<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number 33-7106-A
NATURADE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2442709
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
7110 East Jackson Street, Paramount, California 90723
-----------------------------------------------------
(Address of principal executive offices)
(562) 531-8120
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X____ No_______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate by number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 5,349,084 shares as
of April 30, 1999.
Exhibit Index on Page 14
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 1999
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 1999 3
(unaudited) and December 31, 1998 (unaudited)
Statements of Operations for the three month periods ended 5
March 31, 1999 (unaudited) and March 31, 1998
(unaudited)
Statements of Cash Flows for the three month periods ended 6
March 31, 1999 (unaudited) and March 31, 1998
(unaudited)
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURADE, INC.
Balance Sheets
Assets
--------
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $544,339 $842,029
Accounts receivable 1,029,295 1,294,612
Related party receivable 600,000 600,000
Inventories 2,071,815 2,093,981
Refundable income taxes 163,416 163,416
Prepaid expenses and other current assets 444,957 325,853
----------------- ---------------------
Total current assets 4,853,822 5,319,891
Property and equipment, net 1,997,177 1,981,326
Intangible assets, net 1,092,129 1,106,358
Other assets 89,735 116,014
----------------- ---------------------
Total assets 8,032,863 8,523,589
----------------- ---------------------
----------------- ---------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $1,266,199 $891,069
Lawsuit judgment payable $2,774,000 -
Accrued expenses 431,463 565,794
Notes payable 1,735,719 1,450,000
Current portion of long-term debt 192,400 193,383
--------------- ------------------
Total current liabilities 6,399,781 3,100,246
--------------- ------------------
Long-term debt, less current maturities 1,916,476 1,964,324
--------------- ------------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $0.0001 per share;
authorized, 50,000,000 shares; issued and outstanding,
5,349,084 (5,273,731 at December 31, 1998) 533 527
Preferred stock, par value $0.0001 per share;
authorized, 2,000,000 shares; issued and
outstanding, 1,250,024 125 125
Additional paid-in capital 7,493,054 7,453,201
Retained earnings (accumulated deficit) (7,777,106) (3,994,834)
--------------- ------------------
Total stockholders' equity (283,394) 3,459,019
--------------- ------------------
Total liabilities and stockholders' equity $8,032,863 $8,523,589
--------------- ------------------
--------------- ------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NATURADE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $2,352,808 $3,139,098
Cost of sales 1,384,629 2,198,951
--------------- ----------------
Gross profit 968,179 940,147
--------------- ----------------
Costs and expenses:
Selling, general and administrative expenses 1,842,253 2,290,250
Special legal expenses 52,032 -
Lawsuit judgment expense 2,774,000 -
Depreciation & amortization 46,780 46,796
Other (income) expense:
Interest expense 89,251 109,328
Miscellaneous, net (56,265) 96,012
--------------- ----------------
Total costs and expenses 4,748,051 2,542,386
--------------- ----------------
(Loss) income before income taxes (3,779,872) (1,602,240)
Provision for income taxes 2,400 (57,454)
--------------- ----------------
Net (Loss) income ($3,782,272) ($1,544,786)
--------------- ----------------
--------------- ----------------
Basic (loss) earnings per share ($0.71) ($0.29)
--------------- ----------------
--------------- ----------------
Weighted average number of shares
used in computation of basic (loss)
earnings per share 5,336,733 5,297,378
--------------- ----------------
--------------- ----------------
Diluted (loss) earnings per share ($0.71) ($0.29)
--------------- ----------------
--------------- ----------------
Weighted average number of shares
used in computation of diluted
(loss) earnings per share 5,336,733 5,297,378
--------------- ----------------
--------------- ----------------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NATURADE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income (3,782,272) (1,544,786)
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 46,780 46,796
Gain on disposition of property and equipment (49,580) -
Changes in assets and liabilities:
Accounts receivable 265,317 158,389
Inventories 22,166 427,894
Prepaid expenses and other current assets (119,104) (48,343)
Other assets 26,279 (91,884)
Lawsuit judgment payable 2,774,000 -
Accounts payable, accrued expenses and income taxes
payable 240,803 (63,323)
------------------- ------------------
Net cash (used in) provided by operating activities: (575,611) (1,115,257)
Cash flows from investing activities:
Purchase of property and equipment (53,821) (17,489)
Sale of property and equipment 55,000
------------------- ------------------
Net cash (used in) provided by investing activities: 1,179 (17,489)
Cash flows from financing activities:
Net borrowings under note payable 285,720 (26,555)
Payments of long-term debt, including capital lease (48,831) (55,849)
Proceeds from sale of stock 38,794 87,502
Proceeds from exercise of warrants 1,059 -
------------------- ------------------
Net cash provided by financing activities: 276,742 5,098
Net increase (decrease) in cash and cash equivalents (297,690) (1,127,648)
Cash and cash equivalents, beginning of period 842,029 5,744,067
Cash and cash equivalents, end of period 544,339 4,616,419
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest 87,880 109,920
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
NATURADE, INC.
Notes to Financial Statements
1. The results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year.
In the opinion of management, the information contained herein includes
all adjustments necessary for fair presentation of the financial
statements. All such adjustments are of a normal recurring nature. These
financial statements do not include all disclosures associated with the
Company's annual financial statements and accordingly, should be read in
conjunction with such statements.
2. The related party advance of $600,000 represents a temporary loan to
Bill D. Stewart, the Company's Chief Executive Officer, pursuant to an
Employment Agreement dated March 2, 1998, between the Company and Mr.
Stewart (the "Stewart Employment Agreement") and filed as exhibit
10.20 to the Company's Form 10-Q for the period ended March 31, 1998.
This related party advance was secured by Mr. Stewart's former
residence in Tennessee. In April 1999, in accordance with the terms of
the Stewart Employment Agreement, the Company acquired Mr. Stewart's
former residence and cancelled such related party advance. The Company
is actively pursuing the sale of this residence.
3. Inventories are stated at the lower of weighted average cost or market.
Weighted average cost is determined on a first-in, first-out basis.
Inventories at December 31, 1998 and March 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Unaudited)
-------------- ------------------
<S> <C> <C>
Raw Materials $ 373,307 $ 880,660
Finished Goods 1,698,508 1,213,321
-------------- ------------------
$ 2,071,815 $ 2,093,981
</TABLE>
4. The Company is currently in escrow regarding its interest in its former
headquarter facility which housed executive offices, manufacturing, sales,
marketing and product development operations. If this sale is consummated,
the Company anticipates recording a small gain on the sale. In mid-April
1999, the Company relocated to Irvine, California. In anticipation of this
move, the Company outsourced its production requirements to several
independent food processing companies.
7
<PAGE>
5. Commencing January 1, 1999, the Company changed its fiscal year to end
on December 31st. The Company's Annual Report on Form 10-K will cover
the new fiscal year of January 1, 1999 to December 31, 1999.
6. On March 11, 1999, a civil judgment was entered against the Company and a
co-defendant for a total of $2,774,000 by the United States Bankruptcy
Court for the Northern District of Texas following trial in a proceeding
initiated by the Trustee in the Chapter 7 bankruptcy case of Performance
Nutrition, Inc. ("PNI"). The court's award was based on findings against
the Company of aiding and abetting a breach of fiduciary duty by PNI
management, conspiracy to breach fiduciary duty, tortious interference
with contract and unjust enrichment. The court also awarded the Trustee
pre-judgment and post-judgment interest. The pre-judgment interest amount
is $206,283 and the post-judgment interest amount as of March 31, 1999 is
$2,151. The Trustee subsequently moved for allowance of alleged costs
against the Company in the amount of $125,326, which the Company intends
to contest on several grounds. The Company is studying the judgment and is
considering its options. In the interim, the Company has preserved its
right to appeal the judgment to the United States District Court.
On January 20, 1999 the PNI Trustee filed a second adversary complaint
against the Company, seeking recovery of $130,200 in allegedly
preferential payments made to the Company by PNI prior to bankruptcy.
Management is contesting the Trustee's preference claims. However, all
litigation contains an element of uncertainty, and it is not possible to
determine at this time whether the ultimate outcome of this second
adversary complaint will have a material adverse effect on the Company's
results of operations or financial condition.
7. In early February 1999, the Company signed a 7 1/2 year lease agreement
for new executive offices, sales & marketing and warehouse operations
located in Irvine, Ca. The total minimum rental commitments under this
lease for the respective years ending December 31 are:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $ 246,681
2000 328,908
2001 351,327
2002 358,800
2003 381,228
Thereafter 1,122,756
---------
Total $ 2,789,700
</TABLE>
8. In March 1999, the Company entered into a Financing Agreement (the
"Financing Agreement") with Health Holdings and Botanicals, Inc.
("Health Holdings"). The Financing Agreement provides that the Company
may borrow up to $1.0 million at a per annum interest rate of 8%. All
borrowings under the Financing Agreement are secured by the assets of
the Company and are due on March 7, 2000. The Financing Agreement
further provides that for each dollar borrowed, the Company shall
issue a warrant ("Warrant") to Health Holdings to purchase
three-tenths (0.3) of a share of common stock of the Company at an
exercise price of $2.125 per share, subject to adjustment. As of March
31, 1999, the Company borrowed $600,000 under the Financing Agreement
and issued 180,000 Warrants to Health Holdings.
8
<PAGE>
9. On January 26, 1999, the Company granted 20,000 options to the newly
hired Vice President in charge of sales to the mass market. These
options were granted at fair market value and vest at the rate of 5,000
shares per year for four years. On February 1, 1999, the Company granted
100,000 options to the newly hired Chief Operating Officer & Chief
Financial Officer. These options were granted at fair market value and
vest at the rate of 25,000 shares per year for four years.
10. Certain inventory write-offs totaling $666,000 that were included in
costs and expenses at March 31, 1998 have been reclassified to cost of
sales.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Although Naturade,
Inc. (the "Company" or the "Registrant") believes that the expectations
reflected in such forward looking statements are reasonable, such statements
are inherently subject to risk and the Company can give no assurances that
such expectations will prove to be correct. Such forward looking statements
involve risks and uncertainties and actual results could differ from those
described herein and future results may be subject to numerous factors, many
of which are beyond the control of the Company. Such risk factors include,
without limitation, the risk of changes or developments in the regulatory
framework or product liability principles applicable to the Company and its
products, and the risk of consolidation in the distribution channels expected
to be used by the Company to distribute its products. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $575,611 in operating activities in the three
months ended March 31, 1999.
The Company's working capital decreased from $2,219,645 at December 31,
1998 to $(1,545,958) at March 31, 1999. This decrease was largely due to a
judgment against the Company of $2,774,000 (see "Legal Proceedings" below)
and an increase in Accounts Payable of $375,130 and Notes Payable of
$285,720 required to fund the Company's operating losses for the three month
period ended March 31, 1999.
Cash provided by investing activities during the three month period
ended March 31, 1999 total $1,179. The Company anticipates its capital
expenditures for the three-month period ended June 30, 1999 to be
approximately $50,000.
The Company's cash provided by financing activities of $276,742 for the
three month period ended March 31, 1999 was the result of borrowings from a
new financing agreement with Health Holdings and Botanicals, Inc. as set
forth in Note 8 to the Financial Statements above.
The Company is currently in discussions with several asset-based
lenders for an expanded line of credit to support the Company's working
capital requirements as it expands sales into the mass market. The Company
has extended its current $1,500,000 line of credit agreement with South Bay
Bank to August 1, 1999. The Company is also in discussions with a financial
advisory firm to explore new financing options in order to fund any
settlement of the Texas Lawsuit judgment as well as the Company's future
capital requirements. The Company's inability to obtain financing to fund any
settlement of the Texas Lawsuit judgment or obtain new financing after the
August 1, 1999 South Bay Bank deadline could have a material adverse effect
on the financial condition of the Company.
9
<PAGE>
RESULTS OF OPERATIONS
Total net sales for the three months ended March 31, 1999 decreased
$786,290 or 25.0% compared to the same period last year. Of this amount,
domestic sales decreased $313,404 or 13.4% while "Kids Plex-TM-" sales
decreased $349,655 or 82.3% and international sales decreased $229,138 or
91.6% for the March 31, 1999 quarter compared to the same period last year.
Partially offsetting this sales decline in the March 31, 1999 quarter was the
sale of $148,163 of raw materials to copackers as the Company continues its
strategy of complete production outsourcing. Total net sales were also
impacted by a recall of certain Aloe Vera products creating returns of over
$160,000 in March 1999, which was partially offset by replacement orders in
the same month.
Gross profit as a percentage of sales increased 11.2% to 41.1% of sales
for the three months ended March 31, 1999 from 29.9% for the same quarter
last year. This gross profit percentage increase was due to the
reclassification of $666,000 of inventory write-offs in the March 1998
quarter for which there were no such amounts incurred in the March 31, 1999
quarter.
Selling, general and administrative expenses decreased $447,997 to
$1,842,253 or 78.3% of sales for the three months ended March 31, 1999, from
$2,290,250 or 73.0% for the same period last year. These decreases were
primarily the result of: 1) Lower selling and marketing expenses which
decreased $500,545 to $865,004 or 36.8% of sales for the quarter ended March
31, 1999 from $1,365,549 or 43.5% of sales for the same period last year and
2) Higher general and administrative expenses, which increased $54,529 to
$645,352 or 27.4% of sales for the quarter ended March 31, 1999, from
$590,823 or 18.8% of sales for the same period last year. Shipping and
receiving expenses decreased $1,422 to $265,019, but increased as a percent
of sales to 11.3% for the quarter ended March 31, 1999, from $266,441, or
8.5% for the same period last year.
Interest expense decreased $20,078 for the three-month period ended March
31, 1999 compared to the same period last year.
Miscellaneous expenses for the quarter ended March 31, 1999 decreased
$152,277 compared to the same period last year due to the lack of
non-recurring charges in 1999 which in the March 31, 1998 quarter amounted to
$157,500. No such amounts were incurred in the March 31, 1999 quarter. The
March 31, 1999 quarter also reflects a $49,580 gain on sale of equipment that
the Company no longer needs due to its strategy to completely outsource its
production activities.
Income tax expense was $2,400 for the three-month period ended March
31, 1999 compared to $ (57,454) for the same period last year due to losses
for the periods and the carryback benefits of such losses.
10
<PAGE>
PART II. Other Information
ITEM 1. Legal Proceedings
As previously reported in its 8-K filing, on March 17, 1999, a
civil judgment was entered against the Company and a co-defendant for a
total of $2,774,000 by the United States Bankruptcy Court for the
Northern District of Texas following a bench trial last year in a
proceeding initiated by the Trustee in the Chapter 7 bankruptcy case of
Performance Nutrition, Inc. ("PNI") on October 3, 1997. The court's
award was based on findings against the Company of aiding and abetting a
breach of fiduciary duty by PNI management, conspiracy to breach
fiduciary duty, tortious interference with contract and unjust
enrichment. The court also awarded the Trustee pre-judgment and
post-judgment interest. The pre-judgment interest amount is $206,283 and
the post-judgment interest amount as of March 31, 1999 is $2,151. The
Trustee subsequently moved for allowance of alleged costs against the
Company in the amount of $125,326, which the Company intends to contest
on several grounds. The Company is studying the judgment and is
considering its options. In the interim, the Company has preserved its
right to appeal the judgment to the United States District Court.
On January 20, 1999 the PNI Trustee filed a second adversary complaint
against the Company, seeking recovery of $130,200 in allegedly
preferential payments made to the Company by PNI prior to bankruptcy.
The Company believes that these payments are statutorily protected from
avoidance because they were made in the ordinary course of the two
companies' business relationship or were followed by new value provided
to PNI by the Company. Management is contesting the Trustee's preference
claims. Because all litigation contains an element of uncertainty; it is
not possible to determine at this time whether the ultimate outcome of
these matters will have a material adverse effect on the
Company's results of operations or financial condition.
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults upon Senior Securities
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
NONE
ITEM 5. Other Information
NONE
11
<PAGE>
ITEM 6. Exhibits & Reports on Form 8-K
<TABLE>
<CAPTION>
Exhibits
Number Description Page
--------- ----------- ----
<S> <C> <C>
10.1 Employment Contract with 15
Lawrence J. Batina dated February 1, 1999
10.2 Financing Agreement between Naturade, Inc. 16
and Health Holdings and Botanicals, Inc.
27 Financial Data Schedule 17
</TABLE>
Reports on Form 8-K
On March 17, 1999, the Company filed Form 8-K with respect to
a judgment entered against it in the United States Bankruptcy Court for the
Northern District of Texas. See Part II, Item 1-"Legal Proceedings".
12
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
NATURADE, INC.
--------------
(Registrant)
DATE: May 14, 1999 By /s/ Bill D.Stewart
------------------------ ---------------------
Bill D. Stewart
Chief Executive Officer
DATE: May 14, 1999 By /s/Lawrence J. Batina
------------------------ ------------------------
Lawrence J. Batina
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
10.1 Employment Contract with 15
Lawrence J. Batina dated
February 1, 1999
10.2 Health Holdings and 16
Botanicals, Inc. Financing
Agreement
27 Financial Data Schedule 17
</TABLE>
14
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into by and between
NATURADE, INC., a Delaware corporation (the "Company"), and LAWRENCE J. BATINA
(the "Employee") as of February 1, 1999 (the "Effective Date").
1. Employment
The Company employs the Employee and the Employee accepts employment
(hereinafter, the "Employment") upon the terms and conditions of this Agreement.
2. Duties
Employee shall perform the duties of Chief Operating Officer, Chief
Financial Officer, Director of Administration and such other duties of a
responsible nature consistent with his position as may be prescribed from time
to time by the Board of Directors of the Company (the "Board"). Employee is to
devote all of his working time and efforts to the business and affairs of the
Company. During the Employment, Employee shall report to the Chief Executive
Officer of the Company and the Board.
3. Term
The term of this Agreement shall begin on (the Effective Date and, subject
to extension and termination as provided herein, shall expire on December 31,
1999 (the "Initial Termination Date"). The period commencing on the Effective
Date and expiring on the Initial Termination Date shall be referred to
hereinafter as the "Initial Term" and, together with any extension thereof, the
"Term." Notwithstanding the foregoing, this Agreement and the Employment shall
be automatically extended after the Initial Term for an indefinite period. The
effective date of any termination hereunder is referred to hereinafter as the
"Termination Date."
-1-
<PAGE>
4. Compensation
1. Base Salary
The Company shall pay the Employee for all services rendered a salary of
$150,000 per year, payable in such manner as the Company shall pay its
executives.
2. Incentive Compensation
Within thirty (30) days following each calendar year-end during the Term,
the Company shall pay to the Employee a bonus ("Incentive Bonus") up to a
maximum amount of 30% of Employee's Base Salary pursuant to an Incentive Bonus
Plan Description to be negotiated in good faith between the Company and the
Employee following the Effective Date.
3. Stock Options
Upon commencement of the Employment, the Board of Directors will grant the
Employee the option to purchase 100,000 shares of the Company's common stock
(the "Options") subject to the terms and conditions of the Company's Stock
Option Agreement to be executed by the Company and the Employee (the "Option
Agreement"). Such Options shall be granted at Fair Market Value (as defined in
the Option Agreement) and shall vest in accordance with the following vesting
schedule:
<TABLE>
<CAPTION>
Number of Options Vesting Date
----------------- ------------
<S> <C>
25,000 First Anniversary of Effective Date
25,000 Second Anniversary of Effective Date
25,000 Third Anniversary of Effective Date
25,000 Fourth Anniversary of Effective Date
</TABLE>
The Options shall terminate in accordance with the terms and conditions of
the Option Agreement.
4. Fringe Benefits
Employee and his dependents shall be eligible for all fringe benefits
provided to its employees. In addition, the Employee shall be entitled to
three (3) weeks paid vacation during each year of the Term.
5. Extent of Services
-2-
<PAGE>
During the Term, Employee shall not, without the prior written consent
of the Company, be engaged in any other business activity whether or not such
business activity is pursued for gain, profit or other pecuniary advantage.
This shall not be construed as preventing Employee from investing his assets
in such form or manner as will not require the performance of services of
Employee in the operation of the affairs of the enterprises or companies in
which said investments are made.
6. Competitive Activities
During the Term, Employee shall not, directly or indirectly, either as
an employee or employer, consultant, agent, principal, partner, stockholder
(of more than 5% of the outstanding stock on any entity), corporate officer,
director, or in any other individual or representative capacity, engage or
participate in any business that is in competition with the business of the
Company. The parties agree that the terms of this paragraph are reasonable
and in compliance with applicable law and, in that regard, anything to the
contrary appearing in this Agreement notwithstanding, if a court shall
determine that the scope of this paragraph shall be unenforceable, such court
is hereby authorized and empowered to restrict the geographic area and the
scope of activities to which this paragraph pertains to the minimum extent
necessary so that this paragraph as so restricted shall be rendered
enforceable.
7. Non-Disclosure; Nonsolicitation; Nondisparagement
A. Employee shall not during the Term or at any time thereafter (i)
disclose to any person not employed by the Company or any person, firm or
corporation engaged to render services to Company except during the Term for
the benefit of Company, or (ii) use for the benefit of himself, or others,
any Confidential Information (as defined below) obtained by Employee prior to
the Effective Date, during the Term or any time thereafter, including,
without limitation, "know-how", trade secrets, details of the Company's
contracts with third parties, pricing policies, financial data, operational
methods, marketing and sales information or strategies, product development
techniques or plans or any strategies relating thereto, technical processes,
designs and design projects, and other proprietary information of Company
("Confidential Information"); PROVIDED, HOWEVER, that this provision shall
not preclude Employee from (x) upon advice of counsel and after reasonable
notice to Company, making any disclosure required by any applicable law or
(y) using or disclosing information known generally to the public (other than
information known generally to the public as a result of any violation of
this paragraph VII by or on behalf of Employee).
B. As requested by the Company from time to time and upon the
termination of the Employment for any reason, Employee will
-3-
<PAGE>
promptly deliver to the Company all copies and embodiments, in whatever form,
of all Confidential Information in Employee's possession or within Employee's
control (including, but not limited to, written records, notes, photographs,
manuals, notebooks, documentation, program listings, flow charts, magnetic
media, disks, diskettes, tapes and all other materials containing any such
Confidential Information) regardless of the location or form of such material
and, if requested by the Company, will provide the Company with written
confirmation that all such materials have been delivered to the Company.
C. The Employee shall not, either directly or indirectly, call on,
solicit or take away or assist to be called on, solicited or taken away, any
of the customers, employees or independent contractors of the Company on whom
the Employee called or with whom the Employee became acquainted during the
Employee's employment with or hiring by the Company, either for the
Employee's own benefit, or for the benefit of any other person, firm or
corporation. The Employee shall not disclose the name of any employee,
customer, sales representative or other employee of the Company to any third
party, unless the disclosure occurs during the Employee's employment with the
Company and is reasonably required by the Employee's position with the
Company. The Employee shall not now or in the future disrupt, damage, impair
or interfere with the business of the Company in any manner, including,
without limitation, inducing an employee to leave the employ of the Company
or inducing an employee, a consultant, a sales representative or an
independent contractor to sever that person's relationship with the Company
either by interfering with or raiding the Company's employees or sales
representatives, disrupting its relationships with customers, agents,
independent contractors, representatives or vendors, or otherwise.
In the event of a breach or threatened breach by Employee of the
provisions of paragraph VI above or this paragraph VII, the Company will be
entitled to injunctive or other equitable relief restraining Employee from
any breach or threatened breach of paragraph VI above or this paragraph VII.
Nothing herein shall be construed as prohibiting the Company from pursuing
any other remedies available to the Company for such breach or threatened
breach, including the recovery of damages from Employee.
8. Expenses
The Employee may incur reasonable expenses, in accordance with Company
policies for such expenses, for promoting the Company's business, including
expenses for entertainment, travel and similar items. The Company will
reimburse the Employee for all such expenses upon the Employee's presentation
of an itemized account of such expenditures and supporting documentation, in
accordance with Company policy.
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<PAGE>
9. Termination by the Company for Cause
This Agreement may be terminated by the Company under any of the following
circumstances:
1. Upon the death of Employee; or
2. Upon the inability of Employee to perform all of his duties
hereunder by reason of illness, physical, mental or emotional disability or
other incapacity, which inability shall continue for more than three (3)
successive months or six (6) months in the aggregate during any period of
twelve (12) consecutive months, or
3. For cause, defined as:
(i) the willful failure of Employee (other than for the reasons
described in subparagraph IX(B) above) to (a) substantially perform his
duties hereunder, or (b) comply materially with reasonable directives of the
Company, in either case which remains uncured following ten (10) days after
written notice thereof has been provided to the Employee by the Company. No
act, or failure to act, on Employee's part shall be considered "willful"
unless done, or omitted to be done, by him not in good faith and without
reasonable belief that his action or omission was in the best interest of the
Company;
(ii) conviction of a crime involving a felony, fraud embezzlement
or the like,
(iii) the engaging by Employee in conduct, or the taking by
Employee of any action, which is materially injurious to the Company and
remains uncured following ten (10) days after written notice thereof has been
provided to the Employee by the Company,
(iv) habitual insobriety or habitual abuse of a controlled
substance,
(v) misappropriation of the Company's funds, or
(vi) the failure of Employee to comply with the provisions of
Paragraphs V, VI or VII above.
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<PAGE>
10. Termination by Employee for Good Reason
This Agreement may be terminated by Employee under any of the following
circumstances ("Good Reason"):
1. The failure of the Company to observe or comply with any of the
material terms or provisions of this Agreement after written notice from
Employee to Company specifying the grounds for termination and the Company
fails within ten (10) days after receipt of such notice to cure such failure;
2. A "Change of Control" (as defined in Exhibit A hereto) pursuant to
which the Employee is not retained by the Company (or other surviving or
successor entity following such Change of Control ) on substantially the same
terms as provided herein.
11. Termination Without Cause
This Agreement may be terminated by either party without cause upon
thirty (30) days' prior written notice to the other party.
12. Severance
In the event this Agreement is terminated by the Company without cause
pursuant to paragraph XI, or in the event this Agreement is terminated by the
Employee for Good Reason as provided in paragraph X, the Company shall
continue to pay the Employee his then current Base Salary and provide the
benefits set forth in paragraph IV above during the period commencing on the
Termination Date and ending six (6) months thereafter. In the event of
termination prior to year-end, the Employee shall not be entitled to (i)
payment of Incentive Bonus payable for such year (unless such termination was
without cause or for Good Reason, in which event the Employee shall be
entitled to the Incentive Bonus pro-rated through the Termination Date and
payable at the time set forth in paragraph IV(B) above), or (ii) stock
options which have not vested as of the Termination Date; PROVIDED that if
such termination occurs as a result of a Change of Control as provided in
paragraph X(B), all Options which have not then vested shall immediately vest
prior to the effectiveness of any such termination.
13. Waiver of Breach
The waiver by either party of a breach of any provision of this
Agreement by the other shall not operate or be construed as a waiver of any
subsequent breach.
14. Arbitration
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<PAGE>
Any dispute arising out of or relating to this Agreement or the
transactions contemplated hereby shall be finally resolved and determined by
mandatory, binding arbitration before a single arbitrator in Irvine,
California, in accordance with the then-prevailing commercial arbitration
rules of the American Arbitration Association; PROVIDED, HOWEVER, that no
claim for specific performance or injunctive relief shall be required to be
submitted to arbitration; PROVIDED, FURTHER, that the arbitrator shall apply
the internal laws of the State of California. Each of the parties hereto
submits to the jurisdiction of the arbitrator appointed in accordance with
such rules and (without limiting the effect of the foregoing arbitration
clause) to the jurisdiction of any state or federal court sitting in Orange
County, California, in any action or proceeding arising out of or relating to
this Agreement and agrees that all claims in respect of the action or
proceeding may be heard and determined in any such court. Each of the
parties hereto waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto.
Nothing in this paragraph XIV, however, shall affect the right of any party
to bring any action or proceeding arising out of or relating to this
Agreement or the transactions contemplated hereby in any other court or to
serve legal process in any other manner permitted by law or at equity, for
the purposes of compelling arbitration, enforcing any award in arbitration,
or seeking specific performance or injunctive relief. Any party hereto may
make service on any other party by sending or delivering a copy of the
process to the party to be served at the address and in the manner provided
for the giving of notices in paragraph XVII hereof. Each party hereto agrees
that a final award in any such arbitration or final judgment in any such
action or proceeding so brought shall be conclusive and may be enforced by
entry of such award in any court of competent jurisdiction, suit on the award
or judgment, or in any other manner provided by law or at equity. In the
event of legal action or arbitration to construe or enforce this Agreement,
the prevailing party (as determined by the court or arbitrator, as
applicable) shall be entitled to recover its reasonable attorneys' fees and
costs.
15. Assignment
The rights and obligations of the Company under this Agreement shall
inure to the benefit of and shall be binding upon the successors and assigns
of the Company, but the rights and obligations of Employee are personal and
may not be assigned or delegated without the Company's prior written consent.
16. Entire Agreement
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<PAGE>
This Agreement and all Exhibits attached hereto contain the entire
agreement of the parties and may not be changed orally, but only by an
agreement in writing executed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
17. Law Applicable
This Agreement shall be governed in all respects, whether as to
validity, construction, capacity, performance or otherwise, by the internal
laws of the State of California. In the event any provision of this
Agreement shall be held invalid by a court with jurisdiction over the parties
to this Agreement, such provision shall be deleted from the Agreement, which
shall then be construed to give effect to the remaining provisions thereof.
18. Notices
Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally or sent by facsimile
transmission and shall be deemed given when so delivered personally or sent
by facsimile transmission, if to the Company addressed to the Chief Executive
Officer of the Company at its then principal place of business and if to the
Employee at his home address then shown in the Company's records. For the
purpose of determining compliance with any time limit in this Agreement, a
notice shall be deemed to have been duly given (a) on the date of service or
delivery, if served personally on the party to whom notice is to be given or
sent by facsimile, or (b) on the second business day after mailing, if mailed
to the party to whom the notice is to be given in the manner provided in this
paragraph.
IN WITNESS WHEREOF, the parties intending to be legally bound, have
executed this Agreement as of the day and year first above stated.
NATURADE, INC. EMPLOYEE
- ----------------------------------- -----------------------------------
Bill D. Stewart, Chief Executive Lawrence J. Batina
Officer
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<PAGE>
EXHIBIT A
As used in this Agreement, the phrase "Change in Control" shall mean:
(a) Except as provided by subparagraph (b) hereof, the acquisition by
any person, entity or "group", within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 50% or more of the combined voting power of the
then outstanding securities entitled to vote generally in the election of
directors of the Company; or
(b) Approval by the Board of a reorganization, merger or consolidation
of the Company with any other person, entity or corporation, other than:
(i) a merger or consolidation which would result in the voting
securities of the Company immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of another entity) more than 50% of the combined voting power of the
securities entitled to vote generally in the election of directors of the
Company or such other entity outstanding immediately after such merger or
consolidation; or
(ii) a merger or consolidation effected to implement a
recapitalization of the Company or similar transaction in which no person,
entity or group acquires beneficial ownership of 50% or more of the combined
voting power of the securities entitled to vote generally in the election of
directors of the Company outstanding immediately after such merger or
consolidation; or
(iii) Approval by the Board of a plan of complete liquidation of
the Company or an agreement for the sale or other disposition by the Company
of all or substantially all of the Company's assets (other than a liquidation
or sale pursuant to which all or substantially all of the Company's assets
continue to be owned by an affiliate of the Company).
A-1
<PAGE>
EXHIBIT 10.2
FINANCE AGREEMENT
Dated as of March 17, 1999
NATURADE, INC., a Delaware corporation (the "Borrower"), and HEALTH
HOLDINGS AND BOTANICALS, INC., a California corporation (the "Lender") hereby
agree as of the Effective Date (defined in Section 8.11 below) as follows:
ARTICLE I
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 1.01. THE ADVANCES. The Lender agrees, on the terms and
conditions hereinafter set forth, to consider making advances (the
"Advances") to the Borrower from time to time on any day of the year on which
banks are not required or authorized to close in San Francisco (a "Business
Day") during the period from the date hereof until February 29, 2000 (such
date, or the earlier date of termination of the Commitment (as defined below)
pursuant to Section 5.01, being the "Termination Date") in an aggregate
principal amount not to exceed One Million United States Dollars ($1,000,000)
(the "Commitment"). Each Advance shall be in an amount not less than One
Hundred Thousand United States Dollars ($100,000) or an integral multiple
thereof, EXCEPT that an Advance may be in an amount equal to the entire
unused Commitment. Anything to the contrary appearing herein
notwithstanding, amounts borrowed and repaid or prepaid hereunder may not be
reborrowed.
SECTION 1.02. MAKING THE ADVANCES.
(a) Each Advance shall be made on notice, given not later than
11:00 A.M. (San Francisco time) on the third Business Day prior to the date
of the proposed Advance, by the Borrower to the Lender, specifying the date
and amount
<PAGE>
thereof. Upon Lender's receipt of such notice, Lender may determine in its
sole and complete discretion to make of not to make such requested Advance.
Lender shall notify Borrower whether Lender will make such Advance within two
Business Days of Lender's receipt of notice requesting such Advance;
provided, that if Lender shall not notify Borrower of Lender's agreement to
make such Advance within such period, the Lender shall be deemed to have
notified Borrower that Lender will not make such Advance, and no further
notice of Lender shall be required hereunder. If Lender's shall notify
Borrower of Lender's agreement to make such Advance requested by Borrower and
upon fulfillment of the applicable conditions set forth in Article II, the
Lender will make such Advance available to the Borrower in same day funds by
wire transfer to the Borrower's account referred to in Section 8.02 for wire
transfers.
(b) Each notice from the Borrower to the Lender requesting an
Advance shall be irrevocable and binding on the Borrower. The Borrower shall
indemnify the Lender against any loss, cost or expense incurred by the Lender
as a result of any failure to fulfill on or before the date specified in such
notice for such Advance the applicable conditions set forth in Article II,
including, without limitation, any loss (including loss of anticipated
profits), cost or expense incurred by reason of the liquidation or
reemployment of funds acquired by the Lender to fund the Advance when the
Advance, as a result of such failure, is not made on such date.
SECTION 1.03. REPAYMENT. The Borrower shall repay the aggregate unpaid
principal amount of all Advances, together with all amounts of interest then
accrued thereon, by no later than March 7, 2000 (such date, or the earlier
date on which the Advances shall become due and payable in accordance with
the terms hereof, "Maturity Date").
SECTION 1.04. INTEREST. On the last Business Day of each calendar
quarter beginning after the date hereof, Borrower shall pay to Lender all
amounts of interest then accrued and unpaid with respect to the Advances as
provided below. The Borrower shall pay interest on the unpaid principal
amount of each Advance from the date of such Advance until such principal
amount shall be paid in full, at the rate of eight percent (8%) per annum;
PROVIDED that any amount of principal which is not paid when due (whether at
stated maturity, by acceleration or otherwise) shall bear interest, from the
date on which such amount is due until such amount is paid in full, payable
on demand, at a rate per annum equal at all times to eleven percent (11%) per
annum.
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<PAGE>
SECTION 1.05. PREPAYMENTS. The Borrower may, upon at least three (3)
Business Days' notice to the Lender stating the proposed date and principal
amount of the prepayment, and if such notice is given the Borrower shall,
prepay the outstanding principal amounts of the Advances in whole or in part,
together with accrued interest to the date of such prepayment on the
principal amount prepaid; PROVIDED, HOWEVER, that each partial prepayment
shall be in an aggregate principal amount not less than One Hundred Thousand
United States Dollars ($100,000).
SECTION 1.06. PAYMENTS AND COMPUTATIONS.
(a) The Borrower shall make each payment hereunder not later than
11:00 a.m. (San Francisco time) on the day when due in U.S. dollars to the
Lender at its address referred to in Section 8.02 in same day funds.
(b) All computations of interest shall be made by the Lender on the
basis of a year of 365 or 366 days, as the case may be, in each case for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest is payable. Each
determination by the Lender of any amount of interest payable hereunder shall
be conclusive and binding for all purposes, absent manifest error.
(c) Whenever any payment hereunder shall be stated to be due on a
day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest.
ARTICLE II
CONDITIONS OF LENDING
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<PAGE>
SECTION 2.01. CONDITION PRECEDENT TO INITIAL ADVANCE. The Lender shall
have no obligation to make any Advance hereunder until such time (if any) as
Lender has notified Borrower of Lender's agreement, in Lender's sole and
complete discretion, to make a requested Advance as provided in Article I
above. Upon Lender's agreement (if any) to make the initial Advance, the
obligation of the Lender to make such initial Advance is subject to the
further condition precedent that the Lender shall have received on or before
the day of such Advance the following, each dated such day, in form and
substance satisfactory to the Lender:
(a) Certified copies of resolutions of the Board of Directors of
the Borrower approving this Agreement, and of all documents evidencing other
necessary corporate action and governmental approvals, if any, with respect
to this Agreement as the Lender may reasonably require.
(b) A certificate of the Secretary or an Assistant Secretary of
the Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign this Agreement and the other documents to be
delivered hereunder.
SECTION 2.02. CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender shall
have no obligation to make any Advance hereunder until such time (if any) as
Lender has notified Borrower of Lender's agreement, in Lender's sole and
complete discretion, to make a requested Advance as provided in Article I
above. Upon Lender's agreement (if any) to make an Advance (including the
initial Advance), Lender's obligation to make such Advance shall be subject
to the further conditions precedent that on the date of such Advance (a) the
following statements shall be true, and each of the giving of the notice
requesting such Advance and the acceptance by the Borrower of the proceeds of
such Advance shall constitute a representation and warranty by the Borrower
that on the date of such Advance such statements are true:
(i) The representations and warranties of the Borrower contained
in this Agreement and any Mortgage then in effect are correct on and as of
the date of such Advance, before and after giving effect to such Advance and
to the use of the proceeds thereof, as though made on and as of such date, and
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<PAGE>
(ii) No event has occurred and is continuing, or would result from
such Advance or from the use of the proceeds thereof, which constitutes an
Event of Default (as defined in Section 5.01 hereof) or would constitute an
Event of Default but for the requirement that notice be given or time elapse
or both;
and (b) the Lender shall have received the Warrants (defined below)
corresponding to such Advance in accordance with Article VII below, and such
approvals, opinions or documents as the Lender may reasonably request.
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<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows as of each of (i) the Effective
Date, (ii) the date of each Advance and (iii) the date of each request by
Borrower for an Advance:
(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower of
this Agreement are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action, and do not contravene (i) the
Borrower's charter or by-laws or (ii) any law or any contractual restriction
binding on or affecting the Borrower.
(c) No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required
for the due execution, delivery and performance by the Borrower of this
Agreement.
(d) This Agreement is, and each Mortgage in effect from time to
time will be, the legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with its terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium and other
laws of general application relating to or affecting the enforcement of
creditors' rights and the exercise of judicial discretion
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<PAGE>
in accordance with general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law).
(e) The balance sheet of the Borrower as at September 30, l998,
and the related statements of income and retained earnings of the Borrower
for the fiscal year then ended, copies of which have been furnished to the
Lender, fairly represent the financial condition of the Borrower as at such
date and the results of the operations of the Borrower for the period ended
on such date, all in accordance with generally accepted accounting principles
consistently applied, and since September 30, l998, there has been no
material adverse change in such condition or operations other than the
judgment entered against the Borrower in the PNI Case (defined below) prior
to the date hereof.
(f) Except for PERFORMANCE NUTRITION, INC., DEBTOR, JEFFREY H.
MIMS, TRUSTEE, PLAINTIFF VS. KENNEDY CAPITAL MANAGEMENT, INC., ET. AL
(U.S.B.C.N.D.T.), case No. 97-30566-HCA-7 ; Ad. No.397-3452 (the "PNI Case"),
there is no pending or, to the best knowledge of Borrower, threatened action
or proceeding affecting the Borrower before any court, governmental agency or
arbitrator which the Borrower reasonably believes will be adversely
determined against the Borrower and which, if adversely determined, would
materially and adversely affect the financial condition or operations of the
Borrower, or which purports to affect the legality, validity or
enforceability of this Agreement or any Mortgage.
(g) No judgment or order for the payment of money in excess of
$100,000 has been rendered against the Borrower, regardless of whether (i)
enforcement proceedings shall have been commenced by any creditor upon such
judgment or order or (ii) there shall be any stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise other than the
judgment entered against the Borrower in the PNI Case prior to the date
hereof.
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<PAGE>
(h) Except as set forth in Schedule 3.1(h), the Borrower is the
legal and beneficial owner of the Collateral (defined below) free and clear
of any lien, security interest, option or other encumbrance of any kind
(collectively, "Liens") except for (i) the security interest created by this
Agreement, (ii) security interests in favor of South Bay Bank (the "Bank")
arising under agreements in effect on the date hereof (such Liens being
referred to herein as the "Prior Liens"), (iii) such Liens ("Finova Liens")
as may be contemplated in connection with financing to be provided by Finova
Capital Corporation ("Finova") and (iv) Liens described on Schedule 3.1(h).
Except as set forth in Schedule 3.1(h), no effective financing statement or
other instrument similar in effect covering all or any part of the Collateral
is on file in any recording office, except such as may have been filed in
favor of the Lender relating to this Agreement and in favor of the Bank
relating to the Prior Liens and in favor of Finova.
(i) Appropriate financing statements covering the Collateral and
the Lien created hereby ("Financing Statements") were recorded in all
applicable jurisdictions no later than March 18, 1999. The recordings of
such Financing Statements and this Agreement create a valid and perfected
security interest in the Collateral, securing the payment of the Secured
Obligations (defined below), subject, as to priority, only to the Prior
Liens, the Finova Liens and Liens listed on Schedule 3.1(h), and all filings
and other actions necessary or desirable to perfect and protect such security
interest have been duly taken.
(j) Except with respect to South Bay Bank and Finova (and the
filings of all continuation financing statements necessary to maintain the
effectiveness of the Financing Statements), no consent of any other person
and no authorization, approval or other action by, and no notice to or filing
with, any governmental authority or regulatory body or other third party is
required either (i) for the grant by the Borrower of the assignment and
security interest granted hereby or for the execution, delivery or
performance of this Agreement by the Borrower, (ii) for the perfection or
maintenance of the pledge, assignment and security interest created hereby
(including as to the priority of such pledge, assignment or security
interest) or (iii) to the best knowledge of Borrower, for the exercise
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<PAGE>
by the Lender of its the remedies in respect of the Collateral pursuant to
this Agreement.
(k) There are no conditions precedent to the effectiveness of this
Agreement as against Borrower that have not been satisfied or waived.
ARTICLE IV
COVENANTS OF THE BORROWER
SECTION 4.01. AFFIRMATIVE COVENANTS. So long as any Secured Obligations
(defined below) shall remain unpaid or the Lender shall have any Commitment
hereunder, the Borrower will, unless the Lender shall otherwise consent in
writing:
(a) COMPLIANCE WITH LAWS, ETC. Comply in all material respects
with all applicable laws, rules, regulations and orders, such compliance to
include, without limitation, paying before the same become delinquent all
taxes, assessments and governmental charges imposed upon it or upon its
property except to the extent contested in good faith.
(b) USE OF PROCEEDS. Use the proceeds of all Advances solely for
working capital purposes of the Borrower.
(c) MORTGAGES. The Borrower shall use its best efforts to
deliver to the Lender as soon as practicable, but in all events no later than
May 1, 1999, deeds of trust, trust deeds, mortgages, leasehold mortgages and
leasehold deeds of trust in form satisfactory to the Lender in its
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sole discretion and covering such of the real properties of the Borrower as
the Lender may require (as amended from time to time in accordance with their
terms, the "MORTGAGES"), duly executed by the Borrower, together with
(A) evidence that counterparts of the Mortgages have been
duly recorded in all filing or recording offices that the Lender
may deem necessary or desirable in order to create a valid and
subsisting Lien on the property described therein in favor of
the Lender,
(B) American Land Title Association Lender's Extended
Coverage title insurance policies (the "Mortgage Policies") in
form, with endorsements and in amount acceptable to the Lender,
issued and reinsured by title insurers acceptable to the Lender,
insuring the Mortgages to be valid subsisting Liens on the
property described therein, free and clear of all defects and
encumbrances, excepting such encumbrances as Lender shall
determine in its sole discretion, and providing for such other
insurance and such reinsurance as the Lender may deem necessary
or desirable,
(C) such consents and agreements of lessors and other third
parties, and such estoppel letters and other confirmations, as
the Lender may deem necessary or desirable, and
(D) evidence that all other action that the Lender may deem
necessary or desirable in order to create valid and subsisting
Liens on the property described in the Mortgages has been taken,
subject, as to priority, only to such Liens as the Lender shall
determine in its sole discretion;
PROVIDED, HOWEVER, anything appearing herein to the contrary
notwithstanding, the Borrower shall not be required to encumber its property
located in
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<PAGE>
Paramount, California (the "Paramount Property") under this Section 4.01(c)
until the earlier of (i) June 9, 1999 (the "Applicable Date") and (ii) the
date, if any, such property shall be released to the Borrower from the escrow
in effect on the date hereof; PROVIDED, FURTHER, HOWEVER, that the provisions
of this Section 4.01(c) shall not apply in the event the Paramount Property
is sold prior to the Applicable Date.
SECTION 4.02. NEGATIVE COVENANTS. So long as any Secured Obligations
shall remain unpaid or the Lender shall have any Commitment hereunder, the
Borrower will not, without the written consent of the Lender:
(a) LIENS, ETC. Create or suffer to exist any lien, security
interest or other charge or encumbrance, or any other type of preferential
arrangement, upon or with respect to any of its properties, whether now owned
or hereafter acquired, or assign any right to receive income, in each case to
secure or provide for the payment of any Debt (as defined in subsection (b)
of this Section 4.02) of any person or entity, other than (i) Mortgages to
the benefit of persons or entities other than the Lender, or (ii) Liens
encumbering personal property securing Debt in aggregate amount not in excess
of Five Million Dollars ($5,000,000) at any one time outstanding, or (iii)
Liens solely securing obligations of the Borrower to the Lender.
(b) DEBT. "DEBT" means (i) indebtedness for borrowed money, (ii)
obligations evidenced by bonds, debentures, notes or other similar
instruments, (iii) obligations to pay the deferred purchase price of property
or services, (iv) obligations as lessee under leases which shall have been or
should be, in accordance with generally accepted accounting principles,
recorded as capital leases, and (v) obligations under direct or indirect
guaranties in respect of, and obligations (contingent or otherwise) to
purchase or otherwise acquire, or otherwise to assure a creditor against
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<PAGE>
loss in respect of, indebtedness or obligations of others of the kinds
referred to in clause (i) through (iv) above.
(c) LEASE OBLIGATIONS. Create or suffer to exist any obligations
for the payment of rental for any property under leases or agreements to
lease having a term of one year or more which would cause the direct or
contingent liabilities of the Borrower in respect of all such obligations to
exceed $600,000 payable in any period of 12 consecutive calendar months.
(d) SUBSIDIARIES. Form, or acquire any interest in, any
subsidiary.
ARTICLE V
EVENTS OF DEFAULT
SECTION 5.01. EVENTS OF DEFAULT. If any of the following events ("Events
of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of, or interest
on, any Advance when the same becomes due and payable; or
(b) Any representation or warranty made by the Borrower herein or
by the Borrower (or any of its officers) in connection with this Agreement
shall prove to have been incorrect in any material respect when made; or
(c) The Borrower shall fail to perform or observe any material
term, covenant or agreement contained in this Agreement (other than those
specified in Section 5.01(a)) on its part to be performed or observed if such
failure shall remain unremedied for 10 days after written notice thereof
shall have been given to the Borrower by the Lender; or
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(d) The Borrower shall fail to pay any principal of or premium or
interest on any Debt (as defined in Section 4.02(b)) (but excluding Debt
evidenced hereby) of the Borrower, when the same becomes due and payable
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise), and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such
Debt; or any other event shall occur or condition shall exist under any
agreement or instrument relating to any such Debt and shall continue after
the applicable grace period, if any, specified in such agreement or
instrument, if the effect of such event or condition is to accelerate, or to
permit the acceleration of, the maturity of such Debt; or any such Debt shall
be declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), redeemed, purchased or defeased, or
an offer to prepay, redeem, purchase or defease such Debt shall be required
to be made, in each case prior to the stated maturity thereof; or
(e) The Borrower shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors;
or any proceeding shall be instituted by or against the Borrower seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee, custodian or other similar
official for it or for any substantial part of its property and, in the case
of any such proceeding instituted against it (but not instituted by it),
either such proceeding shall remain undismissed or unstayed for a period of
30 days, or any of the actions sought in such proceeding (including, without
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limitation, the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or for any
substantial part of its property) shall occur; or the Borrower shall take any
corporate action to authorize any of the actions set forth above in this
subsection (e);
(f) any Warrant shall fail to be valid and enforceable in
accordance with the terms hereof;
(g) this Agreement shall fail to create a valid and perfected Lien
in any material portion of the Collateral securing the payment of the Secured
Obligations, subject, as to priority, only to the Prior Liens, the Finova
Liens and Liens described on Schedule 3.1(h); or
(h) any event of default shall occur and be continuing under any
Mortgage securing the Borrower's obligations hereunder in effect from time to
time in favor of the Lender;
THEN, and in any such event, the Lender (i) may, by notice to the
Borrower, declare its obligation to make Advances to be terminated, whereupon
the same shall forthwith terminate, and (ii) may, by notice to the Borrower,
declare the Advances, all interest thereon and all other amounts payable
under this Agreement to be forthwith due and payable, whereupon the Advances,
all such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest, or further notice of any kind,
all of which are hereby expressly waived by the Borrower; provided, however,
that in the event of an actual or deemed entry of an order for relief with
respect to the Borrower under the Federal Bankruptcy Code, (A) the obligation
of the Lender to make Advances shall automatically be terminated and (B) the
Advances and all such interest and all such amounts shall automatically
become and be due and payable, without presentment, demand, protest or any
notice of any kind, all of which are hereby expressly waived by the Borrower.
SECTION 5.02. LENDER'S RIGHT TO CONVERT. Without limitation to any
other right or remedy Lender may have under this
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Agreement, applicable law, or otherwise, upon the occurrence and during
the continuance of any Event of Default, the Lender may, by notice to
the Borrower in accordance with Section 8.02, convert all or any part
of the Advances and other Secured Obligations into common stock of the
Borrower at a conversion price equal to the lower of (i) $2.00 per
share or (b) the Fair Market Value of the Borrower's common stock
determined with respect to the date of such notice or, at Lender's sole
election, on the Maturity Date. Upon Borrower's receipt of such
notice, Borrower shall immediately issue shares of common stock to the
Lender as provided in such notice. Upon such issuance the amount of
the Secured Obligations shall be reduced by the amount applied to such
conversion.
SECTION 5.03 REMEDIES WITH RESPECT TO COLLATERAL. Without
limitation to any other right or remedy Lender may have under this Agreement,
applicable law, or otherwise, upon the occurrence and during the continuance
of any Event of Default,
(a) The Lender may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party upon default
under the Uniform Commercial Code in effect in the State of California at
such time (the "Uniform Commercial Code") (whether or not the Uniform
Commercial Code applies to the affected Collateral) and also may (i) require
the Borrower to, and the Borrower hereby agrees that it will at its expense
and upon request of the Lender forthwith, assemble all or part of the
Collateral as directed by the Lender and make it available to the Lender at a
place to be designated by the Lender that is reasonably convenient to both
parties and (ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private
sale, at any of the Lender's offices or elsewhere, for cash, on credit or for
future delivery, and upon such other terms as the Lender may deem
commercially reasonable. The Borrower agrees that, to the extent notice of
sale shall be required by law, at least ten days' notice to the Borrower of
the
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time and place of any public sale or the time after which any private sale is
to be made shall constitute reasonable notification. The Lender shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given. The Lender may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.
(b) All cash proceeds received by the Lender in respect of any
sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Lender, be held by the Lender as
collateral for, and/or then or at any time thereafter applied in whole or in
part by the Lender against all or any part of the Secured Obligations in such
order as the Lender shall elect. Any surplus of such cash or cash proceeds
held by the Lender and remaining after payment in full of all the Secured
Obligations shall be paid over to the Borrower or to whomsoever may be
lawfully entitled to receive such surplus.
(c) The Lender may exercise any and all rights and remedies of the
Borrower under or in connection with the Assigned Agreements or otherwise in
respect of the Collateral, including, without limitation, any and all rights
of the Borrower to demand or otherwise require payment of any amount under,
or performance of any provision of, any Assigned Agreement.
(d) All payments received by the Borrower under or in connection
with any Assigned Agreement or otherwise in respect of the Collateral shall
be received in trust for the benefit of the Lender, shall be segregated from
other funds of the Borrower and shall be forthwith paid over to the Lender in
the same form as so received (with any necessary endorsement).
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ARTICLE VI
SECURITY INTEREST
SECTION 6.01. GRANT OF SECURITY. The Borrower hereby assigns and
pledges to the Lender, and hereby grants to the Lender a security
interest in, the following (collectively, the "Collateral"):
(a) all of the Borrower's right, title and interest, whether now
owned or hereafter acquired, in and to all equipment in all of its forms,
wherever located, now or hereafter existing, all fixtures and all parts
thereof and all accessions thereto (any and all such equipment, fixtures,
parts and accessions being the "Equipment");
(b) all of the Borrower's right, title and interest, whether now
owned or hereafter acquired, in and to all inventory in all of its forms,
wherever located, now or hereafter existing (including, but not limited to,
(i) all raw materials and work in process therefor, finished goods thereof
and materials used or consumed in the manufacture or production thereof, (ii)
goods in which the Borrower has an interest in mass or a joint or other
interest or right of any kind (including, without limitation, goods in which
the Borrower has an interest or right as consignee) and (iii) goods that are
returned to or repossessed by the Borrower), and all accessions thereto and
products thereof and documents therefor (any and all such inventory,
accessions, products and documents being the "Inventory");
(c) all of the Borrower's right, title and interest, whether now
owned or hereafter acquired, in and to all accounts, contract rights, chattel
paper, instruments, deposit accounts, general intangibles and
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other obligations of any kind, now or hereafter existing, whether or not
arising out of or in connection with the sale or lease of goods or the
rendering of services, and all rights now or hereafter existing in and to all
security agreements, leases and other contracts securing or otherwise
relating to any such accounts, contract rights, chattel paper, instruments,
deposit accounts, general intangibles or obligations (any and all such
accounts, contract rights, chattel paper, instruments, deposit accounts,
general intangibles and obligations, to the extent not referred to in clause
(d), (e) or (f) below, being the "Receivables", and any and all such leases,
security agreements and other contracts being the "Related Contracts");
(d) all of the Borrower's right, title and interest in and to each
of the agreements to which the Borrower is now or may hereafter become a
party, in each case as such agreements may be amended or otherwise modified
from time to time (collectively, the "Assigned Agreements"), including,
without limitation, (i) all rights of the Borrower to receive moneys due and
to become due under or pursuant to the Assigned Agreements, (ii) all rights
of the Borrower to receive proceeds of any insurance, indemnity, warranty or
guaranty with respect to the Assigned Agreements, (iii) claims of the
Borrower for damages arising out of or for breach of or default under the
Assigned Agreements and (iv) the right of the Borrower to terminate the
Assigned Agreements, to perform thereunder and to compel performance and
otherwise exercise all remedies thereunder (all such Collateral being the
"Agreement Collateral");
(e) all of the following (collectively, the "Account Collateral"):
(i) all deposit accounts of the Borrower, all funds held therein and all
certificates and instruments, if any, from time to time representing or
evidencing such deposit accounts; (ii) all notes, certificates of deposit,
deposit accounts, checks and other instruments from time to time hereafter
delivered to or otherwise possessed by the Lender for or on behalf of the
Borrower in substitution for or in addition to any or all of the then
existing Account Collateral; and (iii) all interest, dividends, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of the then
existing Account Collateral; and
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(f) all proceeds of any and all of the foregoing Collateral
(including, without limitation, proceeds that constitute property of the
types described in clauses (a) - (e) of this Section 6.01) and, to the extent
not otherwise included, all (i) payments under insurance (whether or not the
Lender is the loss payee thereof), or any indemnity, warranty or guaranty,
payable by reason of any loss or damage to or otherwise with respect to any
of the foregoing Collateral and (ii) cash.
SECTION 6.02. SECURITY FOR OBLIGATIONS. This Agreement secures the
repayment of all obligations of the Borrower now or hereafter existing under
this Agreement and any other document or instrument delivered in connection
herewith, whether for principal, interest, fees, expenses or otherwise (all
such obligations being the "Secured Obligations"). Without limiting the
generality of the foregoing, this Agreement secures the payment of all
amounts that constitute part of the Secured Obligations and would be owed by
the Borrower to the Lender but for the fact that they are unenforceable or
not allowable due to the existence of a bankruptcy, reorganization or similar
proceeding involving the Borrower.
SECTION 6.03. BORROWER REMAINS LIABLE. Anything herein to the contrary
notwithstanding, (a) the Borrower shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to
perform all of its duties and obligations thereunder to the same extent as if
this Agreement had not been executed, (b) the exercise by the Lender of any
of the rights hereunder shall not release the Borrower from any of its duties
or obligations under the contracts and agreements included in the Collateral
and (c) the Lender shall have no obligation or liability under the contracts
and agreements included in the Collateral by reason of this Agreement, nor
shall the Lender be obligated to perform any of the obligations or duties of
the Borrower
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thereunder or to take any action to collect or enforce any claim for
payment assigned hereunder.
SECTION 6.04. FURTHER ASSURANCES. (a) The Borrower agrees that from
time to time, at the expense of the Borrower, the Borrower will promptly
execute and deliver all further instruments and documents, and take all
further action, that may be necessary or desirable, or that the Lender may
reasonably request, in order to perfect and protect any pledge, assignment or
security interest granted or purported to be granted hereby or to enable the
Lender to exercise and enforce its rights and remedies hereunder with respect
to any Collateral.
(b) The Borrower hereby authorizes the Lender to file one or more
financing or continuation statements, and amendments thereto, relating to all
or any part of the Collateral without the signature of the Borrower where
permitted by law. A photocopy or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
(c) The Borrower will furnish to the Lender from time to time
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Lender may
reasonably request, all in reasonable detail.
SECTION 6.05. AS TO EQUIPMENT AND INVENTORY. (a) The Borrower shall
keep the Equipment and Inventory (other than Inventory sold in the ordinary
course of business) at the Borrower's property in Paramount, California or
at 14370 Myford Road, Irvine, California.
(b) The Borrower shall cause the Equipment to be maintained and
preserved in the same condition, repair and working order as when new,
ordinary wear and tear excepted, and in accordance with any manufacturer's
manual, and shall forthwith, or in the case of any material
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loss or damage to any of the Equipment as quickly as practicable after the
occurrence thereof, make or cause to be made all repairs, replacements and
other improvements in connection therewith that are necessary or desirable to
such end. The Borrower shall promptly furnish to the Lender a statement
respecting any material loss or damage to any of the Equipment.
(c) The Borrower shall pay promptly when due all property and
other taxes, assessments and governmental charges or levies imposed upon, and
all claims (including claims for labor, materials and supplies) against, the
Equipment and Inventory. In producing the Inventory, the Borrower shall
comply with all requirements of the Fair Labor Standards Act.
SECTION 6.06. INSURANCE. The Borrower shall, at its own expense,
maintain insurance with respect to the Equipment and Inventory in such
amounts, against such risks, in such form and with such insurers, as shall be
reasonably satisfactory to the Lender from time to time. Further, the
Borrower shall, at the request of the Lender, duly exercise and deliver
instruments of assignment of such insurance policies to comply with the
requirements of this Agreement and cause the insurers to acknowledge notice
of such assignment.
SECTION 6.07. THE LENDER'S DUTIES. The powers conferred on the Lender
hereunder are solely to protect its interest in the Collateral and shall not
impose any duty upon it to exercise any such powers. Except for the safe
custody of any Collateral in its possession and the accounting for moneys
actually received by it hereunder, the Lender shall have no duty as to any
Collateral, or as to the taking of any necessary steps to preserve rights
against any parties or any other rights pertaining to any Collateral.
SECTION 6.08. CONTINUING SECURITY INTEREST. This Agreement shall
create a continuing security interest in the Collateral and
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shall (a) remain in full force and effect until the later of the indefeasible
cash payment in full of the Secured Obligations and the Termination Date, (b)
be binding upon the Borrower, its successors and assigns and (c) inure,
together with the rights and remedies of the Lender hereunder, to the benefit
of the Lender, and its successors, transferees and assigns.
SECTION 6.09. RELEASE AND TERMINATION. Upon the later of indefeasible
cash payment in full of the Secured Obligations and the Termination Date, the
pledge, assignment and security interest granted hereby shall terminate and
all rights to the Collateral shall revert to the Borrower. Upon any such
termination, the Lender will, at the Borrower's expense, execute and deliver
to the Borrower such documents as the Borrower shall reasonably request to
evidence such termination.
SECTION 6.10. THE MORTGAGES. In the event that any of the Collateral
hereunder is also subject to a valid and enforceable Lien under the terms of
any Mortgage and the terms of such Mortgage are inconsistent with the terms
of this Agreement, then with respect to such Collateral, the terms of such
Mortgage shall be controlling in the case of fixtures and leases, letting and
licenses of, and contracts and agreements relating to the lease of real
property, and the terms of this Agreement shall be controlling in the case of
all other Collateral.
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ARTICLE VII
THE WARRANTS
SECTION 7.01. GRANT OF WARRANTS.
(a) The Borrower hereby agrees to grant to the Lender warrants (the
"Warrants") to acquire an initial aggregate of 300,000 shares of common stock
of the Borrower (the "Common Stock") on the terms and conditions set forth
below.
(b) Simultaneously with each Advance, and as a condition precedent
thereto, the Borrower shall issue to Lender Warrants to purchase the number
of shares of Common Stock equal to the product of (.3) and the amount of such
Advance.
(c) The initial exercise prices for each of the Warrants shall be
$2.125 per share, subject to adjustment as provided herein (the "Exercise
Price").
(d) Each of the Warrants shall expire on the tenth anniversary of
the date on which Warrants are first issued.
SECTION 7.02. EXERCISABILITY OF WARRANTS. Each of the Warrants shall
be exercisable in whole or in part, on any Business Day following their
respective date of issuance.
SECTION 7.03. EXERCISE OF WARRANTS. (a) In order to exercise the
Warrants, the Lender shall, from time to time, give
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written notice to the Borrower specifying the number of shares of Common
Stock to be purchased pursuant to such exercise of Warrants. Such notice
shall be accompanied by payment of the applicable Exercise Price as provided
in Section 7.01. Warrants may not at any time be exercised with respect to
fewer than the lesser of (i) 100 shares of Common Stock, or (ii) the number
of shares of Common Stock which may be purchased upon exercise of all
Warrants then owned by the Lender. In no event shall the Borrower be
required to issue fractional shares to the Lender.
(b) The Borrower shall not be required to issue or transfer any
certificate or certificates for shares of the Borrower's Common Stock
purchased upon exercise of the Warrants granted under this Agreement until
all then applicable requirements of law and the national securities exchange
or exchanges (including NASDAQ), if any, on which the Borrower's securities
are then listed have been met. The Borrower will act promptly and in good
faith to make all reasonable efforts to meet all applicable requirements for
such issuance or transfer.
SECTION 7.04. PAYMENT OF EXERCISE PRICE. The Exercise Price may be
paid to the Borrower at the time of delivery of notice of exercise of the
Warrants any of: (i) in cash (by check, money order or wire transfer); (ii)
with previously acquired shares of Common Stock having a fair market value
equal to the Exercise Price; (iii) with cash and previously acquired shares
of Common Stock having a Fair Market Value which, together with such cash, is
equal to the Exercise Price or (iv) by set off of the Secured Obligations
outstanding at such time in whole or in part (or any combination of the
foregoing). In addition, at the election of the Lender, in lieu of paying the
Exercise Price as provided above, the Warrants may be exercised by reducing
the number of shares of Common Stock underlying the Warrants ("Shares")
received
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upon such exercise (a "Cashless Exercise"). The number of Shares delivered
upon a Cashless Exercise shall be determined based on the formula:
N = E
---------
FMV
where:
N = the number of Shares which would otherwise have been
received but are not to be received upon a Cashless Exercise
E = the aggregate Exercise Price for the number of Shares being
exercised that would have been paid without the Cashless
Exercise.
FMV = the Fair Market Value (defined below) determined with
respect to the date of the notice of exercise.
"Fair Market Value" means, with respect to any date of determination,
the average closing price of the Common Stock on the principal market or the
facilities of the NASDAQ Bulletin Board (or if the Common Stock shall then be
listed on the NASDAQ National Market or other national exchange, such
exchange) for the ten trading days (or, if no trades have closed in any such
trading day, the closing bid price for such trading day) prior to such date
of determination (or if the Common Stock is not listed on an exchange or on
the facilities of NASDAQ National Market or the NASDAQ Bulletin Board, the
average of the closing bid and cash prices for the ten trading days prior to
such date of determination).
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SECTION 7.04. NATURE OF WARRANTS. The Warrants have been granted in
consideration of the Lender's undertaking to make the Commitment available
hereunder, and not as interest payable with respect to the Advances or any
other loan. The grant of the Warrants by the Borrower to Lender is
irrevocable and is in no way conditioned upon the performance of any specific
future services and such Warrants are and at all times shall be fully vested
after their issuance in Lender subject only to this Agreement.
SECTION 7.05. TRANSFERABILITY OF WARRANTS. The Warrants granted
hereunder shall not be transferred, assigned, pledged or hypothecated in any
way (whether by operation of law or otherwise) other than in accordance with
applicable law. Any attempt to transfer, assign, pledge, hypothecate, or
otherwise dispose of the Warrants or such rights contrary to the provisions
of this Agreement, or the levy of any attachment or similar process upon the
Warrants or such rights, shall be null and void.
SECTION 7.06 REGISTRATION OF THE SHARES. The Borrower agrees that it
will, within a reasonable time after the date on which Borrower shall be
eligible to register its stock on Form S-3 (or the then equivalent form),
register at the Borrower's expense on Form S-3 (or the then equivalent form)
(the "S-3 Registration"), and maintain at all times the effectiveness of such
S-3 Registration of the shares of Common Stock subject to the Warrants, and
the shares of Common which may be obtained by the Lender pursuant to its
conversion rights under Article III above (such Shares and other shares being
referred to herein as the "Registrable Securities"), so that such shares may
be publicly sold by the Lender and transferees thereof. During any period in
which the S-3 Registration of the Registrable Securities is not effective, or
if it is determined by the Borrower that Form S-3 (or the then equivalent
form) is not available under applicable rules to effect the registration of
the Registrable Securities for resale, then at any time the Borrower proposes
to file a registration statement to register securities under the Securities
Act of 1933, as amended ("1933 Act"), it shall, at least 30 days prior to
each such filing, give written notice of such proposed filing to the Lender,
each transferee thereof and each Lender of Registrable Securities at their
respective addresses as they appear on the
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records of the Borrower, and shall offer to include and shall include in such
filing any proposed disposition of the Registrable Securities, upon receipt
by the Borrower, not less than 10 days prior to the proposed filing date, of
a request therefor setting forth the facts with respect to such proposed
disposition and all other requested information with respect to such person
reasonably necessary to be included in such Registration Statement (the
"Request Securities"). In the event that the managing underwriter for said
offering advises the Borrower in writing that the inclusion of all or any
portion of such Request Securities in the offering would be detrimental to
the offering, or that the disposition of all or a portion of the Request
Securities should be held back for a period of not more than 90 days
following the effectiveness of such registration statement, such Request
Securities shall not be included in the Registration Statement, or shall be
held back, as the case may be, provided that if any securities held by
persons with similar rights (a) are to be included in the Registration
Statement, the Request Securities shall be included on a pro rata basis and
(b) are not to be held back, the Request Securities shall not be held back on
a pro rata basis. Until such registration, the Lender understands that the
Registrable Securities are restricted securities subject to the provisions of
this Agreement.
SECTION 7.07. REPRESENTATIONS BY LENDER. (a) The Lender (i) is a
sophisticated investor with knowledge and experience in business and
financial matters, (ii) has received certain information concerning the
Borrower and has had the opportunity to obtain additional information as
desired in order to evaluate the merits and risks inherent in the Warrants
and the Registrable Securities (collectively, the "Securities"), and (iii) is
able to bear the economic risk in the Securities, (iv) is an accredited
investor as defined under Rule 501 of the 1933 Act.
(b) By accepting the Warrants under this Agreement, the Lender
acknowledges that any and all Registrable Securities purchased under this
Agreement shall be acquired for investment and not for
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distribution, as that term is used in the 1933 Act, unless in the opinion of
legal counsel to the Borrower such distribution is in compliance with or
exempt from the registration requirements of the 1933 Act, and the Lender
agrees (if the sale of the Shares upon exercise of the Warrants has not
previously been registered under the 1933 Act) to execute a certificate to
such effect at the time of exercising such Warrants; and the Lender further
acknowledges and understands that the Registrable Securities purchased upon
exercise of the Warrants may have to be held indefinitely unless they have
been or are subsequently registered under the 1933 Act or an exemption from
such registration is available; the Lender understands that the certificates
evidencing such Registrable Securities will (if the sale of the Registrable
Securities has not previously been registered under the 1933 Act) be
imprinted with a legend substantially as follows:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"). These
shares have been acquired for investment and not with a view to
distribution or resale, and may not be sold, mortgaged, pledged,
hypothecated or otherwise transferred without an effective
registration statement for such shares under the Act, or unless an
exemption from registration is available with respect to any proposed
sale or transfer."
(c) The Lender acknowledges and understands that the Lender may
have to bear the economic risk associated with the purchase of the Shares for
an indefinite period of time because the shares have not been registered
under the 1933 Act and, therefore, cannot be sold unless they are so
registered or an exemption from registration is available with respect to any
proposed sale or transfer.
SECTION 7.08 CERTAIN ADJUSTMENTS. (a) In the event of any change in the
Common Stock by reason of any stock dividend, recapitalization,
reorganization, merger, consolidation, split-up, combination, exchange of
shares, issuance of additional shares or rights to purchase shares, or any
other change affecting the Common Stock or
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issuance of shares of Common Stock (collectively, "Dilution Events"), in each
case occurring after the date hereof, (i) the number of shares of Common
Stock which may be acquired after such Dilution Event upon exercise of the
Warrants shall be ratably adjusted automatically and without the act of the
Borrower or any other person, so that the percentage of all of the Borrower's
outstanding Common Stock (as determined on a fully diluted basis) which may
be acquired upon exercise of the Warrants is the same following such Dilution
Event as it was immediately preceding such Dilution Event and (ii) the
Exercise Price shall be adjusted so that the aggregate Exercise Price payable
upon exercise of all Warrants after giving effect to clause (i) above is the
same after such Dilution Event as it was immediately prior to such Dilution
Event; PROVIDED, HOWEVER, anything to the contrary appearing herein
notwithstanding, this Section 7.08 shall in no event (x) reduce, or be
construed to reduce, the number of shares of Common Stock which may be
acquired upon exercise of the Warrants or to increase the Exercise Price
payable with respect to any share of Common Stock or (y) apply to any
Dilution Event arising on account of the Borrower's satisfaction of
obligations existing before the date of this Agreement, including, without
limitation, the Borrower's issuance of shares of Common Stock pursuant to
exercise of any options or contract rights outstanding on the date hereof.
(b) Anything to the contrary appearing in this Agreement
notwithstanding, the Lender may, by notice to the Borrower no later than
ninety days after the Effective Date, cause the Exercise Price for each share
of Common Stock which may be acquired by exercise of the Warrants to be reset
to equal the Fair Market Value (as defined in Section 7.04 above) as
determined with respect to the date of such notice, whereupon, the Exercise
Price shall be adjusted in accordance with such notice without further action
of the Borrower, Lender or any other person. Lender may exercise its right
to reset the Exercise Price pursuant to this Section 7.08(b) one or more
times, in each case in Lender's sole and complete discretion. Any adjustment
in the Exercise Price under this
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Section 7.08(b) shall be in addition to, and not in limitation on,
adjustments required to be made under Section 7.08(a).
SECTION 7.09 NO RIGHTS AS SHAREHOLDERS. Neither the Lender nor any
transferee thereof shall be, or have any rights or privileges of, a
shareholders of the Borrower concerning the shares issuable upon exercise of
the Warrants granted under this Agreement, unless, until and to the extent
the Warrants have been duly exercised in accordance with this Agreement.
SECTION 7.10 CERTAIN CORPORATE TRANSACTIONS. Nothing in this Agreement
shall in any way prohibit the Borrower from merging with or consolidating
into another corporation, or from selling or transferring all or
substantially all of its assets, or from distributing all or substantially
all of its assets to its shareholders in liquidation, or from dissolving and
terminating its corporate existence. In the event the Borrower merges or
consolidates with another corporation, or all or substantially all of the
Borrower's capital stock or assets are acquired by or are subject to a tender
offer of another corporation, entity or person (collectively, together with
each event described in the immediately preceding sentence, "Control
Events"), and the surviving or acquiring corporation, person or entity issues
shares of stock or other consideration to the Borrower's stockholders in
connection with the merger, consolidation or acquisition, the surviving or
acquiring corporation shall adopt this Agreement (including, without
limitation the anti-dilution provisions of Section 7.08 hereof) and, upon the
exercise of the Warrants, the Lender shall, at no additional cost (other than
the Exercise Price), be entitled to receive, in lieu of the number of shares
of Common Stock to which such Warrants are then exercisable, the number and
class of shares of stock or other consideration to which the Lender would
have been entitled pursuant to the terms of the merger, consolidation or
acquisition if immediately prior thereto the Lender had been the Lender of
record of the number of shares of Common Stock equal to the number of shares
of Common Stock for which the Warrants shall then be exercisable. Anything
to the contrary appearing herein or in any Warrant notwithstanding, each
Warrant shall immediately become exercisable upon the occurrence of any
Control Event.
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<PAGE>
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. AMENDMENTS, ETC. No amendment or waiver of any provision
of this Agreement, nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and
signed by the Lender, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
SECTION 8.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier
communication) and mailed, telecopied or delivered, if to the Borrower, at
its address at
NATURADE, INC.
7110 East Jackson Street
Paramount, California 90723
Fax: 562-531-8170;
with a copy to
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attention: James M. Rene, Esq.
Fax: 213-620-1398
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<PAGE>
and if to the Lender, at its address at:
HEALTH HOLDINGS AND BOTANICALS, INC.
c/o Doyle & Boissiere LLC
330 Primrose Road, Suite 500
Burlingame, California 94104
Fax: (650) 685-8711;
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<PAGE>
with a copy to:
Christensen, Miller, Fink, Jacobs,
Glaser, Weil & Shapiro, LLP
2121 Avenue of the Stars
Suite 1800
Los Angeles, California 90067
Attn: Kenneth G. McKenna, Esq.
Fax: 310-556-2920
or, as to each party, at such other address as shall be designated by
such party in a written notice to the other party. All such notices and
communications shall effective when actually received by the party notified.
SECTION 8.03. NO WAIVER; REMEDIES. No failure on the part of the Lender
to exercise, and no delay in exercising, any right hereunder shall operate as
a waiver thereof; nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
SECTION 8.04. CERTAIN TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistent with those applied in the preparation of the
financial statements referred to in Section 3.01(e). The term "to the best
knowledge of" means, when modifying a representation, warranty or other
statement of any person, that the fact or situation described therein is
known by the person or, in the case a person other than a natural person,
known by a director, officer or consultant of such person, or with the
exercise of reasonable due diligence under the circumstances (in
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<PAGE>
accordance with the standard of what a reasonable person in similar
circumstances would have done) would have been known by the person or
director, officer or consultant. As used herein the term "including" shall be
construed to mean "including, without limitation", unless expressly stated to
the contrary.
SECTION 8.05. COSTS, EXPENSES AND TAXES.
(a) The Borrower agrees to pay on demand all costs and expenses in
connection with the preparation, execution, delivery, administration,
modification and amendment of this Agreement and the other documents to be
delivered hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of counsel for the Lender with respect thereto and
with respect to advising the Lender as to its rights and responsibilities
under this Agreement. The Borrower further agrees to pay on demand all costs
and expenses, if any (including reasonable counsel fees and expenses), in
connection with the enforcement (whether through negotiations, legal
proceedings or otherwise) of this Agreement and the other documents to be
delivered hereunder, including, without limitation, reasonable counsel fees
and expenses in connection with the enforcement of rights under this Section
8.05(a). In addition, the Borrower shall pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution
and delivery of this Agreement and the other documents to be delivered
hereunder, and agrees to save the Lender harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify the Lender from and against
any and all claims, losses and liabilities growing out of or resulting from
this Agreement (including, without limitation, enforcement of this
Agreement), except claims, losses or liabilities resulting from the Lender's
gross negligence or willful misconduct as determined by a final judgment of a
court of competent jurisdiction.
(c) The Borrower will upon demand pay to the Lender the amount of
any and all reasonable expenses, including the
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<PAGE>
reasonable fees and expenses of its counsel and of any experts and agents,
that the Lender may incur in connection with (i) the administration of this
Agreement, (ii) the custody, preservation, use or operation of, or the sale
of, collection from or other realization upon, any of the Collateral, (iii)
the exercise or enforcement of any of the rights of the Lender hereunder or
(iv) the failure by the Borrower to perform or observe any of the provisions
hereof.
SECTION 8.06. RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default the Lender is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set
off and apply any and all amounts at any time held and other indebtedness at
any time owing by the Lender to or for the credit or the account of the
Borrower against any and all of the obligations of the Borrower now or
hereafter existing under this Agreement, whether or not the Lender shall have
made any demand under this Agreement and although such obligations may be
unmatured. The Lender agrees promptly to notify the Borrower after any such
set-off and application, PROVIDED that the failure to give such notice shall
not affect the validity of such set-off and application. The rights of the
Lender under this Section are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which the Lender may
have.
SECTION 8.07. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Lender.
SECTION 8.08. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
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<PAGE>
SECTION 8.09. USURY Anything to the contrary appearing in this
Agreement notwithstanding, if any return, interest payment, or other charge
payable under this Agreement shall at any time exceed the maximum amount
chargeable by applicable law, then the applicable rate of return or interest
shall be the maximum rate permitted by applicable law.
SECTION 8.10 SUBORDINATION. The Borrower's obligation under this
Agreement shall in all respects be subject and subordinate to the Borrower's
obligations to the Bank and Finova, and the Liens created in the Collateral
hereby shall in all respects be subject and subordinate to the Prior Liens
and to Liens securing Borrower's obligations to Finova, to the extent such
Prior Liens and Finova Liens shall constitute valid and perfected Liens on
Collateral or other property encumbered by Mortgages in favor of such
creditors. Lender hereby agrees that, upon Bank's or Finova's request, Lender
will in good faith negotiate and enter into a reasonable subordination
agreement with the Bank or Finova, as applicable, respecting the Secured
Obligations and the Lien created hereby and by the Mortgages.
SECTION 8.11 EFFECTIVE DATE. This Agreement shall become effective
and binding on the parties hereto upon the execution and delivery hereof by
the parties hereto and receipt by Lender of an effective consent of South
Bay Bank to this Agreement and the transactions contemplated hereby in form
and substance satisfactory to Lender (such date of effectiveness is referred
to herein as the "Effective Date").
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the
date first above written.
NATURADE, INC.
By:
Title:
HEALTH HOLDINGS AND BOTANICALS, INC.
By
Title:
-37-
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