<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1996.
Commission File Number 33-7106-A
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NATURADE, INC.
--------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-23442709
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
7110 EAST JACKSON STREET, PARAMOUNT, CALIFORNIA 90723
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(Address of principal executive offices)
(Zip Code)
(310) 531-8120
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by court.
Yes x No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate by number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 2,593,005 shares as of March
31, 1996.
1
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FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 1996
TABLE OF CONTENTS
PART 1: FINANCIAL INFORMATION PAGE NO
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Item 1. Financial Statements
Statements of Financial Position at 3
March 31, 1996 (unaudited) and September
30, 1995 (audited).
Statements of Operations for the three and six 4
month periods ended March 31, 1996 (unaudited)
and March 31, 1995 (unaudited).
Statements of Cash Flows for the six month 5
periods ended March 31, 1996 (unaudited)
and March 31, 1995 (unaudited).
Notes to Financial Statements. 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operation.
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURADE, INC.
Statements of Financial Position
<TABLE>
<CAPTION>
Assets
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March 31, 1996 September 30, 1995
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash $72,298 $116,444
Accounts receivable 596,902 664,816
Inventories 1,418,799 1,095,975
Prepaid expenses and other 185,604 189,826
Available for sale security 162,750 149,188
Deferred income taxes 78,575 84,000
-------------- --------------
Total current assets 2,514,928 2,300,249
Property and equipment 2,197,041 2,182,535
Intangible assets 155,408 162,965
Investment in joint venture 55,044 71,000
Other assets 104,026 104,026
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Total assets $5,026,447 $4,820,775
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-------------- --------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $730,000 $415,111
Current installments of
long-term debt 208,311 304,599
Accounts payable 590,522 300,230
Accrued expenses 234,344 326,140
Income tax payable - 21,432
-------------- --------------
Total curent liabilities 1,763,177 1,367,512
Long-term debt, excluding current installments 2,471,386 2,555,675
Stockholders' equity:
Common stock; .0001 par value; 50,000,000 shares
authorized, 2,593,005 issued and
outstanding (2,538,461 at
September 30, 1995) 259 254
Common stock to be issued - 100,000
Additional paid-in capital 224,163 107,420
Retained earnings 516,612 647,201
Unrealized gain on security available
for sale, net 50,850 42,713
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Total stockholders' equity 791,884 897,588
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Total liablitities and
stockholders' equity $5,026,447 $4,820,775
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-------------- --------------
</TABLE>
See accompanying notes to financial statements.
3
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NATURADE, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 1996 March 31, 1995 March 31, 1996 March 31, 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $2,145,088 $2,766,990 $3,988,935 $5,114,914
Cost of sales 1,107,938 1,475,189 1,997,248 2,697,522
-------------- ------------- ------------- -------------
Gross profit 1,037,150 1,291,801 1,991,687 2,417,392
Selling, general and
administrative expenses 1,127,270 1,016,212 2,023,999 1,895,022
-------------- ------------- ------------- -------------
Operating income (loss) (90,120) 275,589 (32,312) 522,370
Other (expenses):
Miscellaneous, net 321 14,239 (5,309) 13,883
Interest expense (95,365) (42,906) (179,967) (57,688)
-------------- ------------- ------------- -------------
Earnings (loss)before income tax
expense (benefit) (185,164) 246,922 (217,588) 478,565
Income tax expense (benefit) (74,000) 60,000 (87,000) 110,000
-------------- ------------- ------------- -------------
Net Income (Loss) ($111,164) $186,922 ($130,588) $368,565
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Net Income (Loss) per common
share ($0.04) $0.07 ($0.05) $0.13
-------------- ------------- ------------- -------------
Shares used in computing net
earnings per common share 2,823,968 2,815,161 2,835,673 2,815,161
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NATURADE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
March 31, 1996 March 31, 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash used in operating activities ($108,847) ($284,913)
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Cash flows used in investing activities:
Capital expenditures-Property and equipment (78,559) (686,912)
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Cash flows used in financing activities:
Net borrowings under line of
agreements 314,889 329,814
Borrowings on long-term debt - 875,000
Principal payments under long-term debt (180,577) (104,947)
Proceeds from exercise of warrants 8,948 2,919
Purchase of common stock for retirement - (233,374)
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Net cash provided by financing activities 143,260 869,412
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Net (decrease) in cash (44,146) (102,413)
Cash at beginning of period 116,444 201,929
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Cash at end of period $72,298 $99,516
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-------------- --------------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NATURADE, INC.
Notes to Financial Statements
1. The results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year.
In the opinion of management, the information contained herein includes all
adjustments necessary for fair presentation of the financial statements.
All such adjustments are of a normal recurring nature. These financial
statements do not include all disclosures associated with the Company's
annual financial statements and accordingly, should be read in conjunction
with such statements.
2. Inventories are stated at the lower of cost (weighted average) or market
(net realizable value); and consist of the following:
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995
(Unaudited) (Audited)
<S> <C> <C>
Finished Goods $ 423,032 $ 382,908
Components 995,767 713,067
---------- -------
TOTAL $ 1,418,799 $1,095,975
</TABLE>
3 . Depreciation of property and equipment is provided over the estimated
useful lives of the respective assets on the straight-line basis.
4. Research and development costs are included in expense when incurred.
5. Trademarks and copyrights are being amortized using the straight-line
method over a 17 year and 25 year period respectively.
6. Earnings per common and common equivalent share are computed by dividing
earnings by the weighted average number of common and common equivalent
shares outstanding during the period. Primary and fully diluted income per
share are the same.
7. Income tax expense (benefit) is recorded at the Company's estimated
effective tax rate after taking into account the available net operating
loss carryforward.
6
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $108,847 in operating activities in the six months
ended March 31, 1996. This decrease was mainly a result of an increase in
inventory of $322,824 and a corresponding increase in accounts payable and
accrued expenses of $198,496. This inventory increase was due to the Company's
new line of herbal products and initial purchases of its revised Aloe Vera 80
skin and hair care line.
The Company's working capital decreased from $932,737 at September 30, 1995
to $751,751 at March 31, 1996.
Cash used for capital expenditures during the six months ended March 31,
1996 totaled $78,559, of which the majority was for a new roof on the Company's
facility. Management anticipates capital expenditures for the remainder of its
September 30, 1996 fiscal year of less than $50,000.
The Company's cash provided by financing activities of $143,260 for the six
months ended March 31, 1996 was primarily the result of an increase in
borrowings under its open line of credit.
Management is of the opinion that the Company has sufficient business,
liquidity and capital resources to finance its operations.
RESULTS OF OPERATIONS
Total net sales for the second quarter ended March 31, 1996 decreased
$621,469 or 22.5% compared to the same quarter last year. Total net sales for
the six month period ended March 31, 1996 decreased $1,125,545 or 22.0% compared
to the same period last year. Of this amount, domestic sales of the Company's
brand products increased $162,911 or 9.9% and $265,836 or 8.9% for the second
quarter and first six months respectively. However, sales to private label
customers decreased $418,526 or 66.4% and $850,755 or 62.5% for the second
quarter and first six months respectively. Additionally, sales to international
customers decreased $365,854 or 75.4% and $540,627 or 69.8% for the second
quarter and first six months respectively.
The decrease in private label sales was primarily due to a decision by one
of the Company's largest private label customers to discontinue the line of
products it was purchasing from the Company. The Company is continuing its
efforts to obtain new private label customers. However, due to the nature of
this business, there is no assurance that this can be attained.
For the last several years international sales were largely dependent upon
two significant customers; one in South Korea and one in Saudi Arabia. The
Company believes that the current decrease in sales was due to the customer in
South Korea adding additional competitive products from suppliers in other
countries, and the decrease in Saudi Arabia sales was due to that customer's
lack of marketing direction and its continuing and ongoing reorganization.
In response to these decreases in international sales, the Company has
reorganized its international department and plans have been formulated to
aggressively seek new business in a number of countries, with the intention of
lessening reliance on its significant international customers in Saudi Arabia
and Korea.
Gross profit as a percentage of sales increased 1.7% to 48.4% of sales for
the quarter ended March 31, 1996 from 46.7% for the same period last year and
increased 2.7% to 49.9% of sales for the six months
7
<PAGE>
ended March 31, 1996 from 47.2% of sales for the same period last year. This
was primarily due to the reduction in private label and international sales
which generally carry lower gross margins.
Operating expenses increased 15.6% to 52.3% of sales for the quarter ended
March 31, 1996 from 36.7% for the same period last year and increased 13.6% to
50.7% of sales for the six months ended March 31, 1996 from 37.1% of sales for
the same period last year. These percentage increases are directly related to
the reduction in sales of private label and international business in addition
to increases in selling and marketing expenses as the Company increased its
advertising and promotion expenditures and added several key managers in the
sales department.
Interest expense for the second quarter ended March 31, 1996 increased to
$95,365 from $42,906 for the same quarter last year and to $179,967 for the six
months ended March 31, 1996 from $57,688 for the same period last year. This
was due primarily to the Company's purchase on June 30, 1995 of the two-thirds
interest in its production, warehouse and office facilities from a deceased
former major shareholder of the Company.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
Exhibit 10.1 Employment agreement dated May 1, 1995 with Michael Fernicola,
executed on April 8, 1996.
Exhibit 10.2 Option Agreement for purchase of common stock of Naturade, inc.
with Michael Fernicola dated March 15, 1996.
Exhibit 27 Financial Data Schedule
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NATURADE, INC.
DATE: April 29, 1996 By /s/ Allan Schulman
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Allan Schulman
Chief Executive Officer
DATE: April 29, 1996
------------------ By /s/ Paul D. Shapnick
-----------------------
Paul D. Shapnick
Chief Financial Officer
<PAGE>
NATURADE, INC.
EMPLOYMENT AGREEMENT
This Agreement is made and entered into on the 1st day of May, 1995 by
and between NATURADE, INC., a Delaware corporation ("Employer") and MICHAEL
R. FERNICOLA ("Executive").
RECITALS
Executive has acquired special skills, abilities, background and
knowledge which will be of value to Employer. In order to retain the benefit
of Executive's unique abilities, Employer is willing to employ Executive on
the terms and conditions set forth in this Agreement. Executive desires to
work for Employer, and is willing to do so on those terms and conditions.
NOW, THEREFORE, in consideration of the above recitals and of the mutual
promises and conditions in this Agreement, it is agreed as follows:
1. TERM. Subject to earlier termination or extension as provided in
this Agreement, Executive shall be employed for the following term:
COMMENCEMENT DATE: May 1, 1995
TERMINATION DATE: April 30, 1998
2. DUTIES AND AUTHORITY. Executive shall initially have the position
and title of Executive Vice President, and shall perform his duties and
responsibilities subject to policies adopted from time to time by Employer.
Executive shall perform such other duties and undertake such other positions
and responsibilities as may be prescribed from time to time by Employer's
President or Board of Directors.
3. RESTRICTIONS ON OUTSIDE BUSINESS ACTIVITIES. During the employment
term, Executive's full productive time, energies, interest, and abilities
shall be devoted to the performance of this Agreement, and Executive shall
not, without Employer's prior written consent, render to others services of
any kind for compensation, or engage in any other business activity that
would materially interfere with the performance of Executive's duties under
this Agreement.
4. SALARY. Employer shall pay Executive, in equal monthly
installments, an annual salary of $ __________, which may be adjusted at the
option of Employer. Payment of salary shall be monthly or bi-monthly at
Executive's option. All payments made to Executive under this Agreement
shall be subject to all applicable governmental withholding requirements.
5. ADDITIONAL BENEFITS. Executive will be covered during his
employment term by the benefit package that Employer provides to all of its
executive employees, which may include group term life and group medical
insurance. All benefits are subject to change or termination at Employer's
sole discretion. Executive shall also be eligible for annual vacation and
sick leave in accordance with Employer's policies.
6. TERMINATION FOR CAUSE. Employer may terminate this Agreement at
any time, upon written notice, if Executive commits any act of dishonesty,
fraud, misrepresentation or other acts of moral turpitude, in connection with
his employment, commits gross carelessness or misconduct in connection with
his employment, habitually neglects his employment duties or acts in any
other way that has a direct, material, and adverse effect on Employer's
business. Any notice of termination required by this paragraph 6 shall
specify the
<PAGE>
grounds for termination and shall be supported by a statement of the relevant
facts. Termination under this paragraph shall be considered "for cause" for
the purpose of this Agreement.
7. DEATH OR DISABILITY. If Executive dies or is unable due to
mental or physical illness or injury to perform Executive's duties in a
normal and regular manner, this Agreement shall terminate (i) upon
Executive's death or (ii) 90 days after Executive's disability. The good
faith determination by Employer's President that Executive is disabled shall
be binding for the purpose of this Agreement. Termination for disability
shall be effected by Employer giving Executive written notice at least 10
days prior to the effective date of such termination. Any amounts due
Executive at the time of his death shall be paid to Executive's executor,
personal representative, or other person legally entitled to such payments.
8. TERMINATION BY EXECUTIVE. Executive may terminate this Agreement
by giving Employer at least 90 days notice in advance.
9. EFFECT OF TERMINATION ON COMPENSATION. If this Agreement is
terminated, with or without cause, Executive shall be entitled to the
compensation earned by and vested in him prior to the effective date of
termination, computed pro rata up to and including such date.
10. TRADE SECRETS AND CONFIDENTIAL INFORMATION. In the course of
employment, Executive will have access to proprietary and confidential
information relating to the business of Employer and its Affiliates. Except
as required in the course of Executive's employment by Employer, Executive
will not, without Employer's prior written consent, during the employment
term and at any time thereafter, directly or indirectly use for his own
benefit or the benefit of anyone other than Employer or an Affiliate, or
otherwise disclose to any third party, any such proprietary or confidential
information. For this purpose, the term "proprietary or confidential
information" shall include but not be limited to any knowledge or data,
whether of a technical or commercial nature, all non-public information about
Employer or Affiliates, employee staffing and all other personnel matters,
personnel files, computer records, and other confidential business
information related to the conduct of the business of Employer or Affiliates.
The term "Affiliates" includes any entity in which Employer has an ownership
or other interest.
11. SOLICITATION OF OTHER EMPLOYEES. Executive will not, during his
employment term and at any time thereafter, induce or attempt to induce any
of Employer's or Affiliates' employees or representatives to discontinue
working for or representing Employer or Affiliates.
12. ARBITRATION. Any controversy or claim arising out of or relating
to this agreement, or breach of this agreement, shall be settled by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction. There shall be
three arbitrators, one to be chosen directly by each party at will, and the
third arbitrator to be selected by the two arbitrators so chosen. Each party
shall pay the fees of the arbitrator selected by that party, the fees of the
party's own attorneys, the expense of the party's own witnesses, and any
other expenses connected with presenting that party's case. All other costs
of arbitration, including the cost of any record or transcripts of the
arbitration, administrative fees, the fee of the third arbitrator, and all
other fees and costs, shall be borne equally by the parties.
13. NON-ASSIGNMENT BY EXECUTIVE. Executive's rights and obligations
under this agreement are personal and non-assignable.
<PAGE>
14. INTEGRATION. This Agreement contains the entire agreement of the
parties and supersedes all prior oral and written agreements, understandings,
commitments, and practices between the parties. No amendments to this
agreement may be made except by a writing signed by both parties.
15. CHOICE OF LAW. This agreement shall be governed by California law.
16. NOTICES. Any notice to Employer required or permitted under this
Agreement shall be given in writing, either by personal service or by
registered or certified mail, postage prepaid, addressed to Employer's
President at Employer's principal place of business. Any such notice to
Executive shall be given in a like manner and, if mailed, shall be addressed
to Executive at Executive's home address then shown in Employer's files.
Notice by personal service are deemed given on the date of delivery; notices
by mail are deemed given on the second business day after mailing.
17. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable, the other provisions of the Agreement shall nevertheless
continue in full force and effect. If any provision is held invalid or
unenforceable with respect to particular circumstances, it shall nevertheless
remain in full force and effect in all other circumstances.
Executed by the parties as of the day and year first above written.
NATURADE, INC.
By: Allan Schulman, Pres.
-------------------------
ALLAN SCHULMAN, PRESIDENT
Michael R. Fernicola
-------------------------
MICHAEL R. FERNICOLA
4-8-96
<PAGE>
OPTION AGREEMENT FOR PURCHASE OF COMMON STOCK
OF NATURADE, INC.
(MICHAEL R. FERNICOLA)
This Option Agreement (the "Agreement"), dated March 15, 1996, is between
NATURADE, INC., a Delaware corporation (the "Company"), and MICHAEL R. FERNICOLA
("Optionee").
RECITAL
The Board of Directors of the Company granted to Optionee, effective as of
the date set forth above, an option to purchase 100,000 shares of Common Stock,
$0.0001 par value of the Company (the "Shares") on the terms and conditions
stated in this Agreement.
AGREEMENT
1. GRANT OF OPTION. The Company grants to Optionee the option
("Option") to purchase, upon and subject to the terms and conditions of this
Agreement, all or any part of the Shares at a price of $1.50 per share. The
number of shares subject to the Option and the purchase price per share are
subject to adjustment in certain events as provided in this Agreement.
2. TERM OF OPTION. The Option shall expire on the earlier of (i) the
date upon which Optionee is terminated for cause or (ii) one year after
Optionee's employment with the Company otherwise terminates, unless the Option
shall have been previously terminated in accordance with provisions set forth in
this Agreement.
3. EXCERCISABILITY OF OPTION. The Option shall be exercisable in the
amounts and on the dates, as follows, provided Optionee remains an employee of
the Company in good standing on the option vesting dates as set forth below:
Option Vesting Date Number of Options Vested
------------------- ------------------------
September 12, 1996 20,000
September 12, 1997 20,000
September 12, 1998 20,000
September 12, 1999 20,000
September 12, 2000 20,000
The Option may be exercised at any time or from time to time, in whole or
in part, once vested, until it expires.
<PAGE>
4. MANNER OF EXERCISE. The Option may be exercised by written notice
delivered to the Company at its then principle office, stating the number of
Shares with respect to which the Option is being exercised, together with cash
or a check in the amount of their purchase price and the written statement
provided for in paragraph 10.
5. ASSIGNMENT OR TRANSFER. The Optionee shall not "Transfer" the Option
except by a will or by the laws of descent and distribution and shall be
exercisable only by Optionee (regardless of any community property interest
therein of the Optionee's spouse, if any) during Optionee's lifetime. The term
"Transfer" shall include, without limitation, a voluntary or involuntary sale,
assignment, transfer, pledge, hypothecation, encumbrance, disposal, loan, gift,
attachment or levy, except transfers permitted by this paragraph 5.
Notwithstanding the foregoing, Optionee is expressly authorized to transfer this
Agreement to a revocable inter vivos trust ("Trust") of which he is a trustor;
provided that (1) Optionee furnishes evidence satisfactory to the Company that
the trust is (i) in full force and effect and is (ii) revocable by Optionee
during his lifetime, (2) the Trust is for the benefit of Optionee's "Immediate
Family", and (3) Optionee and the Trustee of such trust execute in a form
acceptable to the Company an agreement to be bound by the terms of this
Agreement and to hold the Option and any Shares purchased pursuant to the Option
subject to the terms of this Agreement. Optionee's Immediate Family shall be
his spouse, descendants, (including any adopted children), parents and siblings.
If Optionee shall die prior to the expiration date of this Option, the person or
persons to whom Optionee's rights under the Option shall have passed by will,
by operation of a Trust, or by the applicable laws of descent and distribution
shall have the right, at any time within one year after the date of Optionee's
death, to exercise such Option as to those shares, if any, as to which the
Option was exercisable as of the date of Optionee's death; provided, that all
rights under the Option shall expire in any event on the day specified in
paragraph 2 hereof.
6. CAPITOL ADJUSTMENTS. The existence of this Option shall not affect
in any way the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations, or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company or any issue of bonds, debentures, preferred or
preference stock affecting the Company's common stock or the rights thereof, or
the issuance of any securities convertible into any thereof or of any rights,
options, or warrants to purchase any thereof, or the dissolution or liquidation
of the Company, any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceedings of the Company, whether of a
similar character or otherwise.
The Shares with respect to which this Option is granted are shares of the
common stock of the Company as presently constituted; but if and whenever, prior
to the delivery by the Company of all the Shares of the stock with respect to
which this Option is granted, the Company shall effect a subdivision or
consolidation of shares or other capital readjustment, the payment of a stock
dividend, or other increase or reduction of the number of shares of the stock
outstanding without paying or receiving compensation therefore in money,
services or property, the number of Shares then remaining subject to option
hereunder shall (a) in the event of an increase in the
<PAGE>
number of outstanding shares, be proportionately increased and the cash
consideration payable per Share shall be proportionately reduced; and (b) in the
event of a reduction in the number of outstanding shares, be proportionately
reduced, and the cash consideration payable per Share shall be proportionately
increased.
7. MERGER AND CONSOLIDATION: DISSOLUTION. On the merger of one or
more corporations into the Company, a consolidation of the Company and one or
more corporations, or other reorganization or recapitalization of the Company,
in which the Company shall be the surviving corporation, thereafter, on any
exercise of the Option, Optionee shall, at no additional cost, be entitled to
receive (subject to any required action by stockholders), in lieu of the number
of Shares as to which this Option shall then be so exercised, the number and
class of shares of stock or other security to which Optionee would have been
entitled pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to the merger or consolidation or reorganization or
reclassification, Optionee had been the holder of record of a number of shares
of stock of the Company equal to the number of shares as to which such Option
shall be so exercised.
8. RIGHT OF FIRST REFUSAL. Each time the Optionee purposes to Transfer
(or is required by operation of law or other involuntary transfer) any or all of
the Shares purchased by him pursuant to this Option, Optionee shall first offer
such Shares to the Company in accordance with the following provisions. Any
proposed Transfer must also comply with the terms of EXHIBIT "A" to this
Agreement.
Optionee shall deliver a written notice (a "Notice") to the Company stating
(a) Optionee's bona fide intention to Transfer Shares, (b) the name and address
of the proposed transferee, or that the Transfer is to be accomplished through a
brokerage transaction on the open market, (c) the number of Shares to be
transferred, and (d) the purchase price per Share and terms of payment for which
the Optionee proposes to Transfer such Shares, or that the Shares are to be
Transferred at the market price at the time of sale.
Within 30 days after receipt of the Notice, the Company or its designee
shall have the first right to purchase or obtain such Shares, upon the price and
terms of payment designated in the Notice. If the Notice provides for the
payment of non-cash consideration, the Company at its option may pay the
consideration in cash equal to the Company's good faith estimate of the present
fair market value of the non-cash consideration offered.
If the Company or its designee elects not to purchase or obtain all of the
Shares designated in the Optionee's Notice, then the Optionee may Transfer the
Shares referred to in the Notice to the proposed transferee, providing such
Transfer (a) is completed within 30 days after the expiration of the Company's
right to purchase or obtain such Shares, and (b) is made at the price and terms
designated in the Notice. If such Shares are not so transferred, the Optionee
must give notice in accordance with this paragraph prior to any other or
subsequent Transfer of such Shares.
<PAGE>
Optionee may not Transfer any Shares to a competitor of the Company, or to
any shareholder, partner, or other beneficial holder of an equity ownership
interest in a competitor, other than pursuant to a merger, combination, or other
transaction approved by the company's Board of Directors.
9. NO RIGHTS AS SHAREHOLDER. Optionee shall have no rights as a
shareholder with respect to shares covered by the Option until the date of
issuance of a stock certificate or stock certificates.
10. RESTRICTED SHARES. Optionee will acquire the Shares upon
exercise not with a view to their resale or distribution. Optionee agrees that
upon each such exercise of the Option, Optionee will furnish to the Company a
written certification in the form attached to this Agreement as EXHIBIT "A" and
such other or additional documents as the Company may request. Any person or
persons entitled to exercise the Option under the provisions of paragraph 5
shall, upon each exercise of the Option, concurrently furnish to the Company the
same statement and documents.
11. This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts made and to be
carried out in California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
COMPANY:
Naturade, Inc.
By: /s/ Allan Schulman, President
_____________________________
By: _____________________________
OPTIONEE:
/s/ Michael R. Fernicola
________________________________
Michael R. Fernicola
<PAGE>
EXHIBIT "A"
CERTIFICATE
I certify that I am acquiring all shares (the "Shares") of Naturade, Inc.,
a Delaware corporation, purchased by me pursuant to the exercise on this date of
the option granted by an Option Agreement, dated March 15, 1996 (the "Stock
Option Agreement"), not with a view to or for resale in connection with, any
distribution of the Shares. I understand that the Shares have not been
registered under the Securities Act of 1933, as amended (the "1933 Act") or
pursuant to any state securities laws, by reason of specific exemptions from
such registration and qualification which depend, among other things, upon the
bona fide nature of my certifications in this Certificate.
I understand and agree to the following:
1. I have received and read carefully the Company's most recent Annual
Report and any interim reports to Shareholders. I have received, reviewed and
considered information fully covering all matters that I deem relevant to make a
decision to purchase the Shares. I have also been given the opportunity to ask
any questions and to ask for further information to the extent I deem necessary.
2. I must hold the Shares indefinitely unless they are subsequently
registered under the 1933 Act or an exemption from such registration is
available. The Company is under no obligation to register the Shares or to make
available any such exemption.
3. I have been advised of Rule 144 promulgated by the Security and
Exchange Commission (the "Commission") under the 1933 Act which permits limited
resale of securities purchased in a private placement without registration under
the 1933 Act (such as my purchase of the Shares pursuant to the Stock Option
Agreement) if certain conditions are met. These conditions include, among other
things:
(a) The availability of current public information about the Company;
(b) The resale occurring at least two years after purchase of and
full payment for the Shares to be sold;
(c) The sale being through a broker in a "broker's transaction"; and
(d) The number of shares of common stock of the Company that I may
sell during any three month period may not exceed specified
<PAGE>
limitations (generally, the greater of 1% of the total number of
shares of stock outstanding or the average weekly trading volume
of the shares during the four calendar weeks preceding the filing
of the required notice).
Although Rule 144 as adopted is not the exclusive means provided for the
public sale of the Shares other than in a registered offering, I understand that
the staff of the Commission has expressed its opinion that persons proposing to
sell privately placed stock (such as the Shares) other than in a registered
offering and other than pursuant to Rule 144 will have a substantial burden of
proof in establishing that an exemption from registration is available for that
sale and that those persons and the brokers and other persons who participate in
the transaction do so at their own risk.
4. If I propose to effect any transaction pursuant to Rule 144, I will
deliver to the Company at its principal office (to the attention of its
Secretary) at least 2 business days before placing with a broker an order to
sell (i) a copy of all materials required to be filed with the Commission
pursuant to Rule 144, (ii) an unqualified opinion, in form and substance
satisfactory to the Company and its counsel, of recognized securities counsel to
the effect that the proposed sale or disposition may lawfully be made under Rule
144, (iii) a statement from the broker effecting the transaction evidencing the
compliance by it of the Rule, and (iv) a copy of each document delivered to the
broker with respect to such sale.
5. I agree not to dispose of any of the shares except (i) with the prior
consent of the California Commission of Corporations, if required by California
law, and (ii) either pursuant to an effective Registration Statement under the
1933 Act or an exemption from registration under the 1933 Act after receipt by
the Company of an unqualified opinion (obtained at my cost), of recognized
securities counsel, acceptable in form and substance to the Company and its
counsel, that registration of those shares is not required under the 1933 Act.
6. All certificates representing the Shares and any certificate for any
securities issued pursuant to any stock split, share reclassification, stock
dividend, or other similar capital event shall bear a legend in substantially
the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED, SOLD, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THAT ACT AND THE
RULES AND REGULATIONS PROMULGATED UNDER IT AND IN ACCORDANCE WITH AN AGREEMENT
BETWEEN THE COMPANY AND THE ISSUEE OF THE SECURITIES, A COPY OF WHICH MAY BE
OBTAINED FROM THE COMPANY. SUCH AGREEMENT PROVIDES THE COMPANY WITH A RIGHT OF
FIRST REFUSAL TO PURCHASE THESE SECURITIES.
<PAGE>
and/or such other legend or legends as the Company and its counsel deem
necessary or appropriate. Appropriate stop transfer instructions with respect
to the shares have been placed with the Company's transfer agent.
7. Notwithstanding any other provision of this Certificate, I confirm
that the Shares are subject to the Company's right of first refusal contained in
the Stock Option Agreement.
Dated: __________________ __________________________
Print or Type Name
__________________________
Signature
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
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