<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the Securities
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
Commission File Number 33-7106-A
NATURADE, INC.
Delaware 23-2442709
(State of incorporation) (I.R.S. Employer Identification No.)
7110 East Jackson Street, Paramount, CA. 90723
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 531-8120
Securities registered pursuant to Section 15(d) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ----------------------
Common Stock, $0.0001 par value None
Warrants None
Securities registered pursuant to Section 12 (g) of the Act:
None
As of November 29, 1996, 2,593,005 shares of the Registrant's Common Stock
were outstanding and the aggregate market value of such Common Stock held by
non-affiliates as of that date was $2,220,750 based on the average of the
bid and asked price on that date.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
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PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Naturade, Inc., a Delaware corporation (the "Company" or "Naturade")
manufactures and distributes a variety of health related products, including
vitamins, nutritional supplements and skin and hair care products. Its products
are sold primarily to distributors who resell to health and natural food stores.
Independent brokers and outside sales representatives are utilized throughout
the United States and internationally.
The Company's plant and executive offices are located at 7110 East
Jackson Street, Paramount, California 90723, telephone (310) 531-8120.
B. HISTORICAL DEVELOPMENT OF NATURADE, INC.
Naturade was incorporated in Delaware in 1986 for the purpose of acquiring
other businesses. In April 1989, Naturade acquired Naturade Products, Inc.
("NPI"), the common stock of which was owned by Allan Schulman, the Company's
present Chief Executive Officer, and other family members.
C. HISTORICAL DEVELOPMENT OF NATURADE'S BUSINESS
NPI was established in 1926 by Nathan Schulman, the father of Allan
Schulman. The business, which started with one retail health food store,
expanded until in 1970 it operated fourteen retail stores located in Southern
California and manufactured health related products which were distributed
nationally. During the early 1970's, NPI commenced a program to sell its retail
stores and concentrated on product manufacturing and wholesale distribution. The
last four retail stores were sold in 1989. NPI was merged into Naturade on
September 30, 1993.
D. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
At present, the Company's business is in a single business segment, the
manufacture and distribution of a variety of health related products, including
vitamins, nutritional supplements, skin care and hair care products. Financial
information for the Company is presented in the financial statements
accompanying this report.
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E. DESCRIPTION OF BUSINESS OF NATURADE
(i) Products
Naturade has three major product lines: skin and hair care, fitness and
energy, and specialty nutritional formulas.
The skin and hair care line includes the "Aloe Vera 80 Collection" of
cleansers, moisturizers, shampoos and other beauty aids, all of which contain a
high percentage of Aloe Vera Gel.
The fitness and energy line includes a variety of products for the
serious body builder as well as products for the average person. "N-R-G
Protein" supplement has been an industry leader for over 40 years. "All
Natural Vegetable Protein" powder meets the needs of vegetarians or people who
prefer products that contain no animal products. Other products include
"Muscle Maker" formulas, Anabolic tablets, and Amino Acid tablets. Naturade's
diet and weight loss products include a meal replacement powder drink mix
marketed under the name "Weight Reduction Program."
The specialty nutritional line includes vitamin and mineral formulas,
herbal tablets and powders and special liquid formulas. Naturade's K.B.11 herbal
diuretic was one of the first natural diuretic formulas available to the natural
food industry. Popular products include Colon Conditioner (a natural fiber
formula), Tri-Zymes (digestive enzymes), Booster (liquid vitamin supplement),
Herbex (herbal laxative), and Aloe Vera drinks .
At the end of fiscal 1996 the Company introduced a new product grouping
brand called "Biospec." The products initially introduced include vitamins,
minerals, herbal formulas and natural remedies. This new brand will be
distributed exclusively through health care practitioners, especially those
involved with alternative medicine. The Biospec line contains many Naturade
formulas but also has specifically designed products to meet the requirements
of the health care practitioners and their patients.
In November 1994, the Company entered into a joint venture with an
unrelated party, Harrier, Inc., a Delaware corporation, to form a California
Limited Liability Company named "DermaRay International, LLC." The purpose of
this venture is to develop, market and sell the Bioptron Lamp in the United
States . The lamp, which utilizes linearly polarized incoherent light of
specific wavelength distribution and power intensity, is effective for the
relief of pain or as a skin care device and emits no ultraviolet light.
Marketing of the lamps began in 1995. Naturade provides the general management
for the venture.
(ii) Marketing
For the fiscal year ended September 30, 1996, Naturade had sales of
$10,105,532, of which 93% was domestic and 7% international. Gross profit was
$4,869,105, with domestic and international sales contributing gross profit
amounts proportionate to sales.
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(a) DOMESTIC SALES
Naturade's domestic branded product business is primarily handled through a
distributor network. There are approximately 15 key distributors and 15 smaller
distributors that service approximately 6,000 retail health food stores. The
Company has a group of distributors who are affiliated with each other and whose
aggregate purchases during 1996 represented 27.2% of the Company's total sales.
The loss of these customers could have a material adverse effect on the Company.
Domestic branded sales in the United States are broken down by geographic
regions as follows:
%
Northeast Region 27.0
Southeast Region 12.1
Southwest Region 7.0
Mid-West Region 13.4
Rocky Mountain Region 9.0
California & Hawaii 23.6
Northwest Region 7.9
-----
100.0
Naturade maintains brokerage agreements with brokers in the United
States. These agreements grant exclusive territories in which the broker
represents Naturade and receives a commission on sales generated in their
territory.
In addition to Naturade's branded products, the Company sells various
private label products to several customers. These sales comprised
approximately 12% of the Company's total sales. One customer accounted for
approximately 75% of these sales.
(b) FOREIGN SALES
Naturade's international business is designed to meet each country's unique
cultural and distribution requirements. Naturade will typically grant the
wholesaler or distributor the right to utilize Naturade's trademarks and brand
names in a specified geographical territory and commit the wholesaler or
distributor to a non-binding sales goal to purchase minimum levels of Naturade's
products. The Company also offers secondary brands in addition to the Naturade
brand and offers private label products to its international customers.
The majority of the Company's international sales in 1996 were in South
Korea. As a result of a reorganization by the Company's customer in Saudi Arabia
and the redesign of its packaging, there were no sales to that customer during
fiscal 1996. The Company has restructured its international department with an
emphasis on obtaining a diversified group of new customers.
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(c) SEASONAL FLUCTUATIONS
The general nature of the Company's domestic business is not considered
seasonal. However, international sales tend to fluctuate depending upon the
current economic conditions, seasonal patterns and cultural differences within
each country.
(d) NO GOVERNMENT CONTRACT BUSINESS
No material portion of Naturade's business is government contract business
nor is its business adversely impacted by government regulation or action.
(iii) Backlogs
Naturade does not carry backlog orders as they are not relevant to its
business. Most customers prefer to reorder products on a regular basis.
Sufficient inventory levels are maintained to allow normal orders to be shipped
within 72 hours. Special orders are shipped in 30 days.
(iv) Inventory
Naturade's inventory generally ranges from $1,100,000 to $1,600,000
throughout the year. Management has a weekly sales forecast meeting to review
inventory status. If any excess inventory is indicated, every effort is made to
reduce the excessive inventory as soon as possible. A complete physical
inventory is counted once a year.
(v) Raw Material
Naturade is primarily a sales and marketing company and as such only
manufactures its powder supplements. Naturade began manufacturing its powder
supplements in the 1950's in response to an inability to obtain powders of
satisfactory quality from outside suppliers. Naturade's current powder
manufacturing includes a specially designed vacuum feeder which avoids powder
filling problems caused by heavy bags and excessive powder dust. As an
additional safety procedure, all powders pass through a fine screen before they
are packaged.
Quality Control is integrated throughout every phase of product
development and production. Ingredients are selected for nutritional value,
stability and other qualities that will contribute to the product's worth.
Individual ingredients are checked for adherence to industry and government
food standards. To further maintain high standards of control, up-to-date
automated equipment is used to package the Company's vitamin and herb products.
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Powder supplements represent approximately 46% of total sales. Raw
materials are purchased from a variety of leading manufacturers. The Company has
rarely experienced a problem in obtaining raw materials and anticipates no
significant problems in the future.
(vi) Competition
The natural food industry does not have an industry-wide reporting system
which makes it difficult to measure Naturade's market share. As an alternative,
management reviews product category percentage data, as shown in the sales
reports of several major distributors, to determine the sales position of key
products. An analysis of these reports indicates that the sales volume of many
Naturade key products are in the top 15% of the product groups carried by its
distributors.
The principal method of competing within the industry is to build
goodwill and credibility with the retailer and consumer. Naturade has a very
strong brand position since it is one of the oldest companies in the natural
food industry (over 70 years). Naturade's diversified product lines, along
with its reputation for high quality products, enables the Company to compete
effectively in its market.
(vii) Copyrights, Trademarks and Licenses
Naturade maintains United States registrations on over a dozen trademarks,
and California registrations on five trademarks. Naturade also maintains
copyrights on "Aloe Vera Plant," and maintains trademark registrations for a
variety of names in over 25 foreign countries.
(viii) Product Research and Development
Naturade's product development expenses were $123,643, $133,737, and
$125,295 for the years ended September 30, 1996, 1995, and 1994, respectively.
The majority of product research and development in 1996 was devoted to the
repackaging of the Company's Aloe Vera 80 line of skin and hair care products.
This new expanded line was introduced in the spring of 1996. Research and
development also continued in the herbal category and in herb-related products
for both Naturade and Biospec brands.
Product research and development in 1995 was devoted to two areas. The
first was to continue to develop new products in the herb category. The second
was to research and evaluate the Company's skin and hair care products and to
evaluate a new packaging design concept.
Product research in 1994 was primarily involved with the development and
introduction of the Silver Series line and Power Shake products. Both product
lines were introduced with a floor display and other collateral material. The
Company continued to redesign new packaging for its existing products. In 1994
new labeling was placed on the Herbal product group and many of the protein and
fitness products were repackaged.
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(ix) Environmental Discharge Expenditures
In its powder blending operations, Naturade utilizes an internal dust
collecting system which prevents dust and pollutants from being released into
the environment. Accordingly, Naturade believes it is in compliance with
applicable government regulations regarding discharge of materials into the
environment.
(x) Employees
Naturade currently employs approximately 48 people.
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(xi) Financial Information regarding Export Sales
<TABLE>
<CAPTION>
NET SALES TO NET SALES TO
KOREA SAUDI ARABIA
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- ----------------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
431,593 547,555 977,016 1,904,854 1,840,542 0 839,124 363,006 327,435 365,186
NET SALES
OTHER EXPORT DOMESTIC NET SALES
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- ----------------------------------------------------------------- ---------------------------------------------------------
270,800 341,835 246,238 341,875 273,192 9,403,139 8,366,226 6,522,316 5,018,096 4,495,700
TOTAL NET SALES
ALL MARKETS
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------
10,105,532 10,094,740 8,108,576 7,592,260 6,974,620
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
8
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ITEM 2. PROPERTIES
The Company's executive offices, manufacturing, sales, marketing and
product development operations are located in an approximately 54,000 square
foot building located in Paramount, California which is owned two thirds by the
Company and one third by Allan Schulman, the Company's Chief Executive Officer
and a Director.
Mr. Schulman's one-third interest in the building is leased under a triple
net lease that has a remaining term extending through July of 1998. The monthly
rental paid to Mr. Schulman is $8,339 and increases with changes in the cost of
living index. The Company is responsible for paying all real estate taxes,
maintenance and operating expenses and insurance. A Tenancy in Common Agreement
effective February 1, 1995, between the Company and Mr. Schulman, among other
things, provides that the Company and Mr. Schulman each have a right of first
refusal to purchase the other's interest in the property under certain
circumstances. See Item 13 for further information.
Management believes that the Company's manufacturing facilities are
suitable and more than adequate for its current production capacity and future
growth. The facility was originally designed and built to the Company's
manufacturing requirements. Additionally, current production on one shift is
approximately 60% of capacity. The Company is capable of operating second and
third shifts (if necessary) without further capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a single lawsuit involving a claim for
commissions by a former sales representative. Management believes that this
lawsuit is ordinary routine litigation incidental to the Company's business and
is not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The Company's shares began trading on the over-the-counter securities
market in the third quarter of 1991. The over-the-counter market quotations
reflect interdealer bid prices, without retail markup, markdown or commission,
and may not necessarily represent actual transactions. These prices were
retrieved from the National Quotation Bureau.
COMMON STOCK
For Fiscal Year Ended September 30, 1996 High Low
- --------------------------------------- ------ -------
1st Quarter $ 2.00 $ 1.38
2nd Quarter 1.63 1.25
3rd Quarter 1.38 1.03
4th Quarter 2.00 1.06
For Fiscal Year Ended September 30, 1995 High Low
- --------------------------------------- ------ -------
1st Quarter $ 1.25 $ 1.07
2nd Quarter 2.03 1.68
3rd Quarter 2.00 1.64
4th Quarter 2.13 1.75
On December 11, 1996, the last reported price for the Company's Common
Stock was $ 2.125 bid, $ 2.50 ask.
B. HOLDERS
To the best knowledge of the Company, the number of record holders of
common stock as of December 4 , 1996 was 596. The Company believes that
approximately 631 additional shareholders hold the Company's common stock in
"street name."
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C. DIVIDENDS
The Company has not paid a cash dividend on its common stock, and it is not
anticipated that the Company will pay any dividends in the foreseeable future.
The Company intends to follow a policy of retaining any future earnings to
reduce debt and provide funds for the expansion of its business.
D. WARRANTS
The Company presently has outstanding a series of Class A and a series of
Class B Warrants.
Class A Warrants originally provided for the purchase of one share of
common stock of Naturade for $1.50 per share and Class B Warrants for the
purchase of one share of common stock for $3.00 per share. The Board of
Directors has reduced the exercise price of Class A Warrants to $1.00. The
expiration date of both the Class A and Class B Warrants had been extended by
the Board of Directors to December 31, 1996. The Board of Directors has
further extended the expiration date of the Class B warrants to December 31,
1998.
As of November 30, 1996, a total of 306,601 Class A Warrants and 337,747
Class B Warrants were outstanding. During the period from October, 1, 1992
through November 30, 1996, 31,825 Class A Warrants and 679 Class B Warrants were
exercised.
During the 3rd quarter of fiscal 1995, a market was established in the
Company's Series A and Series B Warrants. These securities are quoted through
the facilities of the National Quotation Bureau "Pink Sheets" and are
available on the NASDAQ Bulletin Board under the symbols NRDCW and NRDCZ.
Series A Series B
For Fiscal Year Ended September 30, 1996 Bid Price Bid Price
- -------------------------------------------- --------- ----------
1st Quarter $ 0.15 $ 0.05
2nd Quarter $ 0.15 $ 0.05
3rd Quarter $ 0.15 $ 0.05
4th Quarter $ 0.15 $ 0.05
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Series A Series B
For Fiscal Year Ended September 30, 1995 Bid Price Bid Price
- ------------------------------------------ --------- ----------
3rd Quarter $ 0.15 $ 0.05
4th Quarter $ 0.15 $ 0.05
On December 11, 1996, the last bid price for the Company's Series A
warrants was $0.125, and $0.05 for the Series B Warrants.
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize certain selected financial data for the
periods presented for the Company. The data for the year ended September 30,
1996, should be read in conjunction with the more detailed audited statements
for such year presented elsewhere herein.
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STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
NATURADE, INC.
YEARS ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
------------ ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales 10,105,532 10,094,740 8,108,576 7,592,260 6,974,620
Gross Profit 4,869,105 4,738,852 3,835,249 3,450,637 2,910,155
Income (loss) from operations before income taxes, extraordinary
item and cumulative effect of change in accounting principle 204,158 336,808 387,631 49,860 (444,427)
Income Tax expense (benefit) 38,000 (58,275) (29,000) 27,000 (29,606)
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle 166,158 395,083 416,631 22,860 (414,821)
Extraordinary item, relief of indebtedness - - - 136,448
Income (loss) before cumulative effect of change in 166,158 395,083 416,631 22,860 (278,373)
accounting principle
Cumulative effect of change in accounting principle - - 91,000 - -
Net income (loss) 166,158 395,083 507,631 22,860 (278,373)
Income (loss) per common and common equivalent shares:
Before extraordinary item and cumulative effect of change
in accounting principle 0.06 0.14 0.15 0.01 (0.17)
Extraordinary item - - - 0.06
Cumulative effect of change in accounting principle - - 0.03 - -
Net Income (loss) 0.06 0.14 0.18 0.01 (0.11)
<CAPTION>
BALANCE SHEET DATA SEPTEMBER 30,
1996 1995 1994 1993 1992
------------ ------------ ----------- ---------- ----------
Total Assets 5,160,235 4,820,775 2,564,613 2,093,239 2,048,751
Long-term obligations 2,418,334 2,555,675 199,060 393,117 590,861
Common Stock 259 254 278 269 260
Shareholders Equity (deficit) 1,080,224 897,588 762,800 67,965 (49,563)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
Inventories increased $237,560 to $1,333,535 at September 30, 1996 from
$1,095,975 at September 30, 1995, and are expected to continue to increase
during fiscal 1997. This increase was required to support the overall increase
in the sales of the Company's products during the last quarter of fiscal 1996
and the anticipation of increased future sales. The Company expects to finance
inventory increases in the same manner they have financed their growth in the
last five years, through bank borrowings and internally generated funds.
The Company's cash provided by operating activities increased $5,586 from
$90,635 in 1995 to $96,221 in 1996. This increase was mainly a result of the
changes in accounts receivable and accounts payable. In 1996 there was an
increase in accounts receivable of $260,393 primarily resulting from higher
sales in the month of September 1996 as compared to the month of September 1995.
In 1996 the Company's accounts payable increased $160,534 as a result of higher
inventory purchases.
During 1996 the Company's working capital increased to $879,651 from
$783,549 at September 30, 1995.
Cash used in capital expenditures totaled $147,140, down from $1,056,254 in
1995 primarily as a result of the Company's purchase in 1995 of a two-thirds
interest in the real property it occupies. The capital expenditures for 1995
were much more significant than in prior years as a result of this purchase.
Management forecasts that capital expenditures for 1997 will be less than
$150,000 and will be financed by bank loans, leasing and/or cash flow from
operations.
The Company's cash provided by financing activities was $54,618 compared to
$880,134 in 1995 primarily as a result of the borrowing for the capital
expenditure described above.
The Company has a $1,000,000 open line of credit available through February
1, 1997. As of September 30, 1996, $700,000 was outstanding on this line
compared to $350,000 as of September 30, 1995. Management has no reason to
believe that this line will not be extended.
Management is of the opinion that the Company has sufficient business,
liquidity and capital resources to finance its operations.
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RESULTS OF OPERATIONS
1996 VS. 1995
Net sales for the fiscal year ended September 30, 1996 exceeded the prior
year by $10,792. However, domestic branded sales, which represented 81% of
total sales, increased $1,798,310 or 28% to $8,186,613. Private label sales,
representing 12% of total sales decreased $761,397 or 39% to $1,216,526.
International sales, which represented the remaining 7% of sales, decreased
$1,026,121 or 59% to $702,393.
The Company attributes the majority of the 28% domestic branded sales
increase to increased promotional and marketing expenditures in a concerted
effort to expand distribution. On January 1, 1996, the Company implemented an
approximate 5% price increase on selected items representing 15% of total
domestic sales, excluding private label sales. The sales increase was
accomplished primarily by expanded distribution to existing distributors and the
addition of several smaller distributors covering areas in which the Company was
not previously represented.
The Company redesigned its Aloe Vera 80 Skin & Hair Care line and the "new
look" started distribution in the Spring of 1996. The Company also added eight
new products to the line as well as three new Aloe Vera 80 Sun Care products.
In addition to the new Aloe Vera 80 products, the Company developed and
introduced two new protein formulas, one new herbal formula and three new amino
acid formulas.
A new area of distribution for the Company in 1996 was the chain of 2,400
GNC stores. The Company now distributes its complete line of Aloe Vera 80 Skin
and Hair Care products through both the GNC corporate and franchise stores. In
addition to the Aloe Vera 80 products, the Company sells a variety of its herbal
products to GNC.
The Company completed the initial product development and package design
for its new Biospec brand of vitamins, minerals and herbal supplements. This new
label will be distributed exclusively through alternative health practitioners.
Distribution is planned to begin during the first fiscal quarter of 1997.
Private label sales decreased because a major private label customer
discontinued a product grouping that the Company had manufactured for them in
1995.
International sales decreased because a customer in Saudi Arabia (who was
the Company's largest international customer in 1995) completely reorganized
and redesigned its packaging which resulted in no shipments during fiscal 1996.
As this reorganization and redesign is now completed, the Company expects
shipments to this customer to resume during the first quarter of fiscal 1997.
Gross profit for the fiscal year ended September 30, 1996 increased 1.3% to
48.2% from 46.9% in the prior fiscal year. This increase was primarily the
result of decreased private label
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and international sales, both of which carry lower margins, as well as the price
increase discussed above.
Selling, general and administrative expenses increased $474,997 or 12.3% to
42.8% of sales from 38.1% last year. Sales and marketing expenses related to
domestic sales increased $593,319 or 44.5% to 19.1% of sales from 13.2% last
year, while the remaining expenses in sales and marketing related to
international sales and general and administrative expenses decreased $118,322.
The majority of this $593,319 increase is comprised of the following: an
increase in advertising of $133,640; an increase in compensation and related
payroll costs of $197,124; an increase in design, production and printing
related to the packaging upgrade of the Company's skin and hair care products as
well as for new products in the amount of $117,294; and an increase in
promotional expenses of $97,013.
Management has eliminated the valuation allowance on deferred tax assets
since they believe it is more likely than not that the deductible temporary
differences will be realized. 1996, 1995, and 1994 pretax income was
approximately $204,000, $337,000 and $388,000, respectively. Deferred tax
assets will be realizable from future taxable income. Management estimates that
it will require four years of taxable income consistent with levels of the past
four years to realize the deferred tax assets. Based on the Company's operating
results and management's expectation of future performance it believes this
level of taxable income is attainable. If the company is unable to generate the
income necessary to recognize the deferred tax assets recorded, a valuation
allowance will need to be provided that would be charged to income when
recorded.
RECENT ACCOUNTING DEVELOPMENTS
As described in Note 1 to the financial statements there are two accounting
standards that will be adopted by the Company during next year. These adoptions
are not expected to have a material impact on the financial statements nor is
management aware of any accounting developments pending that would have a
material impact on the financial statements.
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1995 VS. 1994
Net sales for the fiscal year ended September 30, 1995, increased
$1,986,164 or 24.5%. Domestic sales, which represented 83% of total sales,
increased $1,843,910 or 28% while international sales, which represented the
remaining 17% increased $142,254 or 9%. Private label sales which are included
in the domestic sales category increased $965,888 or 96%.
On January 1, 1995, the Company implemented an approximate 10% price
increase on selected items representing 19% of total domestic sales, excluding
private label sales.
The Company attributed the majority of the 24.5% domestic sales increase to
increased promotional activity and an increase in private label sales.
The results of the Company's package redesign program continued to be very
positive. Nearly all of the packaging for the fitness, energy and specialty
nutritional formula products was redesigned. Private label sales continued to
improve in fiscal 1995 and this category was a strong contributor to increased
sales. However, because of the nature of the private label business, there is no
assurance that increases in this business will continue. The private label
business increases the Company's utilization of its production capacity.
International sales showed a 9% improvement even though several key
customers experienced changes in management and distribution. The company
reorganized its international department and planned to become more active in
this arena. Because of the nature of the international marketplace, there are no
assurances that increases in this business will continue.
Gross profit for the fiscal year ended September 30, 1995 decreased 0.4% to
46.9% from 47.3% in the prior fiscal year. This decrease was primarily the
result of increased private label sales during the year which have lower
margins. The effect of the increase in private label sales was largely offset by
the increase in margins of other products. Overall, the gross profit increased
$903,603 due to the increase in sales.
Selling, general and administrative expenses decreased 3.7% to 38.1% of
sales from 41.8% last year. This was attributed to an increase in operating
expenses of $460,604 or 13.6% compared to the sales increase of 24.5%. The
increase in selling, general and administrative expenses was primarily related
to a $206,293 or 21.7% increase in compensation and related payroll costs as a
result of additional staff hired to support operations, a $241,717 or 39.5%
increase in other expenses as a result of increased legal expenses and
depreciation due to the Company's purchase of the two thirds interest in the
building from the Becker Family Trust, as well as costs related to the Company's
first annual report to shareholders and a $141,580 or 11.7% increase in
commissions, promotion, advertising and freight expense as a result of increased
sales. These increases were offset by a $175,902 decrease in rent expense as a
result of the Company's purchase of the land and building.
The Company recorded a deferred tax asset of $184,000 as a result of
deductible temporary differences existing at September 30, 1995. Among other
deductible temporary differences at September 30, 1995, the Company had a net
operating loss carryover of
17
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$275,000 for federal income tax purposes which expires in 2007. Management
recorded the deferred tax asset to the extent that they believe it is more
likely than not to be realized prior to its ultimate expiration. Management
considered its current operational profitability as well as expected future
sales levels increases. Management believed its recorded deferred asset to be
conservative given 1995 and 1994 pretax income of approximately $337,000 and
$388,000, respectively.
Income before income taxes and cumulative effect of change in accounting
principle decreased $50,823 ( including a charge to earnings of $268,000 for the
settlement of a lawsuit) or 13% to $336,808 from $387,631 last year. Income
before income taxes and cumulative effect of change in accounting principle
would have increased $217,177 or 56% without this unusual charge.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached as Exhibits are Financial Statements and the supplementary
financial information as required (see Item 14- Exhibits).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors and executive officers of the Company
as of September 30, 1996, are as follows:
Name Age Position Since
---- --- -------- -----
Allan Schulman 65 President, Chief 1959
Executive Officer,
Director, Chairman
of the Board
Robert Bearson 73 Director 1995
William P. Cordeiro 52 Director 1991
Robert L. Zuber 44 Director 1992
Barry M. Zwick 61 Director 1992
Michael Fernicola 50 Executive Vice President 1994
Paul D. Shapnick 60 Chief Financial Officer,
Secretary-Treasurer 1992
The directors serve until the next annual meeting of shareholders, or
until their successors are elected.
ALLAN SCHULMAN. Mr. Schulman has attended and completed business courses at the
University of California at Los Angeles, Long Beach State College and the
University of California at Irvine. A veteran of the Korean War, Mr. Schulman
joined NPI in 1953, and was elected President of NPI in 1959. He was elected to
the Board of Directors of NPI in 1959, and to the Board of Directors of Naturade
in 1991.
ROBERT BEARSON. Mr. Bearson has an MBA in Business Administration from the
Harvard Business School, Harvard University, Cambridge, Mass. He also holds a
Bachelor of Science Degree from Cal Tech, Pasadena, CA. He runs a consulting
business (ABM) and is a Senior Instructor at the University of California at Los
Angeles, Business and Engineering Extension. He is a nationally recognized
authority on specialty store retailing.
19
<PAGE>
WILLIAM P. CORDEIRO. Dr. Cordeiro has a Ph.D. in Executive Management from
Claremont Graduate School and an MBA from the University of Southern California.
Since 1983 he has been a partner of BCA Consulting. Since 1988 Dr. Cordeiro has
been a Management Professor in the School of Business and Economics of the
California State University, Los Angeles. His business experience prior to BCA
Consulting was with The Veta Grande Companies, Inc. as their Vice Chairman
(1979-1983) and the Manager of Planning and Analysis at various divisions of
ARCO (1967-1979).
ROBERT L. ZUBER. Mr. Zuber has a BA in Business from the University of Southern
California, and is a CPA. From June of 1993 to July of 1996 he was the Director
of Finance at Sheppard, Mullin, Richter and Hampton, and is presently Executive
Director of the firm. The previous six years he was Chief Financial Officer and
a member of the Board of American Pacific Mint, Inc. He was a Senior Manager at
Stonefield and Josephson Accountancy Corporation from 1984 to 1987. He has over
20 years experience in financial management, including ten years as Senior Audit
Manager with Ernst & Young.
BARRY M. ZWICK. Mr. Zwick has a BS Degree from the U.S. Military Academy at West
Point and an MBA from the University of Southern California. Mr. Zwick has over
25 years experience in the securities business. He was a registered investment
advisor. Mr. Zwick has been a member of the Midwest Stock Exchange and the
Chicago Board of Trade. Since 1989 he has been a private investor. Prior to this
period he was a Managing Director of Ladenburg, Thalmann & Co., Inc.
MICHAEL FERNICOLA. Mr. Fernicola attended Cal Poly Los Angeles doing his
undergraduate work majoring in Business Administration and then later earned a
Juris Doctorate degree from Northrop Law School. Mr. Fernicola is a licensed
attorney in California and was in private practice specializing in business and
corporate law before joining Naturade. He is a current member of "The
Association of Trial Lawyers of America" and the American Bar Association as
well as the Los Angeles County Bar. Prior to practicing law, Mr. Fernicola was
an executive for a construction supply company in Los Angeles.
PAUL D. SHAPNICK. Mr. Shapnick has a BS in Accounting from the University of
California at Los Angeles, and is a CPA. He has been vice president of finance
and chief financial officer of several manufacturing companies, including nine
years as chief financial officer and executive vice president of one of the
largest health food companies in the industry. Mr. Shapnick joined Naturade in
June 1992. From October of 1990 through May of 1992, Mr. Shapnick operated his
own financial consulting practice. During the preceding five years, he was the
Vice President of Finance for Sandberg Furniture Manufacturing Company.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid and accrued by the
Company during its last three fiscal years to the executive officers to whom it
paid in excess of $100,000, including cash and issuance of securities.
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
- ------------ ------- --------- -------- ------------- ---------- --------- -------- --------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Restricted All
and Annual Stock LTIP Other
Principal Compensation Award(s) Options/ Payouts Compensation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($)
- ------------ ------- --------- -------- ------------- ---------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allan
Schulman
Chief 9/30/94 183,798 17,237 0 0 0 0 11,351
Executive 9/30/95 186,040 39,409 0 0 80,000 0 11,712
Officer 9/30/96 188,754 0 0 0 10,000 0 11,712
- ------------ ------- --------- -------- ------------- ---------- --------- -------- --------------
Michael
Fernicola
Executive 9/30/94 3,462* 0 0 0 0 0 0
Vice 9/30/95 89,231 5,000 0 0 20,000 0 4,400
President 9/30/96 105,385 4,013 0 0 40,000 0 6,600
- ------------ ------- --------- -------- ------------- ---------- --------- -------- --------------
</TABLE>
*Mr. Fernicola's employment with Naturade commenced September 1994.
In addition, both Mr. Schulman and Mr. Fernicola participate with other
full-time employees in the Company's group health and life insurance program.
Mr. Schulman owns one third of the land and building in which the Company
conducts its activities. As such, Mr. Schulman receives $8,339 per month rental
paid by the Company under a facilities lease which extends through July of 1998.
The 10,000 options awarded to Mr. Schulman were for serving on the Board of
Directors and are exercisable at $1.72 per share which was the fair market value
on the date of the grant.
The 40,000 options awarded to Mr. Fernicola included 20,000 excercisable at
$1.50 and 20,000 excercisable at $1.13. The fair market value on the date of the
grant of both of these options was $1.13.
21
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual for Option Term
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
% of Total
Options/SARs
Options/ Granted to Exercise Market Price
SARs Employees or Base on Date of
Granted in Fiscal Price Grant Expiration
Name (#) Year ($/Sh) ($/Sh) Date 5% ($) 10% ($) 0% ($)
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allan Schulman
Chief Executive
Officer
10,000 14% 1.72 1.72 January 25, 2006 $11,100 $29,400 -
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
Michael Fernicola
Executive Vice
President
20,000 28% 1.50 1.13 September 12, 2006 $19,400 $51,200 -
20,000 28% 1.13 1.13 September 12, 2006 $14,600 $38,600 -
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
- ------------------- ------------ ---------------- ------------ ------------ ------------------ -------------- ----------------------
</TABLE>
No options were exercised by officers or directors during the fiscal
year ended September 30, 1996.
The expiration date was arbitrarily estimated to be ten years from the
grant date because the options do not have a fixed expiration date. The
options expire one year after departure from the Board of Directors. The
Company does not have a mandatory retirement date for Directors.
In June of 1992, the Company entered into a five year Employment
Agreement with Allan Schulman, its Chief Executive Officer, providing for a
base salary of $175,000 per year, adjusted for cost of living annually, a
bonus equal to 10% of pre-tax net operating profits over $250,000, a $1,000
per month car and travel allowance, and various other terms and conditions.
All directors receive directors' fees of $500 per month, including
committee meetings, plus expenses.
22
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership as of November 1, 1996, of the Company's common stock, by any
person who is known to the Company to be the beneficial owner of more than 5% of
the Company's voting securities and by each director and by Officers and
Directors of the Company as a group.
Amount and Nature of
Name & Address Beneficial Percent
of Beneficial Owner Owner of Class
------------------- -------------------- --------
Allan Schulman 1,281,129 (1) 34.84
Naturade, Inc.
7110 E. Jackson St.
Paramount, CA 90723
Becker Family Trust 188,222 (2) 5.12
6052 Avenida De Costillo
Long Beach, CA 90803
Barry M. Zwick 123,017 (3) 3.35
925 De La Vina St., Suite 102
Santa Barbara, CA 93101
Robert L. Zuber 57,804 (4) 1.57
333 S. Hope St., Suite 4300
Los Angeles, CA 90071
William P. Cordeiro 50,000 (5) 1.36
5755 Kanan-Dume Rd.
Malibu, Ca. 90265
Dallas Gold & Silver Exchange, Inc. 372,580 (6) 10.13
519 Interstate 30, Suite 243
Rockwall, Tx. 75087
All officers and Directors as a Group 1,671,950 45.47
Consisting of 6 Persons
23
<PAGE>
FOOTNOTES
(1) Total includes 1,002,907 shares solely owned by Mr. Schulman; 89,111 shares
which can be purchased upon exercise of the Company's Class A Warrants; 89,111
shares which can be purchased upon exercise of the Company's Class B Warrants;
and 100,000 shares which can be purchased under presently exercisable options.
(2) Total includes 10,000 shares solely owned by the Becker Family Trust;
89,111 shares which can be purchased upon exercise of the Company's Class A
Warrants and 89,111 shares which can be purchased upon exercise of the Company's
Class B Warrants.
(3) Total includes 71,268 shares solely owned by Mr. Zwick; 1,887 shares which
can be purchased upon exercise of the Company's Class A Warrants; and 40,000
shares which can be purchased under presently exercisable options; and the
following amounts owned by Mr.Zwick's minor son: 8,125 shares, 875 shares which
can be purchased upon exercise of the Company's Class A Warrants and 862 shares
which can be purchased upon exercise of the Company's Class B Warrants.
(4) Total includes 15,000 shares solely owned by Mr. Zuber; 1,402 shares which
can be purchased upon exercise of the Company's Class A Warrants; 1,402 shares
which can be purchased upon exercise of the Company's Class B Warrants; and
40,000 shares which can be purchased under presently exercisable options.
(5) Total includes 10,000 shares owned by BCA Associates, of which Dr. Cordeiro
is a 44% shareholder; and 40,000 shares which can be purchased under presently
exercisable options.
(6) Dallas Gold & Silver Exchange, Inc. ("Dallas Gold") is a national
wholesaler and retailer of precious metals and jewelry products based in Dallas,
Texas. The securities of Dallas Gold trade on the American Stock Exchange under
the symbol " DLS.EC". Dr. Len Smith, a consultant to the Company, is the
Chairman of the Board, Chief Executive Officer and the controlling stockholder
of Dallas Gold, and is the direct beneficial owner of 100,000 of these shares of
the Company's common stock and 60,000 shares which can be purchased under a
presently exercisable option. Dallas Gold and Dr. Smith each disclaim beneficial
ownership of the shares held by each other, and report separately.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Option Agreements dated January 25, 1995, each Director then
serving on the Company's Board was granted an option to acquire 20,000
additional shares of the Company's Common Stock, at an exercise price equal to
the average bid price of the common stock for the thirty day period ending
December 30, 1994 (which was $1.07 per share). In addition, the Option
Agreements provide that Directors will be granted options to purchase an
additional 10,000 shares of the Company's Common Stock for each year that they
serve as a director of the Company after January 1, 1995, at a price equal to
the average bid price of the Common Stock for the 30 day period ending December
30th preceding the date
24
<PAGE>
on which such option is granted. These options expire one year after the
Director leaves the Board. During January 1995, four directors each were granted
options to acquire 10,000 additional shares of the Company's common stock, at an
excercise price equal to the average bid price of the common stock for the
thirty day period ending December 30, 1995 (which is $1.72 per share).
The Company and Allan Schulman, the Company's President, own a two-thirds
and a one-third interest, respectively, in the industrial building which houses
the Company's production facilities and executive offices. The Company and Mr.
Schulman are parties to a Tenancy in Common Agreement dated as of February 1,
1995, which defines the obligations of the Company and Mr. Schulman as co-owners
of the property and grants to each a right of first refusal to purchase the
other's interest under certain circumstances. The Company has a facilities
lease covering Mr. Schulman's one-third interest in this property. This lease,
which extends through July 31, 1998, has a current monthly rental payable to Mr.
Schulman of $8,339, subject to annual cost of living adjustments. In the
current Southern California rental market it is unclear whether the terms of
this lease are comparable to those that could be obtained from an independent
third party. However, in management's opinion the terms were fair and
reasonable in 1988, the year this lease was entered into, and the lease
represents a binding obligation of the Company.
In September 1996, the Company granted additional stock options to Michael
Fernicola, the Company's Executive Vice President to purchase 20,000 shares of
the Company's common stock at an exercise price of $1.13.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) Financial Statements. The following Financial Statements, together
with the report of McGladrey & Pullen, LLP are included in this report.
FINANCIAL STATEMENTS
Balance Sheets
Statements of Income
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Exhibits.
INDEX TO EXHIBITS
PG #
----
(a) Lease Agreement between NPI and Messs. Schulman and Becker,
incorporated by reference to the Company's Form 10-K Annual Report
filed for fiscal 1991 and the Exhibits and Attachments thereto.
(b) Form of Class A Warrant Certificate, incorporated by reference to
the Company's Form 10-K Annual Report filed for fiscal 1991 and the
Exhibits and Attachments thereto.
(c) Form of Class B Warrant Certificate, incorporated by reference to
the Company's Form 10-K Annual Report filed for fiscal 1991 and the
Exhibits and Attachments thereto.
(d) Revised Consulting Agreement between Sam Becker and NPI,
incorporated by reference to the Company's Form 10-K Annual Report filed
for fiscal 1992 and the Exhibits and Attachments thereto.
(e) Form of Broker Agreement between NPI and Domestic Brokers,
incorporated by reference to the Company's Form 10-K Annual Report filed
for fiscal 1991 and the Exhibits and Attachments thereto.
26
<PAGE>
(f) Employment Agreement with Sandy Hines, Vice President,
International/Brand Development, incorporated by reference to the
Company's Form 10-Q Report filed for the quarterly period ended December
31, 1993 and the Exhibits and Attachments thereto.
(g) Consulting Agreement with Dr. Len Smith, incorporated by
reference to the Company's Form 10-Q Report filed for the quarterly
period ended March 31, 1994 and the Exhibits and Attachments thereto.
(h) Certificate of Incorporation of Naturade, Inc. incorporated by
reference to the Company's 10-K Annual Report filed for fiscal 1991 and
the Exhibits and Attachments thereto.
(i) Employment Agreement with Allan Schulman, incorporated by
reference to the Company's Form 10-K Annual Report filed for fiscal 1992
and the Exhibits and Attachments thereto.
(j) Amendment to Employment Contract with Paul Shapnick, Chief
Financial Officer, incorporated by reference to the Company's Form 10-K
Annual Report filed for fiscal 1993 and the Exhibits and Attachments
thereto.
(k) DermaRay International L.L.C. Limited Liability Company
Agreement, incorporated by reference to the Company's Form 10-K Annual
Report filed for Fiscal 1994 and the Exhibits and Attachments thereto.
(l) By Laws of Naturade, Inc., as amended dated July 6, 1995,
incorporated by reference to the Company's Form 10-K Annual Report filed
for Fiscal 1995 and the Exhibits and Attachments thereto.
(m) Form of Option Agreement for Purchase of Naturade, Inc. Common
Stock for Directors, incorporated by reference to the Company's Form
10-K Annual Report filed for Fiscal 1995 and the Exhibits and
Attachments thereto.
(n) Option Agreement for Purchase of Naturade, Inc. Common Stock for
Michael Fernicola, incorporated by reference to the Company's Form 10-K
Annual Report filed for Fiscal 1995 and the Exhibits and Attachments
thereto.
(o) Amendment dated May 2, 1995 to Agreement For Purchase of Stock and
Real Property dated January 1, 1995, incorporated by Reference to the
Company's Form 10-Q Report filed for quarterly period ended December 31,
1994 and Exhibits and Attachments thereto.
(p) Open Line of Credit with South Bay Bank, incorporated by reference
to the Company's Form 10-K Annual Report filed for Fiscal 1995 and the
Exhibits and Attachments thereto.
(q) Exclusive License and Distributorship Agreement dated August 14,
1995 with Group Michel Iderne, incorporated by reference to the
Company's Form 10-K
27
<PAGE>
Annual Report filed for Fiscal 1995 and the Exhibits and Attachments
thereto.
(r) Product Development and Promotion Agreement dated August 23, 1995
with Health-Tech Institute Corp., incorporated by reference to the
Company's Form 10-K Annual Report filed for Fiscal 1995 and the
Exhibits and Attachments thereto.
(s) Settlement Agreement with Neal D'Agostino dated November 30, 1995,
incorporated by reference to the Company's Form 10-K Annual Report filed
for Fiscal 1995 and the Exhibits and Attachments thereto.
Exhibit 27. Financial Data Schedule
Exhibit 99. Open line of credit Promissory Note with South Bay Bank. 29
B. THERE WERE NO FORM 8-K'S FILED DURING FISCAL 1996.
C. FINANCIAL STATEMENT SCHEDULES. THE FOLLOWING IS A LIST OF THE FINANCIAL
STATEMENT SCHEDULES FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K.
None
28
<PAGE>
Supplemental Information to be furnished with Reports filed pursuant to
Section 15 (d) of the Act by Registrants which have not registered securities
pursuant to Section 12 of the Act.
No annual report or proxy material has been sent to security holders with
respect to the Company's last fiscal year. Proxy materials will be furnished to
security holders subsequent to the filing of this Form 10-K and copies of such
material will be furnished to the Commission when it is sent.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NATURADE, INC.
Date: 12/12/96 BY /S/ ALLAN SCHULMAN
-----------------------------------
Allan Schulman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and dates indicated.
Signature Title Date
Chief Executive Officer 12/12/96
President
/S/ ALLAN SCHULMAN Chairman of the Board
- ------------------------- (Principal Executive Officer)
Allan Schulman
/S/ PAUL D. SHAPNICK Chief Financial Officer 12/12/96
- ------------------------- (Principal Accounting Officer)
Paul D. Shapnick
/S/ROBERT BEARSON Director 12/12/96
- -------------------------
Robert Bearson
/S/WILLIAM P. CORDEIRO Director 12/12/96
- -------------------------
William P. Cordeiro
/S/ROBERT L. ZUBER Director 12/12/96
- -------------------------
Robert L. Zuber
/S/BARRY M. ZWICK Director 12/12/96
- -------------------------
Barry M. Zwick
31
<PAGE>
NATURADE, INC.
FINANCIAL REPORT
SEPTEMBER 30, 1996
<PAGE>
CONTENTS
Page
- -------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS F-1
- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets F-2
Statements of income F-3
Statements of stockholders' equity F-4 and F-5
Statements of cash flows F-6
Notes to financial statements F-7 to F-26
- ------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE F-27
- ------------------------------------------------------------------------------
SCHEDULE
Schedule II - Valuation and qualifying account F-28
- ------------------------------------------------------------------------------
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS
To the Board of Directors
Naturade, Inc.
Paramount, California
We have audited the accompanying balance sheets of Naturade, Inc., as of
September 30, 1996 and 1995, and the related statements of income, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Naturade, Inc. as of September
30, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
Anaheim, California
October 31, 1996
F-1
<PAGE>
NATURADE, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 120,143 $ 116,444
Accounts receivable, net 921,361 664,816
Inventories 1,333,535 1,095,975
Prepaid expenses 28,289 189,826
Deferred income taxes 138,000 84,000
-------------------------------
TOTAL CURRENT ASSETS 2,541,328 2,151,061
Available-for-Sale Security 128,573 149,188
Property and Equipment, net 2,201,102 2,182,535
Intangible Assets, net 147,851 162,965
Other Assets 141,381 175,026
-------------------------------
$ 5,160,235 $ 4,820,775
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ 720,938 $ 415,111
Current maturities of long-term debt 181,783 304,599
Other current liabilities 758,956 647,802
-------------------------------
TOTAL CURRENT LIABILITIES 1,661,677 1,367,512
-------------------------------
Long-Term Debt, less current maturities, including
net obligations to stockholder and related parties;
1996 $234,611; 1995 $258,110 2,418,334 2,555,675
-------------------------------
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.0001 per share; authorized
50,000,000 shares; issued and outstanding 2,593,005
shares in 1996 and 2,538,461 shares in 1995 259 254
Common stock to be issued -- 100,000
Additional paid-in capital 236,263 107,420
Retained earnings 813,359 647,201
Unrealized gain on available-for-sale security, net 30,343 42,713
-------------------------------
1,080,224 897,588
-------------------------------
$ 5,160,235 $ 4,820,775
-------------------------------
-------------------------------
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
NATURADE, INC.
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 10,105,532 $ 10,094,740 $ 8,108,576
Cost of Sales 5,236,427 5,355,888 4,273,327
----------------------------------------------------
GROSS PROFIT 4,869,105 4,738,852 3,835,249
----------------------------------------------------
Selling, General and Administrative
Expenses, including rent expense
to a related party, 1996 none;
1995 $100,072; 1994 $293,826 4,323,154 3,848,157 3,387,553
Lawsuit Settlement Expense -- 268,000 --
----------------------------------------------------
4,323,154 4,116,157 3,387,553
----------------------------------------------------
OPERATING INCOME 545,951 622,695 447,696
Other Income (Expense)
Miscellaneous, net 13,180 1,816 31,237
Interest expense (354,973) (287,703) (91,302)
----------------------------------------------------
INCOME BEFORE INCOME
TAXES AND CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 204,158 336,808 387,631
Income Tax Expense (Benefit) 38,000 (58,275) (29,000)
----------------------------------------------------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 166,158 395,083 416,631
Cumulative Effect of Change in
Accounting Principle -- -- 91,000
----------------------------------------------------
NET INCOME $ 166,158 $ 395,083 $ 507,631
----------------------------------------------------
----------------------------------------------------
Income Per Common and Common
Equivalent Shares
Before cumulative effect of change
in accounting principle $ 0.06 $ 0.14 $ 0.15
Cumulative effect of change in
accounting principle -- -- 0.03
----------------------------------------------------
NET INCOME PER SHARE $ 0.06 $ 0.14 $ 0.18
----------------------------------------------------
----------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
NATURADE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Gain On
Available-
Common Stock Common Additional Retained for-Sale
--------------------------- Stock To Be Paid-In Earnings Security,
Shares Amount Issued Capital (Deficit) Net
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993 2,771,138 $ 269 $ -- $ 323,209 $ (255,513) $ --
Contributed capital arising
from stock option
compensation -- -- -- 11,250 -- --
Issuance of common stock
as compensation 5,000 5 -- 6,245 -- --
Exercise of stock warrants:
Class A 3,105 4 -- 3,101 -- --
Class B 158 -- -- 474 -- --
Change in accounting
for available-for-sale
security, net -- -- -- -- -- 166,125
Net income -- -- -- -- 507,631 --
-------------------------------------------------------------------------------------------
Balance, September 30, 1994 2,779,401 278 -- 344,279 252,118 166,125
Issuance of common stock 185,000 19 -- 185,981 -- --
Repurchase of common
stock (440,411) (44) -- (451,956) -- --
Exercise of options 10,000 1 -- 8,749 -- --
Contributed capital arising
from stock option
compensation -- -- -- 15,700 -- --
Exercise of stock warrants:
Class A 4,373 -- -- 4,373 -- --
Class B 98 -- -- 294 -- --
Decrease in unrealized gain
on available-for-sale
security, net -- -- -- -- -- (123,412)
Common stock to be issued
in connection with
lawsuit settlement -- -- 100,000 -- -- --
Net income -- -- -- -- 395,083 --
----------------------------------------------------------------------------------------
Balance, September 30, 1995,
forward 2,538,461 $ 254 $ 100,000 $ 107,420 $ 647,201 $ 42,713
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
NATURADE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Gain On
Available-
Common Stock Common Additional Retained for-Sale
----------------------- Stock To Be Paid-In Earnings Security,
Shares Amount Issued Capital (Deficit) Net
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995
forwarded 2,538,461 $ 254 $ 100,000 $ 107,420 $ 647,201 $ 42,713
Issuance of common stock 45,662 4 (100,000) 99,996 -- --
Contributed capital arising
from stock option
compensation -- -- -- 19,900 -- --
Exercise of stock warrants:
Class A 8,849 1 -- 8,848 -- --
Class B 33 -- -- 99 -- --
Decrease in unrealized gain
on available-for-sale
security, net -- -- -- -- -- (12,370)
Net income -- -- -- -- 166,158 --
----------------------------------------------------------------------------------------
Balance, September 30, 1996 2,593,005 $ 259 $ -- $ 236,263 $ 813,359 $ 30,343
------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
NATURADE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 166,158 $ 395,083 $ 507,631
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 142,530 113,571 69,036
Provision for losses on accounts receivable 3,848 (9,537) 104
Deferred income taxes (27,000) (64,000) (29,000)
Undistributed loss on equity investment 8,109 29,000 --
Cumulative effect of change in accounting
principle -- -- (91,000)
Compensation expense arising from stock
options and issuance of common stock 19,900 15,700 17,500
Common stock to be issued -- 100,000 --
(Increase) decrease in assets:
Accounts receivable (260,393) (19,519) 199,088
Inventories (237,560) (129,307) (224,830)
Prepaid expenses 161,537 (83,079) (45,443)
Increase (decrease) in other current liabilities 111,154 (225,676) 91,657
Other 7,938 (31,601) 1,858
---------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 96,221 90,635 496,601
---------------------------------------------------
Cash flows from Investing Activities, net cash
(used for) capital expenditures (147,140) (1,056,254) (44,892)
---------------------------------------------------
Cash Flows from Financing Activities
Net borrowings (payments) under line of credit
agreement 350,000 119,000 (135,500)
Proceeds from issuance of debt 81,560 1,150,984 36,888
Principal payments under debt, including capital lease (398,545) (408,781) (216,506)
Proceeds from exercise of options and warrants 8,948 13,417 3,579
Principal payments received on receivable
from stockholder 12,655 5,514 --
---------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 54,618 880,134 (311,539)
---------------------------------------------------
NET INCREASE (DECREASE) IN CASH 3,699 (85,485) 140,170
Cash
Beginning of year 116,444 201,929 61,759
---------------------------------------------------
End of year $ 120,143 $ 116,444 $ 201,929
---------------------------------------------------
---------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>`
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Naturade, Inc. manufactures and markets products for the health and fitness
industries, including vitamins and skin and hair care products. The Company
distributes its products on a wholesale basis both domestically and
internationally to retailers specializing in health oriented products and
fitness facilities. The Company grants credit to customers on an unsecured
basis after performing credit evaluations of its customers consistent with
industry practice. The Company's ability to purchase raw materials, sell
products and collect the amounts due from customers is affected by economic
fluctuations in the health and fitness industries both domestically and
internationally.
The Company has three fictitious business name statements to operate under:
Scientific Botanicals, Pure Life Natural Products, and Naturade Products, Inc.
The first two dba's are primarily for private label products sales.
A SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES UTILIZED BY THE COMPANY IS AS
FOLLOWS:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH CONCENTRATION:
The Company maintains cash balances in accounts insured by the federal
government up to $100,000. At September 30, 1996 the Company had cash in one
bank totaling $313,741, which is $213,741 in excess of the insured amount. The
balance represents the banks balance and is not reduced for checks outstanding
in the amount of $195,415 at September 30, 1996.
INVENTORIES:
Inventories are stated at the lower of cost (weighted average) or market.
F-7
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN MARKETABLE EQUITY SECURITY:
The Company has an investment in a marketable equity security, consisting of
108,500 shares of common stock.
The Company accounts for this security under the provisions of Financial
Accounting Standards Board (FASB) Statement No. 115, "ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES". Statement No. 115 requires that
management determine the appropriate classification of securities at the date of
adoption, and thereafter at the date individual investment securities are
acquired, and that the appropriateness of such classification be reassessed at
each balance sheet date. Since the Company does not buy investment securities
in anticipation of short-term fluctuations in market prices, the investment in
marketable equity securities has been classified as available-for-sale in
accordance with Statement No. 115. Available-for-sale securities are stated at
fair value, and unrealized holding gains and losses, net of the related deferred
tax effect, are reported as a separate component of stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1996, the Company adopted FASB Statement No. 107, which requires disclosure
about the fair value of the company's financial instruments. The carrying
amount of cash, accounts receivable and accounts payable approximates fair value
because of the short maturity of those instruments. The method and assumptions
used to estimate the fair value of the following classes of financial
instruments were:
AVAILABLE-FOR-SALE SECURITY - Fair value and carrying value is based on
quoted market prices.
LINE OF CREDIT - The carrying amount approximates fair value because the
interest rate fluctuates with a prime rate.
LONG-TERM DEBT - The carrying amounts of the mortgage notes payable
approximate fair value because the interest rate fluctuates with a prime
rate. The fair value of the other long-term debt is estimated based on
interest rates for the same or similar debt offered to the Company having
the same or similar remaining maturities and collateral requirements. The
fair value of the other long-term debt is approximately $850,000 compared
to the carrying value of other long-term debt of $914,000.
The fair value estimates presented herein are based on pertinent information
available to management as of September 30, 1996. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purpose of
these financial statements since that date, and a current estimate of fair
values may differ significantly from the amounts presented herein.
F-8
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION:
Depreciation of property and equipment is provided over the following estimated
useful lives of the respective assets on the straight-line basis:
- -------------------------------------------------------------------------------
Building 27 years
Machinery and equipment 5 - 10 years
Furniture and fixtures 7 years
Autos and trucks 5 years
Leasehold improvements 5 - 20 years
Amortization expense on capitalized leases is included with depreciation expense
on owned assets.
INVESTMENT IN JOINT VENTURE:
The Company is accounting for its investment in a joint venture with another
company by the equity method of accounting under which the Company's 50% share
of the net loss of the joint venture is recognized as a loss in the Company's
income statement and deducted from the investment account, net of related
amortization of negative goodwill. The negative goodwill is being amortized
over a five-year period.
INTANGIBLE ASSETS:
Trademarks, copyrights and other intangible assets with a total combined cost of
$279,834 at both September 30, 1996 and 1995, are being amortized using the
straight-line method over a 15-year to 25-year period. Accumulated amortization
on these assets at September 30, 1996 and 1995 amounted to $131,983 and
$116,869, respectively.
DISCOUNT ON CAPITAL LEASE OBLIGATION:
Discount on capital lease obligation represents the difference between the
present value of the minimum lease payments and the amount that was recorded to
capitalize the building at its fair value. The discount is being amortized over
23.5 years (the amortized life of the related debt) using the interest method.
F-9
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE:
Earnings per common and common equivalent shares was computed by dividing the
Company's earnings by the weighted average number of common and common
equivalent shares outstanding during the period. The weighted average number of
common and common equivalent shares used to calculate earnings per common and
common equivalent share during 1996, 1995 and 1994 was 2,777,000, 2,822,000 and
2,836,000, respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are included in expense when incurred.
ADVERTISING:
The Company expenses the cost of advertising the first time the advertising
takes place. No amounts are included in the Company's balance sheet for
deferred advertising costs at September 30, 1996 and 1995.
ACCOUNTING DEVELOPMENTS:
In 1995 the FASB issued Statement No 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION". Statement No. 123, establishes financial accounting and
reporting standards for stock-based employee compensation plans such as a stock
purchase plan. The Statement generally suggests, but does not require,
stock-based compensation transactions with employees be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. An enterprise may
continue to follow the requirements of Accounting Principles Board (APB) Opinion
No. 25, which does not require compensation to be recorded if the consideration
to be received is at least equal to the fair value at the measurement date. If
an enterprise elects to follow APB Opinion No. 25, it must disclose the pro
forma effects on net income as if compensation were measured in accordance with
the suggestions of Statement No. 123. Nonemployee stock-based transactions
occurring after December 15, 1995 must be accounted for at fair value. The
Company has determined that it will continue to follow the measurement
principles of APB Opinion No. 25 for stock-based employee compensation,
therefore, adoption of this pronouncement in fiscal year 1997 is not expected to
have a material impact on the financial statements.
F-10
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1995, the FASB issued Statement No. 121, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." Statement
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Statement No. 121 will first be required for the
Company's year ending September 30, 1997. Based on its preliminary analysis,
the Company does not anticipate that the adoption of Statement No. 121 will have
a material impact on the financial statements.
RECLASSIFICATION OF CERTAIN ACCOUNTS:
Certain accounts have been reclassified with no effect on stockholders' equity
or net income to be consistent with the classifications adopted for 1996.
NOTE 2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at September 30, 1996 and 1995:
1996 1995
- -------------------------------------------------------------------------------
Trade $ 969,930 $ 709,024
Other 16,431 10,792
Allowance for doubtful accounts (5,000) (5,000)
Allowance for returns and allowances (60,000) (50,000)
-----------------------------
$ 921,361 $ 664,816
-----------------------------
-----------------------------
NOTE 3. INVENTORIES
Inventories consist of the following at September 30, 1996 and 1995:
1996 1995
- -------------------------------------------------------------------------------
Raw materials $ 902,064 $ 713,067
Finished goods 431,471 382,908
-----------------------------
$ 1,333,535 $ 1,095,975
-----------------------------
-----------------------------
F-11
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4. AVAILABLE-FOR-SALE SECURITY
During 1993, the Company exchanged 156,000 shares of its restricted common stock
for 108,500 shares of restricted common stock of another publicly held company.
The Company valued the transaction at its fair value of $78,000. A consultant
for the Company is the Chairman of the Board for the other company. During 1995
the restrictions on the stock were removed.
At September 30, 1996 and 1995, stockholders' equity includes $30,343 (net of
$20,230 in deferred tax effect) and $42,713 (net of $28,475 in deferred tax
effect), respectively, to recognize the unrealized gain on the
available-for-sale security at that date.
The available-for-sale security at September 30, 1996 and 1995 is summarized as
follows:
1996 1995
- -------------------------------------------------------------------------------
Cost of security $ 78,000 $ 78,000
Gross unrealized gain 50,573 71,188
-----------------------------
FAIR VALUE $ 128,573 $ 149,188
-----------------------------
-----------------------------
NOTE 5. PROPERTY AND EQUIPMENT, NET
A summary as of September 30, 1996 and 1995 of property and equipment at cost
follows:
1996 1995
- -------------------------------------------------------------------------------
Land $ 318,533 $ 318,533
Building and improvements 1,757,727 1,757,727
Machinery and equipment 467,618 401,582
Furniture and fixtures 151,762 139,705
Autos and trucks 124,514 115,338
Leasehold improvements 149,125 96,983
-----------------------------
2,969,279 2,829,868
Accumulated depreciation and amortization (768,177) (647,333)
-----------------------------
PROPERTY AND EQUIPMENT, NET $ 2,201,102 $ 2,182,535
-----------------------------
-----------------------------
Building and improvements include a capitalized lease of $691,333 at September
30, 1996 and 1995. The related accumulated amortization on this capitalized
lease is $49,000 and $20,000 at September 30, 1996 and 1995, respectively.
F-12
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6. NOTES PAYABLE
The Company has a $1,000,000 line of credit agreement with a bank. Interest on
borrowings under the agreement, which is payable monthly, is charged at the
"Bank of America Prime Lending Rate" (8.25% at September 30, 1996) plus 1.5%.
The agreement expires in February 1997. The agreement is collateralized by
substantially all of the Company's assets and is guaranteed by the Company's
president. In connection with the agreement there cannot be a change in
ownership of the Company greater than 25%. Borrowings under this agreement at
September 30, 1996 totaled $700,000.
The Company also has two other short-term notes payable at September 30, 1996
totaling $20,938.
NOTE 7. LONG-TERM DEBT
A summary of long-term debt including capitalized lease obligation follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Variable mortgage notes payable to bank, secured by a first
trust deed on the Company's building and land (A):
Due in monthly installments of $11,609, including interest,
through June 2000, at which time all remaining principal
and interest is due. Interest, which cannot exceed 13%, is
charged at the "Wall Street Journal Prime Rate" (8.25% at
September 30, 1996) plus 1% and is adjusted annually.
The note is guaranteed by the Company's president. $ 1,238,230 $ 1,252,375
Due in monthly installments of $5,813, including interest,
through May 2000, at which time all remaining principal
and interest is due. Interest is charged at the "Wall Street
Journal Prime Rate" plus 1.5% and is adjusted annually. 212,588 258,327
8% notes payable to a former stockholder's estate (see Note 13),
due in monthly installments of $10,616, including interest,
through March 2005. The notes provide a 10% prepayment penalty
calculated on the outstanding principal balance if the Company
enters into a merger, sale or reorganizes prior to March 2005.
One note for $207,665 is unsecured and subordinated to all
other debt whereas the other note for $570,797 is secured
by a second trust deed on the Company's building and land. 778,462 840,843
-------------------------------------
SUBTOTAL FORWARD $ 2,229,280 $ 2,351,545
</TABLE>
F-13
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. LONG-TERM DEBT (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
SUBTOTAL FORWARDED $ 2,229,280 $ 2,351,545
10% note payable to bank, secured by substantially all
of the Company's assets, due in monthly installments
of $1,229, including interest, through July 1999. 35,923 --
10% imputed interest liability to an individual, due
in monthly installments of $3,000, including interest,
through December 1998. 71,438 92,974
Capitalized lease obligation (Note 8) 234,611 226,489
Other notes payable 28,865 189,266
---------------------------------
2,600,117 2,860,274
Less current maturities of long-term debt 181,783 304,599
---------------------------------
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES $ 2,418,334 $ 2,555,675
---------------------------------
---------------------------------
</TABLE>
(A) In June 1995, the Company refinanced with another bank the debt on the
Company's 67% ownership in its building and land. In connection with the
refinancing, the Company agreed to be the sole obligor on 100% of the debt
secured by the building and land. The Company has recorded the full amount
of the refinanced notes in long-term debt and has recorded a receivable
from the holder of the building and lands' 33% owner. The owner of the 33%
interest is the Company's president and is the Company's largest
stockholder. The balance of the receivable at September 30, 1996 and 1995
is $449,497 and $462,153, respectively. The receivable is due in monthly
installments of approximately $4,900 and bears interest at the same rates
prevailing on the debt (see Note 8).
A summary of long-term debt maturities are: 1997 $181,783; 1998 $189,613; 1999
$168,929; 2000 $927,913; 2001 $103,006; and thereafter $1,028,873 (total
$2,600,117).
F-14
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. CAPITALIZED LEASE OBLIGATION
The Company leases 33% of a building from its president, who is the Company's
largest stockholder, under a ten-year lease agreement which requires monthly
payments of $8,339. The Company is the sole obligor on the president's portion
of the note payable on the building, and has recorded the lease as a capital
lease over the 23.5 year fully amortized term of the note. The Company has also
recorded a related receivable from the president for his portion of the note
payable on the building. In connection with this receivable, the Company has an
agreement with the president granting a right of offset between the receivable
from the president and the capitalized lease obligation, therefore, the
receivable has been netted against the capitalized lease obligation.
The following is a schedule by years of the future minimum lease payments under
the capital lease together with the present value of the net minimum lease
payments as of September 30, 1996:
Year Ending September 30,
- -------------------------------------------------------------------------------
1997 $ 100,068
1998 100,068
1999 100,068
2000 100,068
2001 100,068
Thereafter 1,684,478
-----------
TOTAL MINIMUM LEASE PAYMENTS 2,184,818
Amounts representing interest at 10% 1,297,905
-----------
PRESENT VALUE OF MINIMUM LEASE PAYMENTS 886,913
Discount on capitalized lease obligation 202,805
-----------
684,108
Less receivable from stockholder with right of offset 449,497
-----------
$ 234,611
-----------
-----------
F-15
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at September 30, 1996 and
1995:
1996 1995
- -------------------------------------------------------------------------------
Accounts payable $ 460,764 $ 300,230
Customer deposits 5,308 14,074
Accrued bonuses 18,100 61,859
Accrued payroll and vacation 109,097 97,531
Accrued commissions 47,425 75,185
Other accrued expenses 85,920 77,491
Income taxes payable 32,342 21,432
----------------------------
$ 758,956 $ 647,802
----------------------------
----------------------------
NOTE 10. STOCKHOLDERS' EQUITY
STOCK WARRANTS:
As part of a restructuring of the Company in 1991, holders of 2,369,250 shares
of old common stock of the Company exchanged their shares and received one share
of new common stock for one share of old common stock and one Class A warrant
and one Class B warrant for seven shares of old common stock. Any fractional
warrants computed were rounded to the nearest whole number. All shares of old
common stock were then canceled.
One Class A warrant will allow for the purchase of one share of common stock for
$1.00 (lowered from $1.50 to $1.00 on October 20, 1993) until December 31, 1996
(extended from June 30, 1993 to December 31, 1993 and three times again extended
to December 31, 1996).
One Class B warrant will allow for the purchase of one share of common stock for
$3.00 per share until December 31, 1998 (extended from June 4, 1993 to December
4, 1993 and four times again extended to December 31, 1998).
F-16
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the activity of Class A and Class B stock warrants is as follows:
Class A Class B
Warrants Warrants
- -------------------------------------------------------------------------------
Outstanding, September 30, 1993 322,928 338,036
Warrants exercised (3,105) (158)
-------------------------------
Outstanding, September 30, 1994 319,823 337,878
Warrants exercised (4,373) (98)
-------------------------------
Outstanding, September 30, 1995 315,450 337,780
Warrants exercised (8,849) (33)
-------------------------------
Outstanding, September 30, 1996 306,601 337,747
-------------------------------
-------------------------------
STOCK OPTIONS:
In 1992, stock options to purchase 50,000 shares of the Company's stock were
granted to members of the Board of Directors at an exercise price of $.875. The
options are exercisable after December 31, 1992 and expire one year after the
departure of the Director from the Board of Directors. During 1995, 10,000 of
these options were exercised.
In 1995, stock options to purchase 80,000 shares of the Company's stock were
granted to members of the Board of Directors at an exercise price of $1.07. The
options expire one year after the departure of the Director from the Board of
Directors. The Company will also grant stock options to purchase 10,000 shares
of the Company's stock to each of the five board members for each full year that
a Director serves on the Board of Directors commencing on January 1, 1995. The
additional options are exercisable on the grant date at an exercise price equal
to the average bid price of the company's stock for the thirty (30) day period
ending December 30 of the year preceding the grant of such options. The options
would expire one year after the departure of each Director from the Board of
Directors. In January 1996, 40,000 options were issued to board members who
served a full year. These options were granted at an exercise price of $1.72.
F-17
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED):
In April 1992, the Company entered into an agreement with a Company officer
whereby the officer will be granted stock options to purchase 100,000 shares of
the Company's common stock. During 1994, the agreement was amended which
provided for the granting of additional stock options to purchase 40,000 shares
of the Company's common stock. The options expire on the earlier of the date
the officer is terminated for cause or one year after the date the officer
leaves employment of the Company. The date of grant and exercise price of the
options are as follows:
Number of Exercise
Date of Option Grant Shares Price
- ------------------------------------------------------------------------------
June 8, 1993 40,000 $ 0.50 per share
June 8, 1994 20,000 0.75 per share
June 8, 1995 20,000 1.22 per share
June 8, 1996 20,000 0.77 per share
June 8, 1997 20,000 (a)
June 8, 1998 20,000 (a)
(a) 75% of the average of the bid prices for the Company's stock for the ten
days preceding each such date.
In January 1995, the Company issued 85,000 shares of its common stock and
options to purchase 60,000 shares of its common stock to the Company's president
and significant stockholder, in lieu of compensation accrued to him in prior
years in the amount of $86,000. The exercise price of the options granted is
$.80 per share. The options expire in January 2005.
In January 1995, the Company entered into an agreement with a Company officer
whereby the officer will be granted stock options to purchase 100,000 shares of
the Company's common stock at an exercise price of $1.50. Under terms of the
agreement, options to purchase 20,000 shares will be granted each year over a
five-year period beginning September 12, 1995. In September 1996, the Company
granted additional stock options to purchase 20,000 shares of the Company's
common stock at an exercise price of $1.13. The options expire on the earlier
of the date the officer is terminated for cause or one year after the date the
officer leaves employment of the Company.
F-18
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (continued):
In February 1994, the Company entered into an agreement with a minority
stockholder who will provide consulting to the Company. The agreement expires
in January 1997 and requires minimum monthly payments of $1,500. As additional
compensation under the agreement, the Company granted stock options to purchase
60,000 shares of the Company's common stock. The options expire five years from
the date of option grant. A summary of the options follows:
Date of Option Grant Number of Shares Exercise Price
- -------------------------------------------------------------------------------
February 1, 1994 20,000 $ 0.94 per share
February 1, 1995 20,000 1.03 per share
February 1, 1996 20,000 1.18 per share
A summary of the Company's outstanding exercisable stock options is as follows:
<TABLE>
<CAPTION>
Board of Consulting
Directors Officers Agreement Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, September 30, 1993 50,000 40,000 -- 90,000
Granted -- 20,000 20,000 40,000
------------------------------------------------------
Outstanding, September 30, 1994 50,000 60,000 20,000 130,000
Granted 80,000 100,000 20,000 200,000
Exercised (10,000) -- -- (10,000)
------------------------------------------------------
Outstanding, September 30, 1995 120,000 160,000 40,000 320,000
Granted 40,000 60,000 20,000 120,000
------------------------------------------------------
Outstanding, September 30, 1996 160,000 220,000 60,000 440,000
------------------------------------------------------
------------------------------------------------------
</TABLE>
STOCK OPTION COMPENSATION:
A portion of the stock options issued to employees includes a compensation
element which is measured and recorded by the difference on the date of grant
between the exercise price of the stock options and the fair market value of a
share of common stock which is assumed to be the quoted price at the grant date
under APB Opinion 25. Stock options issued in connection with a consulting
agreement included a compensation element which was measured using its fair
value. In connection with the stock options granted during 1996, 1995 and 1994,
$19,900, $15,700 and $11,250, respectively, was recorded as compensation expense
and contributed capital in the accompanying financial statements.
F-19
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of the following for 1996,
1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and related payroll costs $ 1,344,330 $ 1,157,581 $ 951,288
Other 924,015 853,546 611,829
Promotion 516,385 400,927 357,900
Freight out 457,321 362,737 333,812
Commissions 372,535 394,943 343,601
Advertising 329,253 193,614 175,328
Insurance 151,839 153,846 152,124
Research and development expenses 123,643 133,737 125,295
Consulting 103,833 121,002 84,250
Facilities rent -- 76,224 252,126
----------------------------------------------------
$ 4,323,154 $ 3,848,157 $ 3,387,553
----------------------------------------------------
----------------------------------------------------
</TABLE>
NOTE 12. INCOME TAX MATTERS AND RELATED ACCOUNTING CHANGE
Effective October 1, 1993, the Company adopted FASB Statement No. 109,
"ACCOUNTING FOR INCOME TAXES". As explained in Note 1, Statement No. 109 adopts
a liability method that requires the recognition of deferred tax assets and
liabilities for the expected future consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, Statement No. 109 generally considers all expected
future events other than enactment's of changes in tax laws or rates.
Previously, the Company used a liability method under FASB Statement No. 96, but
that method gave no recognition to future events other than the recovery of
assets and settlement of liabilities at their reported amounts.
The Company recognizes the future tax benefits of expenses and tax carryforwards
under FASB Statement No. 109. Upon the adoption of Statement No. 109 on October
1, 1993, the Company adjusted the previously reported amount of net deferred tax
assets by $91,000 to recognize the benefit of an operating loss carryforward.
That amount is reported as the cumulative effect of a change in accounting
method in the accompanying 1994 income statement.
F-20
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. INCOME TAX MATTERS AND RELATED ACCOUNTING CHANGE (CONTINUED)
Net deferred tax assets consist of the following components as of September 30,
1996 and 1995:
1996 1995
- -------------------------------------------------------------------------------
Deferred Tax Assets
Inventories $ 81,600 $ 92,400
Accrued compensation 18,200 29,700
Loss carryforwards 31,300 82,600
Alternative minimum tax credits 50,000 27,400
Other assets 58,300 51,600
------------------------------
239,400 283,700
Less valuation allowance -- 62,200
------------------------------
239,400 221,500
------------------------------
Deferred Tax Liabilities
Equipment and leasehold improvements (8,200) (9,000)
Unrealized gain on security available-for-sale (20,200) (28,500)
------------------------------
(28,400) (37,500)
------------------------------
$ 211,000 $ 184,000
------------------------------
------------------------------
The components giving rise to the net deferred tax assets described above have
been included in the accompanying balance sheet as of September 30, 1996 and
1995 as follows:
1996 1995
- -------------------------------------------------------------------------------
Current assets $ 138,000 $ 84,000
Noncurrent assets 73,000 100,000
------------------------------
$ 211,000 $ 184,000
------------------------------
------------------------------
Among other deductible temporary differences at September 30, 1996, the Company
has a net operating loss carryover of approximately $92,000 for federal income
tax purposes which expires in 2007. Management has eliminated the valuation
allowance on deferred tax assets since they believe it is more likely than not
that the deductible temporary differences will be realized. 1996, 1995 and 1994
pretax income was approximately $204,000, $337,000 and $388,000, respectively.
Deferred tax assets will be realizable from future taxable income. Management
estimates that it will require four years of taxable income consistent with
levels of the past four years to realize the deferred tax assets. Based on the
Company's operating results and management's expectation of future performance
it believes this level of taxable income is attainable. If the Company is
unable to generate the income necessary to recognize the deferred tax assets
recorded, a valuation allowance will need to be provided that would be charged
to income when recorded.
F-21
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. INCOME TAX MATTERS AND RELATED ACCOUNTING CHANGE (CONTINUED)
The provision for income taxes charged (credited) to income for 1996, 1995 and
1994 consists of the following:
1996 1995 1994
- -------------------------------------------------------------------------------
Current income tax expense $ 65,000 $ 5,725 $ --
Deferred income tax (benefit) (27,000) (64,000) (29,000)
------------------------------------------
$ 38,000 $ (58,275) $ (29,000)
------------------------------------------
------------------------------------------
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to income before income taxes and
change in accounting principle due to the following:
1996 1995 1994
- -------------------------------------------------------------------------------
Computed "expected" tax expense $ 71,500 $ 117,900 $ 136,000
Increase (decrease) in income taxes
resulting from:
Trademark amortization 4,400 4,400 4,400
Reorganization value amortization 1,600 1,600 1,600
Nondeductible expenses 11,700 40,000 3,000
State income taxes, net of federal
tax benefit 12,200 20,200 23,000
Other (1,200) (51,375) (28,000)
Change in estimated tax rate applied to
temporary differences -- (199,200) --
Change in valuation allowance (62,200) 8,200 (169,000)
------------------------------------------
$ 38,000 $ (58,275) $ (29,000)
------------------------------------------
------------------------------------------
F-22
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES 13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
EMPLOYMENT AGREEMENTS:
The Company has an employment agreement with the president of the Company, who
is also a director and the Company's significant stockholder. The employment
agreement commenced June 1, 1992 and continues for 60 months and provides for a
bonus of 10% of any income before income taxes and bonus exceeding $250,000.
The total bonus expense relating to this agreement for 1996, 1995 and 1994 is
$-0-, $39,409 and $17,237, respectively.
The Company has an employment agreement with the chief financial
officer/secretary-treasurer of the Company. The employment agreement commenced
June 8, 1992 and continues to June 8, 1998.
CONSULTING AGREEMENTS:
In 1992, the Company entered into a consulting agreement with a stockholder
which expired in May 1996. The agreement required monthly payments of $2,083.
The Company's expenses for consulting fees to this stockholder for 1996, 1995
and 1994 totaled $16,667, $25,000 and $25,000, respectively.
OPERATING LEASES:
The Company rents various equipment under noncancelable operating leases. The
total minimum rental commitment at September 30, 1996 is $143,390 and is payable
during the years ending September 30: 1997 $45,071; 1998 $35,768; 1999 $32,603
and 2000 $29,948.
Rent expense for 1996, 1995 and 1994 totaled $55,000, $168,000 and $366,000,
respectively. Rent expense for 1996, 1995 and 1994 includes rent expense to
related parties (a partnership owned by significant stockholder and former
stockholder) of $-0-, $100,072 and $293,826, respectively.
LITIGATION SETTLEMENT IN 1995:
On November 1995, in order to avoid the inherent risk of litigation and the
attendant cost, the Company entered into a settlement agreement with a present
value of $268,000. A portion of the settlement was paid by the issuance of
45,662 shares of the Company's common stock. Under terms of the agreement the
shares will be valued, as defined in the agreement, in November 1997, if the
value determined is less than $100,00 the Company is required to pay the
difference.
PURCHASE OF STOCK, BUILDING AND LAND:
In January 1995, the Company entered into an agreement with a deceased
stockholder's estate to purchase 440,411 of the common shares held by the
deceased stockholder's estate and his 67% undivided interest in the building and
land that was being leased to the Company. The aggregate purchase price for the
stock and undivided interest was $875,000 which is payable over 10 years (see
Notes 7 and 8).
The Company allocated the purchase price between the stock and the property
based on the relative fair values of the assets purchased.
F-23
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14. MAJOR CUSTOMERS
During 1996, 1995 and 1994 the Company had sales to a customer in excess of 10%
of Company's total net sales. Sales to this customer were approximately 27%,
22% and 23% for 1996, 1995 and 1994, respectively. Accounts receivable from
this customer were approximately $287,000 and $250,000 at September 30, 1996 and
1995, respectively.
The Company also had sales to another customer in 1994 that were approximately
10% of the Company's total net sales.
NOTE 15. STATEMENT OF CASH FLOWS INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES:
During 1996, 1995 and 1994, the Company paid cash for interest totaling
$354,000, $275,000 and $93,000, respectively. During 1996, 1995 and 1994 income
taxes paid with cash totaled $46,000, $12,000 and $-0-, respectively.
NONCASH TRANSACTIONS:
During 1995, a capital lease obligation of $691,333 was incurred for the use of
a building; an $875,000 note payable was issued for the repurchase of the
Company's common stock and purchase of real property (see Note 13); 85,000
shares of its restricted common stock and 60,000 stock options were issued in
settlement of accrued compensation to the majority stockholder and 100,000
shares of its restricted common stock valued by management at $100,000 were
exchanged for a 50% interest in a joint venture.
NOTE 16. GEOGRAPHIC SEGMENT DATA
The Company has export sales to several international customers. Summary of net
sales, summarized by geographic areas, is as follows:
<TABLE>
<CAPTION>
Other
Domestic Saudi Arabia Korea International
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales for the years
ended September 30:
1996 $ 9,403,139 $ -- $ 431,593 $ 270,800
1995 8,366,226 839,124 547,555 341,835
1994 6,522,316 363,006 977,016 246,238
</TABLE>
F-24
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17. JOINT VENTURE
In November 1994, the Company entered into a joint venture named "DermaRay
International, LLC" with Harrier Inc., a company engaged in the development and
sale of technologies and products in the health, fitness and medical markets.
The purpose of the venture is to develop, market and sell, in the United States,
the Bioptron lamp. The lamp utilizes linearly polarized incoherent light of
specific wavelength distribution and power intensity for the relief of pain, or
as a skin care device.
In forming this joint venture, Harrier Inc. agreed to contribute $200,000 to the
capital of DermaRay International, LLC, which was formed to conduct this
business. For a 50% equity interest in the joint venture, Naturade contributed
100,000 of its shares of common stock to the capital of the venture. The
Company valued its contribution of shares at $100,000 resulting in a $50,000
difference between the Company's recorded equity investment and the equity in
the net assets of the joint venture. This difference is being amortized by the
Company into the equity in earnings of joint venture over a five-year period.
The total cumulative amortization is $18,260 which was recorded in 1996 and 1995
with a charge to the investment of $10,000 and $8,260, respectively.
The condensed financial information of the joint venture, as of September 30,
1996 and 1995 and for the period from November 1994, date of inception, through
September 30, 1996, is as follows:
ASSETS 1995 1996
- -------------------------------------------------------------------------------
Cash $ 4,000 $ 45,000
Accounts receivable 16,000 --
Inventories 100,000 120,000
Other assets 11,000 --
Investment in Naturade, Inc.'s common stock,
at cost 100,000 100,000
-----------------------------
$ 231,000 $ 265,000
-----------------------------
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 42,000 $ 39,000
Equity 189,000 226,000
-----------------------------
$ 231,000 $ 265,000
-----------------------------
-----------------------------
INCOME STATEMENT
- -------------------------------------------------------------------------------
Sales $ 31,000 $ 8,000
-----------------------------
-----------------------------
Gross profit $ 7,000 $ 3,000
-----------------------------
-----------------------------
Expenses $ 44,000 $ 77,000
-----------------------------
-----------------------------
Net loss $ (37,000) $ (74,000)
-----------------------------
-----------------------------
F-25
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17. JOINT VENTURE (CONTINUED)
At September 30, 1996 and 1995, the Company's recorded investment in the joint
venture is $62,891 and $71,000, respectively, and is included in other assets in
the Company's balance sheet.
During 1995, the Company purchased $30,000 of inventory from Harrier. The
Company also rents a portion of its building to the joint venture under a
month-to-month operating lease. The total rental income in 1996 and 1995 was
$21,000 and $14,000, respectively.
NOTE 18. RETIREMENT SAVINGS PLAN
During 1996, the Company created a defined contribution 401(k) savings plan
(Plan). The Plan covers all employees meeting minimum age and service
requirements. The Company provides a matching contribution of 25% of the first
6% contributed by the employee. Contributions to the Plan were approximately
$7,000 during 1996.
F-26
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE
To the Board of Directors
Naturade, Inc.
Paramount, California
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule II is
presented for purposes of complying with the Securities and Excange Commission's
rules and is not a part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/McGladrey & Pullen, LLP
Anaheim, California
October 31, 1996
F-27
<PAGE>
NATURADE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Balance at Provisions
Beginning Charged to Balance at
Years Ended September 30, of Year Expense Charge-Offs End of Year
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1996 $ 5,000 $ 3,848 $ (3,848) $ 5,000
----------------------------------------------------------------------
----------------------------------------------------------------------
1995 $ 15,000 $ (9,537) $ (463) $ 5,000
----------------------------------------------------------------------
----------------------------------------------------------------------
1994 $ 15,000 $ 104 $ (104) $ 15,000
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
F-28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 120,143
<SECURITIES> 0
<RECEIVABLES> 921,361
<ALLOWANCES> 0
<INVENTORY> 1,333,535
<CURRENT-ASSETS> 2,541,328
<PP&E> 2,969,279
<DEPRECIATION> 768,177
<TOTAL-ASSETS> 5,160,235
<CURRENT-LIABILITIES> 1,661,677
<BONDS> 0
0
0
<COMMON> 259
<OTHER-SE> 1,079,965
<TOTAL-LIABILITY-AND-EQUITY> 5,160,235
<SALES> 10,105,532
<TOTAL-REVENUES> 10,105,532
<CGS> 5,236,427
<TOTAL-COSTS> 4,323,154
<OTHER-EXPENSES> (13,180)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354,973
<INCOME-PRETAX> 204,158
<INCOME-TAX> 38,000
<INCOME-CONTINUING> 166,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,158
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
<PAGE>
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,000,000.00 01-29-1996 02-01-1997 35485 GLB [illegible]
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
BORROWER: NATURADE, INC LENDER: SOUTH BAY BANK
7110 JACKSON STREET MAIN OFFICE
PARAMOUNT, CA 90723 2200 SEPULVEDA BOULEVARD
TORRANCE, CA 90501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRINCIPAL INITIAL DATE OF
AMOUNT: $1,000,000.00 RATE: 10.000% NOTE: JANUARY 29, 1996
PROMISE TO PAY. NATURADE, INC. ("Borrower") promises to pay to SOUTH BAY BANK
("Lender"), or order, in lawful money of the United States of America, the
principal amount of One Million & 00/100 Dollars ($1,00O,000.00) or so much as
may be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on February 1, 1997. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
March 1, 1996, and all subsequent interest payments are due on the same day of
each month after that. Interest on this Note is computed on a 365/360 simple
interest basis; that is, by applying the ratio of the annual interest rate over
a year of 360 days, multiplied by the outstanding principal balance, multiplied
by the actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the BANK
OF AMERICA PRIME LENDING RATE (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute Index after
notice to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each MONTH; SPECIFICALLY ON THE FIRST DAY OF THE MONTH FOLLOWING A RATE
CHANGE. The Index currently is 8.500% per annum. The interest rate to be
applied to the unpaid principal balance of this note will be at a rate of
1.500 percentage points over the index, resulting in an initial rate of
10.000% per annum. NOTICE: Under no circumstances will the interest rate on
this note be more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is entitled
to a minimum interest charge of $100.00. Other than Borrower's obligation to
pay any minimum interest charge, Borrower may pay without penalty all or a
portion of the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation
to continue to make payments of accrued unpaid interest. Rather, they will
reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
6.000% of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
29
<PAGE>
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Any representation or statement made or furnished
to Lender by Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished. (d) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (e) Any creditor tries to take any of Borrower's property on or
in which Lender has a lien or security interest. This includes a garnishment of
any of Borrower's accounts with Lender. (f) Any of the events described in this
default section occurs with respect to any guarantor of this Note. (g) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is impaired.
(h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate
on this Note to 21.000% per annum, and (b) add any unpaid accrued interest to
principal and such sum will bear interest therefrom until paid at the rate
provided in this Note (including any increased rate). Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower also
will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorneys' fees and Lender's legal expenses whether or
not there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law. This note has been delivered to lender and accepted by leader in the
State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Los Angeles County, the
State of California. This note shall be governed by and construed in accordance
with the laws of the State of California.
COLLATERAL. This Note is secured by COMMERCIAL SECURITY AGREEMENT DATED JANUARY
29, 1996 AND UCC-1 DATED AUGUST 8, 1990.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized to request
advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority:
ALLAN SCHULMAN, PRESIDENT; and PAUL SHAPNICK, SECRETARY. Borrower agrees to
be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at any
time may be evidenced by endorsements on this Note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation
to advance funds under this Note if: (a) Borrower or any guarantor is in
default under the terms of this Note or any
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims
or otherwise attempts to limit, modify or revoke such guarantor's guarantee of
this Note or any other loan with Lender; (d) Borrower has applied funds provided
pursuant to this Note for purposes other than those authorized by Lender; or (e)
Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
NATURADE, INC.
BY: /s/ Allan Schulman
--------------------------------
ALLAN SCHULMAN, PRESIDENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Variable Rate. Line of Credit. LASERPRO, Reg.U.S.Pal.&T.M.Off., Ver.3.20b
(c) 1996 CFIProServices, Inc. All rights reserved. [CA-D20 E3.20 P3.20
NATURAD.LN]
