<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 September 30, 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)
<TABLE>
<S> <C>
DELAWARE 23-2442709
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
</TABLE>
14370 MYFORD RD. IRVINE, CALIFORNIA 92606
-----------------------------------------
(Address of principal executive offices)
(714) 573-4800
--------------
(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 October 31, 1999.
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 1999
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
-------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1999 3
(unaudited) and December 31, 1998 (unaudited)
Statements of Operations for the three and nine month 5
periods ended September 30, 1999 (unaudited) and
September 30, 1998 (unaudited)
Statements of Cash Flows for nine month periods ended 6
September 30, 1999 (unaudited) and September 30, 1998
(unaudited)
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURADE, INC.
Balance Sheets
Assets
--------
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,158,460 $842,029
Accounts receivable 1,386,279 1,294,612
Related party receivable - 600,000
Inventories 2,620,456 2,093,981
Refundable income taxes - 163,416
Prepaid expenses and other current assets 211,272 325,853
------------------- ----------------
Total current assets 5,376,467 5,319,891
Property and equipment, net 310,660 1,981,326
Intangible assets, net 102,520 1,106,358
Other assets 103,199 116,014
------------------- ----------------
Total assets 5,892,846 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>
September 30, 1999 December 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $1,732,678 $891,069
Accrued expenses 266,851 565,794
Line of credit 980,308 1,450,000
Notes payable 388,667 -
Amount due to related party, net of
debt discount of $237,366 1,362,634 -
Current portion of long-term debt 31,452 193,383
--------------------- -----------------
Total current liabilities 4,762,590 3,100,246
--------------------- -----------------
Long-term debt, less current maturities 143,866 1,964,324
--------------------- -----------------
Amount due to related party 3,000,000 -
Stockholders' (deficit) equity:
Common stock, par value $0.0001 per share;
authorized, 50,000,000 shares; issued and outstanding,
5,349,084 at September 30, 1999 and 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 9,018,535 7,453,201
Accumulated deficit (11,032,803) (3,994,834)
---------------------- -----------------
Total stockholders' (deficit) equity (2,013,610) 3,459,019
---------------------- -----------------
Total liabilities and stockholders' (deficit) equity 5,892,846 8,523,589
====================== =================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NATURADE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 3,298,259 $ 3,693,196 $ 8,432,184 $ 10,777,915
Cost of sales 1,874,417 2,913,541 5,100,343 7,105,385
-------------------------------------------------------------------------
Gross profit 1,423,842 779,655 3,331,841 3,672,530
-------------------------------------------------------------------------
Costs and expenses:
Selling, general and administrative expenses 2,007,779 1,926,999 5,821,467 6,776,606
New product design costs - 443,333 - 443,333
Depreciation & amortization 3,093 47,142 94,538 140,848
-------------------------------------------------------------------------
Total operating costs and expenses 2,010,872 2,417,474 5,916,005 7,360,787
-------------------------------------------------------------------------
Operating loss (587,030) (1,637,819) (2,584,164) (3,688,257)
Other income (expense):
Interest expense (1,412,723) (92,544) (1,636,209) (296,568)
Other income (expense) (80,315) 66,067 (2,814,659) 16,824
-------------------------------------------------------------------------
Total other expense (1,493,038) (26,477) (4,450,868) (279,744)
-------------------------------------------------------------------------
Loss before income taxes (2,080,068) (1,664,296) (7,035,032) (3,968,001)
Provision for income taxes 537 135,450 2,937 77,996
-------------------------------------------------------------------------
Net loss (2,080,605) (1,799,746) (7,037,969) (4,045,997)
=========================================================================
Loss per share--basic and diluted ($ 0.39) ($ 0.34) ($ 1.32) ($ 0.76)
=========================================================================
Weighted average common shares--basic and diluted 5,349,084 5,303,619 5,345,012 5,300,841
=========================================================================
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NATURADE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss (7,037,969) (4,045,997)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 94,538 140,848
Gain on disposition of property and equipment (146,757) -
Writeoff of intangible assets 992,506 -
Issuance of warrants 1,288,115 -
Legal settlement payable under terms of a note 424,000 -
Changes in operating assets and liabilities:
Accounts receivable (91,666) (29,435)
Related party receivable - (600,000)
Inventories (526,475) 461,214
Prepaid expenses and other current assets 277,997 35,316
Other assets 12,815 (11,439)
Accounts payable and accrued expenses 542,665 206,048
---------- ----------
Net cash used in operating activities: (4,170,231) (3,843,445)
Cash flows from investing activities:
Purchase of property and equipment (186,479) (17,489)
Sale of property and equipment 538,307 -
---------- ----------
Net cash (used in) provided by investing activities: 351,828 (17,489)
Cash flows from financing activities:
Net repayment under line of credit (469,692) (49,809)
Borrowings from related party 4,600,000 -
Payments of long-term debt, including capital lease (35,333) (164,234)
Proceeds from sale of stock 38,800 306,423
Proceeds from exercise of warrants 1,059 -
---------- ----------
Net cash provided by financing activities: 4,134,834 92,380
Net increase (decrease) in cash and cash equivalents 316,431 (3,768,554)
Cash and cash equivalents, beginning of period 842,029 5,744,067
Cash and cash equivalents, end of period 1,158,460 1,975,513
Supplemental disclosures of cash flow information-
Cash paid during the period for:
Interest 242,275 297,969
Taxes 2,937 141,036
</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. As previously reported, the Company acquired the former Tennessee
residence of the Company's Chief Executive Officer and cancelled the
related party advance of $600,000 which was secured by the residence. In
July 1999, the Company had the property appraised for $585,000. However,
due to a downturn in the Tennessee real estate market, the Company
established a $175,000 reserve against the value of this asset. In August,
1999, the Company sold the property for $414,580, and recorded an
additional loss of $14,408 on 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 September 30, 1999 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Raw Materials $ 157,538 $ 880,660
Finished Goods 2,462,918 1,213,321
---------- ----------
$2,620,456 $2,093,981
</TABLE>
4. Effective October 1, 1998, the Company changed its fiscal year to end on
December 31st. The Company's Annual Report on Form 10-K will include
the three month period ended December 31, 1998 and the new fiscal year
of January 1, 1999 to December 31, 1999.
5. As previously reported, a civil judgment (the "PNI 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 (the "PNI Trustee") in the Chapter 7 bankruptcy case of
Performance Nutrition, Inc. ("PNI"). This judgment was recorded in the
March 31, 1999 quarter. On July 7, 1999, the PNI Trustee filed an
application seeking Bankruptcy Court approval of a settlement agreement
between the Company and the PNI Trustee (the "Settlement Agreement").
On August 5, 1999, the Bankruptcy Court approved the Settlement
Agreement. The Settlement Agreement provided the Company with a full
release of the Judgment and the costs and interest thereon, as well as
any and all other claims which the PNI Trustee has or might have
against the Company, including a preference claim for approximately
$130,000 filed in January 1999 by the PNI Trustee. The Settlement
Agreement required the Company to deliver to the PNI Trustee (1) a cash
payment of $1,350,000, (2) a promissory note in the amount of $424,000,
of which $388,667 is outstanding at September 30, 1999, payable over
12 months at 5% interest, and (3) a contingent promissory note in the
amount of $226,000, which
7
<PAGE>
will become payable only to the extent that the Company's sales for the
second, third and fourth quarters of 1999 exceed specified targets. The
Company has reduced its legal accrual by approximately $1,000,000 to
reflect the terms of the settlement. The Company does not believe any
amount will be payable under the contingent promissory note.
6. 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 future minimum rental commitments
under this lease for the respective years ending December 31 are:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 (October 1, 1999 through
December 31, 1999) $ 82,227
2000 328,908
2001 351,327
2002 358,800
2003 381,228
Thereafter 1,122,756
----------
Total $2,625,246
</TABLE>
7. In March 1999, the Company entered into a Financing Agreement (the
"Financing Agreement") with Health Holdings and Botanicals, Inc.
("Health Holdings"), a majority stockholder of the Company. The
Financing Agreement provides that the Company may borrow up to $1.0
Million at a per annum interest rate of 8%. 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. The Company had issued 300,000 Warrants under the
Financing Agreement prior to the Amendment referred to below. The
warrants are exercisable for a period of ten years commencing on the
date of grant.
In June 1999, the Financing Agreement was amended (the "Amendment") to
increase the amount of available borrowings to $1.6 Million also at an
interest rate of 8% per annum. The Amendment further provides that for
each dollar borrowed over $1.0 Million, the Company shall issue a
Warrant to Health Holdings to purchase one-half (0.5) of a share of
common stock of the Company at an exercise price of $1.00 per share.
Further, the exercise price of the 300,000 Warrants previously issued
under the Financing Agreement prior to the Amendment was reset to $1.00
per share, subject to adjustment. As of September 30, 1999, the Company
had issued 300,000 Warrants under the Amendment. All borrowings under
the Financing Agreement are secured by the assets of the Company. All
borrowings made prior to June 1, 1999 are due on March 7, 2000; those
made after May 31, 1999 are due May 31, 2000. As of September 30, 1999,
the Company borrowed $1,600,000 under the Financing Agreement and the
Amendment and issued a total of 600,000 Warrants to Health Holdings.
The warrants are exercisable for a period of ten years commencing on the
date of grant. The Financing Agreement further provides that at any time
upon written notice, Health Holdings may convert any portion of the
advances into shares of the Company's common stock at a conversion price
equal to the lower of $1.00 per share or the then fair market value of
the Company's common stock. The Company recorded interest expense of
approximately $168,000 for the nine months ended September 30, 1999 and
will record additional interest expense in future periods of approximately
$237,000 which will be amortized over the remaining term of the debt.
8
<PAGE>
8. In August 1999, the Company entered into a Credit Agreement (the
"Credit Agreement") with Health Holdings, a majority stockholder of the
Company. The Credit Agreement provides for advances (the "Advances") of
$4,000,000 at a per annum interest rate of 8% with a due date of July
31, 2004. As of September 30, 1999, the Company has borrowed $3,000,000
on this Credit Agreement. The Credit Agreement further provides that
any time upon written notice, Health Holdings may convert any portion
of the Advances into shares of the Company's common stock at a
conversion price equal to the lower of $.75 per share or the then fair
market value of the Company's common stock. The Company recorded
interest expense of $ 1,120,000 for the three months ended September
30, 1999 related to the conversion feature.
9. Currently, the Company has a line of credit for $1,000,000 with South Bay
Bank of which $980,308 is outstanding. This line of credit had originally
expired on February 1, 1999 and has been extended twice in three-month
increments through November 1, 1999. This line of credit is secured by a
first lien position on all of the Company's assets. The Bank has verbally
agreed to extend this line of credit for an additional two-month period
through the end of 1999 while the Company is negotiating with several
asset-based lenders (see Footnote 10). However, there is no assurance that
the Company will be successful in obtaining an extension on this line of
credit. See ITEM 2. Management's Discussion and Analysis.
10. The Company is currently negotiating with several asset-based lenders for
a working capital line to support the Company's growth prospects. The
Company has received proposals from three asset-based lenders and is
assessing the terms of those proposals. The Company plans to consummate a
new banking relationship before the end of the calendar year. However,
there can be no assurance that the Company will be successful in securing
a new working capital line. See ITEM 2. Management's Discussion and
Analysis.
11. As part of a restructuring of the Company in 1991, equity holders
exchanged their shares for new common stock and Class A and Class B
Warrants. The Class A Warrants expired at December 31, 1996. The Class B
Warrants allow for the purchase of one share of common stock for $3.00 per
share. Currently, there are 325,108 Class B Warrants outstanding with an
expiration date of December 31, 1999.
9
<PAGE>
12. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the Company's chief operating decision-maker, or decision-making group, in
deciding how to allocate resources and in assessing performance.
Commencing in January 1999, the Company's reportable operating segments
include Heath Food specialty stores and Mass Market Categories. The
Company does not allocate operating expenses to these segments, nor does
it allocate specific assets to these segments. Therefore, segment
information reported includes only sales, cost of sales and gross profit.
Operating segment data for the three months and nine months ended
September 30, 1999 was as follows:
<TABLE>
<CAPTION>
Distribution Channels
Health Food Mass Market Total
----------- ----------- -----
<S> <C> <C> <C>
Three months ended September 30, 1999
Sales $2,965,298 $332,961 $3,298,259
Cost of Sales 1,739,681 134,736 1,874,417
--------- ------- ---------
Gross Profit 1,225,617 198,225 1,423,842
Nine months ended September 30, 1999
Sale $7,945,186 $486,998 $8,432,184
Cost of Sales 4,889,165 211,178 5,100,343
--------- ------- ---------
Gross Profit 3,056,021 275,820 3,331,841
</TABLE>
Prior to January 1999, the Company's sales to the Mass Market segment were
not significant.
Sales are attributed to geographic areas based on the location of the
entity to which the products were sold. Geographic segment data for the
three months and nine months ended September 30, 1999 and September 30,
1998 was as follows:
<TABLE>
<CAPTION>
United States International Total
------------- ------------- -----
<S> <C> <C> <C>
Three months ended September 30, 1999
Sales $ 3,164,627 $ 133,632 $ 3,298,259
Cost of Sales 1,780,652 93,765 1,874,417
------------- ------------- -----------
Gross Profit 1,383,975 39,867 1,423,842
Nine months ended September 30, 1999
Sales $ 8,009,521 $ 422,663 $ 8,432,184
Cost of Sales 4,688,359 411,984 5,100,343
------------- ------------- -----------
Gross Profit 3,321,162 10,679 3,331,841
Three months ended September 30, 1998
Sales $ 3,468,885 $ 224,311 $ 3,693,196
Cost of Sales 2,794,073 119,468 2,913,541
------------- ------------- -----------
Gross Profit 674,812 104,843 779,655
Nine months ended September 30, 1998
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
United States International Total
------------- ------------- -----
<S> <C> <C> <C>
Sales $9,613,006 $1,164,909 $10,777,915
Cost of Sales 6,398,043 707,342 7,105,385
---------- ---------- -----------
Gross Profit 3,214,963 457,567 3,672,530
</TABLE>
During the three months and nine months ended September 30, 1999, one
customer which includes six distribution centers accounted for 25.6% and
25.4%, respectively of total net sales.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Naturade, Inc founded in 1926 is a leading provider of low carbohydrate, high
protein powders, herbal remedies, skin care and soy protein-based products.
Its products are sold to the health food and mass market channels through
distributors and directly to retailers.
All comparisons below are for the three and nine-month periods ended September
30, 1998 compared to the three and nine-month periods ended September 30, 1999.
RESULTS OF OPERATIONS
Total net sales for the third quarter ended September 30, 1999
decreased $394,937 or 10.7% compared to the same period last year and
decreased $2,345,731 or 21.8% for the nine month period ended September 30,
1999 compared to the same period last year. Of this amount, domestic sales
increased $267,234 or 9.5% and decreased $199,581 or 2.6% for the third
quarter and first nine months respectively while Kids Plex-TM- sales decreased
$455,316 or 90.2% and $1,314,606 or 93.3% for these same periods.
International sales decreased $91,177 or 40.6% for the September 30, 1999
quarter and decreased $743,178 or 63.7% for the first nine months compared to
the same period last year. Partially offsetting this sales decline in the
nine months ended September 30, 1999 was the sale in the first quarter of
1999 of $148,163 of raw materials to copackers as the Company continues its
strategy of complete production outsourcing. Total net sales were also
adversely 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.
Decreases in net sales for the nine month period ended September
30, 1999 were primarily the result of the Company's decision to terminate sales
of product to a major health food retailer, significant international sales
volume in the nine months ended September 30, 1998 and a decline in industry
sales to the Health Food category in 1999 compared to the same period last
year. In January 1999, the Company stopped selling to a major health food
retailer due to its large Accounts Receivable balance outstanding and its
unwillingness to pay Naturade invoices in a timely manner. The Company has
fully reserved for these receivables. Sales to this major health food
retailer were $307,042 for the quarter ended September 30, 1998 and
$1,216,139 for the nine months ended September 30, 1998 for which there were
no comparable sales in the same period of 1999. Without taking into account the
September 1998 quarter sales to this customer, the September 1999 quarter sales
reflects a 2.7% decline from the adjusted September 1998 quarter sales. During
the nine month period ended September 30, 1998, the Company's international
sales of $1,165,841 included $416,077 of non-recurring, low margin private label
business from a Chinese customer for which there was no comparable sales in the
same period of 1999. As part of its new global marketing strategy, management
has decided to emphasize branded products and reduce its dependence
11
<PAGE>
on international private label business due to its low margin and
unpredictability. During 1998, industry sales to the Health Food Category
were expanding at low double-digit rates. However, in late 1998, industry
sales to this category started to soften and have been flat to slightly down
for 1999. While the Company has maintained its market share in this category,
the Company's overall dollar sales are affected by the softness in the
overall category.
Gross profit as a percentage of sales increased 22.1% to 43.2% of
sales for the third quarter ended September 30, 1999 from 21.1% for the same
period last year and increased 5.4% to 39.5% of sales for the nine months
ended September 30, 1999 from 34.1% of sales for the same period last year.
The gross profit percentage for the nine months ended September 30, 1998 was
adversely impacted by an inventory write-off of $666,000 which occurred in
the March 1998 quarter. In 1999, the Company decided to outsource production in
order to add capacity so as to address the anticipated mass market demand. This
outsourcing decision may adversely affect gross profits on a quarterly basis.
Selling, general and administrative expenses increased $80,781 to
$2,007,779 or 60.9% of sales for the three months ended September 30, 1999,
from $1,926,999 or 52.2% for the same period last year, and also decreased
$955,139 to $5,821,467 or 69.0% of sales for the nine months ended September
30, 1999 from $6,776,606 or 62.9% of sales for the same period last year. The
September 1999 quarterly increase was due in part to the Company's investing
in its efforts to capture Mass Market sales. These decreases were primarily
the result of lower selling and marketing expenses which decreased $1,090,195
to $2,761,162 or 32.7% of sales for the nine months ended September 30, 1999
from $3,851,357 or 35.7% of sales for the same period last year which was
partially offset by higher general and administrative expenses, which
increased $106,627 to $2,034,825 or 24.1% of sales for the nine months ended
September 30, 1999, from $1,928,198 or 17.9% of sales for the same period
last year. Shipping and receiving expenses decreased $137,171 to $776,720,
but increased as a percentage of sales to 9.2% for the nine months ended
September 30, 1999, from $913,890 or 8.5% for the same period last year.
Interest expense for the third quarter increased $1,320,179 and
$1,339,641 for the nine-month period ended September 30, 1999 compared to the
same periods last year due primarily to the granting of warrants and the
issuance of debt with a beneficial conversion feature (Notes 7 and 8).
Other income (expense) for the nine months ended September 30,
1999 reflects legal costs of $142,118 and the lawsuit judgment of $2,774,000
both relating to the PNI Judgment referred to in Footnote 5 compared to legal
costs of $527,638 and transaction costs of $261,964 for the same period last
year. Included in this classification for the nine months ended September
30, 1999 is the write off of $992,506 of intangible assets related to the
acquisition of the Performance Nutrition assets in 1997. Also included in
this classification for the nine months ended September 30, 1999 is income of
$1,159,604 compared to an expense reclassification of $806,434 for the same
period last year. In the March 30, 1998 quarter, the Company originally
recorded $666,000 consisting of $466,000 of inventory write offs and $200,000
of additional reserve to miscellaneous expense. However, in the September 30,
1998 quarter, this $666,000 amount was reclassified to cost of sales. This
expense reclassification had the net affect of reducing miscellaneous
expenses for the September 30, 1998 quarter and year to date periods. No such
amounts were incurred in the nine months ended September 30, 1999. The amount
of $1,159,604 for the nine month period ended September 30, 1999 reflects a
$1,000,000 reversal of the PNI judgment as explained in Footnote 5 above and
total gains of $159,604 due to a $54,168 gain on sale of equipment that the
Company no longer needs due to its strategy to completely outsource its
production activities, a $281,997 gain on sale of the Company's interest in
its former headquarters facility, a $189,408 loss due to the sale of the
Tennessee
12
<PAGE>
real estate as set forth in Note 2 to the Financial Statements and $12,847 of
interest and miscellaneous income.
Income tax expense was $2,937 for the nine month period ended
September 30, 1999 compared to $77,996 for the same period last year due to
losses for the periods and the carryback benefits of such losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $4,170,231 in operating activities in the nine
months ended September 30, 1999.
The Company's working capital decreased from $2,219,645 at December 31,
1998 to $613,877 at September 30, 1999. This decrease was largely due to an
adjusted judgment against the Company of $1,774,000 of which $388,667 was
outstanding at September 30, 1999 (see Footnote 5 and "Legal Proceedings"
below) and an increase in borrowings from related party of $1,362,634, and
Accounts Payable and Accrued Expenses of $542,665 required to fund the
Company's operating losses for the nine month period ended September 30, 1999.
Cash provided by investing activities during the nine month period
ended September 30, 1999 was $351,828. The primary source of this cash was
the sale of the Company's interest in its former headquarters facility as set
forth in Note 4 to the Financial Statements and the sale of the CEO's former
Tennessee residence as set forth in Note 2 to the Financial Statements above.
13
<PAGE>
The Company's cash provided by financing activities of $4,134,834 for
the nine month period ended September 30, 1999 was the net result of
borrowings from a new financing agreement with Health Holdings as set forth
in Notes 7 and 8 to the Financial Statements above.
As more fully explained in Note 8 to the Financial Statements above,
effective August 9, 1999, the Company entered into a Credit Agreement with
Health Holdings which provides for advances (the "Advances") up to an aggregate
of $4,000,000 at a per annum interest rate of 8% with a due date of July 31,
2004. The Credit Agreement further provides that any time upon written
notice, Health Holdings may convert any portion of the Advances into shares
of the Company's common stock at a conversion price equal to the lower of
$.75 per share or the then fair market value of the Company's common stock.
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. South Bay Bank
has verbally agreed to extend its current $ 1,000,000 line of credit agreement
with the Company to December 31, 1999.
The Company anticipates that it will require additional capital to support
operations throughout the foreseeable future. Failure to obtain additional
capital will have a material adverse impact on the Company's operations and
financial position.
YEAR 2000 DISCLOSURE
The Company has developed and is implementing a comprehensive program to address
Year 2000 issues. The program considers the effect of the Year 2000 on the
Company's internal systems, customers, products and services, and suppliers
and other critical business partners. Implementation of the Company's plan is
substantially complete, and the Company believes that all identified
potential Year 2000 issues have been effectively resolved. The cost to
identify and resolve Year 2000 was not material to the Company's financial
results and has been expensed as incurred or capitalized where appropriate.
Management does not believe that there will be a significant disruption to
the Company's business due to Year 2000 issues. However, the Company has
begun contingency planning to address any situations which may arise in which
the planning of the Company or third parties prove to be inadequate, and
where practical alternatives are available. There can be no assurance that
the Company's Year 2000 program or the programs of critical business partners
will be successful, and failure could have a material adverse effect on the
Company's business and results of operations.
FORWARD LOOKING STATEMENTS
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 results 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.
PART II. Other Information
ITEM 1. Legal Proceedings
As previously reported in its 8-K filing on August 5, 1999, the
United States Bankruptcy Court for the Northern District of Texas approved
the previously reported settlement agreement between the Company and the
trustee for Performance Nutrition, Inc.
ITEM 2. Changes in Securities
In March 1999, the Company entered into a Financing Agreement
(the "Financing Agreement") with Health Holdings and Botanicals, Inc.
("Health Holdings"), a majority stockholder of the Company. The
Financing Agreement provides that the Company may borrow up to $1.0
Million at a per annum interest rate of 8%. 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. The Company had issued 300,000 Warrants under the
Financing Agreement prior to the Amendment referred to below. The
warrants are exercisable for a period of ten years commencing on the
date of grant.
14
<PAGE>
In June 1999, the Financing Agreement was amended (the "Amendment") to
increase the amount of available borrowings to $1.6 Million also at an
interest rate of 8% per annum. The Amendment further provides that for
each dollar borrowed over $1.0 Million, the Company shall issue a
Warrant to Health Holdings to purchase one-half (0.5) of a share of
common stock of the Company at an exercise price of $1.00 per share.
Further, the exercise price of the 300,000 Warrants previously issued
under the Financing Agreement prior to the Amendment was reset to $1.00
per share. As of September 30, 1999, the Company had issued 300,000
Warrants under the Amendment. All borrowings under the Financing
Agreement are secured by the assets of the Company. All borrowings
made prior to June 1, 1999 are due on March 7, 2000; those made after
May 31, 1999 are due May 31, 2000. As of September 30, 1999, the Company
borrowed $1,600,000 under the Financing Agreement and the Amendment and
issued a total of 600,000 Warrants to Health Holdings. The warrants are
exerciseable for a period of ten years commencing on the date of grant.
The Company relied on Regulation D and/or Section 4(2) of the Securities
Act of 1933 with respect to the securities issuances described in this
ITEM 2. The issuance dates of the Warrants described above follows:
<TABLE>
<CAPTION>
Issue Date Number of Warrants
---------- ------------------
<S> <C>
March 19, 1999 120,000
March 31, 1999 60,000
April 21, 1999 60,000
May 7, 1999 60,000
June 8, 1999 150,000
June 21, 1999 100,000
June 29, 1999 50,000
</TABLE>
ITEM 3. Defaults upon Senior Securities
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
NONE
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
<TABLE>
<CAPTION>
Exhibits
Number Description Page
-------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
15
<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: November 22, 1999 BY /s/ BILL D.STEWART
----------------- --------------------------
Bill D. Stewart
Chief Executive Officer
DATE: November 22, 1999 BY /s/LAWRENCE J. BATINA
----------------- --------------------------
Lawrence J. Batina
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Page
<S> <C> <C>
27 Financial Data Schedule 18
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,158,460
<SECURITIES> 0
<RECEIVABLES> 1,399,511
<ALLOWANCES> 0
<INVENTORY> 2,620,456
<CURRENT-ASSETS> 5,376,467
<PP&E> 651,114
<DEPRECIATION> 340,453
<TOTAL-ASSETS> 5,892,846
<CURRENT-LIABILITIES> 4,762,590
<BONDS> 0
0
125
<COMMON> 533
<OTHER-SE> 2,012,952
<TOTAL-LIABILITY-AND-EQUITY> 5,892,846
<SALES> 8,432,184
<TOTAL-REVENUES> 8,432,184
<CGS> 5,100,344
<TOTAL-COSTS> 6,813,974
<OTHER-EXPENSES> 1,916,691
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,636,209
<INCOME-PRETAX> (7,035,032)
<INCOME-TAX> 2,937
<INCOME-CONTINUING> (7,037,969)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,037,969)
<EPS-BASIC> (1.32)
<EPS-DILUTED> 0
</TABLE>
