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, 1997
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: (562) 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
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.....
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)
As of December 16, 1997, 5,291,445 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 $7,162,499 based on the average of the bid
and asked price on that date.
Exhibit Index on Page 60
Page 1 of 113
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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 (562) 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 Schulman 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
Currently, the Company's business is focused on the manufacture and
distribution 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.
E. Description of Business of Naturade
(i) Products
Naturade has three major product lines: skin and hair care, fitness
and energy, and specialty nutrition formulas.
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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.
In November 1994, the Company entered into a joint venture with
Harrier, Inc. ("Harrier"), to form a California limited liability company named
DermaRay International, LLC ("DermaRay"). The purpose of this venture was 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. In June, 1997, the
Company and Harrier entered into an agreement to liquidate and dissolve
DermaRay. Upon consummation of such liquidation and dissolution, which is
anticipated to occur in fiscal year ending September 30, 1998, the assets of
DermaRay shall be transferred to the Company.
(ii) Marketing
For the fiscal year ended September 30, 1997, Naturade had sales of
$12,578,420, of which 92% was domestic and 8% international. Total gross profit
was $6,196,624, of which $5,831,453 was generated by domestic sales and $365,171
was generated by international sales.
(a) Domestic Sales
Naturade's domestic branded product business is primarily handled
through a distributor network. There are approximately 15 key distributors and
approximately 15 smaller distributors that service approximately 6,000 retail
health food stores. The Company has a group of distributors who are affiliated
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with each other and whose aggregate purchases during 1997 represented
approximately 24.3% of the Company's total sales. The loss of these customers
could have a material adverse effect on the Company.
Sales in the United States are broken down by geographic regions as
follows:
%
-----
Northeast Region 26.0
Southeast Region 12.0
Southwest Region 7.0
Mid-West Region 13.0
Rocky Mountain Region 9.0
California & Hawaii 24.0
Northwest Region 9.0
-------
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
9% of the Company's total sales. In June, 1997, the Company acquired certain
trademarks, software and formulae previously held by the Chapter 7 bankruptcy
estate of Performance Nutrition, Inc. ("PNI"). PNI accounted for approximately
69% of these private label sales prior to such acquisition by the Company.
(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.
Approximately 24% of the Company's international sales in 1997 were in
South Korea and 17% in Saudi Arabia, with the remaining 59% in approximately 15
other countries. The emphasis in the Company's international department has been
focused on obtaining a diversified international customer base.
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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 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 ranged from a low of $1,333,000 to a high of
$2,730,000 during 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 the Company's
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 49% 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 the market.
(vii) Copyrights, Trademarks and Licenses
Naturade maintains United States registrations on over twenty
trademarks, and California registrations on seven 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 $134,807, $123,643, and
$133,737 for the years ended September 30, 1997, 1996, and 1995, respectively.
The majority of product research and development in 1997 was for the
Company's herbal product category. This included the development of a new herbal
product line (21 items) of standardized and whole herbs. In addition, a
"twin-pack" of herbs and natural fibers called "Herbal Cleanse" was developed.
Also in 1997, a new product called "Immune Booster" was added to the cough and
cold category. A new children's sun block was developed and introduced in the
"Aloe Vera 80" category.
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 newly expanded line was introduced in the spring of 1996.
Research and development also continued in the herbal category and in
herb-related products.
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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
area was to research and evaluate the Company's skin and hair care products and
to evaluate a new packaging design concept.
(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 54 people.
Page 7 of 113
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(xi) Financial Information Regarding Export Sales:
Net Sales To
Korea
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
$ 224,525 $ 431,593 $ 547,555 $ 977,016 $ 1,904,854
Net Sales To
Saudi Arabia
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
$ 157,956 0 $ 839,124 $ 363,006 $ 327,435
Net Sales
Other Exports
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
$ 570,400 $ 270,800 $ 341,835 $ 246,238 $ 341,875
Domestic Net Sales
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
$11,625,539 $ 9,403,139 $ 8,366,226 $ 6,522,316 $ 5,018,096
Total Net Sales
All Markets
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
$12,578,420 $10,105,532 $10,094,740 $ 8,108,576 $ 7,592,260
=========== =========== =========== =========== ===========
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.
Page 8 of 113
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Mr. Schulman's one third interest in the building is leased under a
triple net lease (the "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. In
connection with the Health Holdings Transaction (as defined in Item 13 below),
the Company and Mr. Schulman entered into a First Amendment to Lease, dated as
of December 15, 1997, pursuant to which the Company and Mr. Schulman, in their
capacity as joint landlord, granted the Company, in its capacity as tenant, the
right to extend the original term of the Lease for up to three consecutive
two-year terms. The Company and Mr. Schulman also entered into a Mutual Option
Agreement, dated as of December 15, 1997, pursuant to which the Company and Mr.
Schulman each granted the other the right to purchase their respective interests
in such building. More specifically, the Mutual Option Agreement provides that
the Company may purchase Mr. Schulman's interest in the building at any time
prior to the expiration of the Lease upon notice and payment to Mr. Schulman of
one-third of the fair market value of the building. During the twelve month
period following expiration of the Lease, Mr. Schulman may purchase the
Company's interest in the building following one hundred twenty (120) days'
prior written notice and payment to the Company of two-thirds of the fair market
value of the building. In the event that either the Company or Mr. Schulman
exercises its respective right under the Mutual Option Agreement to purchase the
remaining portion of the building, the Lease shall terminate upon the closing of
such purchase.
In connection with the Company's acquisition of certain assets of
Performance Nutrition, Inc. ("PNI") as discussed in Item 13 below, as of August
1, 1997, the Company entered into a lease for 4,490 square feet in a facility
located in Dallas, Texas. The lease terminates on August 1, 2002, and is paid at
the rate of $3,256 per month.
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 one of four defendants in a proceeding styled Jeffrey
H. Mims, Trustee v. Kennedy Capital Management, Inc., Anthony Roth, David Wynne
and Naturade, Inc., adversary no. 397-3452, in the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division (the "Proceeding").
The Proceeding was initiated by the Trustee in the Chapter 7
bankruptcy case of PNI on October 3, 1997. In his first amended complaint, the
Trustee alleges, in substance, that the defendants improperly wrested control of
PNI's board of directors in August, 1996 and bankrupted PNI through alleged acts
of malfeasance, self-dealing and a conspiracy to transfer PNI's assets to the
Company. The Trustee's pleading seeks unspecified damages and exemplary damages
of not less than $10,000,000.
Page 9 of 113
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The Company has categorically denied the Trustee's allegations and
moved to dismiss the Trustee's complaint on the basis of legal and factual
insufficiency of the claims with respect to the Company, lack of standing as to
corporate governance issues, and on other grounds. The Company also filed a
counterclaim for its attorneys' fees and expenses on the basis of the apparent
groundlessness of the Trustee's allegations. On December 16, 1997, the court
entered an order dismissing all of the Trustee's claims against the Company for
failure to state a legally sufficient basis, unless the Trustee files an amended
complaint by December 29, 1997, which specifically describes the basis of the
Trustee's case against the Company and how the Company allegedly injured PNI.
The Company anticipates that the Trustee will amend his complaint and the
Company intends to vigorously contest the Trustee's claims.
In addition to the above-described litigation, the Company is party to
other claims and litigation that arise in the normal course of business. While
any litigation contains an element of uncertainty, management believes that the
ultimate outcome of these claims and litigation will not have a material adverse
effect on the Company's results of operations of financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 10 of 113
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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 common 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. The prices
were retrieved from the National Quotation Bureau.
Common Stock
- ------------
For Fiscal Year Ended September 30, 1997 High Low
- ---------------------------------------- ---- ---
1st Quarter $ 2.13 $ 1.63
2nd Quarter 3.25 2.00
3rd Quarter 3.69 3.13
4th Quarter 4.13 3.50
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
On December 16, 1997, the last reported price for the Company's Common
Stock was $4.9375 bid, $5.25 ask.
B. Holders
To the best knowledge of the Company, the number of record holders of
common stock as of November 26, 1997, was 569. The Company believes that
approximately 650 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 B Warrants
which provide for the purchase of one share of the Company's Common Stock at an
exercise price of $3.00 per share. The Board of Directors has extended the
expiration date of the Class B Warrants to December 31, 1998. The Company
previously had certain Class A Warrants outstanding, but such Class A Warrants
expired in accordance with their terms on December 31, 1996.
As of November 30, 1997, 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. Between November 30, 1996,
and December 30, 1996, 204,218 Class A Warrants were exercised and 102,383 Class
Warrants expired.
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, 1997 Bid Price Bid Price
- ---------------------------------------- --------- ---------
1st Quarter $ 0.37 $ 0.14
2nd Quarter N/A $ 0.19
3rd Quarter N/A $ 0.19
4th Quarter N/A $ 0.50
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
On December 16, 1997, the last bid price for the Company's Series B Warrants was
$1.50.
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,
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1997, should be read in conjunction with the more detailed audited statements
for such year presented elsewhere herein.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA NATURADE, INC.
YEARS ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 12,578,419 $ 10,105,532 $ 10,094,740 $ 8,108,576 $ 7,592,260
Gross Profit 6,196,624 4,869,105 4,738,852 3,835,249 3,450,637
Income from operations before income
taxes and cumulative effect of change in
accounting principle 413,295 204,158 336,808 387,631 49,860
Income Tax expense (benefit) 165,000 38,000 (58,275) (29,000) 27,000
Income before cumulative effect of change
in accounting principle 248,295 166,158 395,083 416,631 22,860
Cumulative effect of change in accounting 0 0 0 91,000 0
principle
Net Income 248,295 166,158 395,083 507,631 22,860
Income per common and common
equivalent shares:
Before cumulative effect of change in
accounting principle 0.08 0.06 0.14 0.15 0.01
Cumulative effect of change in accounting
principle 0 0 0 0.03 0
Net Income 0.08 0.06 0.14 0.18 0.01
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA SEPTEMBER 30,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $ 7,753,574 $ 5,160,235 $ 4,820,775 $ 2,564,613 $ 2,093,239
Long-term Obligations 2,235,908 2,418,334 2,555,675 199,060 393,117
Common Stock 330 259 254 278 269
Shareholders Equity 2,685,286 1,080,224 897,588 762,800 67,965
</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 $1,080,086 to $2,413,621 at September 30, 1997,
from $1,333,535 at September 30, 1996. This increase was required to support the
overall increase in the sales of the Company's products during fiscal 1997 and
the anticipation of increased future sales. The Company does not anticipate
further significant inventory increases during fiscal 1998.
The Company's cash provided by operating activities decreased $432,605
from $96,221 in 1996 to ($336,384) in 1997. This decrease was mainly a result of
the increase in inventory of $1,080,086 and the changes in accounts receivable
and accounts payable. In 1997 there was an increase in accounts receivable of
$483,300 primarily resulting from increased sales levels. In 1997 the Company's
accounts payable increased $566,524 as a result of higher inventory purchases.
During 1997 the Company's working capital increased to $1,356,135 from
$879,651 at September 30, 1996.
Cash used in investing activities totaled $90,102, down from $147,140
in 1996. Management forecasts that capital expenditures for 1998 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 $463,928
compared to $54,618 in 1996. Proceeds from the exercise of the Company's Class A
Warrants totaled $204,218 in 1997, compared with $8,948 in 1996.
The Company has a $1,500,000 open line of credit available through
February 1, 1998. As of September 30, 1997, $1,150,000 was outstanding on this
line compared to $700,000 as of September 30, 1996. 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.
RESULTS OF OPERATIONS
1997 vs. 1996
- -------------
Net sales for the fiscal year ended September 30, 1997 exceeded the
prior year by $2,472,888. Domestic branded sales, which represented 83% of total
sales, increased $2,337,861 or 29% to $10,498,605. Private label sales,
representing 9% of total sales, decreased $109,899 or 9% to $1,126,934.
International sales, which represented the remaining 8% of sales, increased
$244,926 or 35% to $952,881.
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The Company attributes the majority of the 29% domestic branded sales
increase to the continuing effort to expand distribution by increasing
promotional and marketing expenditures. The introduction of new products also
contributed to this increase of sales.
During 1997 the Company introduced a new line of herb products
featuring a blend of standardized herbs and whole herb powders. This product
grouping has 21 items including special formulas and straight herbs. Toward the
end of fiscal 1997 the Company added St. John's Wort to this herb category. Also
in 1997 the Company introduced a "twin-pack" of herbs and natural fibers called
"Herbal Cleanse".
Another herbal based product was added to the Company's cough and cold
category. This product is called "Immune Booster" and contains Echinacea Root,
Elderberry, Cats Claw and Golden Seal Root, plus vitamins and minerals.
The Company also added a new product to the Aloe Vera 80 Sun Care
category. This product is called "Kids Sunblock" and is a specially formulated
sun protection (SPF 30) and moisturizing product for active kids.
Private label sales decreased due to the Company's purchase of
trademarks in June, 1997, of Performance Nutrition, Inc. ("PNI"), previously the
Company's largest private label customer. Sales of these products since the time
of such acquisition have been reported as domestic branded sales.
International sales increased in 1997 primarily because of new
customers. The Company opened markets in Japan, Italy and Spain during 1997. The
Company is continuing efforts to develop new customers in the international
marketplace.
Gross profit for the fiscal year ended September 30, 1997, increased
1.1% to 49.3% from 48.2% in the prior fiscal year. This increase was primarily
the result of the conversion of the PNI private label product line to domestic
branded sales.
Selling, general and administrative expenses increased $1,054,490 or
24.4% from last year. However, the total percent of sales remained constant at
42.8% from the prior year. Sales and marketing expenses related to domestic
sales increased $180,662 or 9.4% but decreased to 16.7% of sales from 19.1% last
year. Sales and marketing expenses since June, 1997 relating to the PNI branded
line of products were $363,137 or 2.9% of sales. There were no comparable
expenses in fiscal 1996 as these products were recorded as private label sales
with corresponding costs of sales.
General and administrative expenses increased $305,709 or 25.9%, but
only increased sales 0.1% of sales to 11.8% from 11.7% last year. Of this
amount, payroll and related taxes and benefits increased $177,320 and legal
expenses increased $93,531.
Page 15 of 113
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1996 vs. 1995
- -------------
Net sales for the fiscal year ended September 30, 1996 exceeded the
fiscal year ended September 30, 1995 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 attributed 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 formulae, one new herbal formula and three new
amino acid formulae.
A new area of distribution for the Company in 1996 was the chain of
2,400 GNC stores. During fiscal 1997 the Company continued to distribute its
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 also
sold a variety of its herbal remedy products to GNC.
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.
Following completion of such reorganization and redesign, the Company resumed
shipments during fiscal 1997.
Page 16 of 113
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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 and international sales, both of which
carry lower margins, as well as a price increase discussed above.
Selling, general and administrative expenses increased $474,997 or
12.3% to 42.8% of sales from 38.1% in fiscal 1995. Sales and marketing expenses
related to domestic sales increased $593,319 or 44.5% to 19.1% of sales from
13.2% the prior year, while the remaining expenses in these categories decreased
$118,322. The majority of this $593,319 increase is comprised of the following:
an increase in advertising of $133,640; compensation and related payroll costs
of $197,124; 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 promotional expenses of $97,013.
In 1996 management eliminated the valuation allowance on deferred tax
assets since they believed it to be more likely than not that the deductible
temporary differences would be realized. 1996 and 1995 pretax income was
approximately $204,000 and $337,000, respectively. Deferred tax assets will be
realizable from future taxable income. Management estimated during 1996 that it
would require four years of taxable income consistent with levels of the past
four years to realize the deferred tax assets, and believes that the results of
fiscal 1997 were consistent with such estimates. Based on the Company's
operating results and management's expectation of future performance it believes
this level of taxable income is attainable. If in the future 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.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of that term in the Private Securities Litigation Reform Act
of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with the
Securities Exchange Commission or otherwise. Statements contained herein that
are not historical facts are forward-looking statements made pursuant to the
safe harbor provisions referenced above. Any matters discussed herein including,
without limitation, the Company's introduction of new products, future sales
levels, ability to secure financing and the potential outcome of pending
litigation involving the Company, are forward-looking statements. In addition,
when used in this discussion, the words "anticipates," "expects," "intends,"
"plans," variations thereof and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements are inherently subject to risk and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained in this Annual Report. Statements in this
Page 17 of 113
<PAGE>
Annual Report on Form 10-K, particularly in "Item 1. Business", "Item 3. Legal
Proceedings", the Notes to Financial Statements and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
describe certain factors that could contribute to or cause such differences
including, but not limited to, unanticipated developments in any one or more of
the following areas: the rate of consumer acceptance of new product
introductions, competition, the number and nature of customers and their product
orders, pricing, sourcing and sales (including foreign government regulation,
trade and importation concerns and fluctuation in exchange rates), borrowing
costs, changes in taxes due to change in the mix of U.S. and non-U.S. revenue,
pending or threatened litigation, the availability of key personnel and other
risk factors which may be detailed from time to time in the Company's Securities
and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any
forward-looking statement contained herein, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unexpected events.
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
On August 12, 1997, the Company filed a Form 8-K reporting a change in
auditors to Rose, Snyder & Jacobs, effective August 5, 1997, replacing McGladrey
& Pullen, LLP. The change in auditors was not a result of any disagreement with
the former auditors on the scope, auditing or presentation of the Company's
financial statements.
Page 18 of 113
<PAGE>
PART III
Item 10. Directors and Executive Officers
The names and ages of the directors and executive officers of the
Company as of December 16, 1997, are as follows:
Name Age Position Since
---- --- -------- -----
Allan Schulman 66 President, Chief 1959
Executive Officer,
Director, Chairman
of the Board
Lionel P. Boissiere 1/ 39 Director 1997
Anders Brag 1/ 44 Director 1997
William B. Doyle, Jr. 1/ 38 Director 1997
William S. Doyle 1/ 53 Director 1997
Barry M. Zwick 63 Director 1992
Paul D. Shapnick 61 Chief Financial Officer, 1992
Assistant Secretary-
Treasurer
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.
- --------
1/ Effective upon the closing of the Health Holdings Transaction (as defined
in Item 13 below) on December 15, 1997, Messrs. Boissiere, Brag, Doyle
and Doyle were appointed by the Company's Board of Directors to fill
vacancies in such Board of Directors.
Page 19 of 113
<PAGE>
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.
WILLIAM S. DOYLE. Mr. Doyle [no relation to William B. Doyle, Jr.] has an AB
degree from Duke University. Mr. Doyle was chief marketing officer of the Chase
Manhattan Bank in New York, after successive management positions with the bank
in London and Hong Kong. He served as Deputy Commissioner of Commerce for New
York State, and was president of Strategen, Inc., a New York City based
health-care investment bank, prior to forming Taishan Holdings, Inc., where he
serves as president.
LIONEL P. BOISSIERE. During the past five years Mr. Boissiere has been an
investor and advisor to middle market companies. From 1993 through 1995 he
worked with Berkeley International Capital Corp., and since 1995 Mr. Boissiere
has been a principal at Doyle & Boissiere LLC.
ANDERS BRAG. During the past five years Mr. Brag has served as a Special Limited
Partner of Hambro International Ventures.
WILLIAM B. DOYLE, JR. Since 1995 Mr. Doyle [no relation to William S. Doyle] has
served as Managing Director of Doyle & Boissiere LLC. Prior to such time Mr.
Doyle was with Berkeley International Capital Corporation. Mr. Doyle is an
investor and an advisor to middle market companies.
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 the 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.
Page 20 of 113
<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>
Allan
Schulman
Chief 9/30/95 186,040 39,409 0 0 80,000 0 11,712 <F2>
Executive 9/30/96 188,754 0 0 0 10,000 0 11,712 <F2>
Officer 9/30/97 192,751 25,366 0 0 10,000 0 2,928 <F2>
- -----------------------------------------------------------------------------------------------------------------------
Michael
Fernicola
Executive 9/30/95 89,231 5,000 0 0 20,000 0 4,440 <F3>
Vice 9/30/96 105,385 4,013 0 0 40,000 0 6,600 <F3>
President<F1> 9/30/97 113,077 1,709 0 0 20,000 0 6,600 <F3>
- -----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Mr. Fernicola served as Executive Vice President and as a Director of
the Company through September 6, 1997.
<F2> Such amounts represent lease payments made relating to an automobile
leased for Mr. Schulman. 3/ Such amounts represent lease payments made
relating to an automobile leased for Mr. Fernicola.
</FN>
</TABLE>
In addition, both Mr. Schulman and Mr. Fernicola participated 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 $1.96 per share, which was the fair
market value on the date of the grant.
The 20,000 options awarded to Mr. Fernicola have an exercise price of
$1.50 per share. The fair market value on the date of the grant of these options
was $3.63.
Page 21 of 113
<PAGE>
<TABLE>
Options/SAR Grants In Last Fiscal Year
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
% of Total
Options/SARs Market
Options/ Granted to Exercise Price
SARs Employees or Base on Date
Granted in Fiscal Price of Grant Expiration
Name (#) Year ($/Sh) ($/Sh) Date* 5%($) 10%($) 0%($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allan Schulman 10,000 20% 1.96 1.96 2/5/07* $12,700 $33,500
Chief Executive
Officer
- ----------------------------------------------------------------------------------------------------------------------------
Michael Fernicola 20,000 40% 1.50 3.63 9/12/98 $1,600 $3,200
Executive Vice
President 1/
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Mr. Fernicola served as Executive Vice President of the Company through
September 6, 1997.
</FN>
</TABLE>
No options were exercised by officers or directors during the fiscal
year ended September 30, 1997.
*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.
On December 12, 1997, the Company entered into a four year Employment,
Consulting and Non-Competition Agreement with Allan Schulman, its Chief
Executive Officer, providing for a base salary of $180,000, $144,000, $115,200,
and $92,169, respectively, for the first, second, third and fourth years of such
agreement, subject to certain adjustments, a $1,250 per month car allowance, and
various other terms and conditions. The terms of this agreement permit Mr.
Schulman to reduce his involvement with, and responsibilities for, the Company
during the term of the agreement with a proportionate reduction in salary.
All directors receive directors' fees of $500 per month. Messrs.
Boissiere and W.B. Doyle will not receive such directors' fees.
Page 22 of 113
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial
ownership as of December 16, 1997, of the Company's outstanding common stock
("Common Shares") 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 the Company's
equity securities held by each director and by officers and directors of the
Company as a group.
Amount and
Nature of
Name & Address Class Beneficial Percent
of Beneficial Owner of Stock Owner of Class
- ------------------- -------- ----------- --------
Allan Schulman Common 551,545 (1) 10.05
Naturade, Inc.
7110 E. Jackson St.
Paramount, CA 90723
Barry M. Zwick Common 251,017 (2) 4.70
925 De La Vina St.
Suite 102
Santa Barbara, CA 93101
Dallas Gold & Silver Common 490,000 (3) 9.12
Exchange, Inc.
519 Interstate 30
Suite 243
Rockwall, TX 75087
Health Holdings and Common 2,881,695 (4) 54.46
Botanicals, Inc. Preferred 1,250,024 100.00
330 Primrose Road
Fifth Floor
Burlingame, CA 94104
Pure World, Inc. Common 293,999 (5) 5.55
376 Main Street, Box 74
Bedminster, NJ 07921
Executive Officers and Common 3,804,257 67.20
Directors As a Group
Consisting of 4 Persons
Page 23 of 113
<PAGE>
FOOTNOTES
(1) Total includes 352,434 Common Shares solely owned by Mr. Schulman; 89,111
Common Shares which can be purchased upon exercise of the Company's Class B
Warrants; and 110,000 Common Shares which can be purchased under presently
exercisable options.
(2) Total includes 11,000 Common Shares solely owned by Mr. Zwick; 151,155
Common Shares owned by the Zwick Financial Corp. Profit Sharing Plan, of
which Mr. Zwick is sole trustee and 91% beneficiary; and 50,000 Common
Shares which can be purchased by Mr. Zwick under presently exercisable
options; and the following amounts owned by Mr. Zwick's minor children:
38,000 Common Shares, and 862 Common Shares which can be purchased upon
exercise of the Company's Class B Warrants.
(3) Dallas Gold & Silver Exchange, Inc. ("DGSE"), is a national wholesaler and
retailer of precious metals and jewelry products based in Dallas, Texas.
The securities of DGSE trade on the American Stock Exchange under the
symbol "DLS.EC". Dr. L.S. Smith, a consultant to the Company, is the
Chairman of the Board, Chief Executive Officer and the controlling
stockholder of DGSE. DGSE owns 260,000 Common Shares. In addition, Dr.
Smith owns 150,000 Common Shares directly; and 80,000 Common Shares which
can be purchased under presently exercisable options. DGSE and Dr. Smith
each disclaim beneficial ownership of the Common Shares held by each other,
and report separately.
(4) Total includes 2,881,695 Common Shares owned by Health Holdings and
Botanicals, Inc. ("Health Holdings"); and 1,250,024 shares of the Company's
Series A Convertible Preferred Stock ("Preferred Shares"). Common and
preferred shares of Health Holdings are held by (i) Doyle & Boissiere LLC,
a Delaware limited liability company (of which Messrs. William B. Doyle,
Jr., and Lionel P. Boissiere, directors of the Company, are principals),
(ii) Mr. Anders Brag, a director of the Company, and (iii) Taishan
Holdings, Inc., a British Virgin Islands corporation (of which Messrs.
William S. Doyle and Anders Brag, each a director of the Company, hold
equity interests). Messrs. William B. Doyle, Jr., William S. Doyle, Anders
Brag and Lionel P. Boissiere each disclaim beneficial ownership of the
Company's Common Shares and Preferred Shares held by Health Holdings.
(5) Total includes 293,000 Common Shares owned by Pure World, Inc. ("Pure
World"), and 999 Common Shares which can be purchased upon exercise of the
Company's Class B Warrants. This statement is based on information
contained in a Schedule 13 D/A filed by Pure World on September 5, 1997.
Item 13. Certain Relationships and Related Transactions
On December 15, 1997, the Company, Allan Schulman, L.S. Smith, Dallas
Gold & Silver Exchange, Inc. ("DGSE"), and Barry M. Zwick (Mr. Schulman, Dr.
Smith, DGSE and Mr. Zwick, together, the "Shareholders" and, collectively, with
the Company, "Sellers") entered into a Stock Purchase Agreement (the "Purchase
Agreement") and certain ancillary documents (collectively, the "Transaction
Documents") with Health Holdings and Botanicals, Inc., a California corporation
Page 24 of 113
<PAGE>
("Health Holdings"). As set forth in Item 12 hereof, Mr. Schulman is President,
Chief Executive Officer and Chairman of the Board of the Company; Dr. Smith is a
shareholder of and consultant to the Company; Dr. Smith is Chairman of the
Board, Chief Executive Officer and controlling shareholder of DGSE; DGSE is a
shareholder of the Company; and Mr. Zwick is a former director and shareholder
of the Company.
Taishan Holdings, Inc. ("THI") is a British Virgin Islands
corporation. William S. Doyle and Anders Brag (each a director of the Company)
own 50% and 25%, respectively, of the equity interests in THI, and William S.
Doyle serves as President of THI. Doyle & Boissiere LLC is a Delaware limited
liability company ("D&B") of which William B. Doyle, Jr. and Lionel Boisierre
(each a director of the Company) are principals. As of the date of this Annual
Report on Form 10-K, THI and D&B are not affiliates. D&B and Anders Brag hold
shares of convertible preferred stock of Health Holdings representing
approximately 85% of the outstanding stock of Health Holdings on a fully-diluted
basis, and THI holds approximately 7.5% of the outstanding shares of Health
Holdings on a fully-diluted basis.
Consummation of the transactions (the "Health Holdings Transaction")
contemplated by the Transaction Documents took place concurrently with the
execution of the Purchase Agreement on December 15, 1997. Accordingly, as of
December 15, 1997, Health Holdings owns approximately 55% of the Company's
Common Shares and 100% of the Preferred Shares. In connection with the execution
and delivery of the Transaction Documents, William S. Doyle, Lionel P.
Boissiere, Anders Brag and William B. Doyle, Jr. were appointed to the Company's
Board of Directors on December 15, 1997.
Pursuant to the terms of the Purchase Agreement, the Shareholders sold
to Health Holdings the following numbers of Common Shares: Mr. Schulman sold
650,473 Common Shares; Dr. Smith sold 50,000 Common Shares; DGSE sold 108,000
Common Shares; and Mr. Zwick sold 50,000 Common Shares. The total purchase price
for the Common Shares sold by the Shareholders was $2,575,419. Simultaneously,
the Company sold to Health Holdings (a) 2,023,222 newly issued Common Shares and
(b) 1,250,024 Preferred Shares for a total purchase price of $6,000,000.
Through to and until December 15, 2007, each Preferred Share is
convertible into one Common Share in accordance with the following terms. Upon
the issuance by Naturade of 45 Common Shares pursuant to the exercise of any
warrant, option, contract or similar right, 55 Preferred Shares shall
immediately become and remain convertible at a conversion price equal to the
average exercise price of the corresponding 45 Common Shares. Conversely, if any
currently outstanding warrant, option, contract or similar right to purchase
Common Shares shall expire unexercised on or prior to December 15, 2007, the
corresponding number of Preferred Shares (on a 55 for 45 basis) shall become
redeemable at par.
In the event that, prior to December 15, 2007, (i) any person other
than D&B or an affiliate of D&B acquires 15% or more of the Common Stock, (ii)
the Company is party to any merger, consolidation, in each case into or with a
person other than D&B or its affiliate, (iii) the Company sells all or
substantially all of the assets of the Company to a person other than D&B or its
Page 25 of 113
<PAGE>
affiliate, or (iv) the Company makes an offering or offerings of the Company's
securities, the aggregate gross proceeds of which are in excess of $10,000,000,
the Preferred Shares shall become and remain convertible at a conversion price
of $1.45 per share. While convertible, the Preferred Shares shall have full
voting rights with the Common Stock on an "as converted" basis.
The Transaction Documents include a Registration Rights Agreement,
dated as of December 15, 1997, between the Company and Health Holdings; a
Consulting Agreement, dated as of December 12, 1997, between the Company and
D&B; a First Amendment to Lease, dated as of December 15, 1997, between Allan
Schulman and the Company, collectively as landlord, on the one hand, and the
Company, as tenant, on the other; a Mutual Option Agreement, dated December 15,
1997, between Allan Schulman and the Company; an Employment, Consulting and
Non-Competition Agreement, dated as of December 15, 1997, between Allan Schulman
and the Company; and a Letter Agreement, dated December 11, 1997, between the
Company and DGSE pursuant to which the Company exchanged 108,500 shares of DGSE
common stock held by the Company for 48,000 Common Shares held by DGSE. The
Health Holdings Transaction was reported by the Company on Form 8-K filed by the
Company on December 23, 1997, which is incorporated herein by this reference.
On June 3, 1997, the Company consummated the acquisition of certain
trademarks, software and formulas (collectively, the "Assets") previously held
by the Chapter 7 bankruptcy estate of Performance Nutrition, Inc. ("PNI"). The
Company acquired the assets from DLS Financial Services, Inc. ("DLS"), a
wholly-owned subsidiary of DGSE. DGSE owns 260,000 Common Shares. L.S. Smith, a
consultant to the Company, is the Chairman of the Board, Chief Executive Officer
and controlling shareholder of DGSE. Dr. Smith individually owns 150,000 Common
Shares, as well as 80,000 additional Common Shares which can be purchased under
presently exercisable options. DGSE and Dr. Smith each disclaim beneficial
ownership of the Common Shares held by each other. See Item 12 hereof. DLS
purchased the assets at a public auction conducted by the bankruptcy trustee of
PNI. The consideration paid by the Company to DLS in connection with this
transaction consisted of 500,000 restricted Common Shares, which was determined
through arms' length negotiations.
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 Common Shares, 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 Common Shares 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 on which such option is granted. These options
expire one year after the Director leaves the Board. During February 1997, five
directors each were granted options to acquire 10,000 additional Common Shares,
at an exercise price equal to the average bid price of the common stock for the
thirty day period ending December 30, 1996 (which was $1.96 per share).
In September 1997, the Company granted additional stock options to
Michael Fernicola, the Company's then Executive Vice President, to purchase
20,000 Common Shares at an exercise price of $1.50.
Page 26 of 113
<PAGE>
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. As
discussed in Item 2 above, the Company and Mr. Schulman have entered into a
First Amendment to Lease, dated as of December 15, 1997, and a Mutual Option
Agreement, dated as of December 15, 1997. Among other things, the First
Amendment to Lease grants the Company the right to extend the original term of
the Lease for two consecutive three year terms. The Mutual Option Agreement
provides, among other things, that the Company may purchase Mr. Schulman's
interest in the building at any time prior to the expiration of the Lease upon
notice and payment to Mr. Schulman of one-third of the fair market value of the
building. The Mutual Option Agreement further provides that during the
twelve-month period following expiration of the Lease, Mr. Schulman may purchase
the Company's interest in the building following one hundred twenty days' prior
written notice and payment to the Company of two-thirds of the fair market value
of the building.
Page 27 of 113
<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 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. Exhibits required to be filed as part of this report are
listed in the Exhibit Index.
(B) Reports on Form 8-K.
On August 12, 1997, the Company filed a Form 8-K reporting a change in
auditors to Rose, Snyder & Jacobs, effective August 5, 1997, replacing McGladrey
& Pullen, LLP. The change in auditors was not a result of any disagreement with
the former auditors on the scope, auditing or presentation of financial
statements.
(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
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.
Page 28 of 113
<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: December 23, 1997 /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
/s/ Allan Schulman President
- ------------------------- Chairman of the Board
Allan Schulman (Principal Executive Officer) December 23, 1997
/s/ Paul D. Shapnick
- ------------------------- Chief Financial Officer
Paul D. Shapnick (Principal Accounting Officer) December 23, 1997
/s/ Barry M. Zwick
- ------------------------- Director December 23, 1997
Barry M. Zwick
/s/ William S. Doyle
- ------------------------- Director December 23, 1997
William S. Doyle
/s/ Lionel P. Boissiere
- ------------------------- Director December 23, 1997
Lionel P. Boissiere
Page 29 of 113
<PAGE>
/s/ Anders Brag
- ------------------------- Director December 23, 1997
Anders Brag
/s/ William B. Doyle, Jr.
- ------------------------- Director December 23, 1997
William B. Doyle, Jr.
Page 30 of 113
<PAGE>
NATURADE, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Page 31 of 113
<PAGE>
NATURADE, INC.
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 1-2
BALANCE SHEETS 4-5
STATEMENTS OF INCOME 6
STATEMENTS OF STOCKHOLDERS' EQUITY 7-8
STATEMENTS OF CASH FLOWS 9-10
NOTES TO FINANCIAL STATEMENTS 11-27
Page 32 of 113
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Naturade, Inc.
Paramount, California
We have audited the accompanying balance sheet of Naturade, Inc. as of
September 30, 1997, and the related statements of income, stockholders' equity,
and cash flows for the year then ended. 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 audit. The balance sheet as
of September 30, 1996, and the related statements of income, stockholders'
equity, and cash flows for the years ended September 30, 1996 and 1995 were
audited by other auditors, whose report dated October 31, 1996, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit 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, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
November 5, 1997
-1-
Page 33 of 113
<PAGE>
Independent Auditor's Report
To the Board of Directors
Naturade, Inc.
Paramount, California
We have audited the accompanying balance sheet of Naturade, Inc., as of
September 30, 1996, and the related statements of income, stockholders'
equity and cash flows for each of the two 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 audited
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 the results of operations and its cash flows for
each of the two years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Anaheim, California
October 31, 1996
-2-
Page 34 of 113
<PAGE>
NATURADE, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
-3-
Page 35 of 113
<PAGE>
NATURADE, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
CURRENT ASSETS
Cash $ 157,585 $ 120,143
Accounts receivable 1,404,661 921,361
Inventories 2,413,621 1,333,535
Prepaid expenses 42,149 28,289
Deferred income taxes 158,514 138,000
----------- -----------
TOTAL CURRENT ASSETS 4,176,530 2,541,328
----------- -----------
AVAILABLE-FOR-SALE SECURITY 217,000 128,573
PROPERTY AND EQUIPMENT
Land 318,533 318,533
Building and improvements 1,909,629 1,906,852
Machinery and equipment 434,317 467,618
Furniture and fixtures 66,452 151,762
Vehicles 112,375 124,514
----------- -----------
2,841,306 2,969,279
Less accumulated depreciation
and amortization (729,500) (768,177)
----------- -----------
NET PROPERTY AND EQUIPMENT 2,111,806 2,201,102
----------- -----------
INTANGIBLE ASSETS 1,177,506 147,851
OTHER ASSETS 70,732 141,381
----------- -----------
TOTAL ASSETS $ 7,753,574 $ 5,160,235
=========== ===========
See independent auditors' report and
notes to financial statements.
-4-
Page 36 of 113
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- -----------
CURRENT LIABILITIES
Note payable $ 1,150,000 $ 720,938
Current portion of long-term debt 194,857 181,783
Accounts payable 1,027,288 460,764
Accrued payroll and vacation 153,825 109,097
Other accrued expenses 187,426 156,753
Income taxes payable 106,998 32,342
----------- -----------
TOTAL CURRENT LIABILITIES 2,820,394 1,661,677
----------- -----------
LONG-TERM DEBT (including net obligation
to stockholder: 1997 - $242,583;
1996 - $234,611) 2,235,908 2,418,334
----------- -----------
DEFERRED INCOME TAXES 11,986 --
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.0001 per
share, authorized 50,000,000 shares
issued and outstanding 3,297,223
in 1997 and 2,593,005 shares in
1996 330 259
Additional paid-in capital 1,539,902 236,263
Retained earnings 1,061,654 813,359
Unrealized gain on available-
for-sale security, net 83,400 30,343
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,685,286 1,080,224
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,753,574 $ 5,160,235
=========== ===========
See independent auditors' report and
notes to financial statements.
-5-
Page 37 of 113
<PAGE>
NATURADE, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 12,578,419 $ 10,105,532 $ 10,094,740
COST OF SALES 6,381,795 5,236,427 5,355,888
------------ ------------ ------------
GROSS PROFIT 6,196,624 4,869,105 4,738,852
------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (including rent expense
to a related party, 1997 - $0;
1996 - $0; 1995 - $100,072) 5,377,644 4,323,154 3,848,157
LAWSUIT SETTLEMENT EXPENSE -- -- 268,000
------------ ------------ ------------
OPERATING INCOME 818,980 545,951 622,695
OTHER INCOME (EXPENSE)
Miscellaneous, net (57,925) 13,180 1,816
Interest expense (347,760) (354,973) (287,703)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 413,295 204,158 336,808
INCOME TAX EXPENSE (BENEFIT) 165,000 38,000 (58,275)
------------ ------------ ------------
NET INCOME $ 248,295 $ 166,158 $ 395,083
============ ============ ============
PRIMARY EARNINGS PER SHARE .08 .06 .14
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 3,232,000 2,777,000 2,822,000
============ ============ ============
</TABLE>
See independent auditors' report and
notes to financial statements.
-6-
Page 38 of 113
<PAGE>
NATURADE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Common Stock Gain On
----------------------- Common Additional Available-
No. of Stock to Be Paid-In Retained for-Sale
Shares Amount Issued Capital Earnings Security(Net)
------ ------ ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 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 independent auditors' report and
notes to financial statements.
-7-
Page 39 of 113
<PAGE>
NATURADE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Common Stock Gain On
----------------------- Common Additional Available-
No. of Stock to Be Paid-In Retained for-Sale
Shares Amount Issued Capital Earnings Security(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
Issuance of common stock 500,000 50 -- 1,013,950 -- --
Contributed capital arising from stock
option compensation -- -- -- 85,492 -- --
Exercise of stock warrants:
Class A 204,218 21 -- 204,197 -- --
Increase in unrealized gain on
available-for-sale security, net -- -- -- -- -- 53,057
Net income -- -- -- -- 248,295 --
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1997 3,297,223 $ 330 $ -0- $ 1,539,902 $ 1,061,654 $ 83,400
=========== =========== =========== =========== =========== ===========
</TABLE>
See independent auditors' report and
notes to financial statements.
-8-
Page 40 of 113
<PAGE>
NATURADE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 248,295 $ 166,158 $ 395,083
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 156,393 142,530 113,571
Provision on accounts receivable -- 3,848 (9,537)
Deferred income taxes (43,898) (27,000) (64,000)
Undistributed loss on equity
investment -- 8,109 29,000
Loss on disposition of property and
equipment 7,350 -- --
Compensation expense arising from
stock options and issuance of
common stock 85,492 19,900 15,700
Common stock to be issued -- -- 100,000
Changes in assets -
(increase) decrease:
Accounts receivable (483,300) (260,393) (19,519)
Inventories (1,080,086) (237,560) (129,307)
Prepaid expenses (13,860) 161,537 (83,079)
Other assets 70,649 -- --
Changes in liabilities -
increase (decrease):
Accounts payable, accrued payroll
and vacation, other accrued
expenses and income taxes
payable 716,581 111,154 (225,676)
Other -- 7,938 (31,601)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (336,384) 96,221 90,635
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (48,884) (147,140) (1,056,254)
Purchase of intangible assets (41,218) -- --
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (90,102) (147,140) (1,056,254)
----------- ----------- -----------
</TABLE>
See independent auditors' report and
notes to financial statements.
-9-
Page 41 of 113
<PAGE>
NATURADE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable $ 429,062 $ 350,000 $ 119,000
Proceeds from issuance of debt -- 81,560 1,150,984
Principal payments under debt,
including capital lease (169,352) (385,890) (403,267)
Proceeds from exercise of option and warrants 204,218 8,948 13,417
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 463,928 54,618 880,134
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 37,442 3,699 (85,485)
CASH AT BEGINNING OF YEAR 120,143 116,444 201,929
----------- ----------- -----------
CASH AT END OF YEAR $ 157,585 $ 120,143 $ 116,444
=========== =========== ===========
SUPPLEMENTARY DISCLOSURES:
Interest paid in cash $ 347,000 $ 354,000 $ 275,000
=========== =========== ===========
Income taxes paid in cash $ 61,000 $ 46,000 $ 12,000
=========== =========== ===========
</TABLE>
See independent auditors' report and
notes to financial statements.
-10-
Page 42 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
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
practices. 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.
Accounts Receivable
-------------------
Accounts receivable are presented net of allowance for doubtful accounts
of $5,000 at September 30, 1997 and 1996, and net of allowance for
returns of $75,000 and $60,000 at September 30, 1997 and 1996,
respectively.
Available-for-Sale Security
---------------------------
The security consists of 108,500 shares of common stock of a publicly
held company. The security is presented at fair market value of $217,000
and $128,573 based on quoted market prices at September 30, 1997 and
1996, respectively. Original cost of security is $78,000, and gross
unrealized gain included in stockholders' equity amounted to $139,000
and $50,573 at September 30, 1997 and 1996, respectively. Change in net
unrealized holding gain (after taxes) on available for sale security
amounted to $53,057, $(12,370), and $(123,412) for the years ended
September 30, 1997, 1996 and 1995, respectively.
Inventories
-----------
Inventories are stated at the lower of cost or market on a weighted
average basis, and consist of the following items:
1997 1996
---------- ----------
Raw materials $1,617,121 $ 902,064
Finished goods 796,500 431,471
---------- ----------
$2,413,621 $1,333,535
========== ==========
See independent auditors' report.
-11-
Page 43 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment
----------------------
Depreciation and amortization of property and equipment is provided over
the following estimated useful lives of the respective assets on the
straight-line basis:
Classification Life
-------------- ----
Building and improvements 5-27 Years
Machinery and equipment 5-10 Years
Furniture and fixtures 5 Years
Vehicles 5 Years
Building and improvements include a capitalized lease of $691,333 at
September 30, 1997 and 1996 (see note 4). The related accumulated
amortization on this capitalized lease is approximately $78,000 and
$49,000 at September 30, 1997 and 1996, respectively.
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 $1,335,052 and $279,834 at September 30,1997 and 1996,
respectively, are being amortized using the straight-line method over a
15-year to 25-year period. Accumulated amortization on these assets at
September 30, 1997 and 1996 amounted to $157,546 and $131,983,
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.
See independent auditors' report.
-12-
Page 44 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company complies with Financial Accounting Standards Board (FASB)
Statement No. 109, Accounting for income taxes.
Research and Development
------------------------
Research and development costs are included in expense when incurred.
They amounted to $134,807, $123,643 and $133,737 for the years ended
September 30, 1997, 1996 and 1995, respectively.
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, 1997 and
1996. Advertising costs charged to expense amounted to $519,811,
$329,259, and $193,614 for the years ended September 30, 1997, 1996 and
1995, respectively.
Estimates
---------
Generally accepted accounting principles require that the financial
statements include estimates by management in the valuation of certain
assets and liabilities. The Company's management estimates the reserve
for doubtful accounts, the reserve for returns, the reserve for obsolete
inventory and the useful lives of property and equipment. The management
uses its historical records and knowledge of its business in making
these estimates.
Reclassification
----------------
Certain amounts previously reported in the Company's 1996 and 1995
financial statements have been reclassified to conform to the
presentation adopted during 1997. Such reclassifications had no effect
on the net income as previously reported.
Cash Concentration
------------------
The Company maintains cash balances in accounts insured by the federal
government up to $100,000. At September 30, 1997, the Company had cash
in one bank totaling $146,292, which is $46,292 in excess of the insured
amount.
Cash Flows
----------
For the purpose of the statement of cash flows, the Company considers
cash equivalent to include cash only, and to exclude any near-cash
short-term investments.
See independent auditors' report.
-13-
Page 45 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
------------------
Weighted average number of shares used to calculate primary earning per
share includes consideration of all common stock equivalents from
warrants and stock options.
2. NOTE PAYABLE
The Company has a $1,500,000 line of credit agreement with a bank.
Interest on borrowings under the agreement, which is payable monthly, is
charged at the Prime Rate (8.5% at September 30, 1997) plus 1%. The
agreement expires in February 1998. The agreement is collateralized by
substantially all of the Company's assets and is guaranteed by the
Company's president. Borrowings under this agreement at September 30,
1997 totaled $1,150,000.
3. LONG TERM DEBT
A summary of long-term debt including capitalized lease obligation
follows:
1997 1996
------------ ----------
Due in monthly installments of $10,639,
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" (8.5% at
September 30, 1997) plus 1% and is
adjusted annually. The note is secured by
the land and building and is guaranteed
by the Company's president. $1,224,527 $1,238,230
Due in monthly installments of $5,755,
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. The note
is secured by the Company's land and
building and is guaranteed by the
Company's president. 162,261 212,588
See independent auditors' report.
-14-
Page 46 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
3. LONG TERM DEBT (Continued)
1997 1996
------------ ----------
8% notes payable to a former
stockholder's estate, due in monthly
installments of $10,616, including
interest, through February 2005
Beginning November 1, 1997 such payments
increased to $12,616. One note for
$189,643 is unsecured and subordinated to
all other debt whereas the other note for
$521,261 is secured by a fourth trust
deed on the Company's building and land. 710,904 778,462
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. 24,241 35,923
10% imputed interest liability to an
individual, due in monthly installments
of $3,000, including interest,
through December 1998. 41,222 71,438
Capitalized lease obligation (see note 4) 242,583 234,611
Other notes payable 25,027 28,865
---------- ----------
2,430,765 2,600,117
Less current portion of
long-term debt 194,857 181,783
---------- ----------
Long-term debt, excluding
current portion $2,235,908 $2,418,334
========== ==========
A summary of long-term debt maturities excluding capitalized lease
obligation (see note 4) are: 1998; $203,355; 1999; $184,299; 2000
$1,326,655; 2001 $94,127; 2002 $100,652; and thereafter $279,094.
In June 1995, the Company refinanced 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
See independent auditors' report.
-15-
Page 47 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
3. LONG TERM DEBT (Continued)
refinanced notes in long-term debt and has recorded notes 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, 1997 and
1996, is $436,320 and $449,497, respectively. These notes receivable are
due in monthly installments of approximately $4,500 and bear interest at
the same rates prevailing on the debt. These notes receivable are
recorded against the capitalized lease obligation.
4. CAPITALIZED LEASE OBLIGATION
The Company leases 33% of a building from its president, 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, 1997:
Year ending September 30,
-------------------------
1998 $ 100,068
1999 100,068
2000 100,068
2001 100,068
2002 100,068
Thereafter 1,584,410
-----------
Total minimum lease payments 2,084,750
Amounts representing interest at 10% 1,209,750
-----------
Present value of minimum lease payments 875,000
Discount on capitalized lease obligation 196,097
-----------
678,903
Less notes from stockholder with right
of offset (see note 3). 436,320
-----------
$ 242,583
===========
See independent auditors' report.
-16-
Page 48 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
5. 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 allowed 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. At December 31, 1996, 102,383 unexercised Class A
warrants expired.
One Class B warrant allows for the purchase of one share of common stock
for $3.00 per share until December 31, 1998.
A summary of the activity of Class A and Class B stock warrants is as
follows:
Class A Class B
Warrants Warrants
-------- --------
Outstanding, October 1, 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
Warrants exercised (204,218) --
Warrants expired (102,383) --
-------- --------
Outstanding, September 30, 1997 -0- 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.
See independent auditors' report.
-17-
Page 49 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY (Continued)
In 1995, stock options to purchase 80,000 shares of the Company's stock
were granted to members from 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 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. In February 1997, 50,000 options were issued to
board members who served a full year. These options were granted at an
exercise price of $1.96.
Stock Option Compensation
-------------------------
The Company has an option plan with three of its officers and one
minority stockholder/consultant. Under this plan, the Company granted
options to these individuals as follows:
1997 60,000 shares
1996 80,000 shares
1995 120,000 shares
1994 40,000 shares
1993 40,000 shares
These options expire on the earlier of the date the officers are
terminated for cause or one year after the date the officers leave
employment of the Company, in the case of two of the officers (200,000
shares), January 2005 in the case of the third officer (60,000 shares)
and five years from the date of the option grant, in the case of the
minority stockholder/consultant (80,000 shares). In September 1997, one
of the officers (80,000 shares) passed away, fixing the expiration date
of his options at September 1998.
See independent auditors' report.
-18-
Page 50 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY (Continued)
A summary of the status of the Company's stock option plan as of
September 30, 1997, 1996 and 1995, and changes during the years ending
on those dates is as follows:
1995 1996 1997
--------------- --------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ -------
Outstanding and
exercisable at the
beginning of year 80,000 0.67 200,000 0.88 280,000 0.99
Granted 120,000 1.03 80,000 1.24 60,000 1.89
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
------- ---- ------- ---- ------- ----
Outstanding and
exercisable at the
end of year 200,000 0.88 280,000 0.99 340,000 1.14
Weighted average grant-date fair value of options granted during the
years ending September 30, 1997, 1996 and 1995 are as follows:
1997 $ 1.42
1996 $ 0.25
1995 $ 0.13
The following table summarizes information about stock options
outstanding and exercisable at September 30, 1997:
Number Weighted Weighted
Number Outstanding Average Average
Range of Outstanding with Expiration Remaining Exercise
Exercise Prices At 9/30/97 Date Determined Contractual Life Price
- --------------- ----------- --------------- ---------------- ---------
0.50 40,000 -0- N/A 0.50
0.75 to 1.62 280,000 220,000 3.4 years 1.14
2.56 20,000 -0- N/A 2.56
----------- ----------
340,000 1.14
See independent auditors' report.
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Page 51 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY (Continued)
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 1997, 1996 and 1995 $85,492, $19,900 and
$15,700, respectively, was recorded as compensation expense and
contributed capital in the accompanying financial statements.
Statement of Financial Accounting NO. 123, "Accounting for Stock-Based
Compensation," requires companies to measure employee stock compensation
plans based on the fair value method of accounting. However, the
statement allows the alternative of continued use of Accounting
Principles Board (APB) Opinion No. 25., "Accounting for Stock Issued to
Employees," with pro-forma disclosure of net income and earnings per
share determined as if the fair value based method had been applied in
measuring compensation cost. The Company has elected the alternative of
continued use of APB No. 25. Had the compensation cost for the Company
stock-based compensation plans been determined based on the fair market
value at the grant dates for awards under those plans consistent with
the method of Statement of Financial Accounting No. 123, the Company's
net income and earnings per share would have been reduced to the
pro-forma amounts indicated below:
1997 1996
------------ ------------
Net income As reported $ 248,295 $ 166,158
Pro-forma $ 205,385 $ 123,725
Primary earnings As reported $ .08 $ .06
per share Pro-forma $ .06 $ .04
The fair value for each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for 1997 and 1996 respectively: risk-free interest rates of
6.45 to 6.58 and 5.41 to 6.64 percent; no dividends; expected lives 2
and 3 years; and volatility of 61 and 76 percent.
See independent auditors' report.
-20-
Page 52 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY (Continued)
Stock Option Summary
--------------------
A summary of the total Company's outstanding exercisable stock options
is as follows:
Board of Consulting
Directors Officers Agreement Total
--------- -------- --------- -----
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
Granted 50,000 40,000 20,000 110,000
-------- -------- -------- --------
Outstanding,
September 30, 1997 210,000 260,000 80,000 550,000
======== ======== ======== ========
6. INCOME TAXES
The provision for income taxes charged (credited) to income for 1997,
1996 and 1995 consists of the following:
1997 1996 1995
--------- --------- ---------
Current income tax expense $136,000 $ 65,000 $ 5,725
Deferred income tax (benefit) 29,000 (27,000) (64,000)
-------- -------- --------
$165,000 $ 38,000 $(58,275)
======== ======== ========
See independent auditors' report.
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Page 53 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES (Continued)
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:
1997 1996 1995
--------- --------- ---------
Computed tax expense $ 141,000 $ 71,500 $ 117,900
Increase (decrease) in
income taxes resulting from:
Trademark amortization 5,000 4,400 4,400
Reorganization value
amortization -- 1,600 1,600
Nondeductible expenses 6,000 11,700 40,000
State income taxes, net of
federal tax benefit 46,000 12,200 20,200
Other (33,000) (1,200) (51,375)
Change in estimated tax
rate applied to
temporary differences -- -- (199,200)
Change in valuation
allowance -- (62,200) 8,200
--------- --------- ---------
$ 165,000 $ 38,000 $ (58,275)
========= ========= =========
Net deferred tax assets consist of the following components as of
September 30, 1997 and 1996:
1997 1996
--------- ---------
Current Deferred Tax Asset:
Allowance for returns $ 34,643 $ --
Inventories 72,140 81,600
Accrued compensation 24,789 18,200
Franchise tax payable 16,867 --
Loss carryforwards -- 31,300
Alternative minimum tax credits 10,075 50,000
Other assets -- 58,300
--------- ---------
158,514 239,400
--------- ---------
Non-current Deferred Tax Liability:
Equipment and leasehold improvements (4,232) (8,200)
Unrealized gain on security available-
for-sale (60,187) (20,200)
Stock options 52,433 --
--------- ---------
(11,986) (28,400)
--------- ---------
$ 146,528 $ 211,000
========= =========
See independent auditors' report.
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Page 54 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
7. 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 with an
original term of 60 months, and was extended until a new contract is
negotiated. The employment agreement 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 1997, 1996, and 1995 is $25,366,
$0, and $39,409, respectively.
The Company has an employment agreement with the chief financial
officer/assistant secretary-treasurer of the Company. The employment
agreement commenced June 8, 1992 and continues to June 8, 1998.
Consulting Agreements
---------------------
In 1996, the Company renewed a consulting agreement with a stockholder
which expires in May 1999. The agreement requires minimum monthly
payments of $1,500 and annual grants of stock options (see note 5). The
Company's payments for consulting fees to this stockholder for 1997,
1996, and 1995 totaled $50,550, $37,625 and $48,700, respectively.
Operating Leases
----------------
The Company rents various equipment under noncancelable operating
leases. The total minimum rental commitments at September 30, 1997 under
these leases for the respective years ending September 30 are: 1998
$43,926; 1999 $38,192; 2000 $29,357; 2001 $13,212 and 2002 $1,890.
Rent expense for 1997, 1996 and 1995 totaled $51,088, $55,000, and
$168,000, respectively. Rent expense for 1997, 1996 and 1995 includes
rent expense to related parties (a partnership owned by significant
stockholder and former stockholder) of $0, $0 and $100,072,
respectively.
Legal Matter
------------
The Company is one of four defendants in adversary proceedings initiated
by the Trustee in the Chapter 7 Bankruptcy case of Performance
Nutrition, Inc. (PNI) on October 3, 1997.
The Trustee alleges, in substance, that the defendants improperly
wrested control of PNI's board of directors in August, 1996 and
bankrupted PNI through alleged acts of malfeasance, self-dealing and a
conspiracy to transfer the assets to the Company. The Trustee has
asserted several claims against the Company and the other defendants.
The Trustee seeks unspecified damages and exemplary damages of not less
than $10,000,000.
See independent auditors' report.
-23-
Page 55 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued)
The Company has categorically denied the Trustee's allegations and has
moved to dismiss the Trustee's complaint on the basis of legal and
factual insufficiency of the claims with respect to the Company, lack of
standing as to corporate governance issues, and on other grounds. The
Company has also filed a counterclaim for its attorneys' fees and
expenses.
According to management, the Company's relationship with PNI was limited
to that of vendor/customer, and the Company had no role whatsoever in
PNI's management. The Company later purchased certain of PNI's general
intangibles, including its trademarks, trade names and formula from the
successful bidder at a bankruptcy sale which was conducted by the
Trustee and approved by the bankruptcy court (see notes 9 and 10).
The Company intends to vigorously contest the Trustee's claims. It has
further moved for a stay of discovery in the case pending a ruling on
its motion to dismiss the Trustee's claims. In management's opinion, the
outcome of this litigation will not have a material adverse impact on
the Company's financial position.
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 note 3).
The Company allocated the purchase price between the stock and the
property based on the relative fair values of the assets purchased.
8. MAJOR CUSTOMER
During 1997, 1996 and 1995 the Company had sales to a customer in excess
of 10% of Company's total net sales. Sales to this customer were
approximately 24%, 27% and 22% for 1997, 1996 and 1995, respectively.
Accounts receivable from this customer were approximately $393,000 and
$287,000 at September 30, 1997 and 1996, respectively.
9. STATEMENT OF CASH FLOWS INFORMATION
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 independent auditors' report.
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Page 56 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
9. STATEMENT OF CASH FLOWS INFORMATION (Continued)
(see note 7); 85,000 shares of its restricted common stock and 60,000
stock options (see note 5) were issued in settlement of accrued
compensation of 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 (see note 12).
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.
During 1997, the Company issued 500,000 shares of its common stock to
acquire intangibles (see note 10).
10. ACQUISITION OF INTANGIBLES
In June 1997, the Company purchased trademark names, customer list,
formulas to produce the trademark names, and the Corporate name
"Performance Nutrition, Inc." by issuing 500,000 shares of its common
stock valued at $1,014,000. These intangible assets were acquired from a
wholly-owned subsidiary of Dallas Gold & Silver Exchange, Inc., a
significant shareholder of the Company which had acquired the assets for
cash in June of 1997. The Company determined that the assets acquired
did not constitute a business. Total intangibles acquired during the
year ending September 30, 1997 have been valued and recorded at
$1,055,218, of which $1,014,000 was recorded through the issuance of
common stock. The Company believes these intangibles will generate
future benefit to the business, and amortizes these intangibles over a
25 year period.
11. GEOGRAPHIC SEGMENT DATA
The Company exports products to several international customers. A
summary of net sales, summarized by geographic areas, is as follows:
See independent auditors' report.
-25-
Page 57 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
11. GEOGRAPHIC SEGMENT DATA (Continued)
Saudi Other
Domestic Arabia Korea Int'l Total
-------- ------ ----- ----- -----
Net sales for
the years
ended Sept-
ember 30:
1997 $11,625,539 $ 157,956 $ 224,525 $ 570,399 $12,578,419
1996 $ 9,403,139 $ -0- $ 431,593 $ 270,800 $10,105,532
1995 $ 8,366,226 $ 839,124 $ 547,555 $ 341,835 $10,094,740
12. 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
utilized linearly polarized 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 $28,260 which was recorded in 1997,
1996 and 1995 with a charge to the investment of $10,000, $10,000 and
$8,260, respectively.
At September 30, 1997 and 1996, the Company's recorded investment in the
joint venture is $62,128 and $62,891, respectively, and is included in
other assets in the Company's balance sheet.
An asset transfer agreement and plan of liquidation and dissolution was
executed by the partners of DermaRay International, LLC in June 1997.
Per the agreement, the joint venture should be dissolved within the next
See independent auditors' report.
-26-
Page 58 of 113
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
12. JOINT VENTURE (Continued)
twelve months. The management does not believe it will have a material
adverse impact on the Company's financial position.
During 1995, the Company purchased $30,000 of inventory from Harrier.
The Company also rented a portion of its building to the joint venture
under a month-to-month operating lease which ended April 30, 1997. The
total rental income in 1997, 1996 and 1995 was $17,500, $21,000 and
$14,000, respectively.
13. SUBSEQUENT EVENTS
On October 17, 1997, the Company entered into a term sheet with Health
Holdings, according to which Health Holdings will purchase 2,858,473
shares of the Company's stock, and warrants for the acquisition of
additional shares in order to provide Health Holdings with at least 55%
of the Company's stock. From the 2,858,473 shares to be purchased,
2,000,000 will be newly issued stock for total proceeds of $6,000,000
($3.00 a share), and 858,473 will be purchased from the majority
stockholders. The warrants will become exercisable with any issuance of
the Company's new stock in order to guarantee Health Holdings with at
least 55% of the Company's stock. The warrants will expire ten years
after their issuance. The exercise price of the warrants will be equal
to the average exercise price of any newly issued stock to a third
party, which triggers the right to exercise the warrants. The warrants
will also become exercisable upon the occurrence of a Control Event, as
defined. Pursuant to the term sheet, an affiliated company of Health
Holdings will render consulting service for $300,000 per year.
See independent auditors' report.
-27-
Page 59 of 113
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit Page
Number Description Number
- --------------------------------------------------------------------------------
2 Stock Purchase Agreement, dated as of December N/A
15, 1997 (the "Stock Purchase Agreement"), by and
among the Company, Allan Schulman, L.S. Smith,
Dallas Gold & Silver Exchange, Inc. ("DGSE"),
Barry M. Zwick and Health Holdings and Botanicals,
Inc. ("HHB"), incorporated by reference to the
Company's Current Report on Form 8-K filed on
December 23, 1997.
3.1 Certificate of Incorporation of Naturade, Inc., 63
together with Amendments and Certificate of
Designations relating thereto.
3.2 Bylaws of Naturade, Inc., as Amended. 74
4.1 Registration Rights Agreement, dated as of December N/A
15, 1997, by and between the Company and HHB,
incorporated by reference to the Company's Current
Report on Form 8-K as filed on December 23, 1997.
4.2 Form of Series A Convertible Preferred Stock Certificate. 87
4.3 Form of Class B Warrant Certificate, incorporated by N/A
reference to the Company's Form 10-K Annual Report
filed for Fiscal 1991 and the Exhibits and Attachments
thereto.
10.1 Consulting Agreement, dated as of December 12, 1997, N/A
by and between the Company and Doyle & Boissiere LLC,
incorporated by reference to the Company's Current
Report on Form 8-K filed December 23, 1997.
10.2 Mutual Option Agreement, dated as of December 15, N/A
1997, by and between the Company and Allan Schulman,
incorporated by reference to the Company's Current
Report on Form 8-K as filed December 23, 1997.
10.3 Employment, Consulting and Non-Competition Agreement, N/A
dated as of December 12, 1997, by and between the
Company and Allan Schulman, incorporated by reference
to the Company's Current Report on Form 8-K as filed
December 23, 1997.
10.4 Form of Option Agreement for Purchase of Naturade, N/A
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.
Page 60 of 113
<PAGE>
10.5 Option Agreement for Purchase of Naturade, Inc. N/A
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.
10.6 Option Agreement for Purchase of Common Stock of 88
Naturade, Inc., for Michael Fernicola, dated
March 15, 1996.
10.7 Form of Broker Agreement between NPI and Domestic N/A
Brokers, incorporated by reference to the Company's
Form 10-K Annual Report filed for Fiscal 1991
and the Exhibits and Attachments thereto.
10.8 Consulting Agreement with Dr. L.S. Smith, N/A
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.
10.9 Addendum to Consulting Agreement with L.S. Smith 96
dated as of November 13, 1996.
10.10 Amendment to Employment Contract with Paul Shapnick, N/A
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.
10.11 DermaRay International L.L.C. Limited Liability N/A
Company Agreement, incorporated by reference to
the Company's Form 10-K Annual Report filed for
Fiscal 1994 and the Exhibits and Attachments thereto.
10.12 Amendment dated May 2, 1995 to Agreement For N/A
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.
10.13 Open Line of Credit with South Bay Bank, N/A
incorporated by reference to the Company's
Form 10-K Annual Report filed for Fiscal 1995
and the Exhibits and Attachments thereto.
10.14 Open Line of Credit with South Bay Bank dated 97
as of February 21, 1997, in the principal amount
of $1,200,000.
10.15 Open Line of Credit with South Bay Bank dated 99
as of September 24, 1997, in the principal amount
of $1,500.000.
Page 61 of 113
<PAGE>
10.16 Exclusive License and Distributorship Agreement N/A
dated August 14, 1995 with Group Michel Iderne,
incorporated by reference to the Company's
Form 10-K Annual Report filed for Fiscal 1995
and the Exhibits and Attachments thereto.
10.17 Product Development and Promotion Agreement dated N/A
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.
10.18 Settlement Agreement with Neal D'Agostino dated N/A
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.
10.19 Lease Agreement between NPI and Messrs. Schulman N/A
and Becker, incorporated by reference to the
Company's Form 10-K Annual Report filed for Fiscal
1991 and the Exhibits and Attachments thereto, and
the First Amendment to Lease, dated as of December
15, 1997, by and among Allan Schulman and the
Registrant (collectively as landlord) and the
Company (as tenant), incorporated by reference
to the Company's Current Report on Form 8-K as
filed December 23, 1997.
10.20 Asset Transfer Agreement and Plan of Liquidation 101
and Dissolution, dated as of June 30, 1997, by
and among Harrier, Inc., a Delaware corporation,
the Company and DermaRay International, L.L.C.,
a California limited liability company.
23.1 Consent of Rose, Snyder & Jacobs, dated
December 23, 1997. 111
23.2 Consent of McGladrey & Pullen, LLP, dated
December 23, 1997. 112
27. Financial Data Schedule. 113
Page 62 of 113
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
SPRINGTON CAPITAL CORP.
THE UNDERSIGNED, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
1. The name of the corporation is:
SPRINGTON CAPITAL CORP.
2. The address of the registered office of the corporation in the State of
Delaware is:
11th Floor Rodney Square North
11th & Market Streets
Wilimington, DE 19899
New Castle County
3. The registered agent in charge thereof is:
Corporation Guarantee and Trust Company
4. The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
5. The corporation is authorized to issue capital stock to the extent of:
Fifty Million (50,000,000) shares with a par value of $.001 per share.
6. The Board of Directors is authorized and empowered to make, alter,
amend and rescind the By-Laws of the corporation, but By-Laws made by the Board
may be altered or repealed, and new By-Laws made, by the stockholders.
7. The corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have
-1-
Page 63 of 113
<PAGE>
power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
8. Election of directors need not be by written ballot unless so provided
in the By-Laws of the corporation.
9. Except as otherwise required by statute, the books and records of the
corporation may be kept outside of the State of Delaware, at such place or
places as provided in the By-Laws of the corporation or from time to time
designated by the Board of Directors.
10. The name and address of the incorporator is as follows:
NAME ADDRESS
R.W. Worthington, 105 N. Watts Street, Philadelphia, PA 19107
IN WITNESS WHEREOF, the incorporator has hereunder set his hand and seal
this nineteenth day of February, A.D. 1986.
/s/ R.W. Worthington
------------------------------
R.W. Worthington
-2-
Page 64 of 113
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
SPRINGTON CAPITAL CORP.
Pursuant to the provisions of the Delaware General Corporation Law,
SPRINGTON CAPITAL CORP. adopts the following Certificate of Amendment to its
Certificate of Incorporation:
FIRST: The name of the Corporation in SPRINGTON CAPITAL CORP.
SECOND: The following amendment to the Certificate of
Incorporation of the Corporation was adopted by resolution provided by the
shareholders on the 10th day of April, 1989, in the manner prescribed by the
Delaware General Corporation Law:
Paragraphs 1 and 5 of the Certificate of Incorporation, as amended,
of SPRINGTON CAPITAL CORP. are hereby repealed and amended by substitution of
the following paragraphs 1 and 5:
1. The name of the corporation is NATURADE, INC.
5. The aggregate number of shares which the Corporation shall have
authority to issue is Fifty Million (50,000,000) shares of common stock,
par value $.0001 each.
THIRD: The date of adoption of the amendments by the
shareholders was April 10, 1989. The date of adoption of the amendments by the
Board of Directors was April 10, 1989.
FOURTH: The number of shares voted for the amendment by the
holders of the outstanding shares of common stock was sufficient for the
approval of the amendments.
FIFTH: The manner in which any exchange, reclassification or
cancellation of issued shares provided for in the amendments shall be effected
as follows: The present holders of one (1) share of common stock of $.001 par
value, will be exchanged for .05 shares of common stock of $.001 par value.
SIXTH: The manner in which such amendments effect a change in the
amount of stated capital and the amount of stated capital changed by such
amendments is as follows: The amount of stated capital is being reduced from
$50,000 to $5,000.
-1-
Page 65 of 113
<PAGE>
IN WITNESS WHEREOF the Corporation has caused this Certificate of
Amendment to the Certificate of Incorporation to be executed this 11th day of
April, 1989.
SPRINGTON CAPITAL CORP.
a Delaware corporation
By: /s/ Michael L. Anderson
----------------------------
Michael L. Anderson
President
ATTEST:
/s/ Travis G. Miller
- --------------------------
Travis G. Miller, Secretary
THE STATE OF TEXAS ss.
ss.
COUNTY OF DALLAS ss.
BEFORE ME, the undersigned authority, a Notary Public in and for the
State of Texas, on this day personally appeared Michael L. Anderson, President
of SPRINGTON CAPITAL CORP., a Delaware corporation, known to me to be the person
and officer whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same as a duly authorized officer of
such corporation, and as the act and deed of such corporation, for the purposes
and consideration therein expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 11th day of
April, 1989
/s/ Kathleen Mann
---------------------------------
Notary Public, State of Texas
Kathleen Mann
---------------------------------
(Printed/Typed Name of Notary)
My Commission Expires:
August 28, 1989
- -------------------
-2-
Page 66 of 113
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NATURADE, INC.
NATURADE, INC., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in the General Corporation
Law of the State of Delaware, (a) the Board of Directors, by unanimous written
consent in accordance with Section 141 of the General Corporation Law of the
State of Delaware, duly adopted resolutions setting forth the following
amendment to the Certificate of Incorporation of the Corporation, declaring the
advisability of such amendment and calling for such amendment to be put before
the stockholders entitled to vote thereon and (b) stockholders of the
Corporation holding approximately 54% of the outstanding shares of the
Corporation and constituting more than the minimum number of votes that would be
necessary to authorize or take action at a meeting at which all shares entitled
to vote were present and voted, by written consent in accordance with Sections
228 and 242 of the General Corporation Law of the State of Delaware, approved
the following amendment replacing the existing Paragraph 5 of such Certificate
of Incorporation:
"5. The aggregate number of shares which the Corporation shall have
authority to issue is Fifty Million (50,000,000) shares of common stock,
par value $.0001 each, and Two Million (2,000,000) shares of preferred
stock, par value $.0001 each. Shares of the Preferred Stock may be issued
from time to time in one or more series. The Board of Directors of the
Corporation is hereby expressly authorized to establish and designate one
or more series of the Preferred Stock, to fix the number of shares
constituting each series, and to fix the designations and the powers,
preferences, qualifications, limitations, restrictions and dividend,
conversion, redemption, distribution, liquidation, special voting and
other rights of the shares of each series and the variations of the
relative powers, rights, preferences, qualifications, limitations and
restrictions as between series, and to increase and to decrease (but not
below the number of shares of such series then outstanding) the number of
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<PAGE>
shares constituting each such series. Such determinations may be fixed
by a resolution or resolutions adopted by the Board of Directors."
IN WITNESS WHEREOF, the Corporation has caused this Certificate to
be signed by its duly authorized officer this 11th day of December, 1997.
NATURADE, INC.
By /s/ Allan Schulman, President
---------------------------------
Allan Schulman, President
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<PAGE>
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
NATURADE, INC.
NATURADE, INC., a Delaware corporation (the "Company"), pursuant to
Section 151 of the General Corporation Law of the State of Delaware, does hereby
make this Certificate of Designations and does hereby state and certify that
pursuant to the authority expressly vested in the Board of Directors of the
Company by the Certificate of Incorporation of the Company, the Board duly
adopted the following resolutions:
WHEREAS, the Board of Directors of the Corporation is authorized,
within the limitations and restrictions stated in the Certificate of
Incorporation, to fix by resolution or resolutions the designation of each
series of Preferred Stock, par value $.0001 per share (the "Preferred Stock"),
and the rights, preferences, privileges and restrictions thereof, including,
without limiting the generality of the foregoing, such provisions as may be
desired concerning voting, dividends, conversion, dissolution or the
distribution of assets, and such other subjects or matters as may be fixed by
resolution or resolutions of the Board of Directors under the Delaware General
Corporation Law; and
WHEREAS, it is the desire of the Board of Directors of the
Corporation, pursuant to its authority as aforesaid, to authorize and fix the
terms of a series of Preferred Stock and the number of shares constituting such
series;
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such
number and series of Preferred Stock on the terms and with the provisions herein
set forth:
A. Designation of Series and Number of Shares. The designation of
the series of Preferred Stock authorized by this resolution shall be "Series A
Convertible Preferred Stock" (the "Series A Preferred Stock"). The total number
of shares of Series A Preferred Stock authorized hereby shall be 1,500,000.
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B. Voting. Each share of Series A Preferred Stock which at any time
becomes convertible into common stock of the Corporation ("Common Stock") as
provided in paragraph (F) below shall at all times thereafter entitle the holder
thereof to one (1) vote on all matters submitted to a vote of the shareholders;
it being understood for the avoidance of doubt, that upon the occurrence of a
Control Event, each share of Series A Preferred Stock shall immediately and at
all times thereafter entitle the holder thereof to one (1) vote on all matters
submitted to a vote of the shareholders. Except as otherwise provided in the
immediately preceding sentence or by applicable law, shares of Series A
Preferred Stock shall not entitle the holder thereof to any vote. Except as
otherwise required by law, with respect to all matters upon which shareholders
are entitled to vote, the holders of the Series A Preferred Stock and the
holders of the Common Stock shall vote together as a single class.
"Control Event" means the occurrence of any of the following: (i)
the acquisition by a Person, other than Doyle & Boissiere LLC, a Delaware
limited liability company (D&B") or its Affiliate (as defined in Rule 12b-2 of
the regulations promulgated under the Securities Exchange Act of 1934, as
amended), of at least 15% of the Common Stock then outstanding, (ii) any merger,
consolidation or liquidation of the Corporation or in which the Corporation is a
party, in each case into or with a Person other than D&B or its Affiliate (as
defined under Rule 12b-2 under the Securities Exchange Act of 1934, as amended),
(iii) the sale of all or a substantial portion of all of the assets of the
Corporation to a Person other than D&B or its Affiliate, or (iv) the completion
of one or more offerings of the Corporation's securities registered under the
Securities Act of 1933, as amended, the aggregate gross proceeds of which
offering(s) are at least $10,000,000.
"Existing Option" means each warrant option, contract or similar
right of or granted by the Corporation (other than the Series A Preferred Stock)
to purchase Common Stock from the Corporation, which warrant, option, contract
or similar right is outstanding on November 21, 1997.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
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<PAGE>
C. Liquidation Preference. In the event the Corporation shall be
Liquidated (as defined below) whether voluntarily or involuntarily, after there
shall have been paid or set aside for the holders of any shares of Preferred
Stock which are senior in rights of liquidation to the Series A Preferred Stock
the full preferential amounts to which such holders are entitled under the terms
of such Preferred Stock, the holders of each share of Series A Preferred Stock
shall be entitled to receive an amount equal to $0.0001 (the "Preferred
Liquidation Preference") for each share of Series A Preferred Stock owned by
such holder prior to the distribution of any amount to the holders of the Common
Stock. After the holders of the Series A Preferred Stock shall have received the
full Preferred Liquidation Preference, the holders of Common Stock shall be
entitled to receive the net assets of the Corporation. The Corporation shall be
deemed to have been "Liquidated" upon the occurrence of (i) any sale by the
Corporation of all or substantially all its assets, and (ii) any liquidation,
dissolution or winding up, merger, consolidation or reorganization of the
Corporation; provided, immediately after the consummation of such merger,
consolidation or reorganization. more than fifty per cent (50%) of the voting
rights of the Corporation (or other surviving corporation are not held by
Persons holding voting rights in the Corporation immediately prior to such
merger, consolidation or reorganization. No sale of assets, merger,
consolidation or reorganization not described under clauses (i) and (ii) above
shall be considered to be a Liquidation.
D. Dividends. The holders of Series A Preferred Stock shall not be
entitled to receive any (i) cash dividends or other cash distributions which may
from time to time be declared by the Board of Directors (except as provided
under paragraph (C) above), or (ii) stock dividends (except as provided in
paragraph E) below).
E. Reorganization. If the Corporation shall in any manner split,
subdivide or combine the outstanding shares of Common Stock, the outstanding
shares of Series A Preferred Stock shall be proportionally split, subdivided or
combined in the same manner and on the same basis as the outstanding shares of
Common Stock. In the event any distribution or dividend in the form of shares of
Common Stock is made to the holders of shares of Common Stock, a distribution or
dividend in the form of shares of Series A Preferred Stock shall made to the
holders of Series A Preferred Stock in the same ratio.
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<PAGE>
F. Conversion. Immediately upon each purchase from the Corporation
of each additional forty-five (45) shares of Common Stock pursuant to any
exercise of Existing Options, the Corporation shall permanently assign a
Conversion Price (determined as provided below) to an additional fifty-five (55)
shares of Series A Preferred Stock and shall notify the holders of all Series A
Preferred Stock of such assignment. Each share of Series A Preferred Stock so
assigned a Conversion Price shall immediately become and thereafter remain
convertible at any time, at the option of the holder thereof, into one (1) fully
paid and nonassessable share of Common Stock; provided, the holder of such share
of Series A Preferred Stock pays the Corporation the Conversion Price assigned
to such share of Series A Preferred Stock. If at any time such an assignment of
the Conversion Price is to be made, there shall be more than one holder of
Series A Preferred Stock, Conversion Prices shall be allocated among such
holders by the Corporation in a reasonable manner which is, as nearly as
practicable, equal and ratable in proportion to their respective holdings of
Series A Preferred Stock. Any such reasonable allocation by the Corporation
shall be dispositive.
The Conversion Price of any Series A Preferred Stock to be converted
may be paid in cash or, at the option of the holder of the Series A Preferred
Stock to be convened, on a "cashless" basis as follows: Each share of Series A
Preferred Stock, whether or not then-convertible, shall have a deemed value
equal to the excess (if any) of the Current Market Price of a share of Common
Stock determined as of the date of conversion over the Conversion Price of the
share of Series A Preferred to be converted. Such deemed value may be applied,
by surrender of such share of Series A Preferred Stock to the Corporation,
towards the payment of the Conversion Price of the share of Series A Preferred
Stock to be converted. Upon any conversion or surrender of a share of Series A
Preferred Stock, such share shall cease to be outstanding, and shall have no
further rights hereunder.
"Conversion Price" means a price assigned to each of fifty-five (55)
shares of Series A Preferred Stock upon each purchase of forty-five (45) shares
of Common Stock from the Corporation pursuant to exercise of Existing Options,
which assigned price shall equal the average exercise price of such
corresponding forty-five (45) shares of Common Stock so purchased upon exercise
of Existing Options, provided, that upon the occurrence of a Control Event, each
share of Series A Preferred Stock not then previously assigned a Conversion
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Price shall be permanently assigned the Conversion Price of $1.45 per share,
and, provided, further, that the Conversion Price shall be adjusted pursuant to
the anti-dilution rights described in this Certificate.
"Current Market Price" of a share of Common Stock means, as of any
date of determination, the average of the closing bid prices for Common Stock on
the NASDAQ OTC Bulletin Board, or other principal securities exchange or market
on which the Common Stock shall then be traded, for the twenty trading days
prior to such date of determination.
G. Redemption of Series A Preferred Stock. Upon each additional
termination of Existing Options to purchase forty-five (45) shares of Common
Stock prior to the exercise thereof, the Corporation shall immediately determine
fifty-five (55) additional shares of Series A Preferred Stock which shall become
redeemable at any time thereafter, at the option of the Corporation, at a
redemption price of $0.01 per share; provided, however, anything to the contrary
appearing herein notwithstanding, no share of Series A Preferred Stock which at
any time becomes convertible hereunder shall at any time thereafter become
redeemable pursuant to this paragraph (G). If at any time such a Determination
of redeemability is to be made there shall be more than one holder of Series A
Preferred Stock, redeemability shall be allocated among such holders by the
Corporation in a reasonable manner which is, as nearly as practicable, equal and
ratable in proportion to their respective holdings of then non-convertible
Series A Preferred Stock. Any such reasonable allocation by the Corporation
shall be dispositive.
IN WITNESS HEREOF, the undersigned has caused this Certificate of
Designations to be duty executed by its President this 11th day of December,
1997.
NATURADE, INC
By /s/ Allan Schulman
------------------------------
Allan Schulman, President
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<PAGE>
EXHIBIT 3.2
NATURADE, INC.
(formerly)
SPRINGTON CAPITAL CORP.
BY-LAWS
ARTICLE I - OFFICES
Section 1. The registered office of the corporation in the State of
Delaware shall be at 11th Floor, Rodney Square North, 11th & Market Streets,
Wilmington, Delaware, 19899.
The registered agent in charge thereof shall be the Corporation Guarantee
and Trust Company.
Section 2. The corporation may also have offices at such other places as
the Board of Directors may from time to time appoint or the business of the
corporation may require.
ARTICLE II - SEAL
Section 1. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware."
ARTICLE III - STOCKHOLDERS' MEETINGS
Section 1. Meetings of stockholders shall be held at the registered office
of the corporation in this state or at such place, either within or without this
state, as may be selected from time to time by the Board of Directors.
Section 2. Annual Meetings: The annual meeting of the stockholders shall
be held on the 15th day of February in each year if not a legal holiday, and if
a legal holiday, then on the next secular day following at 10 o'clock A.M., when
they shall elect a Board of Directors and transact such other business as may
properly be brought before the meeting. If the annual meeting for election of
directors is not held on the date designated therefor, the directors shall cause
the "meeting to be held at such time thereafter as is convenient."
Section 3. Election of Directors: Elections of the directors of the
corporation shall be by written ballot.
Section 4. Special Meetings: "Special meetings of the stockholders may be
called at any time by the President, a majority of the members of the Board of
Directors or one or more stockholders holding shares that in the aggregate are
entitled to cast no more than 10% of the votes at that meeting." At any time,
upon written request of any person or persons who have duly called a special
meeting, it shall be the duty of the Secretary to fix the date of the meeting,
to be held not more than sixty days after receipt of the request, and to give
due notice thereof. If the Secretary shall neglect or refuse to fix the date of
the meeting and give notice thereof, the person or persons calling the meeting
may do so.
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Business transacted at all special meetings shall be confined to the
objects stated in the call and matters germane thereto, unless all stockholders
entitled to vote are present and consent.
Written notice of a special meeting of stockholders stating the time and
place and object thereof, shall be given to each stockholder entitled to vote
thereat not less 10 nor more than 60 days before such meeting, unless a greater
period of notice is required by statute in a particular case.
Section 5. Quorum: A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
entitled to vote is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
Section 6. Proxies: Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally. All
proxies shall be filed with the Secretary of the meeting before being voted
upon.
Section 7. Notice of Meetings: Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called.
Unless otherwise provided by law, written notice of any meeting shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting.
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Section 8. Consent in Lieu of Meetings: Any action required to be taken at
any annual or special meeting of stockholders of a corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 9. List of Stockholders: The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
No share of stock upon which any installment is due and unpaid shall be voted at
any meeting. The list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 10. Voting. At all meetings of the stockholders, every registered
owner of shares entitled to vote may vote in person or by proxy and shall have
one vote for each such share standing in his name on the books of the
Corporation. At all elections of directors, the voting shall be by ballot. The
Board of Directors, or, if the Board shall not have made the appointment, the
chairman presiding at any meeting of stockholders, shall have the power to
appoint two or more persons to act as inspectors or tellers, to receive,
canvass, and report the votes cast by the stockholders at such meeting; but no
candidate for the office of director shall be appointed as inspector or teller
at any meeting for the election of directors.
Section 11. Chairman of meeting: The President, or in his absence, a Vice
President shall preside at all meetings of the stockholders; and, in the absence
of the President and Vice President, the Board of Directors may appoint any
stockholder to act as chairman of the meeting.
Section 12. Secretary of meeting: The Secretary of the Corporation shall
act as secretary of all meetings of the stockholders; and, in his absence, the
chairman may appoint any person to act as secretary of the meeting.
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ARTICLE IV - DIRECTORS
Section 1. The business and affairs of this corporation shall be managed
by its Board of Directors consisting of at least 5 and no more than 7 directors.
The directors need not be residents of this state or stockholders in the
Corporation. They shall be elected by the stockholders at the annual meeting of
stockholders of the corporation, and each director shall be elected for the term
of one year, and until his successor shall be elected and shall qualify or until
his earlier resignation or removal. The majority of the Board may appoint a
Chairman who shall preside at all meetings of the Board and shall perform such
other duties as may be prescribed hereunder or from time to time by the Board of
Directors.
Section 2. Annual Meetings: The annual meeting of the Board of Directors,
of which no notice shall be necessary, shall be held immediately following the
annual meeting of the stockholders or immediately following any adjournment
thereof for the purpose of the organization of the Board and the election or
appointment of officers for the ensuing year and for the transaction of such
other business as may conveniently and properly be brought before such meeting.
Section 3. Regular Meetings: Regular meetings of the Board shall be held
on February 15, May 15, August 15, and November 15 of each year, (or if any such
day shall fail on a legal holiday or a Saturday or Sunday, then on the next
business day), at such place and at such hour as may from time to time be fixed
by the Board, "or on such other day as may be set from time to time by the Board
of Directors." Written notice of regular meetings of the Board need not be given
to each director in advance of the meeting.
Section 4. Special Meetings: Special meetings of the Board of Directors
may be called by order of the Chairman of the Board, the President, or by
one-third of the directors for the time being in office. The Secretary shall
give notice of the time, place, and purpose or purposes of each special meeting
by mailing the same at least two days before the meeting or the telephoning or
telegraphing the same at least one day before the meeting to each director.
Section 5. Conduct of Meetings: At meetings of the Board of Directors, the
Chairman of the Board, the President, or a designated Vice President shall
preside. A majority of the members of the Board of Directors shall constitute a
quorum for the transaction of business, but less than a quorum may adjourn any
meeting from time to time until a quorum shall be present, whereupon the meeting
may be held, as adjourned, without further notice. At any meeting at which every
director shall be present, even though without any notice, any business may be
terminated.
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Section 6. Consent in Lieu of Meeting: Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee. The Board of
Directors may hold its meetings, and have an office or offices, outside of this
state.
Section 7. Conference Telephone: One or more directors may participate in
a meeting of the Board, of a committee of the Board or of the stockholders, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other;
participation in this manner shall constitute presence in person at such
meeting.
Section 8. Compensation: Directors as such, shall not receive any stated
salary for their services, but by resolution of the Board, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of the Board, PROVIDED, that nothing herein contained shall be
construed to preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
"Section 9. Super Majority Required
The following actions of the corporation shall require a 4/5ths majority
vote of the Board of Directors only during the period from the date of
Confirmation of the corporation's Plan of Reorganization on May 23, 1991, up to
and including one year after the reorganized Debtor's compliance with the
requirements respecting public trading of Naturade securities, as satisfied by
its filing of a Form 10-K Annual Report with the Securities and Exchange
Commission on April 10, 1992.
a. Sale or dissolution of the company or the
sale of the majority of the assets of the
company;
b. Hiring of outside consultants;
c. Employee stock options;
d. Bonus compensation;
e. Change of business/philosophy/structure;
f. Issuance of securities (other than as provided by the
Plan of Reorganization);
g. Change of classes of stock;
h. Closing of business;
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i. Filing for relief under any chapter of the Bankruptcy
Code."
ARTICLE V - OFFICERS
Section 1. The executive officers of the corporation shall be chosen by
the directors and shall be a President, Secretary and Treasurer. The Board of
Directors may also choose a Chairman, one or more Vice Presidents and such other
officers as it shall deem necessary. Any number of offices may be held by the
same person.
Section 2. Salaries: Salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
Section 3. Term of Office: The officers of the corporation shall hold
office for the term determined by the Board of Directors. Any officer or agent
elected or appointed by the Board may be removed by the Board of Directors
whenever in its judgment the best interest of the corporation will be served
thereby.
Section 4. Chairman of the Board: The Chairman of the Board of Directors
if elected, or failing his election, the President, shall preside at all
meetings of the Board of Directors and shall perform such other duties as may be
prescribed from time to time by the Board of Directors or by the By-Laws.
Section 5. President: The President shall be the chief executive officer
of the corporation; in the absence of the Chairman he shall preside at all
meetings of the stockholders and directors; he shall have general and active
management of the business of the corporation, shall see that all orders and
resolutions of the Board are carried into effect, subject, however, to the right
of the directors to delegate any specific powers, except such as may be by
statute exclusively conferred on the President, to any other officer or officers
of the corporation. He shall execute bonds, mortgages and other contracts,
requiring a seal, under the seal of the corporation. He shall be EX-OFFICIO a
member of all committees. He shall exercise such duties as customarily pertain
to the office of President, and shall have the general power and duties of
supervision and management usually vested in the office of President of a
corporation.
Section 6. Secretary: The Secretary shall attend all sessions of the Board
and all meetings of the stockholders and act as clerk thereof, and record all
the votes of the corporation and the minutes of all its transactions in a book
to be kept for that purpose, and shall perform like duties for all committees of
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the Board of Directors when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, and under whose supervision he shall be. He shall keep in safe
custody the corporate seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it.
Section 7. Treasurer: The Treasurer shall have custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation, and shall keep the moneys
of the corporation in a separate account to the credit of the corporation. He
shall disburse the funds of the corporation as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the President
and directors, at the regular meetings of the Board, or whenever they may
require it, an account of all his transactions as Treasurer and of the financial
condition of the corporation.
ARTICLE VI - VACANCIES
Section 1. Any vacancy occurring in any office of the corporation by
death, resignation, removal or otherwise, shall be filled by the Board of
Directors. Vacancies and newly created directorships resulting from any increase
in the authorized number of directors may be filled by a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director. If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of these By-Laws.
Section 2. Resignations Effective at Future Date: When one or more
directors shall resign from the Board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, shall have
the power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective.
ARTICLE VII - STOCK CERTIFICATES, DIVIDENDS, ETC.
Section 1. The stock certificates of the corporation shall be numbered and
registered in the share ledger and transfer books of the corporation as they are
issued. They shall bear the corporate seal and shall be signed by the President
(or in his absence, the Vice-President) and the Secretary (or in his absence,
the Treasurer). If certificates are signed by the Transfer Agent, acting on
behalf of the corporation, the signatures of the officers of the corporation may
be made by facsimile.
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Section 2. Transfers: Transfers of shares shall be made on the books of
the corporation upon surrender of the certificates therefor, endorsed by the
person named in the certificate or by attorney, lawfully constituted in writing.
No transfer shall be made which is inconsistent with law.
Section 3. Lost Certificate: The corporation may issue a new certificate
of stock in the place of any certificate theretofore signed by it, alleged to
have been lost, stolen or destroyed, and the corporation may require the owner
of the lost, stolen or destroyed certificate, or his legal representative to
give the corporation a bond sufficient to indemnify it against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate.
Section 4. Transfer Agent: The Board of Directors shall have power to
appoint one or more Transfer Agents and Registrars for the transfer and
registration of certificates of stock of any class, and may require that stock
certificates shall be countersigned and registered by one or more of such
Transfer Agents and Registrars.
Section 5. Record Date: In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than 60 nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any other action.
If no record date is fixed:
(a) The record date for determining stockholders entitled to notice
of or to vote at meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice
is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which
the first written consent is expressed.
(c) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
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(d) A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 6. Dividends: The Board of Directors may declare and pay dividends
upon the outstanding shares of the corporation, from time to time and to such
extent as they deem advisable, in the manner and upon the terms and conditions
provided by statute and the Certificate of Incorporation.
Section 7. Reserves: Before payment of any dividend there may be set aside
out of the net profits of the corporation such sum or sums as the directors,
from time to time, in their absolute discretion, think proper as a reserve fund
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interests of the corporation, and the
directors may abolish any such reserve in the manner in which it was created.
ARTICLE VIII - MISCELLANEOUS PROVISIONS
Section 1. Checks: All checks or demands for money and
notes of the corporation shall be signed by such officer or officers as the
Board of Directors may from time to time designate.
Section 2. Fiscal Year: The Board of Directors shall have power to fix,
and from time to time change, the fiscal year of the Corporation. Unless
otherwise designated, the calendar year shall be the fiscal year.
Section 3. Notice: Whenever written notice is required to be given to any
person, it may be given to such person, either personally or by sending a copy
thereof through the mail, or by telegram, charges prepaid, to his address
appearing on the books of the corporation, or supplied by him to the corporation
for the purpose of notice. If the notice is sent by mail or by telegraph, it
shall be deemed to have been given to the person entitled thereto when deposited
in the United States mail or with a telegraph office for transmission to such
person. Such notice shall specify the place, day and hour of the meeting and, in
the case of a special meeting of stockholders, the general nature of the
business to be transacted.
Section 4. Waiver of Notice: Whenever any written notice is required by
statute, or by the Certificate of Incorporation or the By-Laws of this
corporation a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Except in the case of a
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special meeting of stockholders, neither the business to be transacted at nor
the purpose of the meeting need be specified in the waiver of notice of such
meeting. Attendance of a person either in person or by proxy, at any meeting
shall constitute a waiver of notice of such meeting, except where a person
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting was not lawfully called or convened.
Section 5. Resignations: Any director or other officer may resign at any
time, such resignation to be in writing, and to take effect from the time of its
receipt by the corporation, unless some time be fixed in the resignation and
then from that date. The acceptance of a resignation shall not be required to
make it effective.
ARTICLE IX - ANNUAL STATEMENT
Section 1. The President and Board of Directors shall present at each
annual meeting a full and complete statement of the business and affairs of the
corporation for the preceding year. Such statement shall be prepared and
presented in whatever manner the Board of Directors shall deem advisable and
need not be verified by a certified public accountant.
ARTICLE X - AMENDMENTS
Section 1. These By-Laws may be amended or repealed by the vote of
stockholders entitled to cast at least a majority of the votes which all
stockholders are entitled to cast thereon, at any regular or special meeting of
the stockholders, duly convened after notice to the stockholders of that
purpose, "or by action of the Board of Directors as permitted in the provisions
of the corporation's Articles of Incorporation, as amended."
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Adopted 2/12/92
Bylaw amendment:
ARTICLE XI - INDEMNIFICATION OF
OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE
(a) The corporation shall have power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right
of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
(b) The corporation shall have power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement or
such action or suit if he acted in good faith and in a manner he
reasonable believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
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(c) To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b), or
in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) (unless
ordered by a court) shall be made by the corporation only as authorized in
the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b). Such determination shall be made (1) by the board
of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a
quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion,
or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in this
Section. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another
capacity while holding such office.
(g) The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity,
or arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the
provisions of this section.
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(h) For purposes of this Section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person now is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
the provisions of this Section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation
if its separate existence had continued.
(i) For purposes of this Section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit
plan and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
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EXHIBIT 4.2
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
___ _________
NATURADE, INC.
52,000,000 AUTHORIZED SHARES...$.0001 PAR VALUE
50,000,000 SHARES COMMON STOCK, 2,000,000 SHARES PREFERRED STOCK
(1,500,000 SERIES A CONVERTIBLE)
SERIES A CONVERTIBLE PREFERRED STOCK
This Certifies that ________________________________ is the registered holder
of ____________________________________________________ Shares
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this _____ day of _______________ A.D. ______.
___________________________ _________________________
PAUL D. SHAPNICK, SECRETARY ALLAN SCHULMAN, PRESIDENT
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EXHIBIT 10.6
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
September 12, 1998
September 12, 1999
September 12, 2000
The Option may be exercised at any time or from time to time, in
whole or in part, once vested until it expires.
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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
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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 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
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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.
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 shareholder
with respect to shares covered by the Option until the date of issuance of 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.
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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
------------------------------
By /s/ Paul Shapnick
------------------------------
OPTIONEE:
/s/ Michael R. Fernicola
-----------------------------------
Michael R. Fernicola
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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
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(d) The number of shares of common stock of the Company that I may
sell during any three month period may not exceed specified 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
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RULES AND REGULATIONS PROMULGATED UNDER IT AND IN ACCORDANCE WITH AN AGREEMENT
BETWEEN THE COMPANY AND THE ISSUE 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.
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
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EXHIBIT 10.9
Addendum to Consulting Agreement
That Consulting Agreement (Agreement) entered into on February 1, 1994, between
Naturade Inc. and L.S. Smith titled "Consulting Agreement" is hereby modified as
follows:
1.) At a special board meeting held on November 13, 1996, it was
unanimously agreed by the entire board to extend the "Consulting Agreement"
between Naturade Inc. and L.S. Smith for a period of three years.
2.) This Addendum hereby extends the Agreement through January 31, 2000.
3.) All other terms and conditions will remain in full force and effect.
Chairman of the Board: /S/ Allan Schulman
-------------------------------
Allan Schulman
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EXHIBIT 10.14
PROMISSORY NOTE
Renewal of 35485
$1,200,000.00 February 21, 1997
For value received, NATURADE, INC., 7110 East Jackson Street,
Paramount, California 90723, jointly and severally, promise to pay SOUTH BAY
BANK, its successors and assigns, at 2200 Sepulveda Boulevard, Torrance,
California 90501, the principal sum of ONE MILLION TWO HUNDRED THOUSAND AND
NO/100 DOLLARS ($1,200,000.00).
MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On February 21, 1997 I will receive the
amount of $_____________ and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are as
stated in the commitment letter dated February 13, 1997.
OPEN END CREDIT: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on February 1, 1998.
INTEREST: I agree to pay interest on the outstanding principal
balance from February 21, 1997 at the rate of 9.250% per year
until first change date.
VARIABLE RATE: This rate may then change as stated below:
INDEX RATE: The future rate will be 1.000% over the
following index rate: National Prime as determined by
Bank of America of California.
FREQUENCY AND TIMING: The rate on this note may change as
often as monthly. A change in the interest rate will take
effect on the first day of the month.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments: The amount of each scheduled payment
will change. The amount of the final payment will change.
ACCRUAL METHOD: Interest will be calculated on an actual/360
basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, at a rate equal to 21.00%.
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LATE CHARGE: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of 6% of the required monthly payment.
ADDITIONAL CHARGES: In addition to interest, I agree to
pay the following charges which are/are not included in
the principal amount above: ____________________________.
PAYMENTS: I agree to pay this note as follows:
INTEREST: I agree to pay accrued interest on the first
day of each month beginning March 1, 1997.
PRINCIPAL: I agree to pay the principal February 1, 1998.
ADDITIONAL TERMS:
PREPAYMENT OPTION: If this option is required by Lender
the terms of said options will be as listed below:
SECURITY: This note is separately secured by Security
Agreement dated February 21, 1997 and UCC-1 dated
January 29, 1996.
PURPOSE: The purpose of this loan is business: increase
in working capital.
Borrower:
NATURADE, INC.
By: /S/ Allan Schulman
------------------------------
Allan Schulman, President
Lender:
By: /S/ Gary L. Baker
------------------------------
Gary L. Baker, Vice President
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EXHIBIT 10.15
PROMISSORY NOTE
Account #: 650015
Loan No. 37199
$1,500,000.00 September 24, 1997
For value received, NATURADE, INC., dba NATURADE PRODUCTS, INC.,
7110 East Jackson Street, Paramount, California 90723, jointly and severally,
promise to pay SOUTH BAY BANK, its successors and assigns, at 2200 Sepulveda
Boulevard, Torrance, California 90501, the principal sum of ONE MILLION FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($1,500,000.00).
MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On September 24, 1997 I will receive the
amount of $_____________ and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are maximum advance on the
revolving line is 70% of eligible receivables plus 25% of finished good
and raw material inventory.
OPEN END CREDIT: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on February 1, 1998.
INTEREST: I agree to pay interest on the outstanding principal
balance from September 24, 1997 at the rate of 9.500% per year
until first change date.
VARIABLE RATE: This rate may then change as stated below:
INDEX RATE: The future rate will be 1.000% over the
following index rate: National Prime as determined by
Bank of America of California.
FREQUENCY AND TIMING: The rate on this note may change as
often as monthly. A change in the interest rate will take
effect on the first day of the month.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments: The amount of each scheduled payment
will change. The amount of the final payment will change.
ACCRUAL METHOD: Interest will be calculated on an actual/360
basis.
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<PAGE>
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, at a rate equal to 21.00%.
LATE CHARGE: If a payment is made more than 10 days after it is due, I agree to
pay a late charge of 6% of the required monthly payment with a $10.00 minimum
charge.
PAYMENTS: I agree to pay this note as follows:
INTEREST: I agree to pay accrued interest on the first
day of each month beginning November 1, 1997.
PRINCIPAL: I agree to pay the principal February 1, 1998.
ADDITIONAL TERMS:
PREPAYMENT OPTION: If this option is required by Lender
the terms of said options will be as listed below:
SECURITY: This note is separately secured by Security
Agreement dated September 24, 1997 and two deeds of trust
dated September 24, 1997.
PURPOSE: The purpose of this loan is business: working capital.
Borrower:
NATURADE, INC., dba NATURADE PRODUCTS, INC.
By: /S/ Allan Schulman
---------------------------------
Allan Schulman, President
Lender:
By: /S/ Gary L. Baker
---------------------------------
Gary L. Baker, Vice President
-2-
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<PAGE>
EXHIBIT 10.20
ASSET TRANSFER AGREEMENT AND
PLAN OF LIQUIDATION AND DISSOLUTION
THIS ASSET TRANSFER AGREEMENT AND PLAN OF LIQUIDATION AND DISSOLUTION
("Agreement") is entered into as of June 30, 1997, by and among HARRIER, INC., a
Delaware corporation ("Harrier"), NATURADE, INC., a Delaware corporation
("Naturade") and DERMARAY INTERNATIONAL, L.L.C., a California limited liability
company (the "Company"). Harrier and Naturade are hereinafter referred to
individually as a "Member" and collectively as the "Members."
R E C I T A L S
A. Harrier and Naturade previously organized the Company pursuant to that
certain limited Liability Company Agreement ("LLC Agreement") dated November 29,
1994.
B. Harrier and Naturade are the sole Members of the Company, with Harrier
owning a 50% Membership Interest (as that term is defined at Section 1.6(q) of
the LLC Agreement) and Naturade owning a 50% Membership Interest.
C. The Members desire to liquidate and dissolve the Company pursuant to
the laws of the State of California and this Agreement.
D. The Members have duly authorized and approved the transactions
contemplated by this Agreement.
A G R E E M E N T
It is agreed as follows:
1. SALE AND PURCHASE OF ASSETS.
1.1 TRANSFER. Subject to and upon the terms and conditions set forth
herein, Harrier agrees to sell, assign, convey, transfer and deliver
("Transfer") to the Company, and the Company agrees to purchase from Harrier,
the following assets ("Assets"):
(a) Harrier's entire Membership Interest in the Company; and
(b) Harrier's Bioptron lamp inventory, as identified and described
in the Schedule of Assets attached as Schedule 1 hereto
("Inventory").
1.2 CONSIDERATION. The consideration to be paid by the Company to
Harrier for the Assets on or before the Initial Closing Date (as defined below)
shall be $175,000. Harrier acknowledges its prior receipt of $40,000 of such
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<PAGE>
amount. The Company shall deliver the balance of the consideration on the
Initial Closing Date .pursuant to an unsecured promissory note ("Note") in the
original principal amount of $135,000 in the favor of the Note attached hereto
as Exhibit A.
1.3 CLOSING. The initial closing ("Closing") of the transactions
under this Agreement shall take place on June 30, 1997 (the "Initial Closing
Date"). On the Initial Closing Date, Harrier shall transfer all of its right,
title and interest in and to the Inventory to the Company pursuant to the bill
of sale attached hereto as Exhibit B, and the Company shall deliver the
originally executed Note to Harrier. The down payment of $40,000 and $130,000 of
payments of the principal amount outstanding under the Note shall first be
applied to the purchase of the Harrier's Bioptron lamp inventory, until the
payments, including the down payment, total $170,000. The remaining $5,000 of
principal payments shall be deemed to have redeemed Harrier's Membership
Interest.
1.4 TITLE TO ASSETS. Harrier has and will Transfer to the Company
good and marketable title to the Assets, free and clear of all mortgages,
pledges, security interests, liens, claims, charges, restrictions and
encumbrances. No financing statements under the Uniform Commercial Code or
similar laws naming Harrier as debtor have, been filed in any jurisdiction with
respect to the Assets.
2. DISSOLUTION AND WINDING UP.
2.1 REDEMPTION OF MEMBERSHIP INTEREST. Upon the Company's final
payment of $5,000 of the outstanding principal amount under the Note
("Dissolution Date"), the Company shall be deemed to have redeemed Harrier's
Membership Interest and the Company shall be deemed to have dissolved in
accordance with Article XII of the LLC Agreement.
2.2 NOTIFICATION OF CREDITORS. On the Dissolution Date, Naturade, as
the sole Member, the Company, shall give written notice of commencement of
winding up to the Company in substantially the form of Exhibit C, indicating
that the assets of the Company are to be distributed in liquidation to the
remaining Member.
2.3 SECRETARY OF STATE FILINGS. As soon as practicable after the
Dissolution Date, and after receiving tax clearance certificates from the
California Franchise Tax Board as required by law, Naturade shall execute a
Certificate of Dissolution on Form LLC-3 and a Certificate of Cancellation on
Form LLC-4/7 in accordance with the provisions of the California Corporations
Code, and cause such Certificates to be filed in the office of the Secretary of
State of California.
3. MUTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS. Each party
represents, warrants and covenants to the other as of the date hereof and as of
each Closing as follows:
- 2 -
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<PAGE>
3.1 ORGANIZATION. Each party is duly organized, validly existing and
in good standing under the laws of the state of its organization.
3.2 POWER AND AUTHORITY. Each party has all requisite power and
authority to (enter into and to carry out all of the terms of this Agreement and
all other documents executed and delivered in connection herewith. All action on
the part of the party, its officers, directors, shareholders and members
necessary for the authorization, execution, delivery and performance of this
Agreement by the party has been taken and no further authorization on the part
of the party is required to consummate the transactions provided for in this
Agreement. When executed and delivered by the party, this Agreement shall
constitute the valid and legally binding obligations of the party enforceable in
accordance with its terms. Neither the execution, delivery nor performance of
this Agreement by the party shall (i) violate or result in a breach of any
provisions of the party's charter documents, (ii) constitute a default or result
in a breach of any contract or agreement to which it is a party or its assets or
properties are bound, or (iii) violate any order, writ, injunction, decree,
judgment or other restriction of any court, administrative agency or
governmental body.
3.3 AGREEMENT TO PERFORM NECESSARY ACTS. Each party agrees to
perform any further acts and execute and deliver any documents which may be
reasonably necessary to carry out the provisions and purposes of this Agreement.
4. MISCELLANEOUS.
4.1 CUMULATIVE REMEDIES. Any person having any rights under any
provision of this Agreement will be entitled to enforce such rights
specifically, to recover damages by reason of any breach of any provision of
this Agreement, and to exercise all other rights granted by law, which rights
may be exercised cumulative and not alternatively.
4.2 SUCCESSORS AND ASSIGNS. The rights and obligations of the
parties under this Agreement shall not be assignable without the written consent
of the other parties, provided, however, that nothing herein shall restrict
Harrier's right to assign its interests under the Note. Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
4.3 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
- 3 -
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<PAGE>
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement or the other documents.
4.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts when taken together will constitute one and the
same agreement.
4.5 NOTICES. Any approvals, consents or notices required or
permitted to be sent or given shall be delivered in writing personally or
mailed, certified mail, return receipt requested, to the following addresses and
shall be deemed to have been received within five days after such mailing:
If to the Company:
DermaRay International, L.L.C.
7110 East Jackson Street
Paramount, California 90723
Attn.: Michael Fernicola, President
If to Naturade:
Naturade, Inc.
7110 East Jackson Street
Paramount, California 90723
Attn.: Michael Fernicola,
Executive Vice President
If to Harrier:
Harrier, Inc.
2200 Pacific Coast Highway, Suite 301
Hermosa Beach, California 00254
Attn.: Kevin DeVito, President
4.6 GOVERNING LAW; ARBITRATION. The validity, meaning and effect of
this Agreement shall be determined in accordance with the laws of the State of
California, applicable to contracts made and to be performed in that state,
without regard to its conflicts of laws rules; provided however that the Federal
Arbitration Act of the United States shall govern issues as to arbitrability. If
a dispute arises in connection with or relating to this Agreement and the
parties are unable to resolve it within forty-five (45) days through direct
negotiations, the dispute shall be referred to final and binding arbitration to
be held in Los Angeles, California in accordance with the rules of the American
Arbitration Association for Commercial Arbitration (as they may be amended from
time to time). The award of the arbitrator(s) shall be final and binding upon
the parties hereto and may be enforced by any court of competent jurisdiction.
4.7 LITIGATION COSTS. If any legal action or any arbitration or
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions thereof, the successful or prevailing party or parties
- 4 -
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<PAGE>
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.
4.8 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding of the parties with respect to the subject matter
thereof, and supersedes all prior and contemporaneous agreements and
understandings.
IN WITNESS WHEREOF, each of the parties to this Agreement has executed or
caused this Agreement to be executed as of the date first above written.
"HARRIER"
Harrier, Inc.,
a Delaware corporation
By: /s/ Kevin DeVito
------------------------------
Kevin DeVito, President
"NATURADE"
Naturade, Inc.,
a Delaware corporation
By: /s/ Michael Fernicola
------------------------------
Michael Fernicola,
Executive Vice President
"DermaRay"
DermaRay International, L.L.C.,
a California limited liability
company
By: /s/ Michael Fernicola
------------------------------
Michael Fernicola,
Executive Vice President
- 5 -
Page 105 of 113
<PAGE>
SCHEDULE 1
INVENTORY LIST
All Bioptron lamps, assorted components, parts, tools, literature, VHS
tapes, corrugated boxes, stands, holders, Bioptron literature, and any
other Bioptron units owned by Harrier Inc. owned by Harrier Inc.,
currently stored at 7104 Jackson Street, Paramount California, 90723.
- 6 -
Page 106 of 113
<PAGE>
EXHIBIT A
UNSECURED PROMISSORY NOTE
PARAMOUNT, CALIFORNIA $135,000
JUNE 30, 1997
FOR VALUE RECEIVED, DermaRay INTERNATIONAL, L.L.C., a California limited
liability company (the "Company", promises to pay on or before June 30, 1998 to
the order of Harrier, Inc. or assigns ("Holder"), at the address designated by
Holder, the principal amount of One Hundred Thirty-Five Thousand Dollars
($135,000). The outstanding principal amount under this Note shall not bear
interest and shall be due and payable no later than June 30, 1998; provided that
the Company shall apply all of the gross proceeds from its sale of Bioptron
lamps towards the payment of the outstanding principal amount of this Note and
otherwise use its best efforts to pay the outstanding principal amount under
this Note as soon as possible.
Upon the happening of any Event of Default as set forth below and the
giving of notice by the Holder as provided herein, this Note shall become
immediately due and payable in full, without presentment or protest, both of
which are hereby waived by the Company. In such case, Holder may proceed to
protect and enforce its rights by a suit in equity, action at law, or other
appropriate proceedings. In case of any Event of Default, the Company will
reimburse Holder for its reasonable costs and expenses, including attorney's
fees, incurred in connection with the enforcement of its rights under this Note.
"Event of Default" whenever used herein means any one of the
following events:
(a) Default in the payment of principal under this
Note when it becomes due;
(b) The entry of a decree or order by the court having jurisdiction
in the premises adjudging the Company bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company under applicable bankruptcy laws, or
appointing a receiver, liquidator, assignee, trustee (or similar official) of
the Company or any substantial part of its property, and the continuance of such
decree or order in effect for a period of thirty (30) consecutive days; or
(c) The institution by the Company of proceedings to be adjudicated
as a bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer to consent seeking reorganization or relief under applicable
- 7 -
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<PAGE>
bankruptcy laws, or the consent by it to the filing of any such petition or to
the appointment of any receiver, liquidator, assignee, trustee (or similar
official) the Company or any substantial part of its property, or the making by
it of any assignment for the benefit of creditors.
Except as otherwise provided in this Note, the Company:
(a) Waives demand, presentment for payment, notice of non-payment,
grace, protest, notice of protest, notice of acceleration of the indebtedness
due hereunder and all other notice in collecting this Note;
(b) Consents to all extensions or rearrangements or postponements of
time or payment of this Note, whether or not for a term or terms in excess of
the original term hereof, and to any other indulgence with respect hereto
without notice, consent or consideration to any of them; and
(c) Waives any right it may have to require Holder to exercise the
remedies available on default in any particular order.
WITNESS the signature of a duly authorized officer of the Company.
DermaRay INTERNATIONAL, L.L.C.,
a California limited liability company
By: __________________________________
Michael Fernicola, President
- 8 -
Page 108 of 113
<PAGE>
EXHIBIT B
BILL OF SALE
This Bill of Sale is made this 30th day of June 1997 by and between
HARRIER INC., a Delaware corporation (hereinafter referred to as "Seller"), and
DermaRay INTERNATIONAL, L.L.C., a California limited liability company
(hereinafter, referred to as "Purchaser").
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, Seller does hereby sell, assign, grant, convey, set
over, confirm and deliver to Purchaser and its successors and assigns forever,
all of Sellers right title and interest in and to those "Assets" set forth on
Schedule 1 attached hereto, free and clear of any and all liens, claims and
encumbrances of any kind.
Simultaneously with the execution and delivery hereof and from time to
time thereafter, Seller will execute and deliver to Purchaser such additional
documents of transfer with respect to the Assets as Purchaser may reasonably
require in. order to effectuate this transaction.
IN WITNESS WHEREOF, the Sellers have caused this instrument to be executed
on the date above-written.
"SELLER"
HARRIER, INC.,
a Delaware corporation
_______________________________
Kevin DeVito, President
- 9 -
Page 109 of 113
<PAGE>
EXHIBIT C
NOTICE OF COMMENCEMENT OF VOLUNTARY PROCEEDINGS
TO WIND UP, LIQUIDATE AND DISSOLVE
TO: ALL CREDITORS AND CLAIMANTS
NOTICE IS HEREBY GIVEN pursuant to Section 17352(a) of the California
Corporations Code that DermaRay INTERNATIONAL, L.L.C., a California limited
liability company (the "Company"), whose principal office is located at 7104
Jackson Street, Paramount, California 90723, has voluntarily elected to wind up
its affairs, liquidate and dissolve.
Proceedings for the winding up of the Company commenced on
_______________, 199__, which date all of the members of the Company consented
to the winding up, liquidation and dissolution of the Company.
Dated: __________ 1997 DermaRay INTERNATIONAL, L.L.C.
a California limited liability
company
By: _____________________________
Michael Fernicola, President
- 10 -
Page 110 of 113
<PAGE>
EXHIBIT 23.1
[Rose, Snyder & Jacobs Letterhead]
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our audit report, dated November 5, 1997, in the Annual
Report on Form 10-K to be filed on behalf of Naturade, Inc.
/s/ Rose, Snyder & Jacobs
- -----------------------------
Rose, Snyder & Jacobs
Burbank, California
December 23, 1997
Page 111 of 113
<PAGE>
EXHIBIT 23.2
[McGladrey & Pullen, LLP Letterhead]
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our audit report, dated October 31, 1996, in connection
with the Annual Report on Form 10-K to be filed on behalf of Naturade, Inc.
/s/ McGladrey & Pullen LLP
- --------------------------
McGladrey & Pullen LLP
Anaheim, California
December 23, 1997
Page 112 of 113
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 157,585
<SECURITIES> 0
<RECEIVABLES> 1,404,661
<ALLOWANCES> 0
<INVENTORY> 2,413,621
<CURRENT-ASSETS> 4,176,529
<PP&E> 2,841,306
<DEPRECIATION> 729,500
<TOTAL-ASSETS> 7,753,574
<CURRENT-LIABILITIES> 2,820,394
<BONDS> 0
0
0
<COMMON> 330
<OTHER-SE> 2,696,942
<TOTAL-LIABILITY-AND-EQUITY> 7,753,574
<SALES> 12,578,420
<TOTAL-REVENUES> 12,578,420
<CGS> 6,381,795
<TOTAL-COSTS> 5,377,644
<OTHER-EXPENSES> (57,924)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347,760
<INCOME-PRETAX> 413,297
<INCOME-TAX> 165,000
<INCOME-CONTINUING> 248,297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 248,297
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
