<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 June 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)
DELAWARE 23-2442709
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
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 July
31, 1999.
Exhibit Index on Page 14
1
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at June 30, 1999 3
(unaudited) and December 31, 1998 (unaudited)
Statements of Operations for the three and six month periods 5
ended June 30, 1999 (unaudited) and June 30,
1998 (unaudited)
Statements of Cash Flows for the six month periods ended 6
June 30, 1999 (unaudited) and June 30, 1998 (unaudited)
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURADE, INC.
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 158,960 $ 842,029
Accounts receivable 1,051,056 1,294,612
Related party receivable 0 600,000
Inventories 2,375,007 2,093,981
Refundable income taxes 163,416 163,416
Prepaid expenses and other current assets 303,969 325,853
Property available for sale 428,989
----------- -----------
Total current assets 4,481,397 5,319,891
Property and equipment, net 321,290 1,981,326
Intangible assets, net 1,077,899 1,106,358
Other assets 105,572 116,014
----------- -----------
Total assets 5,986,158 8,523,589
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,768,846 $ 891,069
Lawsuit judgment payable 2,774,000 -
Accrued expenses 281,460 565,794
Notes payable 2,435,719 1,450,000
Current portion of long-term debt 32,397 193,383
----------- -----------
Total current liabilities 7,292,422 3,100,246
----------- -----------
Long-term debt, less current maturities 152,223 1,964,324
----------- -----------
Commitments and contingencies - -
Stockholders' (deficiency) 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) (8,952,199) (3,994,834)
----------- -----------
Total stockholders' (deficiency) equity (1,458,487) 3,459,019
----------- -----------
Total liabilities and stockholders' (deficiency)
equity $ 5,986,158 $ 8,523,589
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NATURADE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales 2,781,116 $ 3,945,620 $ 5,133,924 $ 7,084,718
Cost of sales 1,841,297 1,992,893 3,225,926 4,191,844
------------------------------------------------------------------
Gross profit 939,819 1,952,727 1,907,998 2,892,874
------------------------------------------------------------------
Costs and expenses:
Selling, general and administrative expenses 1,971,435 2,559,364 3,813,688 4,849,614
Special legal expenses 75,228 127,260
Lawsuit judgment expense - 2,774,000
Depreciation & amortization 44,665 46,910 91,445 93,706
Other (income) expense:
Interest expense 134,236 94,696 223,487 204,024
Miscellaneous, net (110,651) (46,777) (166,916) 49,235
------------------------------------------------------------------
Total costs and expenses 2,114,913 2,654,193 6,862,964 5,196,579
------------------------------------------------------------------
Loss before income taxes (1,175,094) (701,466) (4,954,966) (2,303,705)
Provision for income taxes - - 2,400 (57,454)
Net Loss $(1,175,094) $ (701,466) $(4,957,366) $(2,246,251)
------------------------------------------------------------------
------------------------------------------------------------------
Basic and diluted (loss) earnings per share $ (0.22) $ (0.13) $ (0.93) $ (0.42)
Weighted average number of shares
used in computation of basic and diluted (loss)
earnings per share 5,349,084 5,301,697 5,342,942 5,299,428
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NATURADE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss (4,957,366) (2,246,252)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 91,445 93,706
Gain on disposition of property and equipment (331,473) -
Changes in assets and liabilities:
Accounts receivable 243,556 3,468
Inventories (281,026) 107,096
Prepaid expenses and other current assets 192,896 (657,123)
Other assets 10,441 (88,494)
Lawsuit judgment payable 2,774,000 -
Accounts payable and accrued expenses 593,443 15,433
--------------------------------
Net cash used in operating activities: (1,664,084) (2,772,166)
Cash flows from investing activities:
Purchase of property and equipment (186,479) (17,489)
Proceeds from sale of property and equipment 2,113,950
--------------------------------
Net cash (used in) provided by investing activities: 1,927,471 (17,489)
Cash flows from financing activities:
Net borrowings under note payable 985,719 (49,809)
Payments of long-term debt, including capital lease (1,973,087) (109,424)
Proceeds from sale of stock 39,853 115,931
Proceeds from exercise of warrants 1,059 -
--------------------------------
Net cash used in financing activities: (946,456) (43,302)
Net decrease in cash and cash equivalents (683,069) (2,832,957)
Cash and cash equivalents, beginning of period 842,029 5,744,067
--------------------------------
Cash and cash equivalents, end of period 158,960 2,911,110
================================
Supplemental disclosures of cash flow information-
Cash paid during the period for:
Interest 186,457 205,432
</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. In April 1999, in accordance with the terms of the Employment Agreement
dated March 2, 1998, between the Company and Bill D. Stewart, the
Company's Chief Executive Officer, (the "Stewart Employment Agreement),
the Company acquired Mr. Stewart's former residence in Tennessee 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 the softness in the Tennessee real estate
market, the Company has reduced the asking of this property price to
$499,500. Due to a potential impairment of this asset, the Company has
established a $175,000 reserve against the value of this asset. 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 June 30, 1999 consisted of the
following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Raw Materials $ 281,872 $ 880,660
Finished Goods 2,093,135 1,213,321
----------- ----------
$ 2,375,007 $2,093,981
</TABLE>
The June 30, 1999 inventory amounts reflect a write-off of $291,518
consisting of $183,300 of Raw Materials and $108,218 of Finished Goods.
This write-off was based on an analysis of the Company's new product
introduction strategy and the effect of this strategy on Raw Materials
used in the processing of Finished Goods and the current value of existing
Finished Goods inventory.
4. In June 1999, the Company sold its interest in its former headquarters
facility in Paramount, California and recorded a gain of $275,634. In
connection with this sale, the Company paid off approximately $1.9
million of bank and other debt obligations. As previously reported, in
mid-April 1999, the Company relocated to Irvine, California. See
Footnote 7.
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.
7
<PAGE>
6. On March 11, 1999, 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"). 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 provides 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 requires
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 amortized
over 12 months at 5% interest, and (3) a contingent promissory note in
the amount of $226,000, which 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 total cost to the Company of the
settlement is expected to range between $1,774,000 and $2,000,000,
exclusive of interest on the promissory notes. The terms of the
Settlement Agreement are expected to be consummated before the end of
August, 1999.
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%. 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 June 30,
1999, the Company had issued 300,000 Warrants under the Financing
Agreement (prior to the Amendment referred to below).
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
8
<PAGE>
a share of common stock of the Company at an exercise price of $1.00 per
share, subject to adjustment. 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
June 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 June 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.
9. In August 1999, the Company entered into a Credit Agreement (the "Credit
Agreement") with Health Holdings. The Credit Agreement provides for
advances (the "Advances") of $4 Million 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.
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.
All comparisons below are to the three and six-month periods ended June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $1,664,084 in operating activities in the six
months ended June 30, 1999.
The Company's working capital decreased from $2,219,645 at December 31,
1998 to $(2,811,025) at June 30, 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 $877,777 and Notes Payable of $985,719
required to fund the Company's operating losses for the six month period ended
June 30, 1999.
9
<PAGE>
Cash provided by investing activities during the six month period ended
June 30, 1999 total $1,927,471. 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 above. The Company anticipates its capital
expenditures for the three-month period ended September 30, 1999 to be
approximately $50,000.
The Company's cash used by financing activities of $946,456 for the six
month period ended June 30, 1999 was the net result of borrowings from a new
financing agreement with Health Holdings and Botanicals, Inc. ("Health
Holdings") as set forth in Note 8 to the Financial Statements above and the
repayment of bank and other debt obligations related to the sale of the
Company's interest in its former headquarters facility as set forth in Note 4 to
the Financial Statements above.
As more fully explained in Note 9 to the Financial Statements above,
effective August 9, 1999, the Company entered into a Credit Agreement with
Health Holdings and Botanicals which provides for advances (the "Advances") of
$4 Million 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. The Company has extended
its current $985,000 line of credit agreement with South Bay Bank to September
1, 1999.
RESULTS OF OPERATIONS
Total net sales for the second quarter ended June 30, 1999 decreased
$1,164,505 or 29.5% compared to the same period last year and decreased
$1,950,794 or 27.5% for the six month period ended June 30, 1999 compared to the
same period last year. Of this amount, domestic sales decreased $153,411 or 5.8%
and decreased $466,815 or 9.4% for the second quarter and first six months
respectively while Kids Plex-tm sales decreased $509,636 or 106.3% and $859,291
or 95% for these same periods. International sales decreased $422,862 or 61.2%
for the June 30, 1999 quarter and decreased $652,000 or 69.3% for the first six
months compared to the same period last year. Partially offsetting this sales
decline in the six months ended June 30, 1999 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 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 six month period ended June 30, 1999 were
primarily the result of the Company's decision to not sell product to a major
health food retailer, significant international sales volume in the six
months ended June 30, 1998 and a softness 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 their
large Accounts Receivable balance outstanding and their unwillingness to pay
Naturade invoices in a timely manner. The Company has fully reserved for
these receivables. In the six month period ended June 30, 1998, sales to this
major health food retailer were $909,064, for which there were no comparable
sales in the same period of 1999. During the six month period ended June 30,
1998,
10
<PAGE>
the Company's international sales of $941,030 included $416,377 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 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 decreased 15.7% to 33.8% of sales
for the second quarter ended June 30, 1999 from 49.5% for the same period
last year and decreased 3.6% to 37.2% of sales for the six months ended June
30, 1999 from 40.8% of sales for the same period last year. The gross profit
percentage for the June 30, 1999 quarter was adversely impacted by the
inventory write-off of $291,518 as explained in Footnote 3. This inventory
write-off accounted for 10.5% of the 15.7% gross profit decline. A major
portion of the remaining gross profit decline is attributable to the
Company's decision to outsource production and the higher startup costs
charged by the Company's suppliers. The Company made the decision to
outsource production in order to add capacity so as to address the
anticipated mass market demand. The gross profit percentage for the six
months ended June 30, 1998 was adversely impacted by an inventory write-off
of $666,000 which occurred in the March 1998 quarter.
Selling, general and administrative expenses decreased $587,929 to
$1,971,435 or 70.9% of sales for the three months ended June 30, 1999, from
$2,559,364 or 64.9% for the same period last year, and also decreased
$1,035,926 to $3,813,688 or 74.3% of sales for the six months ended June 30,
1999 from $4,849,614 or 69.9% of sales for the same period last year. These
decreases were primarily the result of lower selling and marketing expenses
which decreased $1,068,464 to $1,746,850 or 34.0% of sales for the six months
ended June 30, 1999 from $2,815,314 or 39.7% of sales for the same period
last year which was partially offset by higher general and administrative
expenses, which increased $60,594 to $1,357,992 or 26.5% of sales for the six
months ended June 30, 1999, from $1,297,398 or 18.3% of sales for the same
period last year. Shipping and receiving expenses decreased $53,424 to
$542,484, but increased as a percentage of sales to 10.6% for the six months
ended June 30, 1999, from $595,908 or 8.4% for the same period last year.
Interest expense for the second quarter increased $39,540 and $19,462 for
the six-month period ended June 30, 1999 compared to the same periods last year.
Miscellaneous expenses for the six months ended June 30, 1999 decreased
$216,151 compared to the same period last year due to the absence of
non-recurring charges in 1999 which in the six months ended June 30, 1998
amounted to $157,500. No such amounts were incurred in the six months ended
June 30, 1999. The six month period ended June 30, 1999 also reflects total
gains of $331,473 due to a $49,580 gain on sale of equipment that the Company
no longer needs due to its strategy to completely outsource its production
activities, a $275,634 gain on sale of the Company's interest in its former
headquarters facility and a $175,000 reserve established against the Tennessee
real estate as set forth in Note 4 to the Financial Statements above.
Income tax expense was $2,400 for the six month period ended June 30, 1999
compared to $ (57,454) for the same period last year due to losses for the
periods and the carryback benefits of such losses.
11
<PAGE>
PART II. Other Information
ITEM 1. Legal Proceedings
As previously reported in its 8-K filing on July 7, 1999, the Company has
entered into a settlement agreement of a civil judgment 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. See Note 6 to the
Financial Statements.
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
ITEM 6. Exhibits & Reports on Form 8-K
<TABLE>
<CAPTION>
Exhibits
Number Description Page
-------- ----------- ----
<S> <C> <C>
10.1 Financing Agreement Amendment between Naturade, Inc. and
Health Holdings and Botanicals, Inc.
10.2 Credit Agreement between Naturade, Inc. and Health Holdings
and Botanicals, Inc.
10.3 Settlement Agreement between Naturade, Inc. And the PNI
Trustee
27 Financial Data Schedule
</TABLE>
Reports on Form 8-K
NONE
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<S> <C>
NATURADE, INC.
--------------
(Registrant)
DATE: August 16, 1999 By /s/ Bill D.Stewart
--------------------- ---------------------
Bill D. Stewart
Chief Executive Officer
DATE: August 16, 1999 By /s/Lawrence J. Batina
--------------------- ------------------------
Lawrence J. Batina
Chief Financial Officer
</TABLE>
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Page
<S> <C> <C>
10.1 Financing Agreement Amendment between 15
Naturade, Inc. and Health Holdings and Botanicals, Inc.
10.2 Credit Agreement between Naturade, Inc. and 16
Health Holdings and Botanicals, Inc.
10.3 Settlement Agreement between Naturade, Inc. 17
and the PNI Trustee
27 Financial Data Schedule 18
</TABLE>
14
<PAGE>
AMENDMENT NO. 1 TO
FINANCE AGREEMENT
This AMENDMENT NO. 1 TO FINANCE AGREEMENT (this "Amendment"), dated as of June
1, 1999, by and between NATURADE, INC., a Delaware corporation (the "Borrower"),
and HEALTH HOLDINGS AND BOTANICALS, INC., a California corporation (the
"Lender").
PRELIMINARY STATEMENT
Reference is made to the Finance Agreement, dated as of March 17, 1999 (the
"Finance Agreement"), between Borrower and Lender (collectively, the "Parties").
Capitalized terms appearing herein have the meanings specified in the Finance
Agreement.
AMENDMENT
In consideration of the premises, and in consideration of the
representations, warranties, and covenants herein contained, and for other good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged by each Party, the Parties agree as follows:
PARAGRAPH 1. Section 1.01 of the Finance Agreement is hereby amended by
redefining the "Commitment" to be One Million Six Hundred Thousand Dollars
1
<PAGE>
($1,600,000), effective as of the Effective Amendment Date (defined below).
PARAGRAPH 2. Sections 1.03 of the Finance Agreement is hereby amended and
restated in full as follows, effective as of the Effective Amendment Date:
SECTION 1.03. REPAYMENT. The Borrower shall repay the
aggregate unpaid principal amount of all Advances made prior to June
1, 1999, together with all amounts of interest then accrued thereon,
by no later than March 7, 2000. The Borrower shall repay the
aggregate unpaid principal amount of all Advances made after June 1,
1999, together with all amounts of interest then accrued thereon, by
no later than May 31, 2000 (such date, or the earlier date on which
the Advances shall become due and payable in accordance with the terms
hereof, "Maturity Date"). All amounts received by the Lender in
repayment of Advances shall be applied to such of the Advances as the
Lender shall determine in its sole and complete discretion.
PARAGRAPH 3. Sections 3.01(h), (i) and (j) of the Finance Agreement are
hereby amended and restated in full as follows, effective as of the Effective
Amendment Date:
(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
2
<PAGE>
referred to herein as the "Prior Liens"), (iii) Liens other than
Prior Liens permitted by Section 4.02(a)(ii) (such Liens
beingreferred to herein as the "Additional Prior Liens" and the
Debt secured thereby being referred to herein as "Additional
Secured Debt") 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, in favor of the Bank relating to the Prior Liens, and
the Additional Prior Liens in favor of the lenders secured thereby
(the "Additional Prior Lenders");
(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 Additional Prior 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.
3
<PAGE>
(j) Except with respect to South Bay Bank and the Additional
Prior Lenders (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 by the Lender of its the remedies in respect of the
Collateral pursuant to this Agreement.
.
PARAGRAPH 4. Section 5.01(g) the Finance Agreement is hereby amended and
restated in full as follows, effective as of the Effective Amendment Date:
(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 Additional Prior Liens and Liens described on
Schedule 3.1(h); or
PARAGRAPH 5. Section 5.02 of the Finance Agreement is hereby amended and
restated in full as follows, effective as of the Effective Amendment Date:
SECTION 5.02. LENDER'S RIGHT TO CONVERT. 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, 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) $1.00 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, at a date specified in such notice on or prior to the
Maturity Date and occurring during the continuance of any Event of
Default.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.
4
<PAGE>
PARAGRAPH 6. Section 7.01 of the Finance Agreement is hereby amended and
restated in full as follows, effective as of the Effective Amendment Date:
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 600,000 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; PROVIDED, HOWEVER, anything to
the contrary appearing herein notwithstanding, with respect to any
Advance made after June 1, 1999, the Borrower shall issue to Lender
Warrants to purchase the number of shares of Common Stock equal to the
product of (.5) and the amount of such Advance;
(c) The initial exercise price for each of the Warrants shall be
$2.125 per share, subject to adjustment as provided herein; PROVIDED,
HOWEVER, anything to the contrary appearing herein notwithstanding,
the initial exercise price for each of the Warrants issued with
respect to an Advance made after June 1, 1999 shall be $1.00 per
share, subject to adjustment as provided herein (the exercise price of
each Warrant being referred to as the"Exercise Price").
(d) Each of the Warrants shall expire on the tenth anniversary of
the date on which such Warrant is issued.
PARAGRAPH 7. Anything to the contrary appearing in the Finance Agreement
or any Warrant notwithstanding, the Exercise Price of each Warrant issued prior
to June 1, 1999 is hereby reset as of the Effective Amendment Date to be $1.00
per share, subject to further adjustment as provided in the Finance Agreement,
as amended hereby. The Parties hereby acknowedge that as of the Effective
Amenmdnet Date, 300,000 Warrants have already been issued.
PARAGRAPH 8. Section 8.10 of the Finance Agreement is hereby amended and
restated in full as follows, effective as of the Effective Amendment Date:
5
<PAGE>
SECTION 8.10 SUBORDINATION. The Borrower's obligations under
this Agreement shall in all respects be subject and subordinate to the
Borrower's obligations to the Bank. Lender hereby agrees that, upon
Borrower's request, Lender will in good faith negotiate and enter into
a reasonable subordination agreement with the Bank or Additional Prior
Lenders, as applicable, respecting subordinating the Liens created
hereby and by the Mortgages to the Prior Liens or Additional Prior
Liens, as applicable.
PARAGRAPH 9. The Borrower hereby makes, as of the date hereof and as of the
Effective Amendment Date, each representation and warranty appearing in Section
3.01 of the Finance Agreement. If any of the representations and warranties
made by the Borrower pursuant to this Paragraph 9 shall prove to have been
incorrect in any material respect when made, such incorrectness shall constitute
an Event of Default under Section 5.01(b) of the Finance Agreement.
PARAGRAPH 10. This Amendment shall be governed by and construed in
accordance with the laws of the State of California.
PARAGRAPH 11. This Amendment may be executed in any number of counterparts
with the same effect as if each of the Parties had signed the same document.
All counterparts shall be construed together and shall constitute one agreement.
PARAGRAPH 12. This Amendment shall be adopted and be effective as an
amendment to the Finance Agreement on the date of delivery (including by
facsimile) by each of the Parties to each other of an executed counterpart
hereto (the "Effective Amendment Date"). From and after the Effective Amendment
Date the Finance Agreement shall be amended as provided in this Amendment. This
Amendment shall be effective only to amend to provisions of the Finance
Agreement as specifically provided hereby, all other provisions of the Finance
Agreement are hereby confirmed as fully effective in their entireties in
accordance with their terms, and the Liens created by the Finance Agreement as
amended hereby shall continue to secure all obligations of the Borrower under
the Finance Agreement as amended hereby.
6
<PAGE>
IN WITNESS WHEREOF, the Parties have entered into this Amendment No. 1
as of the date first above set forth.
NATURADE, INC.
By: /s/ Bill D. Stewart /s/ Lawrence J. Batina
------------------------- -------------------------
Title: CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
HEALTH HOLDINGS AND
BOTANICALS, INC.
By /s/ Lionel P. Boisseire, Jr.
----------------------------
Title: PRESIDENT
7
<PAGE>
CREDIT AGREEMENT
Dated as of August 9, 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 8.10 below) as follows:
ARTICLE I
AMOUNTS AND TERMS OF The Advance
SECTION 1.01. THE ADVANCEs. The Lender agrees, on the terms and conditions
hereinafter set forth, to make (i) a single advance (the "Initial Advance") to
the Borrower on the Effective Date in the aggregate principal amount of Three
Million Dollars ($3,000,000), (ii) from time to time and subject to the sole
and complete discretion of Lender, additional advances (the "Additional
Advances", and, together with the Initial Advance, the "Advances") in an
aggregate amount not exceeding One Million Dollars ($1,000,000) (the
"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 by Lender to the Borrower in same day
funds by wire transfer to the Borrower's account referred to in Section 8.02 for
wire transfers. Each Additional 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 Additional Advance, by the Borrower to the Lender, specifying
the date and amount 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 Additional Advance. Lender shall notify Borrower whether Lender will
make such Additional 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 Additional 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 shall notify Borrower of Lender's agreement to make such
Additional Advance requested by Borrower and upon fulfillment of
-1-
<PAGE>
the applicable conditions set forth in Article II, the Lender will make such
Additional Advance available to the Borrower in same day funds by wire
transfer to the Borrower's account referred to in herein for wire transfers.
(b) Each notice from the Borrower to the Lender requesting an
Additional 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 Additional 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 Additional Advance
when the Additional 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, on July 31, 2004 (such date, or the earlier date on which the
Advance 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. A "Business Day"
means a day on which banks are not required or authorized to close in San
Francisco.
SECTION 1.05. PREPAYMENTS. The Borrower may not, without the prior written
consent of Lender, prepay the outstanding principal amount of any Advance in
whole or in part, or accrued interest thereon.
SECTION 1.06. PAYMENTS AND COMPUTATIONS.
-2-
<PAGE>
(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.
(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
SECTION 2.01. CONDITION PRECEDENT TO ADVANCES. The Lender shall have no
obligation to make any Additional 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 Additional Advance as provided in
Article I above. The obligation of the Lender to make any Advance is subject to
the further condition precedent that the Lender shall have received on or before
the day of the 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. FURTHER CONDITIONS PRECEDENT. Lender's obligation to make
each Advance shall be subject to the further conditions precedent that on the
date of the Advance
-3-
<PAGE>
(a) the following statements shall be true, and each of the giving of the
notice requesting the Advance and the acceptance by the Borrower of the
proceeds of the Advance shall constitute a representation and warranty by the
Borrower that on the date of the Advance such statements are true:
(i) The representations and warranties of the Borrower contained
in this Agreement are correct on and as of the date of the Advance, before and
after giving effect to the Advance and to the use of the proceeds thereof, as
though made on and as of such date, and
(ii) No event has occurred and is continuing, or would result
from the 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 such approvals, opinions or documents as
the Lender may reasonably request.
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 the date hereof, the Effective
Date, the date of each Borrower request for any Additional Advance and the date
of each 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
-4-
<PAGE>
required for the due execution, delivery and performance by the Borrower
of this Agreement.
(d) 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 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 "Obligations") 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
funding settlement of the PNI Case and working capital purposes of the
Borrower.
SECTION 4.02. NEGATIVE COVENANTS. So long as any 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 (collectively, "Liens"), upon or with respect
to any of its properties,
-5-
<PAGE>
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) Liens securing Debt arising under agreements or
facilities now in effect or replacements or refundings thereof PROVIDED
such replacements or refundings are on terms and conditions reasonably
acceptable to Lender, (ii) additional Liens securing Debt in the
aggregate amount of not more than $400,000 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 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:
-6-
<PAGE>
(a) The Borrower shall fail to pay any principal of, or interest
on, any Advance within five (5) Business Days after 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
(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 UNLESS such
failure is cured prior to notice to Borrower by Lender 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,
-7-
<PAGE>
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 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); or
(f) This Agreement shall at any time fail to be the legal, valid
and binding obligations of the Borrower enforceable against the Borrower
in accordance with its terms in any material respect, 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 in accordance
with general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law); or
(g) Any balance sheet of the Borrower included in any of
Borrower's filings with the Securities and Exchange Commission filed on
or after January 1, 1999 ("SEC Filings") and the related statements of
income and retained earnings of the Borrower for the applicable fiscal
period shall, in any material respect, fail to fairly represent the
financial condition of the Borrower as at the date thereof 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, or since January 1, l999, there has been a
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; or
(h) 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
-8-
<PAGE>
Case"), there is at any time a pending action or proceeding affecting the
Borrower before any court, governmental agency or arbitrator 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, which
action or proceeding is not withdrawn or dismissed within sixty (60)
days of the commencement thereof; or
(i) A judgment or order for the payment of money in excess of
$100,000 is at any time rendered against the Borrower other than the
judgment entered against the Borrower in the PNI Case prior to the date
hereof, regardless of whether enforcement proceedings shall have been
commenced by any creditor upon such judgment or order UNLESS there shall
be any stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise; or
(j) Any of the representations and warranties of Borrower
contained in this Agreement or otherwise made by the Borrower to the
Lender, or the statements and information contained in the SEC Filings,
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements and information
contained in this Agreement or such SEC Filing not misleading at the
time such representation or warranty is made or such SEC Filing is
filed;
THEN, and in any such event, the Lender (i) may, by notice to the Borrower,
declare its obligation to make or consider making Advances to be terminated,
whereupon the same shall forthwith terminate, and (ii) may, by notice to the
Borrower, declare the Advance, all interest thereon and all other amounts
payable under this Agreement to be forthwith due and payable, whereupon the
Advance, 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 Advance 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.
-9-
<PAGE>
ARTICLE VI
CONVERSION
SECTION 6.01. LENDER'S RIGHT TO CONVERT. Without limitation to any
other right or remedy Lender may have under this Agreement, applicable law,
or otherwise, the Lender may at any time, by notice to the Borrower in
accordance with Section 8.02, convert all or any part of the Advances and
other Obligations into common stock of the Borrower ("Common Stock") at a
conversion price equal to the lower of (i) $0.75 per share (as adjusted in
accordance with Section 6.02 below, the "Maximum Conversion Price") or (b)
the Fair Market Value of the Borrower's common stock determined with respect
to the date of such notice. 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 Obligations shall be
reduced by the amount applied to such conversion. Shares of Common Stock
which may be obtained by the Lender pursuant to its conversion rights under
this Agreement are referred to herein as "Shares".
"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 thirty 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 thirty trading days prior
to such date of determination).
SECTION 6.02 ADJUSTMENTS OF MAXIMUM CONVERSION PRICE. In the event of
any change in the Common Stock by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up,
combination, or exchange of shares (collectively, "Dilution Events"), in each
case occurring after the date hereof, the Maximum Conversion Price shall be
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 after
the Dilution Event for the Maximum Conversion Price is the same following
such Dilution Event as it was immediately preceding such Dilution Event;
PROVIDED, HOWEVER, anything to the contrary appearing herein notwithstanding,
this Section 6.02 shall in no event apply to any Dilution Event arising on
account of the Borrower's
-10-
<PAGE>
satisfaction of obligations existing before the date of this Agreement,
including, without limitation, the Borrower's issuance of Shares pursuant to
exercise of any options or contract rights outstanding on the date hereof.
SECTION 6.03 NO RIGHTS AS SHAREHOLDERS. Neither the Lender nor any
transferee thereof shall be, or have any rights or privileges of, a shareholder
of the Borrower concerning the Shares, unless, until and to the extent such
Shares have been issued upon due exercise of Lender's conversion rights in
accordance with this Agreement.
SECTION 6.04 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 6.02 hereof) and, upon
exercise of its conversion rights under this Agreement , the Lender shall, at
no additional cost, be entitled to receive, in lieu of the number of Shares
which may be obtained by the Lender pursuant to its conversion rights under
this Agreement, 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 which may be obtained by the
Lender pursuant to its conversion rights under this Agreement.
ARTICLE VII
REGISTRATION RIGHTS
SECTION 7.01 REGISTRATION OF THE SHARES. The Borrower agrees that it
will, within a reasonable time after the later to occur of (a) the date on
which Borrower shall be eligible to register its stock on Form S-3 (or the
then equivalent form) and (b) Lender's written notice to Borrower requesting
registration of the Shares under this Section 7.01 and stating that
-11-
<PAGE>
Lender it is Lender's good faith belief that it may wish to exercise rights
hereunder within a reasonable time following such notice; PROVIDED, that the
giving of any such notice shall impose no obligation on Lender to exercise
its conversion rights, 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, 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 Shares 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 Shares 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 Shares at their respective addresses as they appear on the
records of the Borrower, and shall offer to include and shall include in such
filing any proposed disposition of the Shares, 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 Shares are
restricted securities subject to the provisions of this Agreement.
SECTION 7.02. 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 Shares, 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 entering into this Agreement, the Lender acknowledges that any
and all Shares purchased under this Agreement shall be acquired for investment
and not for
-12-
<PAGE>
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 issuance of the Shares under this Agreement has not previously
been registered under the 1933 Act) to execute a certificate to such effect
at the time of such conversion; and the Lender further acknowledges and
understands that the Shares 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 Shares will (if the sale of the Shares 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.
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
-13-
<PAGE>
NATURADE, INC.
14370 Myford Road
Irvine, California 92606
Attention: President
Fax: 714-573-4818
with a copy to:
CASE, KNOWLSON, BURNETT & WRIGHT LLP
2049 Century Park East
Suite 3350
Los Angeles, California 90067
Attention: Ed Swanson, Esq.
Fax: 310-552-3229
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;
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.
-14-
<PAGE>
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 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 reasonable 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 reasonable 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.
-15-
<PAGE>
(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 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 any 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. Without limitation to any other right of Lender,
Lender may sell participations in this Agreement to third parties in such
amounts and on such terms and conditions as Lender shall determine in its
sole and complete discretion.
SECTION 8.08. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
-16-
<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 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").
SECTION 8.11. ARBITRATION; LOCATION OF ACTIONS. All claims, actions
or disputes arising out of or relating to this Agreement or the transactions
contemplated hereby (collectively, "Disputes") including any Disputes
concerning the construction, validity, performance, and interpretation of
this Section or any other provision of this Agreement, shall be exclusively
resolved by arbitration pursuant to the Federal Arbitration Act, as provided
below. Either party hereto may elect to compel arbitration of any Dispute by
notifying the other party hereto of such election. Each Dispute shall be
promptly adjudicated by a panel of three arbitrators. Each party shall each
select an arbitrator for such panel within ten (10) Business Days of the date
of the notice of election to compel arbitration described above. The two
arbitrators so selected shall immediately meet and attempt to appoint a third
arbitrator, who shall be of good reputation and character. If the two
arbitrators shall not have appointed such third arbitrator within thirty (30)
days of the date of the notice of election to compel arbitration described
above, either party hereto may elect to cause such third arbitrator to be
appointed by a California office of the American Arbitration Association, as
soon as practicable. Arbitration shall be conducted by such panel in Los
Angeles, California, pursuant to the commercial rules of the American
Arbitration Association. The arbitration panel shall meet to consider the
Dispute within ten business days of the appointment of its three members, and
shall endeavor to resolve and adjudicate such Dispute in not more than ninety
(90) days after its first meeting. Costs, fees and expenses of the
arbitrators and the American Arbitration Association shall be paid by the
non-prevailing party to such Dispute. Without limitation of any other right
or power of the arbitration panel, such panel shall have the right and power
to grant remedies in the form of an order for specific performance or other
equitable relief. The parties hereby submit exclusively to the jurisdiction
of the Courts of the State of California, and the Federal Courts of the
United States, located in Los Angeles County in any action to compel
arbitration hereunder or to enforce any order, decision or judgment of the
arbitrators. If either party hereto commences any action or proceeding
against the other to enforce any of
-17-
<PAGE>
the terms hereof, or to recover damages for or prevent the breach of this
Agreement, including any arbitration proceedings, the prevailing party shall
be entitled to recover such party's reasonable attorneys' fees, costs of
investigation and costs of suit incurred in connection with said action or
proceeding.
-18-
<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: /s/ Bill D. Stewart /s/ Lawrence J. Batina
------------------------- -------------------------
Title: CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
HEALTH HOLDINGS AND
BOTANICALS, INC.
By /s/ Lionel P. Boisseire, Jr.
-----------------------------
Title: PRESIDENT
-19-
<PAGE>
SETTLEMENT AGREEMENT
This Settlement Agreement is entered into by and between the parties
undersigned below (the "Parties") for the consideration stated.
1. PARTIES:
The Parties to this Settlement Agreement are the following:
1.1 JEFFREY H. MIMS, Trustee for the Chapter 7 Estate of
Performance Nutrition, Inc.;
1.2 NATURADE, INC., a Delaware corporation; and
1.3 HEALTH HOLDINGS AND BOTANICALS, INC., a California
corporation.
2. DEFINED TERMS USED IN THIS AGREEMENT:
2.1 ADVERSARY PROCEEDING shall mean the lawsuit styled JEFFREY
H. MIMS. TRUSTEE V. KENNEDY CAPITAL MANAGEMENT, INC., ANTHONY ROTH, DAVID
WYNNE, AND NATURADE, INC. - Adversary Proceeding No. 397-3452 pending in the
United States Bankruptcy Court for the Northern District of Texas, Dallas
Division, including without limitation the Counterclaim filed by Naturade,
Inc. against the Trustee and the Estate.
2.2 DEBTOR shall mean Performance Nutrition, Inc.
2.3 CHAPTER 7 CASE shall mean the bankruptcy case styled IN RE
PERFORMANCE NUTRITION, INC. - Case No. 97-30566-HCA-7 pending in the United
States Bankruptcy Court for the Northern District of Texas, Dallas Division.
2.4 PROOFS OF CLAIM shall mean any and all proofs of claims
filed by Naturade, Inc. in the Chapter 7 Case, including, without limitation,
Proofs of Claim No. 3 and 64.
2.5 ESTATE shall mean the bankruptcy estate of the Debtor.
SETTLEMENT AGREEMENT Page 1
<PAGE>
2.6 NATURADE shall mean Naturade, Inc., its officers,
directors, employees, agents, attorneys, accountants and other professionals
who have appeared on its behalf in the Adversary Proceeding, excluding
Anthony Roth, William Hatamyar, CFO Associates, Inc., and Trinity Capital,
Inc.
2.7 HEALTH HOLDINGS shall mean Health Holdings and Botanicals,
Inc., its officers, directors, employees, agents, attorneys, accountants, and
other professionals, including Doyle & Boissier, LLC, a shareholder thereof,
but excluding Anthony Roth.
2.8 TRUSTEE shall mean Jeffrey H. Mims, Trustee for the
Estate, and his agents, attorneys, accountants and other professionals who
have appeared on his behalf in the Adversary Proceeding.
2.9 SETTLEMENT AGREEMENT shall mean this Settlement Agreement.
2.10 JUDGMENT shall mean the Amended Final Judgment entered
by the United States Bankruptcy Court for the Northern District of Texas,
Dallas Division in the Adversary Proceeding on March 22, 1999, a copy of
which is attached hereto as Exhibit "A," including without limitation, any
obligation for payment of costs arising therefrom.
2.11 THE INCIDENTS shall mean all allegations made by the
Trustee against Naturade in the Adversary Proceeding and all facts related to
same, including, but not limited to, Naturade's alleged: 1) wrongful
interference with PNI's management, tortious interference with the management
contracts of PNI's management; 2) unjust enrichment at the expense of the
Estate; 3) conspiracy with PNI's management to breach fiduciary duties; and
4) aiding and abetting the breach of fiduciary duties by PNI's management.
SETTLEMENT AGREEMENT Page 2
<PAGE>
3. RECITALS:
3.1 On January 21, 1997, the Debtor filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code.
3.2 On February 19, 1997, the Court ordered the appointment
of a Chapter 11 trustee for the Debtor's Estate. On February 28, 1997, the
Trustee was appointed trustee for the Chapter 11 estate. On March 14, 1997,
this case was converted to a case under Chapter 7. The Trustee is now
serving as trustee for the Chapter 7 Estate.
3.3 In October 1997, the Trustee filed the Adversary
Proceeding against Naturade and three other Defendants who are not parties to
this Settlement Agreement.
3.4 Trial of the Adversary Proceeding, with the exception of
certain of the Trustee's equitable claims and the defendants' counterclaims,
was held over non-consecutive days from July 27, 1998 to October 30, 1998.
After hearing the evidence and arguments of the parties, the Court entered
the Judgment on March 22, 1999. In support of the Judgment, the Court
entered its Amended Findings of Facts and Conclusions of Law on March 22,
1999 (the "Findings").
4. CONSIDERATION AND PAYMENTS:
4.1 The purpose of this Settlement Agreement is to provide for
the payments, undertakings and releases set forth herein. By signing the
Settlement Agreement, the Parties do not admit the truthfulness of any of the
claims made by any opposing party in the Adversary Proceeding and/or Proofs
of Claim; to the contrary, all such claims and allegations are expressly
denied. Naturade further denies and contests each and every finding and
conclusion by the Court in the Findings or in the Judgment that Naturade
engaged in any wrongful conduct or that it damaged PNI in any way.
SETTLEMENT AGREEMENT Page 3
<PAGE>
4.2 The consideration for this Settlement Agreement consists
of the mutual covenants, representations and releases contained herein, and
the payments and notes from Naturade to the Estate described in this
Settlement Agreement.
4.3 Naturade agrees to pay the Estate, in good and collected
funds, the sum of One Million Three Hundred Fifty Thousand and No/100 Dollars
($1,350,000.00)(the "Cash Payment"). This sum shall be paid by Naturade, as
provided below, upon the Bankruptcy Court's approval of the Settlement
Agreement by causing The South Bay Bank to deliver to the Trustee's
litigation counsel an irrevocable clean non-documentary letter of credit in
the form of Exhibit B hereto (the "Letter of Credit"), on the second business
day following the date the Bankruptcy Court's order approving the Settlement
Agreement becomes final and non-appealable (the "Effective Date"). The Letter
of Credit must be payable to the Trustee on the Effective Date and must not
expire for a period of ninety days (90) days following the Effective Date.
The Letter of Credit must not require the presentation of any document other
than a sight draft and payment must not be conditioned upon any event other
than the presentation of a sight draft.
4.4 Naturade also agrees to execute and deliver to the
Trustee on the Effective Date a secured promissory note in the principal
amount of $424,000 payable to the Estate (the "Secured Note") and Security
Agreement, which are attached hereto as Exhibits "C-1 and C-2" respectively,
and incorporated by reference as if fully set forth herein. Naturade will
fully perform pursuant to the terms of the Secured Note, provided that the
first monthly payment thereunder shall not be due until the first day of the
calendar month immediately following the Effective Date. The Secured Note
will be subject to all
SETTLEMENT AGREEMENT Page 4
<PAGE>
currently existing, validly-perfected liens against Naturade's real and
personal property. The Trustee agrees that Health Holdings' future debt
advances to Naturade, if any, shall have lien priority over the security
interest granted hereunder to the Trustee, provided that nothing herein shall
prevent the Trustee from bringing an action for recharacterization or
subordination of Naturade's now existing debt to Health Holdings. The
parties presently contemplate that Naturade will obtain a loan or line of
credit from a non-insider, third party lender in replacement of its current
loans from South Bay Bank. In such event, the Trustee agrees to promptly
execute and deliver to Naturade, in form satisfactory to Naturade's new
lender and the Trustee, a written confirmation that the Trustee's security
interest in Naturade's property shall be subordinate in priority to the
security interests granted to such new lender by Naturade. The Trustee shall
not unreasonably withhold such written confirmation of subordination upon
request therefore by Naturade.
4.5 Naturade also agrees to execute and deliver to the
Trustee on the Effective Date a promissory note in the principal amount of
$226,000 payable to the Estate, which is attached hereto as Exhibit "D," and
incorporated by reference as if fully set forth herein (the "Revenue Note").
Naturade will fully perform pursuant to the terms of the Revenue Note.
Naturade hereby further agrees to maintain accounting practices consistent
with GAAP and with those used prior to March 29, 1999 until such time as the
Revenue Note is paid in full. Naturade hereby grants to the Trustee and his
agents reasonable access to its books and records, upon five days calendar
(5) written notice, to confirm the accuracy of Naturade's total net sales as
reported in its 10-Q or 10-K reports.
4.6 This Settlement Agreement, Letter of Credit, Secured
Note, Revenue Note and any and all security agreements, UCC-1 financing
statements, releases and any
SETTLEMENT AGREEMENT Page 5
<PAGE>
and all other documents executed in connection with or related to the
settlement proposed herein shall be referred to herein as the "Settlement
Documents." Naturade agrees to execute and deliver the Settlement Documents
to the Trustee on the Effective Date.
4.7 Effective as of the Effective Date, and upon delivery of
the instruments to Trustee identified in Paragraphs 4.3, 4.4, and 4.5 above,
the Trustee hereby assigns to Naturade, without representation or warranty of
any kind, all right, title, and interest of the Estate in all of the Estate's
claims and causes of action which may exist against Allan Schulman, Michael
Fernicola, Robert Bearson, William Cordeiro, Robert Zuber, Barry Zwick and
Dr. Lenny Steven Smith arising out of the Incidents. A copy of the
assignment instrument is attached hereto as Exhibit "E." As stated therein,
the claims are assigned to Naturade "as is," and without any representations
or warranties by the Trustee, Debtor, or the Estate including whether such
claims are valid, barred by statutes of limitations or other legal or
equitable defenses, legally enforceable or in existence. In determining to
accept the assignment, and in all matters addressed herein, Naturade has
relied on the advice of its own counsel, and expressly disclaims reliance on
any statements made by the Trustee, Debtor, or the Estate regarding the
assigned claims.
4.8 The parties agree that the settlement payments described
in this Settlement Agreement will be allocated to satisfy the Judgment as
follows: first to satisfy the punitive damages portion of the Judgment
against Naturade, next to satisfy costs allowed against Naturade, next to
satisfy interest accrued on the judgment as of the Effective Date, and next
to satisfy in part, the actual damages awarded in the Judgment for which
Naturade is jointly and severally liable with Defendant Anthony Roth. This
allocation does not reflect Naturade's liability to the Estate and does not
affect in any way
SETTLEMENT AGREEMENT Page 6
<PAGE>
the release of the Judgment against Naturade by the Trustee, the Debtor, and
its Estate. The allocation merely seeks to preserve the greatest possible
recovery by the Trustee, Debtor, and its Estate of the Judgment against
Defendant Anthony Roth.
5. COURT APPROVAL:
5.1 Conditions precedent to the effectiveness of this
Settlement Agreement are: (a) approval of this Settlement Agreement by the
Bankruptcy Court, after notice to creditors and shareholders, by a final,
non-appealable order providing, in part, for Naturade's standing as
representative of the PNI estate for the limited purpose of asserting claims
for violations of the automatic stay under 11 U.S.C. Section 362 related to
any claims asserted against Naturade that Naturade believes are the subject
of this Settlement Agreement with the Trustee; (b) proper and timely delivery
of the Cash Payment to the Trustee; and (c) binding execution and timely
delivery of the Settlement Documents required by this Settlement Agreement.
6. RELEASES:
6.1 The Trustee, the Debtor and its Estate are executing
effective as of the Effective Date a release of Naturade and Health Holdings
(the "Trustee's Release") from: (i) the Judgment, including costs; (ii)
the Trustee's claims against Naturade under 11 U.S.C. Section 547 pending in
Adversary No. 399-3084 or otherwise; and (iii) any and all claims, demands,
actions, rights, remedies, causes of action, debts, liens, sums, suits and/or
accountings the Debtor and/or its Estate now has or hereafter may have or
claim to have arising before the Effective Date, including but not limited to
the matters made the subject of the Adversary Proceeding, including the
Incidents and Proofs of Claim. Defendant Anthony Roth, Lenny Steven Smith,
Allan Schulman, Michael Fernicola, Robert Bearson,
SETTLEMENT AGREEMENT Page 7
<PAGE>
William Cordeiro, Robert Zuber, and Barry Zwick will be specifically excluded
from the Trustee's Release. Additionally, all claims or causes of action of
the Estate which arise from the breach of this Settlement Agreement or the
Settlement Documents with regard to misrepresentations or fraud in the
inducement of this Settlement Agreement will not be released. Further, any
recharacterization and subordination claims against Health Holdings as to
existing debt will not be released. The Trustee shall deliver the Trustee's
Release to Naturade on the Effective Date. The Trustee's Release shall
conform substantially to Exhibit "F" hereto. Within five (5) days of the
Effective Date, the Trustee shall file (a) a release of Judgment in the
Adversary Proceeding, and (b) a dismissal of his claims against Naturade in
Adversary Proceeding No. 399-3084 (the preference suit). At such time,
Naturade shall file a dismissal of its Notice of Appeal in the Adversary
Proceeding.
6.2 Naturade and Health Holdings are executing effective as
of the Effective Date releases (collectively, the "Naturade Release") of the
Trustee, Debtor, and its Estate from any and all claims, demands, actions,
rights, remedies, causes of action, debts, liens, sums, suits and/or
accountings Naturade and/or Health Holdings now has or hereafter may have or
claim to have arising before the Effective Date, including but not limited to
the matters made the subject of the Adversary Proceeding, including the
Incidents and Proofs of Claim or otherwise. The Naturade Release will be
delivered to the Trustee on the Effective Date. Such releases of the Trustee
by Naturade and Health Holdings shall conform substantially to Exhibits G-1
and G-2 hereto.
6.3 The Trustee agrees to forbear from any efforts to collect
or enforce the Judgment from or against Naturade until the Effective Date,
unless the Court signs an
SETTLEMENT AGREEMENT Page 8
<PAGE>
order denying approval of the Settlement Agreement, in which case such
forbearance shall terminate five (5) days thereafter. Also on the Effective
Date, Naturade will file pleadings dismissing its appeal of the Judgment,
and Naturade's Proofs of Claim or any proof of claim filed in the Debtor's
bankruptcy case shall be deemed withdrawn.
7. REPRESENTATIONS:
7.1 Naturade represents and warrants that it is the owner and
holder of all claims held or asserted by Naturade including, without
limitation, those evidenced by the Proofs of Claims, and Naturade has not
transferred any such claims as of the effective date of this Settlement
Agreement.
7.2 The parties hereto are not relying upon any facts,
promises, undertakings, or representations made by any other party or its
attorneys except for the representations specifically set forth in the
Settlement Agreement. The parties hereto have relied solely and completely
upon their own judgment, and the judgment of their attorneys, in executing
the Settlement Agreement.
7.3 The parties hereto understand that by entering into the
Settlement Agreement they are giving a full, complete, and final release of
any and all claims, demands, affirmative defenses, defenses and causes of
action which they have asserted or could have asserted against the other in
the Adversary Proceeding or otherwise, excepting only the obligations
contained in the Settlement Agreement.
7.4 Naturade represents that it is not entering this
Settlement Agreement with the intention or contemplation of filing bankruptcy
thereafter. Health Holdings represents that it is not entering this
Settlement Agreement with the intention or contemplation of causing Naturade
to file bankruptcy thereafter.
SETTLEMENT AGREEMENT Page 9
<PAGE>
7.5 Health Holdings is a party to this Settlement Agreement
only for the purpose of effectuating Sections 4.3, 4.4, 4.5, 4.6, 4.7, 6.1,
6.2, and 7.4.
8. MISCELLANEOUS PROVISIONS:
8.1 This Settlement Agreement may be modified only by written
agreement executed by all parties.
8.2 THE SETTLEMENT AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. THE SETTLEMENT
AGREEMENT HAS BEEN ENTERED INTO IN WHOLE OR IN PART IN DALLAS COUNTY, TEXAS.
IT IS PERFORMABLE, IN PART, IN DALLAS COUNTY, TEXAS. ANY FEDERAL OR STATE
COURT IN DALLAS COUNTY, TEXAS SHALL HAVE EXCLUSIVE JURISDICTION OVER ANY AND
ALL DISPUTES ARISING UNDER OR PERTAINING TO THE SETTLEMENT AGREEMENT, AND
VENUE IN ANY SUCH DISPUTES SHALL LIE EXCLUSIVELY IN DALLAS COUNTY, TEXAS.
8.3 It is acknowledged and understood that the Parties do not
admit the truthfulness of any of the claims or allegations made against them
by the opposing party, and the provisions of this Settlement Agreement shall
not constitute an admission by any of the Parties with regard to the
truthfulness of any of the claims or allegations made against them by the
opposing party.
8.4 This Settlement Agreement, including the Settlement
Documents, contains the entire understanding between the Parties concerning
the matters herein contained. There are no representations, agreements,
arrangements, or understandings, oral or written, between or among the
Parties, relating to the subject matter of this Settlement Agreement that are
not fully expressed herein. To the extent this Settlement
SETTLEMENT AGREEMENT Page 10
<PAGE>
Agreement is inconsistent with any other Settlement Document including the
motion to Approve this Settlement Agreement, this Settlement Agreement shall
control.
8.5 The Parties acknowledge that they and their designated
representatives have read all of this Settlement Agreement, and acknowledge
that the parties hereto are entering this Settlement Agreement after
consulting with counsel.
8.6 This Settlement Agreement may be executed in any number
of identical counterparts, each of which shall be deemed to be an original
for all purposes.
8.7 The Settlement Agreement shall be binding upon and inure
to the benefit of parties and their respective heirs, survivors, executors,
successors, and assigns including a bankruptcy trustee for any Party.
8.8 In the event that any terms of the Settlement Agreement
become subject to construction by any court, the terms of the Settlement
Agreement shall be construed reasonably, equally and fairly with regard to
both Trustee and Naturade, and shall not be strictly construed against any
party.
8.9 Each of the Parties agrees to execute such additional
documents as may be reasonably necessary to effectuate the terms of this
Settlement Agreement.
SETTLEMENT AGREEMENT Page 11
<PAGE>
Signed this 24 day of June 1999.
JEFFREY H. MIMS, CHAPTER 7 TRUSTEE
FOR THE ESTATE OF PERFORMANCE
NUTRITION, INC.
/s/ Jeffrey H. Mims
- ----------------------------
Jeffrey H. Mims, Trustee
NATURADE, INC.
By: /s/ Lawrence J. Batina
----------------------------
Title: CHIEF FINANCIAL OFFICER
----------------------------
HEALTH HOLDINGS AND BOTANICALS, INC.
By: /s/ Lionel P. Boisseire, Jr.
----------------------------
Title: /s/ PRESIDENT
----------------------------
SETTLEMENT AGREEMENT Page 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 158,960
<SECURITIES> 0
<RECEIVABLES> 1,065,063
<ALLOWANCES> 199,317
<INVENTORY> 2,375,007
<CURRENT-ASSETS> 4,481,397
<PP&E> 646,755
<DEPRECIATION> 325,465
<TOTAL-ASSETS> 5,986,158
<CURRENT-LIABILITIES> 7,292,422
<BONDS> 0
0
125
<COMMON> 533
<OTHER-SE> (1,459,145)
<TOTAL-LIABILITY-AND-EQUITY> 5,986,158
<SALES> 5,133,924
<TOTAL-REVENUES> 5,133,924
<CGS> 3,225,926
<TOTAL-COSTS> 3,813,688
<OTHER-EXPENSES> 2,825,788
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,487
<INCOME-PRETAX> (4,954,966)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (4,957,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,957,366
<EPS-BASIC> (.93)
<EPS-DILUTED> (.93)
</TABLE>
