Notice, and the Founder shall concurrently
therewith remit to each participating Holder that portion of the Transfer
proceeds to which such Holder is entitled by reason of its participation in such
Transfer.
4.4 Termination of Rights. The rights of co-sale set forth in
this Section 4 shall terminate upon the earlier of (a) the effective date of the
registration statement pertaining to a public offering of shares of Common Stock
resulting in gross proceeds to the Company of no less than ten million dollars
($10,000,000); (b) a sale, lease or other disposition of all or substantially
all of the Company's assets; or (c) an acquisition of the Company by another
entity by stock purchase, consolidation, merger or other reorganization in which
the holders of the Company's outstanding voting stock immediately prior to such
transaction own, immediately after such transaction, securities representing
less than fifty percent (50%) of the voting power of the entity surviving such
transaction.
5. MISCELLANEOUS
5.1 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties, including
permitted transferees of any Registrable Securities. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
5.2 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
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5.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid or upon delivery to a recognized courier service and addressed
to the party to be notified at the address indicated for such party on the
signature page hereof, or at such other address as such party may designate by
ten (10) days' advance written notice to the other parties.
5.6 Delays or Omissions. It is agreed that no delay or omission
to exercise any right, power or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance or the acquiescence thereof, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind of character on
any Holder's part of any breach default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law or otherwise afforded to Holders, shall be cumulative and not
alternative.
5.7 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
5.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
more than fifty percent (50%) of the Registrable Securities. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
Holder of any Registrable Securities, or shares of Series A Stock, then
outstanding and the Company.
5.9 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
5.10 Aggregation of Stock. All shares of Registrable Securities
or Series A Preferred Stock held or acquired by an Investor and All Related
Parties of such Investor shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
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5.11 Entire Agreement. This Agreement and the Purchase Agreement
constitute the full and entire understanding and agreement between the parties
with regard to the subject matter hereof and thereof.
5.12 Additional Parties. In the event of a subsequent closing
with one or more additional investor as provided for in Section 1.3 of the
Purchase Agreement between the Company and the Investors, such investor shall
become a party to this Agreement as an "Investor" upon receipt from such
investor of a fully executed signature page hereto.
5.13 Jurisdiction; Service of Process. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties only in the courts of the
State of California, County of San Diego, or, if it has or can acquire
jurisdiction, in the United States District Court for the Southern District of
California, and each of the parties consents to the jurisdiction of such courts
(and of the appropriate appellate courts) in any such action or proceeding and
waives any objection to venue laid therein. Process in any action or proceeding
referred to in the proceeding sentence may be served on any party anywhere in
the world.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
The Company: Investor:
FitnessAge, Inc. Natural Alternatives International, Inc.
a Nevada corporation a Delaware corporation
By: /s/ David G. Forster By: /s/ Mark A. LeDoux
-------------------------------- -------------------------------------
David G. Forster, Chief Mark A. LeDoux, Chief Executive
Financial Officer Officer
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<PAGE> 1
EXHIBIT 10.10
EXECUTIVE EMPLOYMENT AGREEMENT
Mark A. Le Doux ("Employee") hereby accepts the offer of Natural
Alternatives International, Inc. ("NAI") for employment as Chief Executive
Officer and President beginning October 1, 1999. Collectively, NAI and Employee
will be referred to herein as the "Parties."
1. The Parties anticipate that Employee will be employed for a period of
twelve (12) months (the "Term"). During the Term, Employee's employment will be
at-will and may be terminated by either Employee or NAI at any time for any
reason or no reason, with or without cause and with or without notice. The
at-will status of the employment relationship may not be modified except in
writing signed by the Chief Executive Officer of NAI and Employee.
2. Employee and NAI further understand and agree that nothing in the NAI
Employee Handbook is intended to be, and nothing in it should be construed to
be, a limitation of NAI's right to terminate, transfer, demote, suspend and
administer discipline at any time for any reason. Employee and NAI understand
and agree nothing in the Handbook is intended to, and nothing in the Handbook
should be construed to, create an implied or express contract of employment
contrary to this agreement.
3. A. Salary. Employee's compensation will be $260,000 per year,
payable no less frequently than monthly. The compensation set forth in this
Section 3 will be Employee's only compensation except standard employee benefits
or any other written compensation arrangement approved by the Board of Directors
and the Company.
B. Expenses. Employee shall receive during the Term a monthly
amount equal to $1,500.00 to reimburse Employee for actual expenses incurred in
ownership and operation of one (1) automobile that Employee shall make and
maintain available for Employee's use on any matter require by or for the
benefit of the Company.
4. If Employee continues working for NAI past the end of the Term, and
if NAI still desires Employee's services, then the following terms and
conditions will apply:
(a) Employee shall be an at-will employee and either Employee or
NAI will be entitled to terminate the employment relationship for any
reason or for no reason, with or without cause and with or without
notice. Employee understands and agrees that transfers, demotions and
suspensions may occur and that employee discipline may be administered
at the will of NAI at any time for any reason, with or without cause and
with or without notice;
(b) Employee will be compensated at the rate set forth in section
3.A hereinabove unless another rate is mutually agreed upon; and
(c) As to benefits and other terms of employment, Employee shall
be subject to the same policies and procedures as other employees of NAI
in similar positions.
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5. During the Term, and any extension thereof, Employee shall have such
responsibilities, duties and authority as NAI may from time to time assign to
Employee. Employee's initial title shall be Chief Executive Officer and
President.
6. In the event this Agreement is terminated by NAI without cause, or
NAI does not allow Employee to continue as such following the completion of the
Term, Employee shall be entitled to severance pay, including standard employee
benefits, in an amount equivalent to one year's compensation. One half of such
amount shall be paid upon termination and the balance shall be paid on a
bi-weekly basis during said one (1) year severance period. For purposes of this
Section 6, Employee shall be deemed terminated without cause if such termination
is for any reason other than a willful breach or habitual neglect of Employee's
duties under the terms of this Agreement.
7. In the event of any Change in Control, the following provisions will
apply.
A. Any of the following shall constitute a "Change in Control"
for purposes of this Section 7:
(1) Merger or consolidation where shareholders of NAI
immediately prior to such transaction own less than 50% of the voting securities
of the surviving entity immediately following such transaction;
(2) Transfer of all or substantially all of the assets of
NAI; or
(3) Voluntary or involuntary dissolution of NAI.
B. In the event of any such Change in Control, Employee at his
sole option, and at any time may elect one of the following provisions:
(a) Continued employment by NAI, and/or the surviving or
resulting corporation, said successor to be bound by all the provisions of this
Agreement;
(b) Voluntary termination of this Agreement and payment to
Employee as severance pay or liquidated damages, or both, a lump sum payment
("Severance Payment") equal to one hundred fifty percent (150%) of the
Employee's annual salary specified in Section 3.B. above or such greater amount
as the Board of Directors determines from time to time pursuant to terms which
may not be revoked or reduced thereafter.
C. In the event this Agreement is terminated following a Change
in Control by NAI, and/or the surviving or resulting corporation, without cause,
Employee shall be entitled to a Severance Payment equal to one hundred fifty
percent (150%) of the Employee's annual salary specified in Section 3.B. above
or such greater amount as the Board of Directors determines from time to time
pursuant to terms which may not be revoked or reduced thereafter.
D. Any Severance Payment shall be made not later than the
fifteenth (15th) day following the effective date of the voluntary or
involuntary termination of this Agreement in connection with a Change in
Control; provided, however, that if the amount of such payments cannot
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<PAGE> 3
be finally determined on or before such date, NAI shall pay to Employee on such
date a good faith estimate of the minimum amount of such payments, and shall pay
the remainder of such payments (together with interest at the rate provided in
Internal Revenue Code Section 1274(b)(2)(B) of the Code), as soon as the amount
thereof can be determined, but in no event later than the thirtieth (30th) day
after the applicable termination date. In the event the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by NAI payable on the fifteenth (15th) day after
receipt by Employee of a written demand for payment from NAI (together with
interest calculated as above). The total of any payment pursuant to this Section
7 shall be limited to the extent necessary, in the opinion of legal counsel
acceptable to Employee and NAI, to avoid the payment of an "excess parachute"
payment within the meaning of Internal Revenue Code Section 280 G or any similar
successor provision.
8. Employee and NAI hereby agree to the Mutual Agreement to Arbitrate
attached hereto and made a part hereof as Attachment #1.
9. Employee and NAI hereby agree to the Assignment of Inventions,
Patents and Copyrights Agreement Regarding Confidential Information Covenant of
Exclusivity and Not to Compete attached hereto and made a part hereof as
Attachment #2.
10. This Agreement contains the entire agreement between the parties. It
supersedes any and all other agreements, either oral or in writing, between the
parties hereto with respect to Employee's employment by NAI. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein and acknowledges that no
other agreement, statement of promise not contained in this Agreement shall be
valid or binding. This Agreement may not be modified or amended by oral
agreement or course of conduct, but only by an agreement in writing signed by
the Chief Executive Officer of NAI and Employee.
11. This Executive Employment Agreement shall be construed and enforced
in accordance with the laws of the State of California.
12. Should any part or provision of this Executive Employment Agreement
be held unenforceable or in conflict with the law of any jurisdiction, the
validity of the remaining parts shall not be affected by such holding.
"EMPLOYEE"
/s/ Mark A. LeDoux
--------------------------------------------
Mark A. Le Doux
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ David Lough
-----------------------------------------
David Lough, Executive Vice President
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ATTACHMENT #1
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
This Mutual Agreement to Arbitrate Claims is entered into between Mark
A. Le Doux ("Employee") and Natural Alternatives International, Inc. ("NAI").
1. Binding Arbitration of Disagreement and Claims
We each voluntarily promise and agree to arbitrate any claims
covered by this Agreement. We further agree that such binding arbitration
pursuant tot his Agreement shall be the sole and exclusive remedy for resolving
any such claims or disputes.
2. Claims Covered by this Agreement
A. Claims and disputes covered by this Agreement include all claims
against NAI (as defined below) and all claims that NAI may have against the
Employee, including, without limitation, those arising under:
(1) Any federal, state or local laws, regulations or statutes
prohibiting employment discrimination (such as, without limitation: race, sex,
national origin, age, disability, religion, sexual orientation) and harassment.
(2) Any alleged or actual agreement or covenant (oral, written or
implied) between Employee and NAI.
(3) Any company policy or compensation or benefit plan, unless
the decision in question was made by an entity other than NAI.
(4) Any public policy.
(5) Any other claim for personal, emotional, physical or economic
injury.
B. The only disputes between Employee and NAI which are not included
within this Mutual Agreement to Arbitrate Claims are:
(1) Any claim by Employee for workers' compensation benefits.
(2) Any claim by Employee for benefits under a company plan which
provides for its own arbitration procedure.
3. Arbitration Procedure
A. The arbitration will be conducted in accordance with the rules of the
current Judicial Arbitration and Mediation Services ("JAMS"), except that the
arbitrator shall be mutually acceptable to both parties. The arbitration will be
held in the state and county of the Employee's primary employment at the time of
the act giving rise to the dispute. The fees and expenses of the Arbitrator, and
the arbitration, will be borne by the Company. Each party will pay for the fees
and expenses of its
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own attorneys, experts, witnesses, transcripts and preparation and presentation
of proofs and post-hearing briefs, unless the party prevails on a claim for
which attorneys' fees and costs are recoverable by statute or contract.
B. Before such arbitration, each party shall have the right to conduct
discovery on the same basis and to the same extent as a civil action brought in
the Federal District Court for the Southern District of California.
C. Any action to enforce or vacate the arbitrator's award shall be
governed by the Federal Arbitration Act if applicable, and otherwise by
applicable state law.
4. Miscellaneous Provisions
A. The term "company" means NAI, and all related entities, all officers,
employees, directors, agents, shareholders, partners, benefit plan sponsors,
fiduciaries, administrators or affiliates of any of the above, and all
successors and assignees of any of the above.
B. If either party pursues a covered claim against the other by any
action, method or legal proceeding other than the arbitration provided herein,
the responding party shall be entitled to dismissal or injunctive relief
regarding such action and recovery of all costs, losses and attorneys' fees
related to such other action or proceeding.
C. The parties of this arbitration agreement acknowledge and agree that
they are wavering their right to a jury trial on the issues covered by this
Agreement.
D. This is the complete Agreement of the parties on the subject of
arbitration of disputes and claims. This Agreement supersedes any prior or
contemporaneous oral, written or implied understanding on the subject, shall
survive the termination of Employee's employment and can only be revoked or
modified by a written agreement signed by the parties which specifically states
an intent to revoke or modify this agreement. If any provision of this Agreement
is adjusted to be void or otherwise unenforceable in whole or in part, such
adjudication shall not affect the validity of the remainder of the Agreement.
E. If any provision of this Agreement is held to be unenforceable by a
final court decision, the remainder of the Agreement shall continue in full
force and effect.
My signature below signifies that I have read, understand and agree to
the Arbitration Agreement.
"EMPLOYEE"
/s/ Mark A. LeDoux
--------------------------------------------
Mark A. Le Doux
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ David Lough
-----------------------------------------
David Lough, Executive Vice President
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ATTACHMENT #2
ASSIGNMENT OF INVENTIONS, PATENTS AND COPYRIGHTS AGREEMENT REGARDING
CONFIDENTIAL INFORMATION COVENANT OF EXCLUSIVITY AND NOT TO COMPETE
In consideration of and as a condition of my prospective and continued
employment and the compensation afforded to me under the terms and conditions
thereof by Natural Alternatives International, Inc. (the "Company"), I agree to
the following, and I agree the following shall be in addition to the terms and
conditions of any Confidential Information and Invention Assignment Agreement
executed by employees of the Company generally, and which I may execute in
addition hereto:
1. INVENTIONS
a. Disclosure. I will disclose promptly in writing to the
appropriate officer or other representative of the Company, any idea, invention,
work of authorship, design, formula, pattern, compilation, program, device,
method, technique, process, improvement, development or discovery, whether or
not patentable or copyrightable or entitled to legal protection as a trade
secret, trademark service mark, trade name or otherwise ("Invention"), that I
may conceive, make, develop, reduce to practice or work on, in whole or in part,
solely or jointly with others ("Invent"), during the term of my employment with
the Company. The disclosure required by this Section 1 (a) applies to each and
every Invention that I Invent (i) whether during my regular hours of employment
or during my time away from work (ii) whether or not the Invention was made at
the suggestion of the Company, and (iii) whether or not the Invention was
reduced to or embodied in writing, electronic media or tangible form. The
disclosure required by this Section 1 (a) also applies to any Invention which
may relate at the time of conception or reduction to practice of the Invention
to the Company's business or actual or demonstrably anticipated research or
development of the Company, and to any Invention which results from any work
performed by me for the Company. The disclosure required by this Section 1 (a)
shall be received in confidence by the Company within the meaning of and to the
extent required by California Labor Code Section 2871, the provisions of which
are set forth on Exhibit "A" hereto.
b. Assignment. I hereby assign to the Company without royalty or
any other further consideration my entire right, title and interest in and to
each and every Invention I am required to disclose under Section 1 (a) other
than an Invention that (i) I have or shall have developed entirely on my own
time without using the Company's equipment, supplies, facilities or trade secret
information, (ii) does not relate at the time of conception or reduction to
practice of the Invention to the Company's business, or actual or demonstrably
anticipated research or development of the Company and (iii) does not result
from any work performed by me for the Company. I acknowledge that the Company
has notified me that the assignment provided for in this Section l(b) does not
apply to any Invention to which the assignment may not lawfully apply under the
provisions of Section Section 2870 of the California Labor Code, a copy of which
is attached as Exhibit "A" hereto.
c. Additional Assistance and Documents. I will assist the Company
in obtaining, maintaining and enforcing patents, copyrights, trade secrets,
trademarks, service marks, trade names and
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<PAGE> 7
other proprietary rights in connection with any Invention I have assigned to the
Company under Section l(b), and I further agree that my obligations under this
Section l(c) shall continue beyond the termination of my employment with the
Company. Among other things, for the foregoing purposes I will (i) testify at
the request of the Company in any interference, litigation or other legal
proceeding that may arise during or after my employment, and (ii) execute,
verify, acknowledge and deliver any proper document (and, if, because of my
mental or physical incapacity or for any other reason whatsoever, the Company is
unable to obtain my signature to apply for or to pursue any application for any
United States or foreign patent or copyright covering Inventions assigned to the
Company by me, I hereby irrevocably designate and appoint each of the Company
and its duly authorized officers and agents as my agent and attorney in fact to
act for me and in my behalf and stead to execute and file any such applications
and to do all other lawfully permitted acts to further the prosecution and
issuance of any United States or foreign patent or copyright thereon with the
same legal force and effect as if executed by me). I shall be entitled to
reimbursement of any out-of-pocket expenses incurred by me in rendering such
assistance and, if I am required to render such assistance after the termination
of my employment, the Company shall pay me a reasonable rate of compensation for
time spent by me in rendering such assistance to the extent permitted by law
(provided, I understand that no compensation shall be paid for my time in
connection with preparing for or rendering any testimony or statement under oath
in any judicial proceeding, arbitration or similar proceeding).
d. Prior Contracts and Inventions; Rights of Third Parties. I
represent to the Company that, except as set forth on Exhibit "B" hereto, there
are no other contracts to assign Inventions now in existence between me and any
other person or entity (and if no Exhibit "B" is attached hereto or there is no
such contract described thereon, then it means that by signing this Agreement, I
represent to the Company that there is no such other contracts). In addition, I
represent to the Company that I have no other employments or undertaking which
do or would restrict or impair my performance of this Agreement. I further
represent to the Company that Exhibit "C" hereto sets forth a brief description
of all Inventions made or conceived by me prior to my employment with the
Company which I desire to be excluded from this Agreement (and if no Exhibit "C"
is attached hereto or there is no such description set forth thereon, then it
means that by signing this Agreement I represent to the Company that there is no
such Invention made or conceived by me prior to my employment with the Company).
In connection with my employment with the Company, I promise not to use or
disclose to the Company any patent, copyright, confidential trade secret or
other proprietary information of any previous employer or other person that I am
not lawfully entitled so to use or disclose. If in the course of my employment
with the Company I incorporate into an Invention or any product process or
service of the Company any Invention made or conceived by me prior to my
employment with the Company, I hereby grant to the Company a royalty-free,
irrevocable, worldwide nonexclusive license to make, have made, use and sell
that Invention without restriction as to the extent of my ownership or interest.
2. CONFIDENTIAL INFORMATION
a. Company Confidential Information. I will not use or disclose
Confidential Information, whether before, during or after the term of my
employment except to perform my duties as an employee of the Company based on my
reasonable judgment as an Officer of the Company, or in accordance with
instruction or authorization of the Company, without prior written consent of
the Company or pursuant to process or requirements of law after I have disclosed
such process or requirements to the Company so as to afford it the opportunity
to seek appropriate relief therefrom. "Confidential Information" means any
Invention of any person in which the Company has an interest and in addition
means any financial, client, customer, supplier, marketing, distribution and
other
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information of a confidential or private nature connected with the business of
the Company or any person with whom it deals, provided by the Company to me or
to which I have access during or in the course of any employment.
b. Third Party Information. I acknowledge that during my
employment with the Company I may have access to patent, copyright,
confidential, trade secret or other proprietary information of third parties
subject to restrictions on the use or disclosure thereof by the Company. During
the term of my employment and thereafter I will not use or disclose any such
information other than consistent with the restrictions and my duties as an
employee of the Company.
3. PROPERTY OF THE COMPANY. All documents, instruments, notes,
memoranda, reports, drawings, blueprints, manuals, materials, data and other
papers and records of every kind which come into my possession during or in the
course of my employment, relating to any Inventions or Confidential Information,
are and shall remain the property of the Company and shall be surrendered by me
to the Company upon termination of my employment with the Company, or upon the
request of the Company, at any time during or after termination of my employment
with the Company.
4. NO SOLICITATION OF COMPANY EMPLOYEES. While employed by the Company
and for a period of one year after termination of my employment with the
Company, I agree not to induce or attempt to influence directly or indirectly
any employee of the Company to terminate employment with the Company or to work
for me or any other person or entity.
5. COVENANT OF EXCLUSIVITY AND NOT TO COMPETE. During the term of my
employment with the Company, I will not engage in any other professional
employment or consulting or directly or indirectly participate in or assist any
business which is a current or potential supplier, customer or competitor of the
Company without prior written approval from the Chief Executive Officer of the
Company.
6. GENERAL.
a. Assignments, Successors and Assignees. All representations,
warranties, covenants and agreements of the parties shall bind their respective
heirs, executors, personal representatives, successors and assignees
("transferees") and shall inure to the benefit of their respective permitted
transferees. The Company shall have the right to assign any or all of its rights
and to delegate any or all of its obligations hereunder. The undersigned
employee shall not have the right to assign any rights or delegate any
obligations hereunder without the prior written consent of the Company or its
transferee.
b. Number of Gender Headings. Each number and gender shall be
deemed to include each other number and gender as the context may require. The
headings and captions contained in this agreement shall not constitute a part
thereof and shall not be used in its construction or interpretation.
c. Severability. If any provision of this agreement is found by
any court or arbitral tribunal of competent jurisdiction to be invalid or
unenforceable, the invalidity of such provision shall not affect the other
provisions of this agreement and all provisions not affected by the invalidity
shall remain in full force and effect.
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<PAGE> 9
d. Amendment and Modification. This agreement may be amended or
modified only by a writing executed by each party.
e. Government Law. The construction, interpretation and
performance of this agreement and all transactions under it shall be governed by
the internal laws of California.
f. Remedies. I acknowledge that breach by me of any of the
provisions of this agreement will cause irreparable injury that cannot
adequately be compensated by money damages. The Company shall be entitled to
specific performance, temporary restraining orders, preliminary injunctions and
permanent injunctive relief to enforce my obligations under this agreement. No
remedy conferred by any of the specific provisions of this agreement is intended
to be exclusive of any other remedy. I agree to arbitrate on a final and binding
basis all disputes under this Agreement in accordance with and before the
Judicial Arbitration and Mediation Service ("JAMS").
g. Attorneys' Fees. In the event of any litigation or other
action in connection with this agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and disbursements from the other party
as costs of suit and not as damages.
h. No Effect on Other Terms or Conditions of Employment. I
acknowledge that this agreement does not affect any term or condition of my
employment except as expressly provided in this agreement, and that this
agreement does not give rise to any right or entitlement on my part to
employment or continued employment with the Company. I further acknowledge that
this agreement does not affect in any way the right of the Company to terminate
my employment.
IN WITNESS WHEREOF, I have executed this agreement as of the date set
forth next to my signature below.
/s/ Mark A. LeDoux
-----------------------------------
Signature of Employee
Mark A. Le Doux
-----------------------------------
Printed Name of Employee
ACCEPTED:
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ David Lough
---------------------------------------
David Lough, Executive Vice President
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<PAGE> 10
EXHIBIT "A"
CALIFORNIA LABOR CODE
SECTION 2870. INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT.
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities or trade secret information expect for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
SECTION 2871. RESTRICTIONS ON EMPLOYER FOR CONDITION OF EMPLOYMENT.
No employer shall require a provision made void or unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
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<PAGE> 11
EXHIBIT "B"
Except as set forth below, Employee represents to the Company that there
are no other contracts to assign Inventions now in existence between Employee
and any other person or entity (see Section l(d) of the Agreement):
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<PAGE> 12
EXHIBIT "C"
Set forth below is a brief description of all Inventions made or
conceived by Employee prior to Employee's employment with the Company which
Employee desires to be excluded from this agreement (see Section l(d) of the
Agreement):
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<PAGE> 1
EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
David Lough ("Employee") hereby accepts the offer of Natural
Alternatives International, Inc. ("NAI") for employment as Executive Vice
President beginning October 1, 1999. Collectively, NAI and Employee will be
referred to herein as the "Parties."
1. The Parties anticipate that Employee will be employed for a period of
twelve (12) months (the "Term"). During the Term, Employee's employment will be
at-will and may be terminated by either Employee or NAI at any time for any
reason or no reason, with or without cause and with or without notice. The
at-will status of the employment relationship may not be modified except in
writing signed by the Chief Executive Officer of NAI and Employee.
2. Employee and NAI further understand and agree that nothing in the NAI
Employee Handbook is intended to be, and nothing in it should be construed to
be, a limitation of NAI's right to terminate, transfer, demote, suspend and
administer discipline at any time for any reason. Employee and NAI understand
and agree nothing in the Handbook is intended to, and nothing in the Handbook
should be construed to, create an implied or express contract of employment
contrary to this agreement.
3. A. Salary. Employee's compensation will be $150,000 per year,
payable no less frequently than monthly. The compensation set forth in this
Section 3 will be Employee's only compensation except standard employee benefits
or any other written compensation arrangement approved by the Board of Directors
and the Company.
B. Expenses. Employee shall receive during the Term a monthly amount
equal to $1,500.00 to reimburse Employee for actual expenses incurred in
ownership and operation of one (1) automobile that Employee shall make and
maintain available for Employee's use on any matter require by or for the
benefit of the Company.
4. If Employee continues working for NAI past the end of the Term, and
if NAI still desires Employee's services, then the following terms and
conditions will apply:
(a) Employee shall be an at-will employee and either Employee or
NAI will be entitled to terminate the employment relationship for any
reason or for no reason, with or without cause and with or without
notice. Employee understands and agrees that transfers, demotions and
suspensions may occur and that employee discipline may be administered
at the will of NAI at any time for any reason, with or without cause and
with or without notice;
(b) Employee will be compensated at the rate set forth in section
3.A hereinabove unless another rate is mutually agreed upon; and
(c) As to benefits and other terms of employment, Employee shall
be subject to the same policies and procedures as other employees of NAI in
similar positions.
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<PAGE> 2
5. During the Term, and any extension thereof, Employee shall have such
responsibilities, duties and authority as NAI may from time to time assign to
Employee. Employee's initial title shall be Executive Vice President.
6. In the event this Agreement is terminated by NAI without cause, or
NAI does not allow Employee to continue as such following the completion of the
Term, Employee shall be entitled to severance pay, including standard employee
benefits, in an amount equivalent to his then current compensation rate for the
period set forth below opposite the number of complete calendar months which
have elapsed from the beginning date set forth in the first paragraph hereof at
the time of termination. One half of such amount shall be paid upon termination
and the balance shall be paid on a bi-weekly basis during said severance period:
<TABLE>
<CAPTION>
MONTHS OF SEVERANCE
EMPLOYMENT PERIOD
---------- ---------
<S> <C>
1 through 6 months 2 months
7 through 12 months 6 months
13 through 24 months 9 months
more than 24 months 12 months
</TABLE>
For purposes of this Section 6, Employee shall be deemed terminated without
cause if such termination is for any reason other than a willful breach or
habitual neglect of Employee's duties under the terms of this Agreement.
7. In the event of any Change in Control, the following provisions will
apply.
A. Any of the following shall constitute a "Change in Control" for
purposes of this Section 7:
(1) Merger or consolidation where shareholders of NAI immediately
prior to such transaction own less than 50% of the voting securities of the
surviving entity immediately following such transaction;
(2) Transfer of all or substantially all of the assets of NAI; or
(3) Voluntary or involuntary dissolution of NAI.
B. In the event of any such Change in Control, Employee at his sole
option, and at any time may elect one of the following provisions:
(a) Continued employment by NAI, and/or the surviving or
resulting corporation, said successor to be bound by all the provisions of this
Agreement;
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<PAGE> 3
(b) Voluntary termination of this Agreement and payment to
Employee as severance pay or liquidated damages, or both, a lump sum payment
("Severance Payment") equal to one hundred fifty percent (150%) of the
Employee's annual salary specified in Section 3.B. above or such greater amount
as the Board of Directors determines from time to time pursuant to terms which
may not be revoked or reduced thereafter.
C. In the event this Agreement is terminated following a Change in
Control by NAI, and/or the surviving or resulting corporation, without cause,
Employee shall be entitled to a Severance Payment equal to one hundred fifty
percent (150%) of the Employee's annual salary specified in Section 3.B. above
or such greater amount as the Board of Directors determines from time to time
pursuant to terms which may not be revoked or reduced thereafter.
D. Any Severance Payment shall be made not later than the fifteenth
(15th) day following the effective date of the voluntary or involuntary
termination of this Agreement in connection with a Change in Control; provided,
however, that if the amount of such payments cannot be finally determined on or
before such date, NAI shall pay to Employee on such date a good faith estimate
of the minimum amount of such payments, and shall pay the remainder of such
payments (together with interest at the rate provided in Internal Revenue Code
Section 1274(b)(2)(B) of the Code), as soon as the amount thereof can be
determined, but in no event later than the thirtieth (30th) day after the
applicable termination date. In the event the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such excess shall
constitute a loan by NAI payable on the fifteenth (15th) day after receipt by
Employee of a written demand for payment from NAI (together with interest
calculated as above). The total of any payment pursuant to this Section 7 shall
be limited to the extent necessary, in the opinion of legal counsel acceptable
to Employee and NAI, to avoid the payment of an "excess parachute" payment
within the meaning of Internal Revenue Code Section 280 G or any similar
successor provision.
8. Employee and NAI hereby agree to the Mutual Agreement to Arbitrate
attached hereto and made a part hereof as Attachment #1.
9. Employee and NAI hereby agree to the Assignment of Inventions,
Patents and Copyrights Agreement Regarding Confidential Information Covenant of
Exclusivity and Not to Compete attached hereto and made a part hereof as
Attachment #2.
10. This Agreement contains the entire agreement between the parties. It
supersedes any and all other agreements, either oral or in writing, between the
parties hereto with respect to Employee's employment by NAI. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein and acknowledges that no
other agreement, statement of promise not contained in this Agreement shall be
valid or binding. This Agreement may not be modified or amended by oral
agreement or course of conduct, but only by an agreement in writing signed by
the Chief Executive Officer of NAI and Employee.
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<PAGE> 4
11. This Executive Employment Agreement shall be construed and enforced
in accordance with the laws of the State of California.
12. Should any part or provision of this Executive Employment Agreement
be held unenforceable or in conflict with the law of any jurisdiction, the
validity of the remaining parts shall not be affected by such holding.
"EMPLOYEE"
/s/ David Lough
----------------------------------------
David Lough
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 5
ATTACHMENT #1
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
This Mutual Agreement to Arbitrate Claims is entered into between David
Lough ("Employee") and Natural Alternatives International, Inc. ("NAI").
1. Binding Arbitration of Disagreement and Claims
We each voluntarily promise and agree to arbitrate any claims
covered by this Agreement. We further agree that such binding arbitration
pursuant tot his Agreement shall be the sole and exclusive remedy for resolving
any such claims or disputes.
2. Claims Covered by this Agreement
A. Claims and disputes covered by this Agreement include all claims
against NAI (as defined below) and all claims that NAI may have against the
Employee, including, without limitation, those arising under:
(1) Any federal, state or local laws, regulations or statutes
prohibiting employment discrimination (such as, without limitation: race, sex,
national origin, age, disability, religion, sexual orientation) and harassment.
(2) Any alleged or actual agreement or covenant (oral, written or
implied) between Employee and NAI.
(3) Any company policy or compensation or benefit plan, unless the
decision in question was made by an entity other than NAI.
(4) Any public policy.
(5) Any other claim for personal, emotional, physical or economic
injury.
B. The only disputes between Employee and NAI which are not included
within this Mutual Agreement to Arbitrate Claims are:
(1) Any claim by Employee for workers' compensation benefits.
(2) Any claim by Employee for benefits under a company plan which
provides for its own arbitration procedure.
3. Arbitration Procedure
A. The arbitration will be conducted in accordance with the rules of the
current Judicial Arbitration and Mediation Services ("JAMS"), except that the
arbitrator shall be mutually acceptable to both parties. The arbitration will be
held in the state and county of the Employee's primary employment at the time of
the act giving rise to the dispute. The fees and expenses of the Arbitrator, and
the arbitration, will be borne by the Company. Each party will pay for the fees
and expenses of its
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<PAGE> 6
own attorneys, experts, witnesses, transcripts and preparation and presentation
of proofs and post-hearing briefs, unless the party prevails on a claim for
which attorneys' fees and costs are recoverable by statute or contract.
B. Before such arbitration, each party shall have the right to conduct
discovery on the same basis and to the same extent as a civil action brought in
the Federal District Court for the Southern District of California.
C. Any action to enforce or vacate the arbitrator's award shall be
governed by the Federal Arbitration Act if applicable, and otherwise by
applicable state law.
4. Miscellaneous Provisions
A. The term "company" means NAI, and all related entities, all officers,
employees, directors, agents, shareholders, partners, benefit plan sponsors,
fiduciaries, administrators or affiliates of any of the above, and all
successors and assignees of any of the above.
B. If either party pursues a covered claim against the other by any
action, method or legal proceeding other than the arbitration provided herein,
the responding party shall be entitled to dismissal or injunctive relief
regarding such action and recovery of all costs, losses and attorneys' fees
related to such other action or proceeding.
C. The parties of this arbitration agreement acknowledge and agree that
they are wavering their right to a jury trial on the issues covered by this
Agreement.
D. This is the complete Agreement of the parties on the subject of
arbitration of disputes and claims. This Agreement supersedes any prior or
contemporaneous oral, written or implied understanding on the subject, shall
survive the termination of Employee's employment and can only be revoked or
modified by a written agreement signed by the parties which specifically states
an intent to revoke or modify this agreement. If any provision of this Agreement
is adjusted to be void or otherwise unenforceable in whole or in part, such
adjudication shall not affect the validity of the remainder of the Agreement.
E. If any provision of this Agreement is held to be unenforceable by a
final court decision, the remainder of the Agreement shall continue in full
force and effect.
My signature below signifies that I have read, understand and agree to
the Arbitration Agreement.
"EMPLOYEE"
/s/ David Lough
---------------------------------------------
David Lough
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 7
ATTACHMENT #2
ASSIGNMENT OF INVENTIONS, PATENTS AND COPYRIGHTS AGREEMENT REGARDING
CONFIDENTIAL INFORMATION COVENANT OF EXCLUSIVITY AND NOT TO COMPETE
In consideration of and as a condition of my prospective and continued
employment and the compensation afforded to me under the terms and conditions
thereof by Natural Alternatives International, Inc. (the "Company"), I agree to
the following, and I agree the following shall be in addition to the terms and
conditions of any Confidential Information and Invention Assignment Agreement
executed by employees of the Company generally, and which I may execute in
addition hereto:
1 . INVENTIONS
a. Disclosure. I will disclose promptly in writing to the
appropriate officer or other representative of the Company, any idea, invention,
work of authorship, design, formula, pattern, compilation, program, device,
method, technique, process, improvement, development or discovery, whether or
not patentable or copyrightable or entitled to legal protection as a trade
secret, trademark service mark, trade name or otherwise ("Invention"), that I
may conceive, make, develop, reduce to practice or work on, in whole or in part,
solely or jointly with others ("Invent"), during the term of my employment with
the Company. The disclosure required by this Section 1 (a) applies to each and
every Invention that I Invent (i) whether during my regular hours of employment
or during my time away from work (ii) whether or not the Invention was made at
the suggestion of the Company, and (iii) whether or not the Invention was
reduced to or embodied in writing, electronic media or tangible form. The
disclosure required by this Section 1 (a) also applies to any Invention which
may relate at the time of conception or reduction to practice of the Invention
to the Company's business or actual or demonstrably anticipated research or
development of the Company, and to any Invention which results from any work
performed by me for the Company. The disclosure required by this Section 1 (a)
shall be received in confidence by the Company within the meaning of and to the
extent required by California Labor Code Section 2871, the provisions of which
are set forth on Exhibit "A" hereto.
b. Assignment. I hereby assign to the Company without royalty or
any other further consideration my entire right, title and interest in and to
each and every Invention I am required to disclose under Section 1 (a) other
than an Invention that (i) I have or shall have developed entirely on my own
time without using the Company's equipment, supplies, facilities or trade secret
information, (ii) does not relate at the time of conception or reduction to
practice of the Invention to the Company's business, or actual or demonstrably
anticipated research or development of the Company and (iii) does not result
from any work performed by me for the Company. I acknowledge that the Company
has notified me that the assignment provided for in this Section l(b) does not
apply to any Invention to which the assignment may not lawfully apply under the
provisions of Section 2870 of the California Labor Code, a copy of which is
attached as Exhibit "A" hereto.
c. Additional Assistance and Documents. I will assist the Company
in obtaining, maintaining and enforcing patents, copyrights, trade secrets,
trademarks, service marks, trade names and
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<PAGE> 8
other proprietary rights in connection with any Invention I have assigned to the
Company under Section l(b), and I further agree that my obligations under this
Section l(c) shall continue beyond the termination of my employment with the
Company. Among other things, for the foregoing purposes I will (i) testify at
the request of the Company in any interference, litigation or other legal
proceeding that may arise during or after my employment, and (ii) execute,
verify, acknowledge and deliver any proper document (and, if, because of my
mental or physical incapacity or for any other reason whatsoever, the Company is
unable to obtain my signature to apply for or to pursue any application for any
United States or foreign patent or copyright covering Inventions assigned to the
Company by me, I hereby irrevocably designate and appoint each of the Company
and its duly authorized officers and agents as my agent and attorney in fact to
act for me and in my behalf and stead to execute and file any such applications
and to do all other lawfully permitted acts to further the prosecution and
issuance of any United States or foreign patent or copyright thereon with the
same legal force and effect as if executed by me). I shall be entitled to
reimbursement of any out-of-pocket expenses incurred by me in rendering such
assistance and, if I am required to render such assistance after the termination
of my employment, the Company shall pay me a reasonable rate of compensation for
time spent by me in rendering such assistance to the extent permitted by law
(provided, I understand that no compensation shall be paid for my time in
connection with preparing for or rendering any testimony or statement under oath
in any judicial proceeding, arbitration or similar proceeding).
d. Prior Contracts and Inventions; Rights of Third Parties. I
represent to the Company that, except as set forth on Exhibit "B" hereto, there
are no other contracts to assign Inventions now in existence between me and any
other person or entity (and if no Exhibit "B" is attached hereto or there is no
such contract described thereon, then it means that by signing this Agreement, I
represent to the Company that there is no such other contracts). In addition, I
represent to the Company that I have no other employments or undertaking which
do or would restrict or impair my performance of this Agreement. I further
represent to the Company that Exhibit "C" hereto sets forth a brief description
of all Inventions made or conceived by me prior to my employment with the
Company which I desire to be excluded from this Agreement (and if no Exhibit "C"
is attached hereto or there is no such description set forth thereon, then it
means that by signing this Agreement I represent to the Company that there is no
such Invention made or conceived by me prior to my employment with the Company).
In connection with my employment with the Company, I promise not to use or
disclose to the Company any patent, copyright, confidential trade secret or
other proprietary information of any previous employer or other person that I am
not lawfully entitled so to use or disclose. If in the course of my employment
with the Company I incorporate into an Invention or any product process or
service of the Company any Invention made or conceived by me prior to my
employment with the Company, I hereby grant to the Company a royalty-free,
irrevocable, worldwide nonexclusive license to make, have made, use and sell
that Invention without restriction as to the extent of my ownership or interest.
2. CONFIDENTIAL INFORMATION
a. Company Confidential Information. I will not use or disclose
Confidential Information, whether before, during or after the term of my
employment except to perform my duties as an employee of the Company based on my
reasonable judgment as an Officer of the Company, or in accordance with
instruction or authorization of the Company, without prior written consent of
the Company or pursuant to process or requirements of law after I have disclosed
such process or requirements to the Company so as to afford it the opportunity
to seek appropriate relief therefrom. "Confidential Information" means any
Invention of any person in which the Company has an interest and in addition
means any financial, client, customer, supplier, marketing, distribution and
other
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<PAGE> 9
information of a confidential or private nature connected with the business of
the Company or any person with whom it deals, provided by the Company to me or
to which I have access during or in the course of any employment.
b. Third Party Information. I acknowledge that during my
employment with the Company I may have access to patent, copyright,
confidential, trade secret or other proprietary information of third parties
subject to restrictions on the use or disclosure thereof by the Company. During
the term of my employment and thereafter I will not use or disclose any such
information other than consistent with the restrictions and my duties as an
employee of the Company.
3. PROPERTY OF THE COMPANY. All documents, instruments, notes,
memoranda, reports, drawings, blueprints, manuals, materials, data and other
papers and records of every kind which come into my possession during or in the
course of my employment, relating to any Inventions or Confidential Information,
are and shall remain the property of the Company and shall be surrendered by me
to the Company upon termination of my employment with the Company, or upon the
request of the Company, at any time during or after termination of my employment
with the Company.
4. NO SOLICITATION OF COMPANY EMPLOYEES. While employed by the
Company and for a period of one year after termination of my employment with the
Company, I agree not to induce or attempt to influence directly or indirectly
any employee of the Company to terminate employment with the Company or to work
for me or any other person or entity.
5. COVENANT OF EXCLUSIVITY AND NOT TO COMPETE. During the term of my
employment with the Company, I will not engage in any other professional
employment or consulting or directly or indirectly participate in or assist any
business which is a current or potential supplier, customer or competitor of the
Company without prior written approval from the Chief Executive Officer of the
Company.
6. GENERAL.
a. Assignments, Successors and Assignees. All representations,
warranties, covenants and agreements of the parties shall bind their respective
heirs, executors, personal representatives, successors and assignees
("transferees") and shall inure to the benefit of their respective permitted
transferees. The Company shall have the right to assign any or all of its rights
and to delegate any or all of its obligations hereunder. The undersigned
employee shall not have the right to assign any rights or delegate any
obligations hereunder without the prior written consent of the Company or its
transferee.
b. Number of Gender Headings. Each number and gender shall be
deemed to include each other number and gender as the context may require. The
headings and captions contained in this agreement shall not constitute a part
thereof and shall not be used in its construction or interpretation.
c. Severability. If any provision of this agreement is found by
any court or arbitral tribunal of competent jurisdiction to be invalid or
unenforceable, the invalidity of such provision shall not affect the other
provisions of this agreement and all provisions not affected by the invalidity
shall remain in full force and effect.
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<PAGE> 10
d. Amendment and Modification. This agreement may be amended or
modified only by a writing executed by each party.
e. Government Law. The construction, interpretation and
performance of this agreement and all transactions under it shall be governed by
the internal laws of California.
f. Remedies. I acknowledge that breach by me of any of the
provisions of this agreement will cause irreparable injury that cannot
adequately be compensated by money damages. The Company shall be entitled to
specific performance, temporary restraining orders, preliminary injunctions and
permanent injunctive relief to enforce my obligations under this agreement. No
remedy conferred by any of the specific provisions of this agreement is intended
to be exclusive of any other remedy. I agree to arbitrate on a final and binding
basis all disputes under this Agreement in accordance with and before the
Judicial Arbitration and Mediation Service ("JAMS").
g. Attorneys' Fees. In the event of any litigation or other
action in connection with this agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and disbursements from the other party
as costs of suit and not as damages.
h. No Effect on Other Terms or Conditions of Employment. I
acknowledge that this agreement does not affect any term or condition of my
employment except as expressly provided in this agreement, and that this
agreement does not give rise to any right or entitlement on my part to
employment or continued employment with the Company. I further acknowledge that
this agreement does not affect in any way the right of the Company to terminate
my employment.
IN WITNESS WHEREOF, I have executed this agreement as of the date set
forth next to my signature below.
/s/ David Lough
-----------------------------
Signature of Employee
David Lough
-----------------------------
Printed Name of Employee
ACCEPTED:
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 11
EXHIBIT "A"
CALIFORNIA LABOR CODE
SECTION 2870. INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT.
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities or trade secret information expect for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
SECTION 2871. RESTRICTIONS ON EMPLOYER FOR CONDITION OF EMPLOYMENT.
No employer shall require a provision made void or unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
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<PAGE> 12
EXHIBIT "B"
Except as set forth below, Employee represents to the Company that there
are no other contracts to assign Inventions now in existence between Employee
and any other person or entity (see Section l(d) of the Agreement):
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<PAGE> 13
EXHIBIT "C"
Set forth below is a brief description of all Inventions made or
conceived by Employee prior to Employee's employment with the Company which
Employee desires to be excluded from this agreement (see Section l(d) of the
Agreement):
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<PAGE> 1
EXHIBIT 10.12
EXECUTIVE EMPLOYMENT AGREEMENT
Peter C. Wulff ("Employee") hereby accepts the offer of Natural
Alternatives International, Inc. ("NAI") for employment as Chief Financial
Officer and Treasurer beginning October 25, 1999. Collectively, NAI and Employee
will be referred to herein as the "Parties."
1. The Parties anticipate that Employee will be employed from the date
hereof through September 30, 2000 (the "Term"). During the Term, Employee's
employment will be at-will and may be terminated by either Employee or NAI at
any time for any reason or no reason, with or without cause upon written notice
to the other. The at-will status of the employment relationship may not be
modified except in writing authorized in advance by the Board of Directors of
NAI and signed by the Chief Executive Officer of NAI and Employee.
2. Employee and NAI further understand and agree that nothing in the NAI
Employee Handbook is intended to be, and nothing in it should be construed to
be, a limitation of NAI's right to terminate, transfer, demote, suspend and
administer discipline at any time for any reason. Employee and NAI understand
and agree nothing in the Handbook is intended to, and nothing in the Handbook
should be construed to, create an implied or express contract of employment
contrary to this agreement.
3. While Employee is employed by NAI, Employee's rate of compensation
will be at least $12,500 per month, which will be reviewed at least annually to
determine, based upon Employee's performance and the performance of NAI, the
amount of increase, (if any), in the rate of compensation. The compensation set
forth in this Section 3 will be Employee's only compensation except standard
employee benefits available to other level one executives of NAI or any other
written compensation arrangement approved by the Board of Directors of NAI. NAI
is currently evaluating a system of bonus compensation for certain of its
employees. Employee will be entitled to participate in any such bonus
compensation in a manner and at a level consistent with other level one
executives of NAI. Currently all the level one executives of NAI include all of
the Corporate Officers of NAI, except for the Chief Executive Officer.
4. If Employee continues working for NAI past the end of the Term, and
if NAI still desires Employee's services, then the following terms and
conditions will apply:
(a) Employee shall be an at-will employee and either Employee or
NAI will be entitled to terminate the employment relationship for any
reason or for no reason, with or without cause and with or without
notice.
(b) Employee will be compensated at the rate set forth in section
3 herein above unless another rate is mutually agreed upon; and
(c) As to benefits and other terms of employment, Employee shall
be subject to the same policies and procedures as other employees of NAI
in similar positions.
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<PAGE> 2
5. During the Term, and any extension thereof, Employee shall have such
responsibilities, duties and authority as NAI through its Chief Executive
Officer may from time to time assign to Employee, and that are normal and
customary duties of a Chief Financial Officer and Treasurer of a publicly held
corporation. Employee's initial title shall be Chief Financial Officer and
Treasurer.
6. In the event this Agreement is terminated by NAI without cause,
whether during or at the end of the Term (and any renewals thereof), Employee
shall be entitled to severance pay, including standard employee benefits
available to other level one executives of NAI, in an amount equivalent to his
then current compensation rate for the period set forth below opposite the
number of complete calendar months which have elapsed from the beginning date
set forth in the first paragraph hereof at the time of termination. One half of
such amount shall be paid upon termination and the balance shall be paid on a
bi-weekly basis during said severance period:
<TABLE>
<CAPTION>
MONTHS OF SEVERANCE
EMPLOYMENT PERIOD
---------- ---------
<S> <C>
1 through 6 months 2 months
7 through 12 months 6 months
13 through 24 months 9 months
more than 24 months 12 months
</TABLE>
NAI may terminate this Agreement with cause, which shall be limited to
the occurrence of one or more of the following events: (i) the Employee's
commission of any fraud against NAI; (ii) Employee's intentional appropriation
for his personal use or benefit the funds of the Company not authorized by the
Chief Executive Officer of the Board of Directors, (iii) Employee's conviction
of any crime involving moral turpitude, (iv) Employee's conviction of a
violation of any state or federal law which could result in a material adverse
impact upon the business of NAI; or (v) Employee's material violation of this
Agreement, provided that Employee shall be given written notice by NAI of any
alleged material violation of the Agreement and an opportunity within 60 days,
to cure the alleged breach, which Employee must diligently pursue to completion.
No severance pay shall be due to Employee if Employee is terminated for cause.
7. In the event of any Change in Control, the following provisions will
apply.
Any of the following shall constitute a "Change in Control" for the
purposes of this Section 7:
A. A "person" (meaning an individual, a partnership, or other group
or association as defined in sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) acquires fifty percent (50%) or more of the combined voting power
of the outstanding securities of NAI having a right to vote in elections of
directors; or
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<PAGE> 3
B. The members of the Board of Directors of the Company who were
members of the Board of Directors on the commencement date hereof, shall for any
reason cease to constitute a majority of the Board of Directors of the Company;
or
C. All, or substantially all of the business of NAI is disposed of by
NAI to a party or parties other than a subsidiary or other affiliate of NAI, in
which NAI owns less than a majority of the equity, pursuant to a partial or
complete liquidation of NAI, sale of assets (including stock of a subsidiary of
NAI) or otherwise.
In the event of any such Change in Control, this Agreement shall
continue in effect unless the Employee at his sole option, and at any time
elects voluntarily to terminate this Agreement. In such case, NAI shall pay
Employee as severance pay or liquidated damages, or both, a lump sum payment
("Change in Control Severance Payment") equal to one hundred fifty percent
(150%) of the Employee's annual salary and bonus specified in Section 3 above or
such greater amount as the Board of Directors determines from time to time
pursuant to terms which may not be revoked or reduced thereafter.
In the event this Agreement is terminated following a Change in Control
by NAI, and/or the surviving or resulting corporation, without cause, Employee
shall be entitled to a Change in Control Severance Payment equal to one hundred
fifty percent (150%) of the Employee's annual salary specified in Section 3
above or such greater amount as the Board of Directors determines from time to
time pursuant to terms which may not be revoked or reduced thereafter.
Any Severance Payment shall be made not later than the fifteenth (15th)
day following the effective date of the voluntary or involuntary termination of
this Agreement in connection with a Change in Control; provided, however, that
if the amount of such payments cannot be finally determined on or before such
date, NAI shall pay to Employee on such date a good faith estimate of the
minimum amount of such payments, and shall pay the remainder of such payments
(together with interest at the rate provided in Internal Revenue Code Section
1274(b)(2)(B) of the Code), as soon as the amount thereof can be determined, but
in no event later than the thirtieth (30th) day after the applicable termination
date. In the event the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall constitute a loan by
NAI payable on the fifteenth (15th) day after receipt by Employee of a written
demand for payment from NAI (together with interest calculated as above). The
total of any payment pursuant to this Section 7 shall be limited to the extent
necessary, in the opinion of legal counsel acceptable to Employee and NAI, to
avoid the payment of an "excess parachute" payment within the meaning of
Internal Revenue Code Section 280 G or any similar successor provision.
In the event of termination of this Agreement either by the Employee
under paragraph 7(B) or by NAI under paragraph 7(C), NAI shall cause each stock
option heretofore granted by NAI to the Employee to become fully exercisable and
to remain exercisable for the term of the option.
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<PAGE> 4
8. Employee and NAI hereby agree to the Mutual Agreement to Arbitrate
attached hereto and made a part hereof as Attachment #1.
9. Employee and NAI hereby agree to the Assignment of Inventions,
Patents and Copyrights Agreement Regarding Confidential Information Covenant of
Exclusivity and Not to Compete attached hereto and made a part hereof as
Attachment #2.
10. This Agreement contains the entire agreement between the parties. It
supersedes any and all other agreements, either oral or in writing, between the
parties hereto with respect to Employee's employment by NAI. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein and acknowledges that no
other agreement, statement of promise not contained in this Agreement shall be
valid or binding. This Agreement may not be modified or amended by oral
agreement or course of conduct, but only by an agreement in writing signed by
the Chief Executive Officer of NAI and Employee.
11. This Executive Employment Agreement shall be construed and enforced
in accordance with the laws of the State of California.
12. Should any part or provision of this Executive Employment Agreement
be held unenforceable or in conflict with the law of any jurisdiction, the
validity of the remaining parts shall not be affected by such holding.
"EMPLOYEE"
/s/ Peter C. Wulff
---------------------------------------------
Peter C. Wulff
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 5
ATTACHMENT #1
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
This Mutual Agreement to Arbitrate Claims is entered into between Peter
C. Wulff ("Employee") and Natural Alternatives International, Inc. ("NAI").
1. Binding Arbitration of Disagreement and Claims
We each voluntarily promise and agree to arbitrate any claims
covered by this Agreement. We further agree that such binding arbitration
pursuant tot his Agreement shall be the sole and exclusive remedy for resolving
any such claims or disputes.
2. Claims Covered by this Agreement
A. Claims and disputes covered by this Agreement include all claims
against NAI (as defined below) and all claims that NAI may have against the
Employee, including, without limitation, those arising under:
(1) Any federal, state or local laws, regulations or statutes
prohibiting employment discrimination (such as, without limitation: race, sex,
national origin, age, disability, religion, sexual orientation) and harassment.
(2) Any alleged or actual agreement or covenant (oral, written or
implied) between Employee and NAI.
(3) Any company policy or compensation or benefit plan, unless the
decision in question was made by an entity other than NAI.
(4) Any public policy.
(5) Any other claim for personal, emotional, physical or economic
injury.
B. The only disputes between Employee and NAI which are not included
within this Mutual Agreement to Arbitrate Claims are:
(1) Any claim by Employee for workers' compensation or unemployment
compensation benefits.
(2) Any claim by Employee for benefits under a company plan which
provides for its own arbitration procedure.
3. Arbitration Procedure
A. The arbitration will be conducted in accordance with the rules of the
current Judicial Arbitration and Mediation Services ("JAMS"), except that the
arbitrator shall be mutually acceptable to both parties. The arbitration will be
held in the state and county of the Employee's primary
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<PAGE> 6
employment at the time of the act giving rise to the dispute. The fees and
expenses of the Arbitrator, and the arbitration, will be borne by the Company.
Each party will pay for the fees and expenses of its own attorneys, experts,
witnesses, transcripts and preparation and presentation of proofs and
post-hearing briefs, unless the party prevails on a claim for which attorneys'
fees and costs are recoverable by statute or contract, in which case the
prevailing party shall be awarded attorneys fees and costs in accordance with
that statute or contract.
B. Before such arbitration, each party shall have the right to conduct
discovery on the same basis and to the same extent as a civil action brought in
the Federal District Court for the Southern District of California.
C. Any action to enforce or vacate the arbitrator's award shall be
governed by the Federal Arbitration Act if applicable, and otherwise by
applicable state law.
4. Miscellaneous Provisions
A. The term "company" means NAI, and all related entities, all officers,
employees, directors, agents, shareholders, partners, benefit plan sponsors,
fiduciaries, administrators or affiliates of any of the above, and all
successors and assignees of any of the above.
B. If either party pursues a covered claim against the other by any
action, method or legal proceeding other than the arbitration provided herein,
the responding party shall be entitled to dismissal or injunctive relief
regarding such action and recovery of all costs, losses and attorneys' fees
related to such other action or proceeding.
C. The parties of this arbitration agreement acknowledge and agree that
they are waiving their right to a jury trial on the issues covered by this
Agreement.
D. This is the complete Agreement of the parties on the subject of
arbitration of disputes and claims. This Agreement supersedes any prior or
contemporaneous oral, written or implied understanding on the subject, shall
survive the termination of Employee's employment and can only be revoked or
modified by a written agreement signed by the parties which specifically states
an intent to revoke or modify this agreement. If any provision of this Agreement
is adjusted to be void or otherwise unenforceable in whole or in part, such
adjudication shall not affect the validity of the remainder of the Agreement.
E. If any provision of this Agreement is held to be unenforceable by a
final court decision, the remainder of the Agreement shall continue in full
force and effect.
My signature below signifies that I have read, understand and agree to
the Arbitration Agreement.
"EMPLOYEE"
/s/ Peter C. Wulff
---------------------------------------------
Peter C. Wulff
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 7
ATTACHMENT #2
ASSIGNMENT OF INVENTIONS, PATENTS AND COPYRIGHTS AGREEMENT REGARDING
CONFIDENTIAL INFORMATION COVENANT OF EXCLUSIVITY AND NOT TO COMPETE
In consideration of and as a condition of my prospective and continued
employment and the compensation afforded to me under the terms and conditions
thereof by Natural Alternatives International, Inc. (the "Company"), I agree to
the following, and I agree the following shall be in addition to the terms and
conditions of any Confidential Information and Invention Assignment Agreement
executed by employees of the Company generally, and which I may execute in
addition hereto:
1 . INVENTIONS
a. Disclosure. I will disclose promptly in writing to the
appropriate officer or other representative of the Company, any idea, invention,
work of authorship, design, formula, pattern, compilation, program, device,
method, technique, process, improvement, development or discovery, whether or
not patentable or copyrightable or entitled to legal protection as a trade
secret, trademark service mark, trade name or otherwise ("Invention"), that I
may conceive, make, develop, reduce to practice or work on, in whole or in part,
solely or jointly with others ("Invent"), during the term of my employment with
the Company. The disclosure required by this Section 1 (a) applies to each and
every Invention that I Invent (i) whether during my regular hours of employment
or during my time away from work (ii) whether or not the Invention was made at
the suggestion of the Company, and (iii) whether or not the Invention was
reduced to or embodied in writing, electronic media or tangible form. The
disclosure required by this Section 1 (a) also applies to any Invention which
may relate at the time of conception or reduction to practice of the Invention
to the Company's business or actual or demonstrably anticipated research or
development of the Company, and to any Invention which results from any work
performed by me for the Company. The disclosure required by this Section 1 (a)
shall be received in confidence by the Company within the meaning of and to the
extent required by California Labor Code Section 2871, the provisions of which
are set forth on Exhibit "A" hereto.
b. Assignment. I hereby assign to the Company without royalty or
any other further consideration my entire right, title and interest in and to
each and every Invention I am required to disclose under Section 1 (a) other
than an Invention that (i) I have or shall have developed entirely on my own
time without using the Company's equipment, supplies, facilities or trade secret
information, (ii) does not relate at the time of conception or reduction to
practice of the Invention to the Company's business, or actual or demonstrably
anticipated research or development of the Company and (iii) does not result
from any work performed by me for the Company. I acknowledge that the Company
has notified me that the assignment provided for in this Section l(b) does not
apply to any Invention to which the assignment may not lawfully apply under the
provisions of Section 2870 of the California Labor Code, a copy of which is
attached as Exhibit "A" hereto.
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<PAGE> 8
c. Additional Assistance and Documents. I will assist the Company
in obtaining, maintaining and enforcing patents, copyrights, trade secrets,
trademarks, service marks, trade names and other proprietary rights in
connection with any Invention I have assigned to the Company under Section l(b),
and I further agree that my obligations under this Section l(c) shall continue
beyond the termination of my employment with the Company. Among other things,
for the foregoing purposes I will (i) testify at the request of the Company in
any interference, litigation or other legal proceeding that may arise during or
after my employment, and (ii) execute, verify, acknowledge and deliver any
proper document (and, if, because of my mental or physical incapacity or for any
other reason whatsoever, the Company is unable to obtain my signature to apply
for or to pursue any application for any United States or foreign patent or
copyright covering Inventions assigned to the Company by me, I hereby
irrevocably designate and appoint each of the Company and its duly authorized
officers and agents as my agent and attorney in fact to act for me and in my
behalf and stead to execute and file any such applications and to do all other
lawfully permitted acts to further the prosecution and issuance of any United
States or foreign patent or copyright thereon with the same legal force and
effect as if executed by me). I shall be entitled to reimbursement of any
out-of-pocket expenses incurred by me in rendering such assistance and, if I am
required to render such assistance after the termination of my employment, the
Company shall pay me a reasonable rate of compensation for time spent by me in
rendering such assistance to the extent permitted by law (provided, I understand
that no compensation shall be paid for my time in connection with preparing for
or rendering any testimony or statement under oath in any judicial proceeding,
arbitration or similar proceeding).
d. Prior Contracts and Inventions; Rights of Third Parties. I
represent to the Company that, except as set forth on Exhibit "B" hereto, there
are no other contracts to assign Inventions now in existence between me and any
other person or entity (and if no Exhibit "B" is attached hereto or there is no
such contract described thereon, then it means that by signing this Agreement, I
represent to the Company that there is no such other contracts). In addition, I
represent to the Company that I have no other employments or undertaking which
do or would restrict or impair my performance of this Agreement. I further
represent to the Company that Exhibit "C" hereto sets forth a brief description
of all Inventions made or conceived by me prior to my employment with the
Company which I desire to be excluded from this Agreement (and if no Exhibit "C"
is attached hereto or there is no such description set forth thereon, then it
means that by signing this Agreement I represent to the Company that there is no
such Invention made or conceived by me prior to my employment with the Company).
In connection with my employment with the Company, I promise not to use or
disclose to the Company any patent, copyright, confidential trade secret or
other proprietary information of any previous employer or other person that I am
not lawfully entitled so to use or disclose. If in the course of my employment
with the Company I incorporate into an Invention or any product process or
service of the Company any Invention made or conceived by me prior to my
employment with the Company, I hereby grant to the Company a royalty-free,
irrevocable, worldwide nonexclusive license to make, have made, use and sell
that Invention without restriction as to the extent of my ownership or interest.
2. CONFIDENTIAL INFORMATION
a. Company Confidential Information. I will not use or disclose
Confidential Information, whether before, during or after the term of my
employment except to perform my duties as an employee of the Company based on my
reasonable judgment as an Officer of the Company, or in
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<PAGE> 9
accordance with instruction or authorization of the Company, without prior
written consent of the Company or pursuant to process or requirements of law
after I have disclosed such process or requirements to the Company so as to
afford it the opportunity to seek appropriate relief therefrom. "Confidential
Information" means any Invention of any person in which the Company has an
interest and in addition means any financial, client, customer, supplier,
marketing, distribution and other information of a confidential or private
nature connected with the business of the Company or any person with whom it
deals, provided by the Company to me or to which I have access during or in the
course of any employment.
b. Third Party Information. I acknowledge that during my
employment with the Company I may have access to patent, copyright,
confidential, trade secret or other proprietary information of third parties
subject to restrictions on the use or disclosure thereof by the Company. During
the term of my employment and thereafter I will not use or disclose any such
information other than consistent with the restrictions and my duties as an
employee of the Company.
3. PROPERTY OF THE COMPANY. All documents, instruments, notes,
memoranda, reports, drawings, blueprints, manuals, materials, data and other
papers and records of every kind which come into my possession during or in the
course of my employment, relating to any Inventions or Confidential Information,
are and shall remain the property of the Company and shall be surrendered by me
to the Company upon termination of my employment with the Company, or upon the
request of the Company, at any time during or after termination of my employment
with the Company.
4. NO SOLICITATION OF COMPANY EMPLOYEES. While employed by the
Company and for a period of one year after termination of my employment with the
Company, I agree not to induce or attempt to influence directly or indirectly
any employee of the Company to terminate employment with the Company or to work
for me or any other person or entity.
5. COVENANT OF EXCLUSIVITY AND NOT TO COMPETE. During the term of my
employment with the Company, I will not engage in any other professional
employment or consulting or directly or indirectly participate in or assist any
business which is a current or potential supplier, customer or competitor of the
Company without prior written approval from the Chief Executive Officer of the
Company.
6. GENERAL.
a. Assignments, Successors and Assignees. All representations,
warranties, covenants and agreements of the parties shall bind their respective
heirs, executors, personal representatives, successors and assignees
("transferees") and shall inure to the benefit of their respective permitted
transferees. The Company shall have the right to assign any or all of its rights
and to delegate any or all of its obligations hereunder. The undersigned
employee shall not have the right to assign any rights or delegate any
obligations hereunder without the prior written consent of the Company or its
transferee.
b. Number and Gender Headings. Each number and gender shall be
deemed to include each other number and gender as the context may require. The
headings and captions contained
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<PAGE> 10
in this agreement shall not constitute a part thereof and shall not be used in
its construction or interpretation.
c. Severability. If any provision of this agreement is found by
any court or arbitral tribunal of competent jurisdiction to be invalid or
unenforceable, the invalidity of such provision shall not affect the other
provisions of this agreement and all provisions not affected by the invalidity
shall remain in full force and effect.
d. Amendment and Modification. This agreement may be amended or
modified only by a writing executed by each party.
e. Government Law. The construction, interpretation and
performance of this agreement and all transactions under it shall be governed by
the internal laws of California.
f. Remedies. I acknowledge that breach by me of any of the
provisions of this agreement will cause irreparable injury that cannot
adequately be compensated by money damages. The Company shall be entitled to
specific performance, temporary restraining orders, preliminary injunctions and
permanent injunctive relief to enforce my obligations under this agreement. No
remedy conferred by any of the specific provisions of this agreement is intended
to be exclusive of any other remedy. I agree to arbitrate on a final and binding
basis all disputes under this Agreement in accordance with and before the
Judicial Arbitration and Mediation Service ("JAMS").
g. Attorneys' Fees. In the event of any litigation or other
action in connection with this agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and disbursements from the other party
as costs of suit and not as damages.
h. No Effect on Other Terms or Conditions of Employment. I
acknowledge that this agreement does not affect any term or condition of my
employment except as expressly provided in this agreement, and that this
agreement does not give rise to any right or entitlement on my part to
employment or continued employment with the Company. I further acknowledge that
this agreement does not affect in any way the right of the Company to terminate
my employment.
IN WITNESS WHEREOF, I have executed this agreement as of the date set
forth next to my signature below.
/s/ Peter C. Wulff
-----------------------------
Signature of Employee
Peter C. Wulff
-----------------------------
Printed Name of Employee
ACCEPTED:
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-------------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 11
EXHIBIT "A"
CALIFORNIA LABOR CODE
SECTION 2870. INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT.
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities or trade secret information expect for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
SECTION 2871. RESTRICTIONS ON EMPLOYER FOR CONDITION OF EMPLOYMENT.
No employer shall require a provision made void or unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
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EXHIBIT "B"
Except as set forth below, Employee represents to the Company that there
are no other contracts to assign Inventions now in existence between Employee
and any other person or entity (see Section l(d) of the Agreement):
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EXHIBIT "C"
Set forth below is a brief description of all Inventions made or
conceived by Employee prior to Employee's employment with the Company which
Employee desires to be excluded from this agreement (see Section l(d) of the
Agreement):
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<PAGE> 1
EXHIBIT 10.13
EXECUTIVE EMPLOYMENT AGREEMENT
Douglas E. Flaker ("Employee") hereby accepts the offer of Natural
Alternatives International, Inc. ("NAI") for employment as Vice President -
Marketing beginning October 1, 1999. Collectively, NAI and Employee will be
referred to herein as the "Parties."
1. The Parties anticipate that Employee will be employed for a period of
twelve (12) months (the "Term"). During the Term, Employee's employment will be
at-will and may be terminated by either Employee or NAI at any time for any
reason or no reason, with or without cause and with or without notice. The
at-will status of the employment relationship may not be modified except in
writing signed by the Chief Executive Officer of NAI and Employee.
2. Employee and NAI further understand and agree that nothing in the NAI
Employee Handbook is intended to be, and nothing in it should be construed to
be, a limitation of NAI's right to terminate, transfer, demote, suspend and
administer discipline at any time for any reason. Employee and NAI understand
and agree nothing in the Handbook is intended to, and nothing in the Handbook
should be construed to, create an implied or express contract of employment
contrary to this agreement.
3. A. Salary. Employee's compensation will be $115,000 per year,
payable no less frequently than monthly. The compensation set forth in this
Section 3 will be Employee's only compensation except standard employee benefits
or any other written compensation arrangement approved by the Board of Directors
and the Company.
B. Expenses. Employee shall receive during the Term a monthly
amount equal to $1,500.00 to reimburse Employee for actual expenses incurred in
ownership and operation of one (1) automobile that Employee shall make and
maintain available for Employee's use on any matter require by or for the
benefit of the Company.
4. If Employee continues working for NAI past the end of the Term, and
if NAI still desires Employee's services, then the following terms and
conditions will apply:
(a) Employee shall be an at-will employee and either Employee or
NAI will be entitled to terminate the employment relationship for any
reason or for no reason, with or without cause and with or without
notice. Employee understands and agrees that transfers, demotions and
suspensions may occur and that employee discipline may be administered
at the will of NAI at any time for any reason, with or without cause and
with or without notice;
(b) Employee will be compensated at the rate set forth in section
3.A hereinabove unless another rate is mutually agreed upon; and
(c) As to benefits and other terms of employment, Employee shall
be subject to the same policies and procedures as other employees of NAI
in similar positions.
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<PAGE> 2
5. During the Term, and any extension thereof, Employee shall have such
responsibilities, duties and authority as NAI may from time to time assign to
Employee. Employee's initial title shall be Vice President - Science and
Technology.
6. In the event this Agreement is terminated by NAI without cause, or
NAI does not allow Employee to continue as such following the completion of the
Term, Employee shall be entitled to severance pay, including standard employee
benefits, in an amount equivalent to his then current compensation rate for the
period set forth below opposite the number of complete calendar months which
have elapsed from the beginning date set forth in the first paragraph hereof at
the time of termination. One half of such amount shall be paid upon termination
and the balance shall be paid on a bi-weekly basis during said severance period:
<TABLE>
<CAPTION>
MONTHS OF SEVERANCE
EMPLOYMENT PERIOD
------------------- ---------
<S> <C>
1 through 6 months 2 months
7 through 12 months 6 months
13 through 24 months 9 months
more than 24 months 12 months
</TABLE>
For purposes of this Section 6, Employee shall be deemed terminated without
cause if such termination is for any reason other than a willful breach or
habitual neglect of Employee's duties under the terms of this Agreement.
7. In the event of any Change in Control, the following provisions will
apply.
A. Any of the following shall constitute a "Change in Control"
for purposes of this Section 7:
(1) Merger or consolidation where shareholders of NAI
immediately prior to such transaction own less than 50% of the voting securities
of the surviving entity immediately following such transaction;
(2) Transfer of all or substantially all of the assets of
NAI; or
(3) Voluntary or involuntary dissolution of NAI.
B. In the event of any such Change in Control, Employee at his
sole option, and at any time may elect one of the following provisions:
(a) Continued employment by NAI, and/or the surviving or
resulting corporation, said successor to be bound by all the provisions of this
Agreement;
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<PAGE> 3
(b) Voluntary termination of this Agreement and payment to
Employee as severance pay or liquidated damages, or both, a lump sum payment
("Severance Payment") equal to one hundred fifty percent (150%) of the
Employee's annual salary specified in Section 3.B. above or such greater amount
as the Board of Directors determines from time to time pursuant to terms which
may not be revoked or reduced thereafter.
C. In the event this Agreement is terminated following a Change
in Control by NAI, and/or the surviving or resulting corporation, without cause,
Employee shall be entitled to a Severance Payment equal to one hundred fifty
percent (150%) of the Employee's annual salary specified in Section 3.B. above
or such greater amount as the Board of Directors determines from time to time
pursuant to terms which may not be revoked or reduced thereafter.
D. Any Severance Payment shall be made not later than the
fifteenth (15th) day following the effective date of the voluntary or
involuntary termination of this Agreement in connection with a Change in
Control; provided, however, that if the amount of such payments cannot be
finally determined on or before such date, NAI shall pay to Employee on such
date a good faith estimate of the minimum amount of such payments, and shall pay
the remainder of such payments (together with interest at the rate provided in
Internal Revenue Code Section 1274(b)(2)(B) of the Code), as soon as the amount
thereof can be determined, but in no event later than the thirtieth (30th) day
after the applicable termination date. In the event the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by NAI payable on the fifteenth (15th) day after
receipt by Employee of a written demand for payment from NAI (together with
interest calculated as above). The total of any payment pursuant to this Section
7 shall be limited to the extent necessary, in the opinion of legal counsel
acceptable to Employee and NAI, to avoid the payment of an "excess parachute"
payment within the meaning of Internal Revenue Code Section 280 G or any similar
successor provision.
8. Employee and NAI hereby agree to the Mutual Agreement to Arbitrate
attached hereto and made a part hereof as Attachment #1.
9. Employee and NAI hereby agree to the Assignment of Inventions,
Patents and Copyrights Agreement Regarding Confidential Information Covenant of
Exclusivity and Not to Compete attached hereto and made a part hereof as
Attachment #2.
10. This Agreement contains the entire agreement between the parties. It
supersedes any and all other agreements, either oral or in writing, between the
parties hereto with respect to Employee's employment by NAI. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein and acknowledges that no
other agreement, statement of promise not contained in this Agreement shall be
valid or binding. This Agreement may not be modified or amended by oral
agreement or course of conduct, but only by an agreement in writing signed by
the Chief Executive Officer of NAI and Employee.
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<PAGE> 4
11. This Executive Employment Agreement shall be construed and enforced
in accordance with the laws of the State of California.
12. Should any part or provision of this Executive Employment Agreement
be held unenforceable or in conflict with the law of any jurisdiction, the
validity of the remaining parts shall not be affected by such holding.
"EMPLOYEE"
/s/ Douglas E. Flaker
---------------------------------------------
Douglas E. Flaker
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 5
ATTACHMENT #1
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
This Mutual Agreement to Arbitrate Claims is entered into between
Douglas E. Flaker ("Employee") and Natural Alternatives International, Inc.
("NAI").
1. Binding Arbitration of Disagreement and Claims
We each voluntarily promise and agree to arbitrate any claims
covered by this Agreement. We further agree that such binding arbitration
pursuant tot his Agreement shall be the sole and exclusive remedy for resolving
any such claims or disputes.
2. Claims Covered by this Agreement
A. Claims and disputes covered by this Agreement include all claims
against NAI (as defined below) and all claims that NAI may have against the
Employee, including, without limitation, those arising under:
(1) Any federal, state or local laws, regulations or statutes
prohibiting employment discrimination (such as, without limitation: race, sex,
national origin, age, disability, religion, sexual orientation) and harassment.
(2) Any alleged or actual agreement or covenant (oral, written or
implied) between Employee and NAI.
(3) Any company policy or compensation or benefit plan, unless
the decision in question was made by an entity other than NAI.
(4) Any public policy.
(5) Any other claim for personal, emotional, physical or economic
injury.
B. The only disputes between Employee and NAI which are not included
within this Mutual Agreement to Arbitrate Claims are:
(1) Any claim by Employee for workers' compensation benefits.
(2) Any claim by Employee for benefits under a company plan which
provides for its own arbitration procedure.
3. Arbitration Procedure
A. The arbitration will be conducted in accordance with the rules of the
current Judicial Arbitration and Mediation Services ("JAMS"), except that the
arbitrator shall be mutually acceptable to both parties. The arbitration will be
held in the state and county of the Employee's primary employment at the time of
the act giving rise to the dispute. The fees and expenses of the Arbitrator, and
the arbitration, will be borne by the Company. Each party will pay for the fees
and expenses of its
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<PAGE> 6
own attorneys, experts, witnesses, transcripts and preparation and presentation
of proofs and post-hearing briefs, unless the party prevails on a claim for
which attorneys' fees and costs are recoverable by statute or contract.
B. Before such arbitration, each party shall have the right to conduct
discovery on the same basis and to the same extent as a civil action brought in
the Federal District Court for the Southern District of California.
C. Any action to enforce or vacate the arbitrator's award shall be
governed by the Federal Arbitration Act if applicable, and otherwise by
applicable state law.
4. Miscellaneous Provisions
A. The term "company" means NAI, and all related entities, all officers,
employees, directors, agents, shareholders, partners, benefit plan sponsors,
fiduciaries, administrators or affiliates of any of the above, and all
successors and assignees of any of the above.
B. If either party pursues a covered claim against the other by any
action, method or legal proceeding other than the arbitration provided herein,
the responding party shall be entitled to dismissal or injunctive relief
regarding such action and recovery of all costs, losses and attorneys' fees
related to such other action or proceeding.
C. The parties of this arbitration agreement acknowledge and agree that
they are wavering their right to a jury trial on the issues covered by this
Agreement.
D. This is the complete Agreement of the parties on the subject of
arbitration of disputes and claims. This Agreement supersedes any prior or
contemporaneous oral, written or implied understanding on the subject, shall
survive the termination of Employee's employment and can only be revoked or
modified by a written agreement signed by the parties which specifically states
an intent to revoke or modify this agreement. If any provision of this Agreement
is adjusted to be void or otherwise unenforceable in whole or in part, such
adjudication shall not affect the validity of the remainder of the Agreement.
E. If any provision of this Agreement is held to be unenforceable by a
final court decision, the remainder of the Agreement shall continue in full
force and effect.
My signature below signifies that I have read, understand and agree to
the Arbitration Agreement.
"EMPLOYEE"
/s/ Douglas E. Flaker
---------------------------------------------
Douglas E. Flaker
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
------------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 7
ATTACHMENT #2
ASSIGNMENT OF INVENTIONS, PATENTS AND COPYRIGHTS AGREEMENT REGARDING
CONFIDENTIAL INFORMATION COVENANT OF EXCLUSIVITY AND NOT TO COMPETE
In consideration of and as a condition of my prospective and continued
employment and the compensation afforded to me under the terms and conditions
thereof by Natural Alternatives International, Inc. (the "Company"), I agree to
the following, and I agree the following shall be in addition to the terms and
conditions of any Confidential Information and Invention Assignment Agreement
executed by employees of the Company generally, and which I may execute in
addition hereto:
1. INVENTIONS
a. Disclosure. I will disclose promptly in writing to the
appropriate officer or other representative of the Company, any idea, invention,
work of authorship, design, formula, pattern, compilation, program, device,
method, technique, process, improvement, development or discovery, whether or
not patentable or copyrightable or entitled to legal protection as a trade
secret, trademark service mark, trade name or otherwise ("Invention"), that I
may conceive, make, develop, reduce to practice or work on, in whole or in part,
solely or jointly with others ("Invent"), during the term of my employment with
the Company. The disclosure required by this Section 1 (a) applies to each and
every Invention that I Invent (i) whether during my regular hours of employment
or during my time away from work (ii) whether or not the Invention was made at
the suggestion of the Company, and (iii) whether or not the Invention was
reduced to or embodied in writing, electronic media or tangible form. The
disclosure required by this Section 1 (a) also applies to any Invention which
may relate at the time of conception or reduction to practice of the Invention
to the Company's business or actual or demonstrably anticipated research or
development of the Company, and to any Invention which results from any work
performed by me for the Company. The disclosure required by this Section 1 (a)
shall be received in confidence by the Company within the meaning of and to the
extent required by California Labor Code Section 2871, the provisions of which
are set forth on Exhibit "A" hereto.
b. Assignment. I hereby assign to the Company without royalty or
any other further consideration my entire right, title and interest in and to
each and every Invention I am required to disclose under Section 1 (a) other
than an Invention that (i) I have or shall have developed entirely on my own
time without using the Company's equipment, supplies, facilities or trade secret
information, (ii) does not relate at the time of conception or reduction to
practice of the Invention to the Company's business, or actual or demonstrably
anticipated research or development of the Company and (iii) does not result
from any work performed by me for the Company. I acknowledge that the Company
has notified me that the assignment provided for in this Section l(b) does not
apply to any Invention to which the assignment may not lawfully apply under the
provisions of Section Section 2870 of the California Labor Code, a copy of which
is attached as Exhibit "A" hereto.
c. Additional Assistance and Documents. I will assist the Company
in obtaining, maintaining and enforcing patents, copyrights, trade secrets,
trademarks, service marks, trade names and
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<PAGE> 8
other proprietary rights in connection with any Invention I have assigned to the
Company under Section l(b), and I further agree that my obligations under this
Section l(c) shall continue beyond the termination of my employment with the
Company. Among other things, for the foregoing purposes I will (i) testify at
the request of the Company in any interference, litigation or other legal
proceeding that may arise during or after my employment, and (ii) execute,
verify, acknowledge and deliver any proper document (and, if, because of my
mental or physical incapacity or for any other reason whatsoever, the Company is
unable to obtain my signature to apply for or to pursue any application for any
United States or foreign patent or copyright covering Inventions assigned to the
Company by me, I hereby irrevocably designate and appoint each of the Company
and its duly authorized officers and agents as my agent and attorney in fact to
act for me and in my behalf and stead to execute and file any such applications
and to do all other lawfully permitted acts to further the prosecution and
issuance of any United States or foreign patent or copyright thereon with the
same legal force and effect as if executed by me). I shall be entitled to
reimbursement of any out-of-pocket expenses incurred by me in rendering such
assistance and, if I am required to render such assistance after the termination
of my employment, the Company shall pay me a reasonable rate of compensation for
time spent by me in rendering such assistance to the extent permitted by law
(provided, I understand that no compensation shall be paid for my time in
connection with preparing for or rendering any testimony or statement under oath
in any judicial proceeding, arbitration or similar proceeding).
d. Prior Contracts and Inventions; Rights of Third Parties. I
represent to the Company that, except as set forth on Exhibit "B" hereto, there
are no other contracts to assign Inventions now in existence between me and any
other person or entity (and if no Exhibit "B" is attached hereto or there is no
such contract described thereon, then it means that by signing this Agreement, I
represent to the Company that there is no such other contracts). In addition, I
represent to the Company that I have no other employments or undertaking which
do or would restrict or impair my performance of this Agreement. I further
represent to the Company that Exhibit "C" hereto sets forth a brief description
of all Inventions made or conceived by me prior to my employment with the
Company which I desire to be excluded from this Agreement (and if no Exhibit "C"
is attached hereto or there is no such description set forth thereon, then it
means that by signing this Agreement I represent to the Company that there is no
such Invention made or conceived by me prior to my employment with the Company).
In connection with my employment with the Company, I promise not to use or
disclose to the Company any patent, copyright, confidential trade secret or
other proprietary information of any previous employer or other person that I am
not lawfully entitled so to use or disclose. If in the course of my employment
with the Company I incorporate into an Invention or any product process or
service of the Company any Invention made or conceived by me prior to my
employment with the Company, I hereby grant to the Company a royalty-free,
irrevocable, worldwide nonexclusive license to make, have made, use and sell
that Invention without restriction as to the extent of my ownership or interest.
2. CONFIDENTIAL INFORMATION
a. Company Confidential Information. I will not use or disclose
Confidential Information, whether before, during or after the term of my
employment except to perform my duties as an employee of the Company in
accordance with instruction or authorization of the Company based on my
reasonable judgment as an Officer of the Company, or without prior written
consent of the Company or pursuant to process or requirements of law after I
have disclosed such process or requirements to the Company so as to afford it
the opportunity to seek appropriate relief therefrom. "Confidential Information"
means any Invention of any person in which the Company has an interest and in
addition means any financial, client, customer, supplier, marketing,
distribution and other
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<PAGE> 9
information of a confidential or private nature connected with the business of
the Company or any person with whom it deals, provided by the Company to me or
to which I have access during or in the course of any employment.
b. Third Party Information. I acknowledge that during my
employment with the Company I may have access to patent, copyright,
confidential, trade secret or other proprietary information of third parties
subject to restrictions on the use or disclosure thereof by the Company. During
the term of my employment and thereafter I will not use or disclose any such
information other than consistent with the restrictions and my duties as an
employee of the Company.
3. PROPERTY OF THE COMPANY. All documents, instruments, notes,
memoranda, reports, drawings, blueprints, manuals, materials, data and other
papers and records of every kind which come into my possession during or in the
course of my employment, relating to any Inventions or Confidential Information,
are and shall remain the property of the Company and shall be surrendered by me
to the Company upon termination of my employment with the Company, or upon the
request of the Company, at any time during or after termination of my employment
with the Company.
4. NO SOLICITATION OF COMPANY EMPLOYEES. While employed by the Company
and for a period of one year after termination of my employment with the
Company, I agree not to induce or attempt to influence directly or indirectly
any employee of the Company to terminate employment with the Company or to work
for me or any other person or entity.
5. COVENANT OF EXCLUSIVITY AND NOT TO COMPETE. During the term of my
employment with the Company, I will not engage in any other professional
employment or consulting or directly or indirectly participate in or assist any
business which is a current or potential supplier, customer or competitor of the
Company without prior written approval from the Chief Executive Officer of the
Company.
6. GENERAL.
a. Assignments, Successors and Assignees. All representations,
warranties, covenants and agreements of the parties shall bind their respective
heirs, executors, personal representatives, successors and assignees
("transferees") and shall inure to the benefit of their respective permitted
transferees. The Company shall have the right to assign any or all of its rights
and to delegate any or all of its obligations hereunder. The undersigned
employee shall not have the right to assign any rights or delegate any
obligations hereunder without the prior written consent of the Company or its
transferee.
b. Number of Gender Headings. Each number and gender shall be
deemed to include each other number and gender as the context may require. The
headings and captions contained in this agreement shall not constitute a part
thereof and shall not be used in its construction or interpretation.
c. Severability. If any provision of this agreement is found by
any court or arbitral tribunal of competent jurisdiction to be invalid or
unenforceable, the invalidity of such provision shall not affect the other
provisions of this agreement and all provisions not affected by the invalidity
shall remain in full force and effect.
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<PAGE> 10
d. Amendment and Modification. This agreement may be amended or
modified only by a writing executed by each party.
e. Government Law. The construction, interpretation and
performance of this agreement and all transactions under it shall be governed by
the internal laws of California.
f. Remedies. I acknowledge that breach by me of any of the
provisions of this agreement will cause irreparable injury that cannot
adequately be compensated by money damages. The Company shall be entitled to
specific performance, temporary restraining orders, preliminary injunctions and
permanent injunctive relief to enforce my obligations under this agreement. No
remedy conferred by any of the specific provisions of this agreement is intended
to be exclusive of any other remedy. I agree to arbitrate on a final and binding
basis all disputes under this Agreement in accordance with and before the
Judicial Arbitration and Mediation Service ("JAMS").
g. Attorneys' Fees. In the event of any litigation or other
action in connection with this agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and disbursements from the other party
as costs of suit and not as damages.
h. No Effect on Other Terms or Conditions of Employment. I
acknowledge that this agreement does not affect any term or condition of my
employment except as expressly provided in this agreement, and that this
agreement does not give rise to any right or entitlement on my part to
employment or continued employment with the Company. I further acknowledge that
this agreement does not affect in any way the right of the Company to terminate
my employment.
IN WITNESS WHEREOF, I have executed this agreement as of the date set
forth next to my signature below.
/s/ Douglas E. Flaker
-----------------------------------
Signature of Employee
Douglas E. Flaker
-----------------------------------
Printed Name of Employee
ACCEPTED:
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 11
EXHIBIT "A"
CALIFORNIA LABOR CODE
SECTION 2870. INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT.
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities or trade secret information expect for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
SECTION 2871. RESTRICTIONS ON EMPLOYER FOR CONDITION OF EMPLOYMENT.
No employer shall require a provision made void or unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
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<PAGE> 12
EXHIBIT "B"
Except as set forth below, Employee represents to the Company that there
are no other contracts to assign Inventions now in existence between Employee
and any other person or entity (see Section l(d) of the Agreement):
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<PAGE> 13
EXHIBIT "C"
Set forth below is a brief description of all Inventions made or
conceived by Employee prior to Employee's employment with the Company which
Employee desires to be excluded from this agreement (see Section l(d) of the
Agreement):
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<PAGE> 1
EXHIBIT 10.14
EXECUTIVE EMPLOYMENT AGREEMENT
David K. Shunick ("Employee") hereby accepts the offer of Natural
Alternatives International, Inc. ("NAI") for employment as Vice President -
Operations beginning October 1, 1999. Collectively, NAI and Employee will be
referred to herein as the "Parties."
1. The Parties anticipate that Employee will be employed for a period of
twelve (12) months (the "Term"). During the Term, Employee's employment will be
at-will and may be terminated by either Employee or NAI at any time for any
reason or no reason, with or without cause and with or without notice. The
at-will status of the employment relationship may not be modified except in
writing signed by the Chief Executive Officer of NAI and Employee.
2. Employee and NAI further understand and agree that nothing in the NAI
Employee Handbook is intended to be, and nothing in it should be construed to
be, a limitation of NAI's right to terminate, transfer, demote, suspend and
administer discipline at any time for any reason. Employee and NAI understand
and agree nothing in the Handbook is intended to, and nothing in the Handbook
should be construed to, create an implied or express contract of employment
contrary to this agreement.
3. A. Salary. Employee's compensation will be $125,000 per year, payable
no less frequently than monthly. The compensation set forth in this Section 3
will be Employee's only compensation except standard employee benefits or any
other written compensation arrangement approved by the Board of Directors and
the Company.
B. Expenses. Employee shall receive during the Term a monthly
amount equal to $750.00 to reimburse Employee for actual expenses incurred in
ownership and operation of one (1) automobile that Employee shall make and
maintain available for Employee's use on any matter require by or for the
benefit of the Company.
4. If Employee continues working for NAI past the end of the Term, and
if NAI still desires Employee's services, then the following terms and
conditions will apply:
(a) Employee shall be an at-will employee and either Employee or
NAI will be entitled to terminate the employment relationship for any
reason or for no reason, with or without cause and with or without
notice. Employee understands and agrees that transfers, demotions and
suspensions may occur and that employee discipline may be administered
at the will of NAI at any time for any reason, with or without cause and
with or without notice;
(b) Employee will be compensated at the rate set forth in
section 3.A hereinabove unless another rate is mutually agreed upon; and
(c) As to benefits and other terms of employment, Employee shall
be subject to the same policies and procedures as other employees of NAI
in similar positions.
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<PAGE> 2
5. During the Term, and any extension thereof, Employee shall have such
responsibilities, duties and authority as NAI may from time to time assign to
Employee. Employee's initial title shall be Vice President - Operations.
6. In the event this Agreement is terminated by NAI without cause, or
NAI does not allow Employee to continue as such following the completion of the
Term, Employee shall be entitled to severance pay, including standard employee
benefits, in an amount equivalent to his then current compensation rate for the
period set forth below opposite the number of complete calendar months which
have elapsed from the beginning date set forth in the first paragraph hereof at
the time of termination. One half of such amount shall be paid upon termination
and the balance shall be paid on a bi-weekly basis during said severance period:
<TABLE>
<CAPTION>
MONTHS OF SEVERANCE
EMPLOYMENT PERIOD
---------- ---------
<S> <C>
1 through 6 months 2 months
7 through 12 months 6 months
13 through 24 months 9 months
more than 24 months 12 months
</TABLE>
For purposes of this Section 6, Employee shall be deemed terminated without
cause if such termination is for any reason other than a willful breach or
habitual neglect of Employee's duties under the terms of this Agreement.
7. In the event of any Change in Control, the following provisions will
apply.
A. Any of the following shall constitute a "Change in Control"
for purposes of this Section 7:
(1) Merger or consolidation where shareholders of NAI
immediately prior to such transaction own less than 50% of the voting securities
of the surviving entity immediately following such transaction;
(2) Transfer of all or substantially all of the assets
of NAI; or
(3) Voluntary or involuntary dissolution of NAI.
B. In the event of any such Change in Control, Employee at his
sole option, and at any time may elect one of the following provisions:
(a) Continued employment by NAI, and/or the surviving
or resulting corporation, said successor to be bound by all the provisions of
this Agreement;
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<PAGE> 3
(b) Voluntary termination of this Agreement and payment
to Employee as severance pay or liquidated damages, or both, a lump sum payment
("Severance Payment") equal to one hundred fifty percent (150%) of the
Employee's annual salary specified in Section 3.B. above or such greater amount
as the Board of Directors determines from time to time pursuant to terms which
may not be revoked or reduced thereafter.
C. In the event this Agreement is terminated following a Change
in Control by NAI, and/or the surviving or resulting corporation, without cause,
Employee shall be entitled to a Severance Payment equal to one hundred fifty
percent (150%) of the Employee's annual salary specified in Section 3.B. above
or such greater amount as the Board of Directors determines from time to time
pursuant to terms which may not be revoked or reduced thereafter.
D. Any Severance Payment shall be made not later than the
fifteenth (15th) day following the effective date of the voluntary or
involuntary termination of this Agreement in connection with a Change in
Control; provided, however, that if the amount of such payments cannot be
finally determined on or before such date, NAI shall pay to Employee on such
date a good faith estimate of the minimum amount of such payments, and shall pay
the remainder of such payments (together with interest at the rate provided in
Internal Revenue Code Section 1274(b)(2)(B) of the Code), as soon as the amount
thereof can be determined, but in no event later than the thirtieth (30th) day
after the applicable termination date. In the event the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by NAI payable on the fifteenth (15th) day after
receipt by Employee of a written demand for payment from NAI (together with
interest calculated as above). The total of any payment pursuant to this Section
7 shall be limited to the extent necessary, in the opinion of legal counsel
acceptable to Employee and NAI, to avoid the payment of an "excess parachute"
payment within the meaning of Internal Revenue Code Section 280 G or any similar
successor provision.
8. Employee and NAI hereby agree to the Mutual Agreement to Arbitrate
attached hereto and made a part hereof as Attachment #1.
9. Employee and NAI hereby agree to the Assignment of Inventions,
Patents and Copyrights Agreement Regarding Confidential Information Covenant of
Exclusivity and Not to Compete attached hereto and made a part hereof as
Attachment #2.
10. This Agreement contains the entire agreement between the parties. It
supersedes any and all other agreements, either oral or in writing, between the
parties hereto with respect to Employee's employment by NAI. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein and acknowledges that no
other agreement, statement of promise not contained in this Agreement shall be
valid or binding. This Agreement may not be modified or amended by oral
agreement or course of conduct, but only by an agreement in writing signed by
the Chief Executive Officer of NAI and Employee.
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<PAGE> 4
11. This Executive Employment Agreement shall be construed and enforced
in accordance with the laws of the State of California.
12. Should any part or provision of this Executive Employment Agreement
be held unenforceable or in conflict with the law of any jurisdiction, the
validity of the remaining parts shall not be affected by such holding.
"EMPLOYEE"
/s/ David K. Shunick
--------------------------------------------
David K. Shunick
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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<PAGE> 5
ATTACHMENT #1
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
This Mutual Agreement to Arbitrate Claims is entered into between David
K. Shunick ("Employee") and Natural Alternatives International, Inc. ("NAI").
1. Binding Arbitration of Disagreement and Claims
We each voluntarily promise and agree to arbitrate any claims
covered by this Agreement. We further agree that such binding arbitration
pursuant tot his Agreement shall be the sole and exclusive remedy for resolving
any such claims or disputes.
2. Claims Covered by this Agreement
A. Claims and disputes covered by this Agreement include all claims
against NAI (as defined below) and all claims that NAI may have against the
Employee, including, without limitation, those arising under:
(1) Any federal, state or local laws, regulations or statutes
prohibiting employment discrimination (such as, without limitation: race, sex,
national origin, age, disability, religion, sexual orientation) and harassment.
(2) Any alleged or actual agreement or covenant (oral, written or
implied) between Employee and NAI.
(3) Any company policy or compensation or benefit plan, unless
the decision in question was made by an entity other than NAI.
(4) Any public policy.
(5) Any other claim for personal, emotional, physical or economic
injury.
B. The only disputes between Employee and NAI which are not included
within this Mutual Agreement to Arbitrate Claims are:
(1) Any claim by Employee for workers' compensation benefits.
(2) Any claim by Employee for benefits under a company plan which
provides for its own arbitration procedure.
3. Arbitration Procedure
A. The arbitration will be conducted in accordance with the rules of the
current Judicial Arbitration and Mediation Services ("JAMS"), except that the
arbitrator shall be mutually acceptable to both parties. The arbitration will be
held in the state and county of the Employee's primary employment at the time of
the act giving rise to the dispute. The fees and expenses of the Arbitrator, and
the arbitration, will be borne by the Company. Each party will pay for the fees
and expenses of its
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own attorneys, experts, witnesses, transcripts and preparation and presentation
of proofs and post-hearing briefs, unless the party prevails on a claim for
which attorneys' fees and costs are recoverable by statute or contract.
B. Before such arbitration, each party shall have the right to conduct
discovery on the same basis and to the same extent as a civil action brought in
the Federal District Court for the Southern District of California.
C. Any action to enforce or vacate the arbitrator's award shall be
governed by the Federal Arbitration Act if applicable, and otherwise by
applicable state law.
4. Miscellaneous Provisions
A. The term "company" means NAI, and all related entities, all officers,
employees, directors, agents, shareholders, partners, benefit plan sponsors,
fiduciaries, administrators or affiliates of any of the above, and all
successors and assignees of any of the above.
B. If either party pursues a covered claim against the other by any
action, method or legal proceeding other than the arbitration provided herein,
the responding party shall be entitled to dismissal or injunctive relief
regarding such action and recovery of all costs, losses and attorneys' fees
related to such other action or proceeding.
C. The parties of this arbitration agreement acknowledge and agree that
they are wavering their right to a jury trial on the issues covered by this
Agreement.
D. This is the complete Agreement of the parties on the subject of
arbitration of disputes and claims. This Agreement supersedes any prior or
contemporaneous oral, written or implied understanding on the subject, shall
survive the termination of Employee's employment and can only be revoked or
modified by a written agreement signed by the parties which specifically states
an intent to revoke or modify this agreement. If any provision of this Agreement
is adjusted to be void or otherwise unenforceable in whole or in part, such
adjudication shall not affect the validity of the remainder of the Agreement.
E. If any provision of this Agreement is held to be unenforceable by a
final court decision, the remainder of the Agreement shall continue in full
force and effect.
My signature below signifies that I have read, understand and agree to
the Arbitration Agreement.
"EMPLOYEE"
/s/ David K. Shunick
David K. Shunick
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-------------------------------------
Mark A. Le Doux,
Chief Executive Officer
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ATTACHMENT #2
ASSIGNMENT OF INVENTIONS, PATENTS AND COPYRIGHTS AGREEMENT REGARDING
CONFIDENTIAL INFORMATION COVENANT OF EXCLUSIVITY AND NOT TO COMPETE
In consideration of and as a condition of my prospective and continued
employment and the compensation afforded to me under the terms and conditions
thereof by Natural Alternatives International, Inc. (the "Company"), I agree to
the following, and I agree the following shall be in addition to the terms and
conditions of any Confidential Information and Invention Assignment Agreement
executed by employees of the Company generally, and which I may execute in
addition hereto:
1. INVENTIONS
a. Disclosure. I will disclose promptly in writing to the
appropriate officer or other representative of the Company, any idea, invention,
work of authorship, design, formula, pattern, compilation, program, device,
method, technique, process, improvement, development or discovery, whether or
not patentable or copyrightable or entitled to legal protection as a trade
secret, trademark service mark, trade name or otherwise ("Invention"), that I
may conceive, make, develop, reduce to practice or work on, in whole or in part,
solely or jointly with others ("Invent"), during the term of my employment with
the Company. The disclosure required by this Section 1 (a) applies to each and
every Invention that I Invent (i) whether during my regular hours of employment
or during my time away from work (ii) whether or not the Invention was made at
the suggestion of the Company, and (iii) whether or not the Invention was
reduced to or embodied in writing, electronic media or tangible form. The
disclosure required by this Section 1 (a) also applies to any Invention which
may relate at the time of conception or reduction to practice of the Invention
to the Company's business or actual or demonstrably anticipated research or
development of the Company, and to any Invention which results from any work
performed by me for the Company. The disclosure required by this Section 1 (a)
shall be received in confidence by the Company within the meaning of and to the
extent required by California Labor Code Section 2871, the provisions of which
are set forth on Exhibit "A" hereto.
b. Assignment. I hereby assign to the Company without royalty or
any other further consideration my entire right, title and interest in and to
each and every Invention I am required to disclose under Section 1 (a) other
than an Invention that (i) I have or shall have developed entirely on my own
time without using the Company's equipment, supplies, facilities or trade secret
information, (ii) does not relate at the time of conception or reduction to
practice of the Invention to the Company's business, or actual or demonstrably
anticipated research or development of the Company and (iii) does not result
from any work performed by me for the Company. I acknowledge that the Company
has notified me that the assignment provided for in this Section l(b) does not
apply to any Invention to which the assignment may not lawfully apply under the
provisions of Section Section 2870 of the California Labor Code, a copy of which
is attached as Exhibit "A" hereto.
c. Additional Assistance and Documents. I will assist the Company
in obtaining, maintaining and enforcing patents, copyrights, trade secrets,
trademarks, service marks, trade names and
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other proprietary rights in connection with any Invention I have assigned to the
Company under Section l(b), and I further agree that my obligations under this
Section l(c) shall continue beyond the termination of my employment with the
Company. Among other things, for the foregoing purposes I will (i) testify at
the request of the Company in any interference, litigation or other legal
proceeding that may arise during or after my employment, and (ii) execute,
verify, acknowledge and deliver any proper document (and, if, because of my
mental or physical incapacity or for any other reason whatsoever, the Company is
unable to obtain my signature to apply for or to pursue any application for any
United States or foreign patent or copyright covering Inventions assigned to the
Company by me, I hereby irrevocably designate and appoint each of the Company
and its duly authorized officers and agents as my agent and attorney in fact to
act for me and in my behalf and stead to execute and file any such applications
and to do all other lawfully permitted acts to further the prosecution and
issuance of any United States or foreign patent or copyright thereon with the
same legal force and effect as if executed by me). I shall be entitled to
reimbursement of any out-of-pocket expenses incurred by me in rendering such
assistance and, if I am required to render such assistance after the termination
of my employment, the Company shall pay me a reasonable rate of compensation for
time spent by me in rendering such assistance to the extent permitted by law
(provided, I understand that no compensation shall be paid for my time in
connection with preparing for or rendering any testimony or statement under oath
in any judicial proceeding, arbitration or similar proceeding).
d. Prior Contracts and Inventions; Rights of Third Parties. I
represent to the Company that, except as set forth on Exhibit "B" hereto, there
are no other contracts to assign Inventions now in existence between me and any
other person or entity (and if no Exhibit "B" is attached hereto or there is no
such contract described thereon, then it means that by signing this Agreement, I
represent to the Company that there is no such other contracts). In addition, I
represent to the Company that I have no other employments or undertaking which
do or would restrict or impair my performance of this Agreement. I further
represent to the Company that Exhibit "C" hereto sets forth a brief description
of all Inventions made or conceived by me prior to my employment with the
Company which I desire to be excluded from this Agreement (and if no Exhibit "C"
is attached hereto or there is no such description set forth thereon, then it
means that by signing this Agreement I represent to the Company that there is no
such Invention made or conceived by me prior to my employment with the Company).
In connection with my employment with the Company, I promise not to use or
disclose to the Company any patent, copyright, confidential trade secret or
other proprietary information of any previous employer or other person that I am
not lawfully entitled so to use or disclose. If in the course of my employment
with the Company I incorporate into an Invention or any product process or
service of the Company any Invention made or conceived by me prior to my
employment with the Company, I hereby grant to the Company a royalty-free,
irrevocable, worldwide nonexclusive license to make, have made, use and sell
that Invention without restriction as to the extent of my ownership or interest.
2. CONFIDENTIAL INFORMATION
a. Company Confidential Information. I will not use or disclose
Confidential Information, whether before, during or after the term of my
employment except to perform my duties as an employee of the Company based on my
reasonable judgment as an Officer of the Company, or in accordance with
instruction or authorization of the Company, without prior written consent of
the Company or pursuant to process or requirements of law after I have disclosed
such process or requirements to the Company so as to afford it the opportunity
to seek appropriate relief therefrom. "Confidential Information" means any
Invention of any person in which the Company has an interest and in addition
means any financial, client, customer, supplier, marketing, distribution and
other
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<PAGE> 9
information of a confidential or private nature connected with the business of
the Company or any person with whom it deals, provided by the Company to me or
to which I have access during or in the course of any employment.
b. Third Party Information. I acknowledge that during my
employment with the Company I may have access to patent, copyright,
confidential, trade secret or other proprietary information of third parties
subject to restrictions on the use or disclosure thereof by the Company. During
the term of my employment and thereafter I will not use or disclose any such
information other than consistent with the restrictions and my duties as an
employee of the Company.
3. PROPERTY OF THE COMPANY. All documents, instruments, notes,
memoranda, reports, drawings, blueprints, manuals, materials, data and other
papers and records of every kind which come into my possession during or in the
course of my employment, relating to any Inventions or Confidential Information,
are and shall remain the property of the Company and shall be surrendered by me
to the Company upon termination of my employment with the Company, or upon the
request of the Company, at any time during or after termination of my employment
with the Company.
4. NO SOLICITATION OF COMPANY EMPLOYEES. While employed by the Company
and for a period of one year after termination of my employment with the
Company, I agree not to induce or attempt to influence directly or indirectly
any employee of the Company to terminate employment with the Company or to work
for me or any other person or entity.
5. COVENANT OF EXCLUSIVITY AND NOT TO COMPETE. During the term of my
employment with the Company, I will not engage in any other professional
employment or consulting or directly or indirectly participate in or assist any
business which is a current or potential supplier, customer or competitor of the
Company without prior written approval from the Chief Executive Officer of the
Company.
6. GENERAL.
a. Assignments, Successors and Assignees. All representations,
warranties, covenants and agreements of the parties shall bind their respective
heirs, executors, personal representatives, successors and assignees
("transferees") and shall inure to the benefit of their respective permitted
transferees. The Company shall have the right to assign any or all of its rights
and to delegate any or all of its obligations hereunder. The undersigned
employee shall not have the right to assign any rights or delegate any
obligations hereunder without the prior written consent of the Company or its
transferee.
b. Number of Gender Headings. Each number and gender shall be
deemed to include each other number and gender as the context may require. The
headings and captions contained in this agreement shall not constitute a part
thereof and shall not be used in its construction or interpretation.
c. Severability. If any provision of this agreement is found by
any court or arbitral tribunal of competent jurisdiction to be invalid or
unenforceable, the invalidity of such provision shall not affect the other
provisions of this agreement and all provisions not affected by the invalidity
shall remain in full force and effect.
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d. Amendment and Modification. This agreement may be amended or
modified only by a writing executed by each party.
e. Government Law. The construction, interpretation and
performance of this agreement and all transactions under it shall be governed by
the internal laws of California.
f. Remedies. I acknowledge that breach by me of any of the
provisions of this agreement will cause irreparable injury that cannot
adequately be compensated by money damages. The Company shall be entitled to
specific performance, temporary restraining orders, preliminary injunctions and
permanent injunctive relief to enforce my obligations under this agreement. No
remedy conferred by any of the specific provisions of this agreement is intended
to be exclusive of any other remedy. I agree to arbitrate on a final and binding
basis all disputes under this Agreement in accordance with and before the
Judicial Arbitration and Mediation Service ("JAMS").
g. Attorneys' Fees. In the event of any litigation or other
action in connection with this agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and disbursements from the other party
as costs of suit and not as damages.
h. No Effect on Other Terms or Conditions of Employment. I
acknowledge that this agreement does not affect any term or condition of my
employment except as expressly provided in this agreement, and that this
agreement does not give rise to any right or entitlement on my part to
employment or continued employment with the Company. I further acknowledge that
this agreement does not affect in any way the right of the Company to terminate
my employment.
IN WITNESS WHEREOF, I have executed this agreement as of the date set
forth next to my signature below.
/s/ David K. Shunick
-----------------------------
Signature of Employee
David K. Shunick
-----------------------------
Printed Name of Employee
ACCEPTED:
NATURAL ALTERNATIVES INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Mark A. LeDoux
-----------------------------------------
Mark A. Le Doux, Chief Executive Officer
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EXHIBIT "A"
CALIFORNIA LABOR CODE
SECTION 2870. INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT.
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities or trade secret information expect for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
SECTION 2871. RESTRICTIONS ON EMPLOYER FOR CONDITION OF EMPLOYMENT.
No employer shall require a provision made void or unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
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EXHIBIT "B"
Except as set forth below, Employee represents to the Company that there
are no other contracts to assign Inventions now in existence between Employee
and any other person or entity (see Section l(d) of the Agreement):
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EXHIBIT "C"
Set forth below is a brief description of all Inventions made or
conceived by Employee prior to Employee's employment with the Company which
Employee desires to be excluded from this agreement (see Section l(d) of the
Agreement):
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-0 OF THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
OF NATURAL ALTERNATIVES INTERNATIONAL, INC. FOR THE QUARTER ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY AS REFERENCE TO SUCH FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT EARNINGS PER SHARE).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 440
<SECURITIES> 196
<RECEIVABLES> 7,575
<ALLOWANCES> (323)
<INVENTORY> 7,403
<CURRENT-ASSETS> 4,815<F1>
<PP&E> 24,092
<DEPRECIATION> (9,618)
<TOTAL-ASSETS> 37,184
<CURRENT-LIABILITIES> 8,104
<BONDS> 3,053
0
0
<COMMON> 60
<OTHER-SE> 22,526
<TOTAL-LIABILITY-AND-EQUITY> 37,184
<SALES> 12,064
<TOTAL-REVENUES> 12,064
<CGS> 12,586
<TOTAL-COSTS> 12,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> (3,847)
<INCOME-TAX> (1,436)
<INCOME-CONTINUING> (2,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,411)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)
<FN>
<F1>INCLUDES INCOME TAX REFUND RECEIVABLE, NOTES RECEIVABLE - CURRENT PORTION,
PREPAID EXPENSES, DEPOSITS AND OTHER CURRENT ASSETS.
</FN>
</TABLE>
