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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 and
transitional quarter ended December 31, 1998
Commission File Number 33-7106-A
NATURADE, INC.
DELAWARE 23-2442709
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
14370 MYFORD ROAD, IRVINE, CA. 92606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 573-4800
SECURITIES REGISTERED PURSUANT TO SECTION 15(d) OF THE ACT:
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Name of each exchange
Title of each class On which registered
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Common Stock, $0.0001 par value: None
Warrants: None
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
As of March 31, 2000, 5,349,084 shares of the Registrant's Common
Stock were outstanding and the aggregate market value of such Common Stock
held by non-affiliates as of that date was $1,683,816 based on the average of
the bid and asked price on that date.
Exhibit Index on Page 65
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PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Naturade, Inc., a Delaware corporation (the "Company" or
"Naturade"), is a branded nutraceuticals marketing company, focusing on high
growth potential niche products and differentiating itself from broad line
dietary supplement manufacturers. The Company is committed to marketing
innovative natural products that actively nourish and improve the health and
well being of consumers. This commitment to innovation and brand identity
focus is exemplified by the Company's low carbohydrate, high protein powders,
aloe vera based health and beauty aids, nutritional and herbal supplements,
aloe drinks and soy protein based powders. These products are sold to the
health food and mass market channels through a coordinated approach with a
direct sales force, augmented by independent brokers, selling to distributors
and increasingly direct to retailers.
The Company's warehouse and executive offices are located at 14370
Myford Road, Irvine, California 92606, telephone (714) 573-4800.
B. HISTORICAL DEVELOPMENT OF NATURADE, INC.
Naturade was incorporated in Delaware in 1986 for the purpose of
acquiring other businesses. In April 1989, Naturade acquired Naturade
Products, Inc. ("NPI"), the common stock of which was owned by Allan
Schulman, the Company's President, and other Schulman family members.
C. HISTORICAL DEVELOPMENT OF NATURADE'S BUSINESS
In 1926, Nathan Schulman opened one of the first natural food stores
in the nation. Here he began to develop his own special nutritional formulas
working with trained herbologists. The business grew rapidly and Schulman
soon began manufacturing his own products under the Naturade brand name.
By 1950, NPI had identified the beneficial health properties of soy
protein and introduced its N-R-G-TM- line of protein powders. N-R-G remains
one of the top 3 protein supplement brands sold today through health food
distributors. The Naturade family of soy protein products grew to include
other best selling brands like Naturade 100% Soy-TM- and Naturade Vegetable
Protein-TM-.
NPI grew to a position of leadership in the health food trade under
the direction of Schulman's son, Allan, who became active in the Company in
1954. The Company remained as a family run enterprise into the 1990's,
offering hundreds of products from vitamins and enzymes to a full line of
aloe vera products in addition to its base line of protein supplements.
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NPI was merged into Naturade on September 30, 1993. Until early
1999, Naturade primarily operated as a manufacturer and national distributor
of its health-related products.
D. RECENT DEVELOPMENTS AFFECTING THE BUSINESS
In March 1998, a new investor group brought in Chief Executive
Officer (CEO) Bill Stewart, a strong consumer products-oriented leader, to
re-invent Naturade as a multi-channel company that could compete effectively
in both health food and mass market. As CEO, Mr. Stewart surrounded himself
with a seasoned management team, several of whom had worked together with
Bill for over ten years at a major consumer packaged goods company. Under his
direction, the Company has invested over $8 million in restructuring, legal
settlement and other one-time charges during 1998 and 1999 to build a solid
platform for profitable growth.
Mr. Stewart's new management team realized that a major
restructuring of the Company had to occur if it was to be successful in
growing the business. This restructuring required financial and
organizational changes and included a detailed analysis of the Company's core
competencies and externally available resources. In fiscal 1999, the
management team revalued inventory, reduced unnecessary costs, outsourced
manufacturing, arranged a substantial line of credit, reformulated most stock
keeping units (skus), relocated the Company, implemented electronic data
interchange (EDI) and rationalized the product line by eliminating over 100
skus.
In fiscal 1999, the Company reserved almost $.9 million of finished
goods and raw materials that no longer fit the growth strategy. It wrote off
intangible assets of $1 million and for $1.9 million settled a 1997 lawsuit
judgment stemming from the acquisition of the Kids Plex brand assets.
Additionally, as the Company obtained financing from its major investor, it
incurred over $1.9 million in non-cash interest charges required to be
recorded per generally accepted accounting principles. The Company considers
these costs of approximately $5.7 million in fiscal 1999 as non-operational.
Accordingly, the Company has streamlined its operations and can now focus on
marketing its products in the health food and mass distribution channels.
E. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by the Company's chief operating decision-maker, or decision-making group, in
deciding how to allocate resources and in assessing performance. Commencing
in January 1999, the Company's reportable operating segments include health
food specialty stores and mass market categories. The Company does not
allocate operating expenses to these segments, nor does it allocate specific
assets to these segments. Therefore, segment information reported includes
only sales, cost of sales and gross profit. The financial information for the
Company is presented in the financial statements accompanying this report.
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F. DESCRIPTION OF BUSINESS OF NATURADE
(i) PRODUCTS
Naturade focuses on developing niche branded products,
differentiating itself from broad line dietary supplement manufactures. The
Company has a long and established heritage as an industry innovator. It
helped launch the soy protein powder market 50 years ago and the aloe vera
based health and beauty aids market twenty years ago. Specific product
categories include fitness and energy, herbal formulas, aloe vera based
health and beauty aids, children's supplements and specialty formulas.
The Company's fitness and energy line includes a variety of
protein-based formulas addressing specific consumer needs. The "N-R-G
Protein" supplement has been an industry leader for almost 50 years. The "All
Natural Vegetable Protein" powder meets the needs of vegetarians or people
who prefer products that contain no animal products. The "100% Whey Protein"
product is formulated for the serious body builder and the "100% Soy Protein"
is available for consumers who want health benefits associated with soy
protein, including cholesterol reduction and a reduced risk of heart disease
when used in a diet low in saturated fat and cholesterol.
After extensive product and consumer research, in 1999 the Company
created a soy protein supplement product that offered measurable advantages
over products then available. Soy protein clinical research revealed
potential health benefits for conditions such as menopause, osteoporosis and
especially cholesterol reduction. Strategically, it was decided that the new
product should be a meal replacement as opposed to a meal supplement to
capitalize on higher growth in that segment and to distance it from
competition.
This product, Naturade Total Soy, a nutritionally balanced meal
replacement with a 50-40-10 ratio of protein to carbohydrate to fat, was
introduced in March 1999. As a meal replacement, the formulation was created
to deliver 50% of the Daily Value of 18 vitamins and minerals plus fiber.
However, the real keys to its success have been the product's great taste and
its ability to deliver 25 grams of soy protein in a single 12 ounce shake.
Naturade was the first company in the industry to fully capitalize on the new
heart disease health claim permitted by the U.S. Food and Drug Administration
(FDA) on October 26, 1999. (See page 8).
In response to the ground swell of industry concern over genetically
modified organisms (GMO), the Company recently introduced a new line of
Naturade Premium Soy, non-GMO protein powders. These will soon be followed by
additional non-GMO, value-added products to meet the significant demand from
health food retailers.
The Company's herbal category is spearheaded by the proprietary
brand line of herbal formulas, "The Chinese Way-TM-". It combines time-tested
solutions from Chinese herbal traditions with the latest scientific research
to provide effective products backed by clinical test support. "The Chinese
Way-TM-" is the consumer's assurance of an all natural product
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produced to the highest quality standards in sourcing and U.S. pharmaceutical-
grade manufacturing. This first-to-market approach represents the fusion of
the traditions of Chinese Herbalism with the latest Western manufacturing
know-how. Currently, "The Chinese Way-TM-"" brand includes two product lines:
Immune Formulas and Life Force Formulas with a third, Woman's Harmony Series,
planned for introduction in Year 2000. Additional products under the Naturade
herbal category include a herbal diuretic, a natural laxative and natural
fiber supplements.
The Company's aloe vera based health and beauty aids product
category, embodied in the Aloe Vera 80-Registered Trademark- brand, was
created over 20 years ago. This Aloe Vera 80 line concentrates on five key
product segments: facial care, skin care, hair care, bath and cleansing care
and sun care. All of these products contain a high percentage of aloe vera
gel, a source of minerals, enzymes, vitamins, amino acids and fatty acids
known for its ability to soothe and hydrate delicate body tissues. The
Company continues to innovate today by re-inventing its aloe products with
Active Aloe-TM-, a more efficacious ingredient standardized to 10% bioactive
polysaccharides, with the potential to transform the aloe vera market.
The Company's children's supplements category features a core group
of products under the "Kids Plex-Registered Trademark--TM-" brand name. These
products provide a full spectrum of vitamins, minerals and amino acids
designed to enhance a child's mental concentration. "Kids Plex-Registered
Trademark--TM-" is currently available in shake mixes as well as nutrition
bars. Both the shakes and bars are available in assorted flavors.
The Company's specialty formulas category includes an entire line of
herbal-based cough and cold formulas as well as a select line of fiber
formulas, diuretics, vitamins and enzymes and aloe vera drinks fortified with
natural botanicals. Top products in this line include "Herbal Cough Syrup",
"Saline/Aloe Nasal Spray", "Immune Booster" with echinachea and "Aloe Vera
Gel Stomach Formula".
G. SALES
For the fiscal year ended December 31, 1999 ("Fiscal 1999"),
Naturade had net sales of $11,946,702 of which 95% was domestic and 5% was
international. Total gross profit was $4,569,798, of which $4,468,092 was
generated by domestic sales and $101,706 was generated by international
sales. For the three months ended December 31, 1998, Naturade had net sales
of $3,597,155 of which 81% was domestic and 19% was international. Total
gross profit was $1,327,205, of which $1,101,047 was generated by domestic
sales and $226,158 was generated by international sales. For the fiscal year
ended September 30, 1998 ("Fiscal 1998"), Naturade had net sales of
$13,506,972 of which 90% was domestic and 10% was international. Total gross
profit was $5,712,883, of which $5,159,073 was generated by domestic sales
and $553,810 was generated by international sales. For the fiscal year ended
September 30, 1997 ("Fiscal 1997"), Naturade had net sales of $12,578,419 of
which 92% was domestic and 8% was international. Total gross profit was
$6,196,624, of which $5,831,453 was generated by domestic sales and $365,171
was generated by international sales.
(i) DOMESTIC SALES
Naturade's direct sales force supervises broker sales organizations
in the health food and mass market channels. While headquarters sales calls
are primarily the responsibility of Naturade sales management, follow-up
calls and retail activity are carried out by over 60 health food broker
personnel and an additional 50 mass market broker personnel.
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The health food branded products are sold through a stocking
distributor network of 15 key distributors and approximately 15 smaller
distributors who service approximately 6,000 retail health food stores in the
United States. Six of these key distributors are divisions of Tree of Life, Inc,
a national health food distributor; their aggregate purchases during 1999
represented approximately 24% of the Company's total sales. The loss of this
major health food distributor could have a material adverse effect on the
Company.
In 1999, Naturade hired a separate set of brokers who have specific
industry and/or key account relationships in the mass market which consists
of the following categories: grocery, drug, warehouse, discount and club
stores. Through this approach, Naturade has shipped or received commitments
from over 25 accounts representing 9,000 store outlets for its Naturade Total
Soy product line by December 31, 1999.
Sales for 1999 in the United States are broken down by
geographic regions as follows:
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Northeast Region 26.1
Southeast Region 14.1
Southwest Region 8.2
Mid-West Region 13.7
Rocky Mountain Region 7.1
California & Hawaii 22.2
Northwest Region 8.6
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100.0
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Naturade maintains brokerage agreements with its health food and
mass brokers throughout the United States. These agreements have a term of
one year and may be terminated on 30 days prior written notice by either
party. In addition, these agreements grant the brokers exclusive territories
to represent Naturade and receive commissions on sales generated in these
territories.
(ii) FOREIGN SALES
Naturade's international business is designed to meet each country's
unique cultural and distribution requirements. Naturade will typically grant
the wholesaler or distributor the right to utilize Naturade's trademarks and
brand names in a specified geographical territory and commit the wholesaler
or distributor to a non-binding sales goal to purchase minimum levels of
Naturade's products. The Company also offers secondary brands in addition to
the Naturade brand and offers private label products to its international
customers.
Approximately 25% of the Company's international sales in Fiscal
1999 were in Saudi Arabia, 25% in Canada and 22% in Korea, with the remaining
28% in approximately 10 other countries. As part of its new global marketing
strategy, the Company has decided to
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emphasize branded products and reduce its dependence on international
private label business due to its low margin and unpredictability.
(iii) SEASONAL FLUCTUATIONS
The general nature of the Company's domestic business is not
considered seasonal. However, international sales tend to fluctuate depending
upon economic conditions, seasonal patterns and cultural differences within
each country.
H. NO GOVERNMENT CONTRACT BUSINESS
None of Naturade's business relates to government contracts.
I. REGULATORY MATTERS
The Company's products are subject to regulation by numerous
governmental agencies, principally the FDA. The Company's products are also
subject to regulation by, among other regulatory agencies, the Consumer
Product Safety Commission, the U.S. Department of Agriculture, and the
Environmental Protection Agency. Advertising of the Company's products is
subject to regulation by the U.S. Federal Trade Commission. The Company's
products are also regulated by various state and local agencies as well as
each foreign country in which the Company distributes its products.
Many Naturade products, including Naturade Total Soy, are food
products that are not subject to regulation by the FDA, Over-the-Counter
(OTC) Drug regulations or the Dietary Supplement Health and Education Act
(DSHEA) of 1994. These food products may use "structure/function" claims, but
unlike Dietary Supplements, are not required to carry a disclaimer regarding
an FDA evaluation or disease. Effective October 26, 1999, the FDA approved a
health claim for soy protein allowing the following product label claim:
"25 GRAMS OF SOY PROTEIN DAILY, IN A DIET LOW IN SATURATED FAT AND
CHOLESTEROL, MAY REDUCE THE RISK OF HEART DISEASE"
To carry this claim, one serving of a product must deliver at least 6.25
grams of soy protein with no more than 3 grams of fat and no more than 1 gram
of saturated fat. The Company is currently shipping 32 products that carry
the heart disease claim under the brand names of Naturade Total Soy, Naturade
100% Soy, Naturade Veg (Vegetable Protein), Naturade NRG and Naturade Premium
Soy.
The enactment of DHSEA established a clear legal framework for the
Company's marketing efforts as it removed many of the legal threats that the
industry had faced. Under DSHEA, dietary supplements (including several of
Naturade products) are separately regulated from over-the-counter drugs or
food products. Dietary supplements may bear
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"structure/function" claims on the product label. In addition, balanced
literature may be used in connection with the sale of dietary supplements in
retail stores. In its latest ruling on dietary supplements that became
effective on February 5, 2000, the FDA changed its position and stated that
afflictions occurring in the course of daily living, such as pre-menstrual
syndrome and aging, are no longer considered diseases and hence, products may
now carry related "structure/function" claims. This change will have a
significant positive impact on claims for the Company's products such as The
Chinese Way PMS Support.
J. BACKLOG
Naturade typically does not carry backlog orders and generally
maintains a sufficient supply of its products to meet customer demands. The
Company's policy is to ship product within seven days of the order being
placed.
K. INVENTORY
Naturade's net inventory ranged from a low of $1,920,467 to a high
of $2,877,229 during Fiscal 1999. Management conducts weekly sales forecast
meetings to review inventory status. If any excess inventory is indicated,
the Company attempts to reduce the excessive inventory as soon as possible. A
complete physical inventory is conducted once a year.
L. RAW MATERIAL
Due to the Company's decision to outsource production, Naturade has
eliminated most of its raw material inventory which at December 31, 1999
approximated $135,000. This amount includes bottles, labels, corrugated
boxes, shippers and certain special raw materials.
M. COMPETITION
Approximately 61% of 1999 Naturade sales are derived from supplement
powders, of which 44% are soy protein based products. These products are sold
through health food distributors to health food stores and natural foods
supermarkets and direct to mass supermarkets, drug stores, club stores and
mass merchandisers. Some additional volume to mass accounts is also sold
through food and drug distributors. Spins Distributor Information, the
independent source for syndicated sales data through health food
distributors, reports a 52.1% share of the market for Naturade in the
Supplement Powders category based on warehouse withdrawals for the 52 week
period ended September/October 1999. This share is up 7.5 percentage points
over the same period during the prior 12 months. This 52.1% share is more
than 2.5 times the share of the next leading competitor in this report.
Competitors in this segment include Twin Labs, Next Nutrition, Fearn,
Champion Nutrition and Genisoy/MLO. Additional products sold in health food
stores and natural foods supermarkets include private label brands from GNC,
Whole Foods and Wild Oats as well as
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the Dr. Atkins brand and Spiru-tein, from Nature's Plus. Since these brands
are not sold through distributors, Naturade does not have a measure of their
volume.
During Fiscal 1999, Naturade began selling significant volume
through mass market outlets which accounted for approximately 11% of 1999
sales volume. Key competitors in this class of trade on soy protein
supplement powders include the Health Source brand from Ross Laboratories and
Genisoy. Naturade does not purchase syndicated sales data relating to
competitive sales volume in the mass market.
Approximately 13% of 1999 Naturade sales volume was derived from the
sale of aloe vera based products, almost all of which came through health
food stores and natural foods supermarkets. Naturade does not purchase
syndicated sales data to measure aloe vera competition. Key competitors in
the health and beauty care segment include Jason, Kiss My Face, Nature's
Essentials and Nature's Gate. Lily of the Desert and Nature's Gate are also
significant competitors in the aloe juice and drink category.
N. COPYRIGHTS, TRADEMARKS AND LICENSES
Naturade maintains registrations on over twenty trademarks in the U.
S. Patent and Trademark Office, as well as California registrations on seven
trademarks. The Company also maintains trademark registrations for a variety
of names in over 25 foreign countries. In addition, Naturade maintains a
variety of copyright registrations and holds certain other intellectual
property rights.
O. PRODUCT RESEARCH AND DEVELOPMENT
Over the past two years, the Company has reformulated virtually all
its products and conducted an exhaustive line review to assure compliance
with the latest regulations in product labeling throughout all categories;
including food (Nutritional Labeling Education Act of 1991 or NLEA), dietary
supplement (DSHEA), over-the-counter drug (OTC Monographs) and cosmetic
packaging regulations. The Company retains control of all labels in-house and
aggressively manages label development and usage as an element of quality
assurance. In addition, all formula specifications are developed under the
direction of Naturade management. Each new batch is quarantined at the
Naturade warehouse until approved for release by in-house quality assurance.
The Company devotes substantial resources to new product development
and reformulation. The research and development resources during 1999 were
spread among Naturade's main product categories of protein and soy powders,
health and beauty aids and herbal supplements. Naturade's product research
and development expenses were $326,946 and $62,474 for the fiscal year ended
December 31, 1999 and the three months ended December 31, 1998. Comparable
product research and development expenses for the fiscal years ended
September 30, 1998 and September 30, 1997 were $279,370 and $134,807,
respectively. The average time to market for reformulations and new products
has been three to four months.
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In the protein powder category, development of Naturade Total Soy
was completed in early 1999. This meal replacement product provides 17 grams
of soy protein per serving along with a balanced caloric ratio of protein,
carbohydrates and fat, and 50% of the daily value for 18 vitamins and
minerals. These powders were formulated in three flavors: Bavarian Chocolate,
French Vanilla and Strawberry Creme. Naturade Total Soy was also formulated
in anticipation of the FDA's soy protein health claim approval. When the
proposed health claim was approved in late October 1999, Naturade Total Soy
immediately began carrying the health claim language on the front panel.
As the issue of foods containing genetically modified organisms
(GMO's) began to take center stage in the minds of trade groups and consumer
activists, Naturade responded quickly with the introduction of Premium Soy, a
soy-based protein booster made with non-GMO soy protein isolate. Naturade
Premium Soy is sold in both natural and chocolate flavors. Natural flavor
contains 25 grams of soy protein per serving, meeting the FDA's total
recommended daily requirement for soy protein in helping to reduce the risk
of heart disease.
In mid-1999, Naturade introduced three new Life Force formulas to
The Chinese Way brand. These formulas took a slightly different approach than
the previous Cough/Cold items in that they focused on up-and-coming Chinese
herbs that were more likely to be recognized by consumers. The Cholesterol
Support Formula contains active amounts of Red Yeast Rice as the primary
ingredient along with Vitamins B6 and Folic Acid. The Memory Formula features
the cognitive enhancer Huperzine A, an extract of the Chinese herb Huperzia
Serrata. Finally, the Lasting Energy Formula contains a blend of four types
of ginseng for increased energy throughout the day. All three Life Force
Formulas also contain a special blend of adaptogenic Chinese herbs, called
Chinequalize-TM-, that were added to supplement and enhance the effects of
the primary herbs in the formula.
Product development and reformulation also focused on the aloe vera
beverage category with a new addition to the top-selling line of aloe gel
concentrates in June 1999. The new Immune Formula, with Vitamin C, Echinacea,
Pau D'Arco and Shiitake and Maitake Mushroom extracts, was designed as an
immune system support formula. Also, a line of three new aloe vera juices,
each containing 100% aloe juice from concentrate were added for those
consumers who drink aloe on a daily basis. The aloe juices are sweetened
lightly with Stevia and are available in natural, peach-mango and
cranberry-apple flavors.
Finally, in the Aloe Vera 80-TM- health and beauty aid category,
formulation work got underway using a new type of aloe vera gel called Active
Aloe-TM-. Active Aloe guarantees 10% polysaccharides, the primary
biologically active component in aloe gel. Naturade has an exclusive
arrangement with Active Aloe to promote the new formulation for the Year
2000. The entire Aloe Vera 80 line is planned for re-launch with new
formulations and consistent, streamlined packaging in March 2000.
During Fiscal 1998 two product groups dominated the Company's
research and development investment. The first group was "The Chinese
Way-TM-" line. The Company
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researched and developed several new products in this line: the "Stay Well
Formula", "Head and Chest Formula", "Sinus Formula" and "Soothing Throat
Lozenges". The Company conducted market research, including focus groups and
developed new packaging. The "Kids Plex-TM-" line formed the second major
product group for which the Company made substantial research and development
expenditures. New "Kids Plex-TM-" flavors and packaging were researched and
developed, as well as new nutritional bars and displays. In addition, two
products in the cough and cold line were developed and introduced: "Sore
Throat Syrup" and "Herbal Sinus Support".
The majority of investment in product research and development in
the fiscal year ended September 30, 1997 was for the Company's herbal product
category. This included the development of a new herbal product line (21
items) of standardized and whole herbs. In addition, a "twin-pack" of herbs
and natural fibers called "Herbal Cleanse" was developed. Also in fiscal year
ended September 30, 1997, a new product called "Immune Booster" was added to
the cough and cold category. A new children's sun block was developed and
introduced in the "Aloe Vera 80" category.
P. ENVIRONMENTAL DISCHARGE EXPENDITURES
Naturade believes it is in material compliance with applicable
government regulations regarding discharge of materials into the environment.
Q. EMPLOYEES
As of December 31, 1999, Naturade employed approximately 30 people.
R. RISK FACTORS
The short and long-term success of the Company is subject to certain
risks, many of which are substantial in nature. Shareholders and prospective
shareholders in the Company should consider carefully the following risk
factors, in addition to other information contained herein.
Impact of Government Regulation
The Company's operations, properties and products are subject to
regulation by various foreign, federal, state and local government entities
and agencies, particularly the FDA and FTC. See "Government Regulation."
Among other matters, such regulation is concerned with statements and claims
made in connection with the packaging, labeling, marketing and advertising of
the Company's products. The governmental agencies have a variety of processes
and remedies available to them, including initiating investigations, issuing
warning letters and cease and desist orders, requiring corrective labeling or
advertising, requiring consumer redress, seeking injunctive relief or product
seizure, imposing civil penalties and commencing criminal prosecution.
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As a result of the Company's efforts to comply with applicable
statutes and regulations, the Company has from time to time reformulated,
eliminated or relabeled certain of its products and revised certain aspects
of its sales, marketing and advertising programs. The Company may be subject
in the future to additional laws or regulations administered by federal,
state or foreign regulatory authorities, the repeal or amendment of laws or
regulations which the Company considers favorable, such as DSHEA, or more
stringent interpretations of current laws or regulations. The Company is
unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can the Company predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on the Company's business in the future. Such future
laws and regulations could, however, require the reformulation of certain
products to meet new standards, the recall or discontinuance of certain
products that cannot be reformulated, the imposition of additional
recordkeeping requirements, expanded documentation of product efficacy, and
expanded or modified labeling and scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's
results of operations and financial condition. See "Government Regulation."
Technological Changes
The Company currently is engaged in developing nutraceuticals, which
are characterized by extensive research efforts and rapid technological
progress and change. New process developments are expected to continue at a
rapid pace in both industry and academia. The Company's future success will
depend on its ability to develop and commercialize its existing product
candidates and to develop new products. There can be no assurance that the
Company will successfully complete the development of any of its existing
product candidates or that any of its future products will be commercially
viable or achieve market acceptance. In addition, there can be no assurance
that research and development and discoveries by others will not render some
or all of the Company's programs or potential product candidates
uncompetitive or obsolete.
Dependence on Third-Party Manufacturers
Although the FDA does not currently regulate manufacturing
facilities for nutraceutical products, there can be no assurance that the FDA
at some time in the future will not begin regulating these manufacturing
facilities. If the FDA were to begin regulating the manufacturing facilities
for nutraceuticals and if the manufacturing facilities used by our
third-party manufacturers did not meet those standards, the production of the
Company's products will be delayed until the necessary modifications are made
to comply with those standards. If the manufacturer were unable or unwilling
to make the necessary modifications, the Company would be required to find an
alternate source to manufacture its products.
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Competition
The market for nutraceutical products is highly competitive. Many,
if not all, of the Company's competitors have substantially greater capital
resources, research and development capabilities, and manufacturing and
marketing resources, capabilities and experience than the Company. The
Company's competitors may succeed in developing products that are more
effective or less costly than any products that may be developed by the
Company.
Dependence on Qualified Personnel
The Company's success is dependent upon its ability to attract and
retain qualified scientific and executive management personnel. To
commercialize its products and product candidates, the Company must maintain
and expand its personnel, particularly in the areas of product sales and
marketing. The Company faces intense competition for such personnel from
other companies, academic institutions, government entities and other
research organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. Moreover, managing the
integration of such new personnel could pose significant risks to the
Company's development and progress and increase its operating expenses.
Product Liability Exposure
Product liability risk is inherent in the testing, manufacture,
marketing and sale of the Company's products and product candidates, and
there can be no assurance that the Company will be able to avoid significant
product liability exposure. The Company may be subject to various product
liability claims, including, among others, that its products include
inadequate instructions for use or inadequate warnings concerning possible
side effects and interactions with other substances. The Company currently
maintains a general liability insurance policy and a product liability
insurance policy. There can be no assurance that the Company will be able to
maintain such insurance in sufficient amounts to protect the Company against
such liabilities at a reasonable cost. Any future product liability claim
against the Company could result in the Company paying substantial damages,
which may not be covered by insurance and may have a material adverse effect
on the business and financial condition of the Company.
Effect of Adverse Publicity
The Company's products consist of vitamins, minerals, herbs and
other ingredients that the Company regards as safe when taken as suggested by
the Company and that various scientific studies have suggested may involve
health benefits. While the Company conducts extensive quality control testing
on its products the Company generally does not conduct or sponsor clinical
studies relating to the benefits of its products. The Company is highly
dependent upon consumers' perception of the overall integrity of its
business, as well as the safety and quality of its products and similar
products distributed by other companies which
14
<PAGE>
may not adhere to the same quality standards as the Company. The Company
could be adversely affected if any of the Company's products or any similar
products distributed by other companies should prove or be asserted to be
harmful to consumers or should scientific studies provide unfavorable
findings regarding the effectiveness of the Company's products. The Company's
ability to attract and retain distributors could be adversely affected by
negative publicity relating to it or to other direct sales organization or by
the announcement by any governmental agency of investigatory proceedings
regarding the business practices of the Company or other direct sales
organizations.
Intellectual Property Protection
Our success depends in part on our ability to obtain and maintain
patent protection for our technologies and products, preserve our trade
secrets, and operate without infringing on the property rights of third
parties. The Company's policy is to pursue registrations for all of the
trademarks associated with its key products. The Company relies on common law
trademark rights to protect its unregistered trademarks as well as its trade
dress rights. Common law trademark rights generally are limited to the
geographic area in which the trademark rights generally are limited to the
geographic area in which the trademark is actually used, while a United
States federal registration of a trademark enables the registrant to stop the
unauthorized use of the trademark by any third party anywhere in the United
States. The Company intends to register its trademarks in certain foreign
jurisdictions where the Company's products are sold. However, the protection
available, if any, in such jurisdictions may not be as extensive as the
protection available to the Company in the United States.
Currently, the Company has received over twenty United States
trademarks as well as California registrations on seven trademarks. The
Company also maintains trademark registrations in over twenty-five foreign
countries. To the extent the Company does not have patents on its products,
another Company may replicate one or more of the Company's products.
Litigation may be necessary to enforce our patent and proprietary rights. Any
such litigation could be very costly and could distract our personnel. We can
provide no assurance of a favorable outcome of any litigation proceeding. An
unfavorable outcome in any proceeding could have a material adverse effect on
our business, financial condition and results of operations.
15
<PAGE>
ITEM 2. PROPERTIES
In December 1998, the Company signed a 7 1/2 year lease agreement
for new executive offices, sales and marketing and warehouse operations
located in Irvine, California. This new 50,000 square foot facility includes
a 40,0000 square foot finished goods warehouse area configured with a
high-density steel rack and frame storage floor plan. This maximum cubic
space utilization provides the Company with reasonably sufficient warehousing
capacity for the term of the lease, specifically in light of the Company's
decision to outsource production thereby eliminating the need for any
manufacturing space. The rent expense related to this lease for fiscal year
ended December 31, 1999, was $450,744. Detailed information relating to this
lease is presented in the footnotes to the financial statements accompanying
this report.
In June 1999, the Company sold its interest in its former
headquarters facility in Paramount, California and recorded a gain of
$281,997. In connection with this sale, the Company paid off approximately
$1.9 million of bank and other debt obligations.
In connection with the Company's acquisition of certain assets of
Performance Nutrition, Inc. ("PNI") as discussed in Item 3 below, as of
August 1, 1997, the Company entered into a lease for 4,490 square feet in a
facility located in Dallas, Texas. The lease terminates on August 1, 2002,
and rent is paid at the rate of $3,256 per month. The Company subleased this
facility as of October 1, 1998 for the remainder of the lease term at a
sublease rental rate equal to the lease rental rate.
ITEM 3. LEGAL PROCEEDINGS
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 August
5, 1999, the Bankruptcy Court approved a settlement agreement ("Settlement
Agreement") between the Company and the PNI Trustee. The Settlement Agreement
provided the Company with a full release of the PNI Judgment and the costs
and interest thereon, as well as any and all other claims which the PNI
Trustee has or might have against the Company (including a preference claim
for approximately $130,000 filed in January 1999 by the PNI Trustee). The
Settlement Agreement required the Company to deliver to the PNI Trustee (1) a
cash payment of $1,350,000 which was made in 1999, (2) a promissory note in
the amount of $424,000, of which $282,667 was outstanding at December 31,
1999, payable over 12 months at 5% interest, and (3) a contingent promissory
note in the amount of $226,000, which would become payable only to the extent
that the Company's sales for the second, third and fourth quarters of 1999
exceed specified targets. As the Company's sales did not meet the specified
target, no amount will be payable under the contingent promissory note.
Consequently, the adjusted total cost to the Company of the settlement is
$1,774,000, exclusive of interest on the promissory note. The terms of the
Settlement Agreement were consummated in August 1999.
16
<PAGE>
On January 15, 1999, Health Holdings filed an action against Allan
Schulman (Schulman) seeking damages for breach of the warranties and
representations contained in that certain Stock Purchase Agreement, executed
December 15, 1997, whereby Schulman and certain others agreed to sell a
portion of their shares of the Company to Health Holdings. See Note 7 to the
Financial Statements. Schulman filed a cross-complaint against the Company
for, among other things, indemnification. The cross-complaint has been
dismissed. This lawsuit was settled on December 31, 1999. As part of the
settlement, Schulman agreed to resign from the Company as an employee,
officer and director effective November 29, 1999.
In addition to the above-described litigation, the Company is party
to various other claims and litigation that arise in the normal course of
business. While any litigation contains an element of uncertainty, management
believes that the ultimate outcome of these claims and litigation will not
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The Company's common shares began trading on the over-the-counter
securities market in the third quarter of 1991 under the symbol NRDC. The
over-the-counter market quotations reflect interdealer bid prices, without
retail markup, markdown or commission, and may not necessarily represent
actual transactions. The prices appearing below were obtained from the
National Quotation Bureau.
<TABLE>
<CAPTION>
Common Stock
- ------------
For Fiscal Year Ended December 31, 1999 High Low
- --------------------------------------- ---- ---
<S> <C> <C>
1st Quarter $ 2.81 $ 1.50
2nd Quarter 1.16 .63
3rd Quarter 1.19 .63
4th Quarter 1.56 .63
For Fiscal Quarter Ended December 31, 1998 High Low
- ------------------------------------------ ---- ---
4th Quarter $ 3.25 $ 1.75
For Fiscal Year Ended September 30, 1998 High Low
- ----------------------------------------- ---- ---
1st Quarter $ 5.25 $ 3.38
2nd Quarter 4.75 3.67
3rd Quarter 4.67 3.25
4th Quarter 4.36 2.61
For Fiscal Year Ended September 30, 1997 High Low
- ---------------------------------------- ---- ---
1st Quarter $ 2.13 $ 1.63
2nd Quarter 3.25 2.00
3rd Quarter 3.69 3.13
4th Quarter 4.13 3.50
</TABLE>
On April 6, 2000, the last reported price for the Company's Common
Stock was $.625.
18
<PAGE>
B. HOLDERS
To the best knowledge of the Company, the number of registered
record holders of common stock as of March 1, 2000, was 541. The Company
believes that approximately 700 additional shareholders hold the Company's
common stock in "street name."
C. DIVIDENDS
The Company did not pay a cash dividend on its common stock during
Fiscal 1998 or 1999, and it is not anticipated that the Company will pay any
dividends in the foreseeable future. As of the date of this Annual Report on
Form 10-K, the Company intends to follow a policy of retaining any future
earnings to provide funds for the expansion of its business.
D. WARRANTS
During 1999, the Company issued 60,000 shares of common stock based
upon the exercise of options at price ranging from $.50 to $ $.94 per share.
During 1999, 600,000 warrants were issued to Health Holdings Inc. as part of
the Finance Agreement (see Note 4 to the Financial Statements). Subsequent to
December 31, 1999, 588 Class B warrants were exercised with the remaining
324,520 Class B warrants expiring.
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize certain selected financial data for
the periods presented for the Company. The data for the year ended December
31, 1999, should be read in conjunction with the more detailed audited
statements for such year presented elsewhere herein.
19
<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS Years Ended September 30
ENDED
December 31, 1999 December 31, 1998 1998 1997 1996 1995
----------------- ----------------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales $11,946,702 $3,597,155 $13,506,972 $12,578,419 $10,105,532 $10,094,740
Gross Profit 4,569,798 1,327,205 5,712,883 6,196,624 4,869,105 4,738,852
(Loss) Income before provision
for income taxes (9,696,013) (946,673) (4,074,365) 413,295 204,158 336,808
Provision for income tax 800 - 35,450 165,000 38,000 (58,275)
Net (Loss) Income ($9,696,813) ($946,673) ($4,109,815) $248,295 $166,158 $395,083
Basic (Loss)Earnings per share ($1.81) ($0.18) ($0.84) $.08 $0.06 $0.14
Diluted (Loss) Earnings per share ($1.81) ($0.18) ($0.84) $.08 $0.06 $0.11
Weighted Average 5,346,000 5,227,000 4,874,000 2,945,000 2,578,000 2,822,000
Number of Shares used in
Computation of Basis (Loss)
Earnings per Share
Weighted Average 5,346,000 5,227,000 4,874,000 3,232,000 2,777,000 3,500,000
Number of Shares used in
Computation of Diluted (Loss)
Earnings per Share
</TABLE>
20
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of As of September 30
December 31, 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $1,056,240 $1,975,513 $157,585 $120,143 $116,444
Working Capital ($649,929) $3,116,309 $1,356,136 $879,651 $783,549
Total Assets $5,102,950 $9,548,470 $7,753,574 $5,160,235 $4,820,775
Long-Term Debt $3,778,528 $2,011,523 $2,235,908 $2,418,334 $2,555,675
Total Stockholders' (Deficit) Equity ($4,002,962) $4,328,192 $2,685,286 $1,080,224 $897,588
</TABLE>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
As reported previously, the Company changed its fiscal year from
September 30 to December 31, effective for the calendar year beginning
January 1, 1999. Consequently, the financial statements discussed herein are
for the year ended December 31, 1999, the three months ended December 31,
1998 (the transition period) and the years ended September 30, 1998 and 1997.
RESULTS OF OPERATIONS
DECEMBER 1999 FISCAL YEAR COMPARED TO SEPTEMBER 1998 FISCAL YEAR
Commencing January 1, 1999, the Company changed its fiscal year to
end December 31st. Consequently, this analysis compares the new fiscal year
ended December 31, 1999 (fiscal 1999) with the prior fiscal year ended
September 30, 1998 (fiscal 1998).
Fiscal 1999 was a milestone year for Naturade. While the health food
industry experienced continued softness, the Company maintained its sales
strength in key health food accounts, while establishing a toehold in the
more diverse mass market. In fiscal 1999, the top 25 customers accounted for
almost $9.2 million or 76.8% of net sales and the top 25 skus accounted for
54.1% of net sales.
Net sales for the fiscal year ended December 31, 1999 declined
$1,560,270 or 11.6% to $11,946,702 from $13,506,972 for the fiscal year ended
September 30, 1998. This decline was primarily due to a decrease in
International and Kids Plex sales which were partially offset by the
successful launch of Naturade Total Soy. Domestic core sales (which include
Naturade Total Soy but exclude Kids Plex, The Chinese Way and Private Label),
represented 90.2% of net sales in fiscal 1999, increased $726,481 or 7.2%
compared to fiscal 1998. Of this amount, Naturade Total Soy represented over
$1,300,000 or 11.0% of net sales. Due to the cancellation of sales to a major
health retailer in early 1999 initiated by Naturade for slow payment of
accounts due, Kids Plex sales declined $1,394,365 or 88.8% to $176,189 from
$1,570,554 for fiscal 1998. International sales declined $817,292 or 59.1% to
$564,530 from $1,381,822 for fiscal 1998.
While the Company has maintained its market share in the health food
category, the Company's domestic dollar sales were affected by the overall
industry softness. Sales to mass market retailers of products designed to be
different from health food offerings partially offset health food category
weakness.
22
<PAGE>
The health food segment decline includes a decline in Kids
Plex-Registered Trademark- sales related to a single customer which in fiscal
1998 accounted for over 95% of Kids Plex-Registered Trademark- sales. In
January 1999, the Company stopped selling to a major health food retailer due
to its large accounts receivable balance outstanding and its unwillingness to
pay Naturade invoices in a timely manner. The Company has fully reserved for
these receivables as of December 31, 1999. Sales to this retailer were
$1,350,712 for the fiscal year ended September 30, 1998 for which there were
no comparable sales in calendar 1999.
The decline in international sales is due to the Company's new
global marketing strategy in which management has decided to emphasize
branded products and reduce its dependence on international private label
business due to its low margin and unpredictability. During fiscal 1998, the
Company's international sales of $1,381,322 included $416,077 of
non-recurring, low margin private label business from a Chinese customer for
which there were no comparable sales in the same period of 1999. Saudi
Arabian sales were $139,658 and $482,854, for the December 31, 1999 and
September 30, 1998 fiscal years, respectively. The Saudi Arabian decline was
due to a slowness in the Arabic market and management's decision to tighten
credit terms to the Company's exclusive Saudi Arabian distributor.
Gross profit as a percentage of sales for fiscal 1999 decreased to
38.3% from 42.3% in fiscal 1998. The gross profit percentage for fiscal 1999
was affected by several management-led initiatives. This included writing off
or reserving approximately $900,000 in obsolete inventory and the Company's
decision to outsource production in order to add capacity, focus its
resources on marketing and distribution, lower fixed operating costs and
ensure quality control. While this outsourcing decision has added
significantly to the Company's ability to serve its customers, it has
slightly penalized gross profits in fiscal 1999 due to startup and
transitional costs.
Selling, general and administrative expenses for the fiscal year
ended December 31, 1999 increased $438,442 or 5.2% to $8,923,832 or 74.7% of
sales from $8,485,390 or 62.8% of sales for the fiscal year ended September
30, 1998.
Marketing costs consist of advertising, trade and consumer
promotions, marketing consultants, public relations, design and product
development and other. For fiscal 1999, these marketing costs decreased
$34,474, or 1.3% compared to the prior fiscal year, to $2,566,469 or 21.5% of
sales for the fiscal year ended December 31, 1999, from $2,600,943, or 19.3%
for the fiscal year ended September 30, 1998.
23
<PAGE>
Sales costs consisting of sales personnel and related costs as well
as sales commissions decreased $368,152 or 17.7% compared to the prior fiscal
year to $1,711,830 or 14.3% of sales for the fiscal year ended December 31,
1999, from $2,079,982 or 15.4% for the fiscal year ended September 30, 1998.
Non-commission sales costs accounted for all of the decline and consisted of
approximately $158,000 in lower international expenses and approximately
$223,000 in lower domestic costs.
Shipping and receiving costs consist of all warehouse operating
costs plus freight costs to the Company's customers. For fiscal 1999, these
shipping and receiving costs decreased $79,328 or 6.8% compared to the prior
fiscal year to $1,092,784 or 9.1% of sales for the fiscal year ended December
31,1999, from $1,172,112 or 8.7% for the fiscal year ended September 30,
1998. Additional personnel and warehouse costs represented $72,321 of this
increase with freight-out costs representing the balance.
General and administrative (G&A) costs increased $752,689 or 32.0%
for fiscal 1999 compared to fiscal 1998 to $3,105,671 or 26.0% of sales for
the fiscal year ended December 31, 1999, from $2,352,982 or 17.4% for the
fiscal year ended September 30, 1998. There were four major causes for this
increase. The first was rent expense of approximately $365,000 for fiscal
1999 compared to none for fiscal 1998 since in fiscal 1998 the Company owned
its own facility whereas in April 1999 it moved to new rented facilities. The
second major cause was an increase in the reserves for doubtful accounts and
returns and allowances of approximately $150,000 over fiscal 1998 amounts due
to an increase in customer receivables over 90 days and unauthorized credits.
The third major cause was the recognition in fiscal 1999 of a full year of
management consulting charges at the rate of $75,000 per quarter. In fiscal
1998, the Company only incurred three quarters' worth of charges since these
quarterly amounts commenced in January 1998. The final major cause was
approximately $88,000 of investor relations costs in fiscal 1999 for which
there were none in fiscal 1998.
As previously reported, during fiscal 1998, the Company conducted an
extensive review and assessment of its business which resulted in the
establishment of a new strategic direction calling for the Company to
aggressively invest in products designed for the mass market. In this
endeavor, the Company conducted extensive market research, retained product
development consultants and incurred other expenses in this new product
design effort. The Company views these product design costs as an investment
in the future direction of Naturade. For fiscal 1998, these expenses included
$82,964 for market research and $360,369 for product development consultants
and other costs for which there were no comparable costs in fiscal 1999.
The fiscal 1999 other operating expense amount includes the PNI
lawsuit settlement of $1,774,000 as explained in Note 7 to the Financial
Statements, and the write off of intangible assets of $1,070,344 as explained
in Note 8 to the Financial Statements. There is no comparable amount for
fiscal 1998.
Other (income) expense consists of two components, interest expense
and other expense, which are separately discussed below.
24
<PAGE>
Interest expense consists of bank and other interest related to
notes shown on Note 4 to the Financial Statements. For fiscal 1999, these
interest expenses increased $1,954,276 compared to the prior fiscal year to
$2,351,992 or 19.7% of sales for the fiscal year ended December 31, 1999,
from $397,716 or 2.9% for the fiscal year ended September 30, 1998. The cause
of this significant increase is the recording of interest expense related to
the conversion feature of the $4 million Health Holdings Credit Agreement
debt which allows Health Holdings to convert any portion of the borrowings
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 borrowed on this Credit Agreement on August 8, 1999 for $3
million and on December 30, 1999 for $650,000. Due to this conversion feature
and the $3.65 million in borrowings, the Company recorded a non-cash interest
expense of approximately $1,501,000 for the fiscal year ended December 31,
1999 as explained in Note 4 to the Financial Statements. Also in fiscal 1999,
the Company recorded a non-cash interest expense of approximately $429,000
related to warrants granted to Health Holdings as part of the Health Holdings
Finance Agreement as explained in Note 4 to the Financial Statements.
The other expense category consists of unusual or non-recurring
charges net of other income. This other expense decreased $315,166 for
fiscal 1999 compared to fiscal 1998 to $145,643 or 1.2% of sales for the
fiscal year ended December 31, 1999, from $460,809 or 3.4% of sales for the
fiscal year ended September 30, 1998.
DECEMBER 1998 QUARTER COMPARED TO DECEMBER 1997 QUARTER
Total net sales for the three months ended December 31, 1998
increased $868,098 or 31.8% to $3,597,155 from $2,729,058 for the three
months ended December 31, 1997. Of this amount, domestic sales increased
$123,960 or 5.5% and international sales increased $477,544 or 221.1%
compared to the three months ended December 31, 1997. The increase in
international sales was due to a large one-time order from a Chinese
customer. In addition, initial sales of "The Chinese Way-TM-" product line
were $230,478 representing the beginning of this product rollout.
Gross profit as a percentage of sales decreased 13.5% to 36.9% of
sales for the three months ended December 31,1998 from 50.4% for the three
months ended December 31, 1997. This decrease was primarily due to inventory
write-off expenses which were a result of a systematic repositioning and
expansion of the Company's product line, including sales history, inventory
turns and competitive position. This inventory write-off reflects the
Company's decision to reduce its stock keeping units and focus its growth on
mass market opportunities. The total inventory write-off expenses for the
three months ended December 31,1998 are $350,629, or 9.8% of sales,
consisting of $275,930 of raw materials and $74,699 of finished goods. If
unable to be sold this inventory will be discarded. Contributing to the
decrease in gross profit was the increased international sales which provide
a lower gross profit than the Company's other product lines.
25
<PAGE>
Selling, general and administrative expenses increased $407,618 to
$1,975,549 or 54.9% of sales for the three months ended December 31, 1998
from $1,567,931 or 57.5% for the three months ended December 31, 1997. These
increases were primarily the result of additional commissions due to the
higher sales level and additional sales and general management personnel
costs.
Relocation expenses for the quarter ended December 31, 1998 were
$130,000 compared to zero for the three months ended December 31, 1997. The
Company had established this amount to reflect employee termination costs and
continuation bonuses which were paid when the Company relocated to its new
location.
Miscellaneous income for the quarter ended December 31, 1998
decreased $166,125 compared to the three months ended December 31, 1997
reflecting the sale of available for sale security in December 1997. In the
1997 fiscal year, the Company held securities that consisted of 108,500
shares of common stock of a publicly held company. The publicly held company
also owned 48,000 shares of Naturade. During the quarter ended December 31,
1997, the two companies exchanged the stock each held in the other company. A
gain of $166,125 was recorded on the transaction in the quarter ended
December 31, 1997 based on the market value on the exchange date. No similar
sale occurred in the current quarter.
SEPTEMBER 1998 FISCAL YEAR COMPARED TO SEPTEMBER 1997 FISCAL YEAR
Net sales for the fiscal year ended September 30, 1998 increased
$928,553 to $13,506,972 from $12,578,419 for the fiscal year ended September
30, 1997. Domestic branded sales, which represented 87% of total sales,
increased $1,205,374 or 11% to $11,703,979. This increase was primarily due
to the introduction of the Kids Plex line of products. Private label sales,
representing 3% of total sales decreased $705,263 or 63% to $421,671.
International sales, which represented the remaining 10% of sales, increased
$428,442 or 45% to $1,381,322. The decline in the Company's private label
sales was largely due to cessation of operations by PNI, formerly the
Company's largest private label customer. International sales increased in
1998 primarily due to a new customer in China. The Company continued efforts
to develop new customers in the international marketplace.
Gross profit as a percentage of net sales for fiscal 1998 decreased
to 42.3% from 49.3% in fiscal 1997. This decrease was primarily the result of
the write-off of $906,094 representing 6.7% of net sales of slow-moving and
obsolete inventory that did not meet the Company's initial sales expectations
and which was adversely effected by changing market conditions.
Selling, general and administrative expenses for fiscal 1998
increased $3,107,746 or 57.8% from the prior year.
26
<PAGE>
During fiscal 1998, the Company made a substantial investment in its
marketing operations. Improved packaging was developed for a number of key
products, new advertising placed and bonus packs were introduced as a
promotional vehicle.
Naturade's sales efforts were enhanced during fiscal 1998 by a
restructuring of the Company's sales department and the hiring of additional
sales personnel. The Company believes that its image with the distributor and
retailers in the natural products industry has been enhanced by these
changes. The Company also purchased a new trade show booth to upgrade the
Company's presence at key trade shows.
Programs for future growth were a major emphasis in fiscal 1998. One
of these programs was the development of a new product line called "The
Chinese Way-TM-". Market research done by the Company during the year
indicated positive consumer acceptance of the value of the heritage of
traditional Chinese medicine. "The Chinese Way-TM-" products contain high
quality Chinese herbs directly imported for packaging in the United States.
All the herbs undergo strict quality control testing for efficacy and purity.
These products have been well received by the trade and product shipments
began the last month of fiscal 1998.
New Product Design Costs
Following the Health Holdings and Botanicals, Inc. transaction, the
Company conducted a comprehensive review and assessment of the business
resulting in the establishment of a new strategic direction, which called for
the Company to aggressively invest in products designed for the mass market.
The Company conducted extensive market research and retained product
development consultants and incurred other expenses in this effort. The
Company views these expenses as an investment in the future direction of
Naturade. These expenses included $82,964 for market research and $360,369
for product development consultants and other costs.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $4,605,402 in operating activities for the
fiscal year ended December 31, 1999, compared to the use of cash of
$3,413,881 in operating activities for the fiscal year ended September 30,
1998.
The Company's working capital decreased from $3,116,309 at September 30,
1998 to ($649,929) at December 31, 1999. This decrease was largely due to a
judgment against the Company of $1,774,000 of which $282,667 was outstanding
at December 31, 1999 (see Note 7 to the Financial Statements and "Legal
Proceedings") and increases in Accounts Payable and Accrued Expenses of
$1,126,570 and the Company's operating losses for the fiscal year ended
December 31, 1999.
Cash provided by investing activities for the fiscal year ended December
31, 1999 totaled $2,288,984. The primary source of this cash was the sale of
the Company's interest in its former headquarters facility and the sale of
the Chief Executive Officer's former Tennessee residence.
The Company's cash provided by financing activities of $2,530,629 for
the fiscal year ended December 31, 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 4 to the Financial Statements offset by
payments of long term obligations.
As more fully explained in Note 4 to the Financial Statements, effective
August 9, 1999, the Company entered into a Credit Agreement with Health
Holdings and Botanicals which provides for advances (the "Advances") of up to
$4 million at an annual interest rate of 8% with a due date of July 31, 2004.
The Credit Agreement further provides that at any time upon written notice,
Health Holdings may convert any portion of the Advances into shares of the
Company's common stock at a conversion price equal to the lower of $.75 per
share or the then fair market value of the Company's common stock.
During fiscal 1999, the Company had a line of credit agreement for
$1,000,000 with South Bay Bank, of which $980,308 was outstanding at December
31, 1999. Interest on borrowings under this agreement, is payable monthly, is
charged at the prime rate (8.5% at December 31, 1999) plus 1%. The agreement
was collateralized by substantially all of the Company's assets. Borrowings
under this agreement totaled $980,308 and $1,450,000 at December 31, 1999 and
September 30, 1998, respectively.
On January 27, 2000, the Company entered into a three year Credit
and Security Agreement with Wells Fargo Business Credit which provides for a
$3 million secured line of credit at the prime rate plus 1.5% to be used for
working capital. The Company anticipates applying funds drawn under this
facility to finance inventory and receivables. This agreement replaces the
South Bay Bank line of credit referred to above and is collateralized by
substantially all of the Company's assets.
28
<PAGE>
The accompanying financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At December 31,
1999, the Company has an accumulated deficit of $13,961,647, a net working
capital deficiency of $649,929 and a stockholders' capital deficiency of
$4,002,962 and has incurred recurring net losses. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
We currently believe that our existing cash balances and financing
arrangements will provide us with sufficient funds to finance our operations
for at least the next twelve months. In the past, we utilized both operating
and capital lease financing for certain equipment used in our operations and
expect to continue to selectively do so in the future. We may in the future
require additional funds to support our working capital requirements or for
other purposes, and may seek to raise such additional funds through the sale
of public or private equity and/or debt financings or from other sources. No
assurance can be given that additional financing will be available in the
future or that if available, such financing will be obtainable on terms
favorable to us or our stockholders when we may require it.
YEAR 2000 ISSUE UPDATE
Many computer systems and other equipment with embedded chips or
processors in use today were designed and developed using two digits, rather
than four, to specify the year. As a result, such systems will recognize the
Year 2000 as "00" and may assume that the year is 1900 rather than 2000. This
is commonly known as the Year 2000 issue, which could potentially result in a
system failure or in miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in other similar normal business activities.
The Company has implemented a comprehensive program to address Year
2000 issues. The program considers the effect of the Year 2000 on the
Company's internal systems, customers, products and services, and suppliers
and other critical business partners. Implementation of the Company's plan is
complete and the Company believes that all identified potential Year 2000
issues have been effectively resolved. The cost to identify and resolve Year
2000 issues was not material to the Company's financial results and has been
expensed as incurred or capitalized where appropriate. There can be no
assurance that the Company's Year 2000 program or the programs of critical
business partners will be completely successful, and failure could have a
material adverse effect on the Company's business and results of operations.
At this time we have not experienced any material Year 2000 related
problems with our information systems and computer software, and we have not
experienced any material problems with our key suppliers or customers related
to Year 2000. There has been no material impact on our business, financial
condition or results of operations related to the Year 2000.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the FASB issued SFAS No. 133: "Accounting for Derivatives
and Hedging Activities", which the Company will adopt in fiscal 2001. SFAS
No. 133 requires that all derivatives be reported at fair value. Management
has not yet determined the impact of the adoption of SFAS No. 133 on the
financial statements of the Company.
29
<PAGE>
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of that term in the Private Securities Litigation Reform
Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with the
Securities Exchange Commission or otherwise. Statements contained herein that
are not historical facts are forward-looking statements made pursuant to the
safe harbor provisions referenced above. Any matters discussed herein
including, without limitation, the Company's introduction of new products,
future sales levels, availability of raw materials, ability to maintain or
secure replacement financing, ability of the Company and its suppliers to
address problems relating to the "Year 2000 problem" and the potential
outcome of pending litigation involving the Company, are forward-looking
statements. In addition, when used in this discussion, the words
"anticipates," "expects," "intends," "plans," variations thereof and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risk and
uncertainties, some of which cannot be predicted or quantified based on
current expectations. Consequently, future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained in this Annual Report. Statements in
this Annual Report on Form 10-K, particularly in "Item 1. Business", "Item 3.
Legal Proceedings", the Notes to Financial Statements and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe certain factors that could contribute to or cause such
differences including, but not limited to, unanticipated developments in any
one or more of the following areas: the rate of consumer acceptance of new
product introductions, competition, the number and nature of customers and
their product orders, pricing, sourcing and sales (including foreign
government regulation, trade and importation concerns and fluctuation in
exchange rates), availability and costs of borrowing, changes in taxes due to
change in the mix of U.S. and non-U.S. revenue, pending or threatened
litigation, the availability of key personnel, the availability of raw
materials, the ability of the Company and its suppliers to address issues
relating to the "Year 2000 problem," the costs to the Company in addressing
the "Year 2000 problem" and other risk factors which may be detailed from
time to time in the Company's Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any
forward-looking statement contained herein, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unexpected events.
30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the Company is exposed to a
variety of risks including market risk associated with interest rate
movements. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's long term debt.
The Company's long term debt primarily consists of a $3 million line
of credit entered into on January 27, 2000, a $4 million credit agreement
with the majority shareholder and a note payable pertaining to the PNI
Judgment. The line of credit bears interest at prime rate plus 1.5%. The
credit agreement bears interest at 8% per annum with a due date of July 31,
2004. The note payable bears interest at 5% per annum with a due date of
August 2000. Given the fixed interest rate on the credit agreement and note
payable, the impact of interest rate changes with respect to the credit
agreement and note payable would not have a material impact on the Company's
results of operations. Given the variable interest rate on the line of
credit, the impact of interest rate changes on the line of credit could have
a material impact on the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached as Exhibits are Financial Statements and the supplementary
financial information as required (see Item 14- Exhibits).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors and executive officers of the
Company as of March 2, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
Bill D. Stewart 57 Director,
Chairman of the Board,
Chief Executive Officer 1998
Lionel P. Boissiere, Jr. 41 Director 1997
William B. Doyle, Jr. 40 Director 1997
Derek Hall 54 Director October 1999
David A. Weil 61 Director October 1999
Lawrence J. Batina 47 Chief Financial Officer, 1999
Chief Operating Officer,
Assistant Secretary-Treasurer
</TABLE>
The directors serve until the next annual meeting of shareholders, or until
their successors are elected.
BILL D. STEWART. Mr. Stewart served from 1989 to 1997 as President of The
Thompsons Minwax Company. In that capacity Mr. Stewart effected an increase
in Thompsons sales from $20 million to $200 million, led the acquisition of
the Red Devil Coatings Co. from Insilco Co., built The Thompsons
waterproofing business to a greater than 60% market share, launched the
national sales effort for Thompson Exterior Stain, and successfully moved the
Do-It-Yourself business into the mass market sales channel, establishing
relationships with Wal*Mart, K-Mart and Target. Mr. Stewart served as Vice
President of Sales with Thompsons from 1986 to 1989. Prior to joining
Thompsons, Mr. Stewart served for 16 years with Richardson Vicks in various
capacities.
LIONEL P. BOISSIERE, JR. During the past five years, Mr. Boissiere has been
an investor and advisor to middle market companies. From 1993 through 1995 he
worked with Berkeley International Capital Corp., and since 1995 Mr.
Boissiere has been a Managing Member at Doyle & Boissiere LLC.
32
<PAGE>
WILLIAM B. DOYLE, JR. Since 1995 Mr. Doyle has served as Managing Member of
Doyle & Boissiere LLC. Prior to such time Mr. Doyle was with Berkeley
International Capital Corporation. Mr. Doyle is an investor and an advisor to
middle market companies.
DEREK HALL. During the past five years, Mr. Hall has been a senior executive
with several companies in the pharmaceuticals, herbal, OTC and supplement
products industries including direct sales, mass market, health food and the
Internet. Prior to this, Mr. Hall was President/Chief Executive Officer of a
leading supplier of raw material products to more than 300 manufacturers in
the herbal beverage and food pharmaceutical industries. Mr. Hall has 26 years
experience with a major distributor of pharmaceuticals and OTC products in
the world.
DAVID A. WEIL. Mr. Weil has been an investor and advisor to early stage
companies during the past five years. Mr. Weil currently serves as co-Chief
Executive Officer of two private companies. Until June 1998, Mr. Weil also
served as co-Chief Executive Officer of Frontline Capital, Inc., a
broker-dealer which specialized in working with early stage companies. Mr.
Weil holds engineering and law degrees from Washington University and an LLM
degree from New York University.
LAWRENCE J. BATINA. Mr. Batina holds an MBA from Harvard Business School, a
BS degree in Accounting with a minor in MIS from the University of California
at Berkeley and is a CPA. He joined the Company in 1999 after serving for two
years as Vice President and Corp. Controller for a $180 million marketing
company. From 1994-97, he was Senior Vice President and General Manager of
Prepared Products Co., a $50 million food processing company. Prior to that,
Mr. Batina was President and Chief Operating Officer of American
Confectionery Co., a $30 million candy and chocolate company and a consulting
manager with KPMG Peat Marwick.
33
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid and
accrued by the Company during the years ended September 30, 1997 and 1998,
the three months ended December 31, 1998 and the fiscal year ended December
31, 1999 to the executive officers to whom it paid in excess of $100,000
("named executive officers"), including cash and issuance of securities.
Annual Compensation
<TABLE>
<CAPTION>
- ------------------ ----------------- ---------- ------------- ------------------- --------------- ----------------
(a) (b) (c) (d) (e) (f) (g)
Name and Other Securities All Other
Principal Annual Underlying Compensation
Position Year Salary Bonus Compensation Options/SAR ($)
($) ($) ($) (#)
- ------------------ ----------------- ---------- ------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Bill Stewart 9/30/98 117,692 74,700 102,238 (1) 255,000 (3) 6,786 (7)
CEO 10/1-12/31/98 53,846 - - - 4,020 (7)
12/31/99 200,000 - - - 15,850 (7)
- ------------------ ----------------- ---------- ------------- ------------------- --------------- ----------------
Allan Schulman 9/30/97 192,751 25,366 - 10,000 (4) 6,833
President 9/30/98 182,976 - - 10,000 (4) 13,969 (8)
10/1-12/31/98 48,046 - - 1,208 (8)
12/31/99 139,961 - - 7,365 (8)
- ------------------ ----------------- ---------- ------------- ------------------- --------------- ----------------
Anthony Roth 9/30/98 110,423 26,613 38,953 (2) 30,000 (5) 745 (9)
VP Domestic 10/1-12/31/98 36,346 25,000 - -
Sales 12/31/99 63,017 - - -
- ------------------ ----------------- ---------- ------------- ------------------- --------------- ----------------
Lawrence Batina 12/31/99 132,692 - - 100,000 (6) 177 (10)
COO/CFO
- ------------------ ----------------- ---------- ------------- ------------------- --------------- ----------------
</TABLE>
(1) Such amount includes relocation expenses of $37,102 paid by the Company on
behalf of Mr. Stewart.
(2) Such amount includes relocation expenses of $13,958 and real estate sales
expenses of $24,995 paid by the Company on behalf of Mr. Roth.
(3) Such amount represents stock options which were granted by the Company to
Mr. Stewart during fiscal 1998. These options vest over 4 years and expire
7 years from the initial grant date. Per Board of Directors resolution,
these options were repriced on October 14, 1999 to 110% of the fair market
value of the Company's common stock on that date.
(4) Such amount represents stock options which were granted by the Company to
Mr. Schulman during the indicated fiscal year. These options vest at the
time of grant, expire one year after Mr. Schulman ceases to serve on the
Company's Board of Directors, and have an exercise price equal to the
average bid price of the Company's common stock for the 30 day period
ending the December 31 prior to grant.
(5) Such amount represents stock options which were granted by the Company to
Mr. Roth during Fiscal 1998. Due to the resignation of this executive
officer in May 1999, these options expired in 1999.
(6) Such amount represents stock options which were granted by the Company to
Mr. Batina during fiscal 1999. These options vest over 4 years and expire 7
years from the initial grant date. Per Board of Directors resolution, these
options were repriced on October 14, 1999 to 110% of the fair market value
of the Company's common stock on that date.
34
<PAGE>
(7) Such amount represents automobile lease payments and life insurance
premiums, respectively, paid on behalf of Mr. Stewart in the following
periods: $15,000 and $850 for the fiscal year ended December 31, 1999,
$3,750 and $270 for the three months ended December 31, 1998 and $6,250 and
$536 for the fiscal year ended September 30, 1998
(8) Such amount represents automobile lease payments, life insurance premiums
and Company contributions to the Company's 401(k) Plan, respectively, paid
on behalf of Mr. Schulman in the following periods: $3,715, $1,905 and
$1,745 for the fiscal year ended December 31, 1999, $474, $734 and $0 for
the three months ended December 31, 1998 and $10,692, $1,046 and $2,231 for
the fiscal year ended September 30, 1998.
(9) Such amount represents life insurance premiums paid on behalf of Mr. Roth
for the fiscal year ended September 30, 1998. Mr. Roth resigned from the
Company in May 1999.
(10) Such amount represents Company contributions to the Company's 401(k) Plan
paid on behalf of Mr. Batina the fiscal year ended December 31, 1999.
In addition, Mr. Stewart, Mr. Schulman, Mr. Roth and Mr. Batina participated
with other full-time employees in the Company's group health and life
insurance program.
35
<PAGE>
Options/SAR Grants In Last Fiscal Year (None granted 10/1-12/31/98)
Potential Realization Value at Assumed Annual
Rates of Stock Price Appreciation for Option Term
<TABLE>
<CAPTION>
- --------------- --------------- ---------------- ------------ ------------- ------------ ------------- -----------
(a) (b) (c ) (d) (e) (f) (g) (h)
Name Options/SAR % of Total Exercise
Granted (#) Options/SARs or Base Expiration
Granted to Price Date 5% ($) 10% ($) 0% ($)
Employees ($/Sh)
- --------------- --------------- ---------------- ------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence
Batina 100,000 (1) 57.5% 1.134 2/1/06 $46,165 $107,584 $0
COO/CFO
- --------------- --------------- ---------------- ------------ ------------- ------------ ------------- -----------
</TABLE>
(1) Options vest and become exercisable at the rate of 25% each year beginning
on the first anniversary of the grant date.
No options were exercised by officers or directors during the fiscal year
ended December 31, 1999 or the three months ended December 31, 1998.
Aggregate Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
- --------------------------------------- ------------------------------------ -------------------------------------
Name # of Shares Underlying Unexercised Value of Unexercised In-the-Money
Options - Exercisable/Unexercisable Options at FY-End -
Exercisable/Unexercisable
- --------------------------------------- ------------------------------------ -------------------------------------
<S> <C> <C>
Bill Stewart 63,750/255,000 $3,443
- --------------------------------------- ------------------------------------ -------------------------------------
Allan Schulman 110,000/110,000 $40,770/0
- --------------------------------------- ------------------------------------ -------------------------------------
Lawrence Batina 0/100,000 $0
- --------------------------------------- ------------------------------------ -------------------------------------
</TABLE>
REPRICING OF STOCK OPTIONS
At a Board of Directors meeting held on October 14, 1999, the Board
of Directors determined that the exercise prices of options held by Bill
Stewart, Lawrence Batina and two other employees were substantially greater
than the market price on the Company's common stock. The exercise price for
these options ranged from $2.375 to $4.00. The Board determined that the
repricing of the options currently held by these employees would promote and
advance the interest of the Company and its shareholders by enabling the
Company to attract, retain and motivate officers and employees by providing
for performance-based benefits. Based on this analysis, the Board approved a
resolution to reprice the exercise price of these options to 110% of the
market price of the Common Stock on October 14, 1999 ($1.134). All other
remaining terms of the options remained in effect.
36
<PAGE>
COMPENSATION OF DIRECTORS
Through October 1999, all directors except Messrs. Boissiere and
Doyle received directors' fees of $500 per month. Effective November 1999,
all directors except Messrs. Boissiere and Doyle will receive directors' fees
of $1,000 per month.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On December 12, 1997, the Company entered into a four year
Employment, Consulting and Non-Competition Agreement with Allan Schulman, its
President, providing for a base salary of $180,000, $144,000, $115,200, and
$92,169, respectively, for the first, second, third and fourth years of such
agreement, subject to certain adjustments, a $1,250 per month car allowance,
and various other terms and conditions. This agreement was terminated as part
of the Health Holdings v. Schulman lawsuit settlement as discussed above
under Item 3: Legal Proceedings.
The Company and Bill D. Stewart have entered into an employment
agreement under which the Company has retained Mr. Stewart as Chief Executive
Officer and a member of the Company's Board of Directors for a period of 48
months beginning March 2, 1998. Under the employment agreement Mr. Stewart
receives an annual salary of $200,000 plus a one-time payment of $16,700 upon
his purchase of a home in Southern California. The Company also agreed to pay
Mr. Stewart a bonus of $58,000 with respect to the fiscal year ending
September 30, 1998, and the agreement provides that the Company and Mr.
Stewart are to use good faith efforts to negotiate criteria respecting his
bonus for subsequent years. The Company also agreed to grant to Mr. Stewart,
pursuant to the Naturade, Inc. 1998 Incentive Stock Option Plan, options to
acquire 255,000 shares of Common Stock. The agreement required the Company to
provide and pay for a twenty-year term life insurance policy of Mr. Stewart
in the amount of $250,000, as well as certain other benefits and payment of
certain expenses. The agreement also required the Company to make a bridge
loan of $600,000 to Mr. Stewart for the purpose of purchasing a residence in
Southern California, such loan to be at zero interest and secured by a deed
of trust. See "Certain Transactions" regarding a loss incurred by the Company
in connection with the loan. The employment agreement may be terminated by
either party. If the agreement is terminated for "Cause" (as defined in the
employment agreement) by the Company, or by resignation by Mr. Stewart, he is
entitled to the compensation then earned and vested prior to the date of
termination (excluding any bonus). If the agreement is terminated other than
for "Cause" by the Company or by resignation, death or disability by or of
Mr. Stewart, he is entitled to (i) the compensation earned by and vested in
him prior to the date of termination as provided for in the agreement
(including bonus) and the 1998 Incentive Stock Option Plan up to that date,
and (ii) payment of his salary, average bonus, and continuation of certain
benefits through the later of (a) March 2, 2000 or (b) 12 months following
termination.
37
<PAGE>
On March 2, 1998 the Company granted to Bill D. Stewart, pursuant to
the Company's 1998 Incentive Stock Option Plan, options to acquire up to
255,000 shares of Common Stock. The exercise price for such options is
approximately $4.00 per share (the average closing bid prices of the shares
of Common Stock on the NASDAQ OTC Bulletin Board as quoted by Bloomberg, LP
for the five (5) day trading period ending on March 2, 1998). Such options
will vest in four equal portions on each of the first four anniversaries of
the grant date, subject to any limitations on exercise contained in the 1998
Incentive Stock Option Plan and provided that the term of Mr. Stewart's
employment agreement with the Company shall not have ended prior to such
anniversary. Notwithstanding the foregoing, in the event of any sale
(including, without limitation, pursuant to either a tender offer or a merger
of the Company which results in the shareholders of the Company holding less
than fifty percent (50%) of the stock of the surviving corporation) of the
Company during such term, subject to certain limitations, all of Mr.
Stewart's options not then vested shall immediately vest.
In February 1999, Mr. Batina entered into an employment agreement
with the Company which can be terminated without cause by either party upon
30 days notice. Pursuant to the agreement, Mr. Batina is entitled to a base
salary of $150,000 per year and a bonus of up to 30% of his base salary
pursuant to the incentive bonus plan. In addition, Mr. Batina has been
granted the options to purchase up to 100,000 shares of Common Stock, which
options vest in equal annual amounts on each of the first four anniversaries
of his employment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership as of December 31, 1999, of the Company's outstanding Common Stock
by any person who is known to the Company to be the beneficial owner of more
than 5% of the Company's voting securities, the Company's equity securities
held by each director and by the named executive officers and directors of
the Company as a group. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person and the percentage of ownership of
that person, shares of Common Stock subject to options held by that person
that are currently exercisable or will become exercisable within 60 days are
deemed outstanding.
38
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name & Address Class Beneficial Percent
Of Beneficial Owner (1) of Stock Owner of Class
- ----------------------- -------- ----- --------
<S> <C> <C> <C>
Lionel P. Boissiere, Jr. Common 0 (4) 0%
William B. Doyle, Jr. Common 0 (4) 0%
Derek Hall Common 4,000 (5) .04%
David Weil Common 210,000 (6) 1.7%
Bill D. Stewart Common 63,750 (7) .5%
Allan Schulman Common 346,545 (2) 2.8%
1330 Southwind Circle
Westlake Village, CA. 90723
Barry M. Zwick Common 237,955 (3) 1.9%
925 De La Vina St.
Suite 102
Santa Barbara, CA 93101
Health Holdings and Common 10,531,079 (4) 84.6%
Botanicals, Inc. Preferred 1,250,024 (4) 100%
330 Primrose Rd.
5th Floor
Burlingame, CA. 94010
Executive Officers and Common 10,808,829 (8) 86.8%
Directors As a Group
Consisting of 6 Persons
</TABLE>
FOOTNOTES
(1) Except as otherwise indicated, the address of each person named in the
above table is in care of Naturade, Inc., 14370 Myford Road, Irvine, CA. 92606
(2) Total includes 236,545 shares of Common Stock owned by the Allan and Rita
Schulman Family Trust; and 110,000 shares of Common Stock which can be
purchased under presently exercisable options.
(3) Total includes 10,800 shares of Common Stock solely owned by Mr. Zwick;
139,155 Common Shares owned by the Zwick Financial Corp. Profit Sharing Plan,
of which Mr. Zwick is sole trustee and 91% beneficiary; 50,000 shares of
Common Stock which can be purchased by Mr. Zwick under presently exercisable
options; and 38,000 shares of Common Stock owned by Mr. Zwick's minor
children.
39
<PAGE>
(4) Total includes 3,066,695 shares of Common Stock owned by Health Holdings
and Botanicals, Inc. ("Health Holdings"); 1,250,024 shares of the Company's
Series A Convertible Preferred Stock ("Preferred Shares"); 600,000 shares of
Common Stock exercisable under warrants related to the Company's Finance
Agreement and 1,997,717 shares of Common Stock representing conversion of
$1,600,000 debt plus accrued interest related to the Company's Finance
Agreement as discussed under Item 13 (such conversion occurred in March
2000); and 4,866,667 shares of Common Stock exercisable under the Company's
Credit Agreement as discussed under Item 13. Common and preferred shares of
Health Holdings are held by (i) Doyle & Boissiere LLC, a Delaware limited
liability company (of which Messrs. William B. Doyle, Jr., and Lionel P.
Boissiere, directors of the Company, are principals), (ii) Mr. Anders Brag
and (iii) Taishan Holdings, Inc., a British Virgin Islands corporation (of
which Messrs. William S. Doyle (no relation to William B. Doyle, Jr.) and
Anders Brag hold equity interests). Messrs. William B. Doyle, Jr. and Lionel
P. Boissiere each disclaim beneficial ownership of the Company's Common
Shares and Preferred Shares held by Health Holdings.
(5) Total includes 4,000 shares of Common Stock directly owned.
(6) Total includes 90,000 shares of Common Stock solely owned by Mr. Weil and
120,000 Common Shares owned by a company of which Mr. Weil is a 50% owner.
(7) Total includes 63,750 shares of Common Stock which can be purchased
under presently exercisable options.
(8) Total includes shares of Common Stock beneficially owned by Health
Holdings; see note 4 above. See also notes 5, 6 and 7 above with respect to
additional shares of Common Stock includes in this total.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM
On December 15, 1997, the Company, Allan Schulman, L. S. Smith,
Dallas Gold & Silver Exchange, Inc. ("DGSE"), and Barry M. Zwick (Mr.
Schulman, Dr. Smith, DGSE and Mr. Zwick, together, the "Shareholders" and,
collectively, with the Company, "Sellers") entered into a Stock Purchase
Agreement (the "Purchase Agreement") and certain ancillary documents
(collectively, the "Transaction Documents") with Health Holdings and
Botanicals, Inc., a California corporation ("Health Holdings"). Mr. Schulman
was formerly President, Chief Executive Officer and Chairman of the Board of
the Company; Dr. Smith is a shareholder of and was consultant to the Company;
Dr. Smith is Chairman of the Board, Chief Executive Officer and controlling
shareholder of DGSE; DGSE is a shareholder of the Company; and Mr. Zwick is a
former director and shareholder of the Company.
40
<PAGE>
Taishan Holdings, Inc. ("THI") is a British Virgin Islands
corporation. William S. Doyle and Anders Brag (each a director of the
Company) own 50% and 25%, respectively, of the equity interests in THI, and
William S. Doyle serves as President of THI. William S. Doyle is not related
to William B. Doyle, Jr. Doyle & Boissiere LLC is a Delaware limited
liability company ("D&B") of which William B. Doyle, Jr. and Lionel Boissiere
(each a director of the Company) are principals. As of the date of this
Annual Report on Form 10-K, THI and D&B are not affiliates. D&B and Anders
Brag hold shares of convertible preferred stock of Health Holdings
representing approximately 85% of the outstanding stock of Health Holdings on
a fully-diluted basis, and THI holds approximately 7.5% of the outstanding
shares of Health Holdings on a fully-diluted basis.
Consummation of the transactions (the "Health Holdings Transaction")
contemplated by the Transaction Documents took place concurrently with the
execution of the Purchase Agreement on December 15, 1997. Accordingly, as of
December 15, 1997, Health Holdings owns approximately 55% of the Company's
Common Stock and 100% of the Preferred Stock.
Pursuant to the terms of the Purchase Agreement, the Shareholders
sold to Health Holdings the following numbers of Common Stock: Mr. Schulman
sold 650,473 shares of Common Stock; Dr. Smith sold 50,000 shares of Common
Stock; DGSE sold 108,000 shares of Common Stock; and Mr. Zwick sold 50,000
shares of Common Stock. The total purchase price for the Common Stock sold by
the Shareholders was $2,575,419. Simultaneously, the Company sold to Health
Holdings (a) 2,023,222 newly issued shares of Common Stock and (b) 1,250,024
shares of Preferred Stock for a total purchase price of $6,000,000.
Through, to and until December 15, 2007, each share of Preferred
Stock is convertible into one share of Common Stock in accordance with the
following terms. Upon the issuance by Naturade of one share of Common Stock
pursuant to the exercise of any warrant, option, contract or similar right,
1.22 shares of Preferred Stock shall immediately become and remain
convertible at a conversion price equal to the average exercise price of the
corresponding one share of Common Stock. Conversely, if any currently
outstanding warrant, option, contract or similar right to purchase shares of
Common Stock shall expire unexercised on or prior to December 15, 2007, the
corresponding number of shares of Preferred Stock (on a 1.22 for one basis)
shall become redeemable at par at the option of the Company.
In the event that, prior to December 15, 2007, (i) any person other
than D&B or an affiliate of D&B acquires 15% or more of the Common Stock,
(ii) the Company is party to any merger, consolidation, in each case into or
with a person other than D&B or its affiliate, (iii) the Company sells all or
substantially all of the assets of the Company to a person other than D&B or
its affiliate, or (iv) the Company makes an offering or offerings of the
Company's securities, the aggregate gross proceeds of which are in excess of
$10,000,000, the shares of Preferred Stock shall become and remain
convertible at a conversion price of $1.45 per share. While convertible, the
shares of Preferred Stock shall have full voting rights with the Common Stock
on an "as converted" basis.
41
<PAGE>
The Transaction Documents include a Registration Rights Agreement,
dated as of December 15, 1997, between the Company and Health Holdings; a
Consulting Agreement, dated as of December 12, 1997, between the Company and
D&B; a First Amendment to Lease, dated as of December 15, 1997, between Allan
Schulman and the Company, collectively as landlord, on the one hand, and the
Company, as tenant, on the other (which was subsequently terminated upon the
sale of the Company's former headquarters); a Mutual Option Agreement, dated
December 15, 1997, between Allan Schulman and the Company (which was
subsequently terminated upon the sale of the Company's former headquarters);
an Employment, Consulting and Non-Competition Agreement, dated as of December
15, 1997, between Allan Schulman and the Company (which was subsequently
terminated as part of the settlement agreement described in Item 3); and a
Letter Agreement, dated December 11, 1997, between the Company and DGSE
pursuant to which the Company exchanged 108,500 shares of DGSE common stock
held by the Company for 48,000 Common Shares held by DGSE. The Health
Holdings Transaction was reported by the Company on Form 8-K filed by the
Company on December 23, 1997, which is incorporated herein by this reference.
Pursuant to Option Agreements dated January 25, 1995, each Director
then serving on the Company's Board was granted an option to acquire 20,000
additional shares of Common Stock at an exercise price equal to the average
bid price of the Common Stock for the thirty day period ending December 30,
1994 (which was $1.07 per share). In addition, the Option Agreements provide
that Directors will be granted options to purchase an additional 10,000
shares of Common Stock for each year that they serve as a director of the
Company after January 1, 1995, at a price equal to the average bid price of
the Common Stock for the 30 day period ending December 30th preceding the
date on which such option is granted. These options expire one year after the
Director leaves the Board. During February 1997, five directors each were
granted options to acquire 10,000 additional shares of Common Stock, at an
exercise price equal to the average bid price of the Common Stock for the
thirty day period ending December 30, 1996 (which was $1.96 per share).
During January 1998, two directors, Mr. Schulman and Mr. Zwick were each
granted options to acquire 10,000 additional shares of Common Stock, at an
exercise price equal to its average bid price of the Common Stock for the
thirty day period ending December 31, 1997 (which was $4.63 per share.) By
special resolution of the Board, Msrs. Schulman and Zwick assigned these
options ratably to three prior directors.
On October 14, 1999, the Company granted 50,000 options to each of
the two new board members Messrs. Hall and Weil at an exercise price of
$1.031 which was the closing price of the Company's Common Stock on that day.
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 acquired Mr. Stewart's former residence in Tennessee and canceled the
prior 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 established a
$175,000 reserve against the value of this asset. In August, 1999, the
Company sold the property for $414,580, and recorded an additional loss of
$14,408 on the sale of this residence.
42
<PAGE>
In March 1999, the Company entered into a Finance Agreement (the
"Finance Agreement") with Health Holdings and Botanicals, Inc. ("Health
Holdings") a majority stockholder of the Company. The Finance Agreement
provides that the Company may borrow up to $1.0 million at a per annum
interest rate of 8%. The Finance 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 Finance
Agreement prior to the Amendment referred to below. The Warrants are
exercisable for a period of ten years commencing on the date of grant.
In June 1999, the Finance Agreement was amended (the "Amendment") to
increase the amount of available borrowings to $1.6 million also at an
interest rate of 8% per annum. The Amendment further provides that for each
dollar borrowed over $1.0 million, the Company shall issue a Warrant to
Health Holdings to purchase one-half (0.5) of a share of Common Stock of the
Company at an exercise price of $1.00 per share. Further, the exercise price
of the 300,000 Warrants previously issued under the Finance Agreement prior
to the Amendment was reset to $1.00 per share, subject to adjustment. As of
December 31, 1999, the Company had issued 300,000 Warrants under the
Amendment. All borrowings under the Finance 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
December 31,1999, the Company borrowed $1,600,000 under the Finance Agreement
and the Amendment and issued a total of 600,000 Warrants to Health Holdings.
The Company recorded the fair value of the warrants issued as a debt discount
and will amortize this discount over the life of the debt. Interest expense
of approximately $429,000 was recorded related to the warrant grants for the
fiscal year ended December 31, 1999. The Finance Agreement further provides
that at any time upon written notice, Health Holdings may convert any portion
of the advances into shares of the Company's Common Stock at a conversion
price equal to the lower of $1.00 per share or the then fair market value of
the Company's Common Stock.
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. As of December 31, 1999, the Company has
draw down $3.65 million of this Credit Agreement. The Credit Agreement
further provides that any time upon written notice, Health Holdings may
convert any portion of the Advances into shares of the Company's Common Stock
at a conversion price equal to the lower of $.75 per share or the then fair
market value of the Company's Common Stock.
In March 2000, the Company and Health Holdings signed a further
Amendment to the Finance Agreement whereby the advances of $1,600,000 plus
accrued interest of $23,145 were converted into Common Stock of the Company
as provided for in the Agreement. Per the Agreement, the debt was converted
at $ .8125 per share which resulted in 1,997,717 shares of restricted Common
Stock being issued to Health Holdings.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
(1) Financial Statements. The following Financial Statements are included
in this report.
FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations and Comprehensive Income (Loss)
Statements of Stockholders' (Deficit) Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Exhibits. Exhibits required to be filed as part of this report are
listed in the Exhibit Index.
(B) There were no reports on Form 8-K filed.
(C) Financial Statement Schedules.
The following is a list of the financial statement schedules filed as part of
this Annual Report on Form 10-K:
None
Supplemental Information to be furnished with Reports filed pursuant to
Section 15 (d) of the Act by Registrants which have not registered securities
pursuant to Section 12 of the Act:
No annual report or proxy material has been sent to security holders with
respect to Fiscal 1999. Proxy materials will be furnished to security holders
subsequent to the filing of this Form 10-K and copies of such material will
be furnished to the Commission when it is sent.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATURADE, INC.
Date: April 14, 2000 /s/ Bill D. Stewart
------------------------------
Bill D. Stewart
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Bill D. Stewart Director
- ---------------------- Chief Executive Officer
Bill D. Stewart (Principal Executive Officer) April 14, 2000
/s/ Lawrence J. Batina Chief Financial Officer
- ---------------------------- (Principal Accounting Officer) April 14, 2000
Lawrence J. Batina
/s/ Lionel P. Boissiere, Jr. Director April 14, 2000
- ------------------------------
Lionel P. Boissiere
/s/ William B. Doyle, Jr. Director April 14, 2000
- ----------------------------
William B. Doyle, Jr.
/s/ Derek Hall Director April 14, 2000
- ------------------
Derek Hall
/s/ David A. Weil Director April 14, 2000
- -----------------------
David A. Weil
</TABLE>
45
<PAGE>
NATURADE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 47
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999, THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND THE YEARS ENDED
SEPTEMBER 30, 1998 AND 1997:
BALANCE SHEETS (DECEMBER 31, 1999 AND SEPTEMBER 30, 1998) 49
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) 50
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY 51
STATEMENTS OF CASH FLOWS 52
NOTES TO FINANCIAL STATEMENTS 53
</TABLE>
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Naturade, Inc.
We have audited the accompanying balance sheets of Naturade, Inc. as of
December 31, 1999 and September 30, 1998, and the related statements of
operations and comprehensive income (loss), stockholders' (deficit) equity,
and cash flows for the year ended December 31, 1999, the three months ended
December 31, 1998, and the year ended September 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
September 30, 1998, and the results of its operations and its cash flows for
the year ended December 31, 1999, the three months ended December 31, 1998,
and the year ended September 30, 1998 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, net
working capital deficiency and stockholders' capital deficiency raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 21, 2000
47
<PAGE>
[ROSE, SNYDER & JACOBS LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Naturade, Inc.
Paramount, California
We have audited the statements of income, stockholders' equity, and cash
flows for the year ended September 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of Naturade, Inc.'s operations
and its cash flows for the year ended September 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Rose, Snyder & Jacobs
- -------------------------
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
November 5, 1997
48
<PAGE>
NATURADE, INC.
BALANCE SHEETS
As of December 31, 1999 and September 30, 1998
<TABLE>
<CAPTION>
December 31, September 30,
1999 1998
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,056,240 $1,975,513
Accounts receivable, net 1,217,323 1,394,383
Related party receivable 600,000
Income taxes receivable 163,416
Inventories 2,225,289 1,957,940
Prepaid expenses and other current assets 178,603 233,812
---------- ------------
Total current assets 4,677,455 6,325,064
Property and equipment, net 326,317 2,018,147
Intangible assets, net - 1,120,588
Other assets 99,178 84,671
---------- ------------
Total assets $5,102,950 $9,548,470
========== ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $2,035,862 $1,011,165
Accrued expenses 547,573 545,210
Current portion of long-term debt 2,743,949 1,652,380
---------- ------------
Total current liabilities 5,327,384 3,208,755
Long-term debt, less current maturities 3,778,528 2,011,523
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, par value $0.0001 per
share; authorized, 50,000,000
shares; issued and outstanding,
5,349,084 at December 31, 1999
and 5,203,731 at September 30, 1998 535 520
Preferred stock, par value $0.0001 per
share; authorized, 2,000,000
shares; issued and outstanding, 125 125
1,250,024
Additional paid-in capital 9,688,025 7,375,708
Accumulated deficit (13,691,647) (3,048,161)
---------- ------------
Total stockholders' (deficit) equity (4,002,962) 4,328,192
---------- ------------
Total liabilities and stockholders'
(deficit) equity $5,102,950 $9,548,470
========== ============
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
NATURADE, INC
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEAR ENDED
DECEMBER 31, 1999, THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 September 30, 1998 September 30,1997
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $11,946,702 $3,597,155 $13,506,972 $12,578,419
Cost of sales 7,376,904 2,269,950 7,794,089 6,381,795
----------------- ----------------- ------------------ -----------------
Gross profit 4,569,798 1,327,205 5,712,883 6,196,624
Costs and expenses:
Selling, general and administrative
expenses 8,923,832 1,975,550 8,485,390 5,377,644
New product design costs - - 443,333 -
Other operating expense 2,844,344 - - -
----------------- ----------------- ------------------ -----------------
Total operating costs and expenses 11,768,176 1,975,550 8,928,723 5,377,644
----------------- ----------------- ------------------ -----------------
Operating (loss) income (7,198,378) (648,345) (3,215,840) 818,980
Other expense:
Interest expense 2,351,992 89,981 397,716 347,760
Other expense 145,643 208,347 460,809 57,925
----------------- ----------------- ------------------ -----------------
(Loss) income before provision for income
taxes (9,696,013) (946,673) (4,074,365) 413,295
Provision for income taxes 800 - 35,450 165,000
----------------- ----------------- ------------------ -----------------
Net (loss) income ($9,696,813) ($946,673) ($4,109,815) $248,295
================= ================= ================== =================
Other comprehensive loss (income):
Unrealized (loss) gain on
available-for-sale security - - (83,400) 53,057
------------------ -----------------
Comprehensive (Loss) Income: ($9,696,813) ($946,673) ($4,193,215) $301,352
================= ================= ================== =================
Basic (Loss) Earnings per share ($1.81) ($0.18) ($0.84) $0.08
================= ================= ================== =================
Weighted Average Number of Shares used in
Computation of Basic (Loss) Earnings
per Share 5,346,000 5,227,000 4,874,000 2,945,000
================= ================= ================== =================
Diluted (Loss) Earnings per share ($1.81) ($0.18) ($0.84) $0.08
================= ================= ================== =================
Weighted Average Number of Shares used in
Computation of Diluted (Loss)
Earnings per Share 5,346,000 5,227,000 4,874,000 3,232,000
================= ================= ================== =================
</TABLE>
50
See accompanying notes to financial statements.
<PAGE>
NATURADE, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY FOR THE YEARS ENDED DECEMBER 31,
1999, THE THREE MONTHS ENDED DECEMBER 31, 1998 AND THE YEARS ENDED
SEPTEMBER 31, 1998 AND 1997
<TABLE>
Common Preferred Additional
------------------ ------------------ Paid-In
Shares Amount Shares Amount Capital
--------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996 2,593,005 259 236,263
Issuance of common stock 500,000 50 1,013,950
Issuance of stock options 85,492
Exercise of stock warrants - Class A 204,218 21 204,197
Increase in unrealized gain on
available-for-sale security, net
Net income for the year
========= ======== ========= ===== ==========
BALANCE SEPTEMBER 30, 1997 3,297,223 $330 - - $1,539,902
Issuance of common stock 2,042,222 204 6,000,000
Issuance of preferred stock 1,250,024 125
Repurchase of common stock (48,000) (5) (244,120)
Cancellation of common stock (100,000) (10) (72,117)
Issuance of stock options 115,516
Exercise of stock warrants 12,286 1 36,527
Decrease in unrealized gain on
available-for-sale security, net
Net loss for the year
========= ======== ========= ===== ==========
BALANCE SEPTEMBER 30, 1998 5,203,731 $520 1,250,024 $125 $7,375,708
Issuance of common stock 70,000 7 77,493
Net loss for the period
========= ======== ========= ===== ==========
BALANCE, DECEMBER 31, 1998 5,273,731 527 1,250,024 125 7,453,201
Issuance of stock warrants and
convertible debt 2,194,973
Exercise of stock warrants and
issuance of common stock 75,353 8 39,851
Net loss for the year
========= ======== ========= ===== ==========
BALANCE, DECEMBER 31, 1999 5,349,084 $535 1,250,024 $125 $9,688,025
<CAPTION>
Retained Accumulated
Earnings Other
(Accumulated Comprehensive
Deficit) Income Total
------------ ------------- ----------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1996 813,359 30,343 $1,080,224
Issuance of common stock $1,014,000
Issuance of stock options $85,492
Exercise of stock warrants - Class A $204,218
Increase in unrealized gain on
available-for-sale security, net 53,057 $53,057
Net income for the year 248,295 $248,295
=========== ======== ==========
BALANCE SEPTEMBER 30, 1997 $1,061,654 $83,400 $2,685,286
Issuance of common stock $6,000,204
Issuance of preferred stock $125
Repurchase of common stock $(244,125)
Cancellation of common stock $(72,127)
Issuance of stock options $115,516
Exercise of stock warrants $36,528
Decrease in unrealized gain on
available-for-sale security, net (83,400) $(83,400)
Net loss for the year (4,109,815) $(4,109,815)
=========== ======== ==========
BALANCE SEPTEMBER 30, 1998 $(3,048,161) $0 $4,328,192
Issuance of common stock $77,500
Net loss for the period (946,673) $(946,673)
=========== ======== ==========
BALANCE, DECEMBER 31, 1998 (3,994,834) 0 $3,459,019
Issuance of stock warrants and
convertible debt $2,194,973
Exercise of stock warrants and
issuance of common stock $39,859
Net loss for the year (9,696,813) $(9,696,813)
=========== ======== ==========
BALANCE, DECEMBER 31, 1999 $(13,691,647) $0 $(4,002,962)
</TABLE>
51
See accompanying notes to financial statements.
<PAGE>
NATURADE, INC
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND THE YEARS ENDED SEPTEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 September 30, 1998 September 30, 1997
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ($9,696,813) ($946,673) ($4,109,815) $248,295
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 149,797 47,178 186,454 156,393
Provision for bad debt expense 316,067 59,800 61,000 15,000
Provision for excess and obsolete inventories 394,467 - 200,000 -
Deferred income taxes 146,528 (43,898)
Loss (gain) on disposition of property and equipment (147,757) 6,363 8,184 7,350
Writeoff of Intangible Assets 1,070,344
Expense for stock options, warrants and convertible
debt 2,194,973 - 115,516 85,492
Net gain on exchange of available-for-sale security - (110,125) -
Legal settlement payment under terms of note 424,000
Changes in assets and liabilities:
Accounts receivable (238,778) 64,881 (75,632) (498,300)
Inventories (525,775) (136,041) 255,681 (1,080,086)
Income taxes receivable 163,416 - (163,416) -
Prepaid expenses and other current assets 147,251 (116,952) (166,752) (13,860)
Other assets 16,836 (31,343) 157,659 70,649
Accounts payable and accrued expenses 1,126,570 (99,511) 80,837 716,581
----------------- ------------------ ------------------ ------------------
Net cash used in operating activities: (4,605,402) (1,152,298) (3,413,881) (336,384)
Cash flows from investing activities:
Related Party Receivable 600,000 - (600,000) -
Purchase of property and equipment (292,772) (2,490) (45,986) (48,884)
Proceeds from sale of property and equipment 1,981,756 - 1,925 -
Purchase of intangible asset - - - (1,055,218)
----------------- ------------------ ------------------ ------------------
Net cash (used in) provided by investing
activities: 2,288,984 (2,490) (644,061) (1,104,102)
Cash flows from financing activities:
Net borrowings (repayment) under line of credit (469,692) - 300,000 429,062
Proceeds from borrowings from majority shareholder 5,099,399
Proceeds from issuance of debt 163,242
Payments of long-term debt, including capital lease (2,302,179) (56,196) (216,862) (169,352)
Repurchase of common stock (244,125)
Proceeds from sale of stock 38,800 77,500 6,000,329 1,014,000
Proceeds from exercise of stock options/warrants 1,059 36,528 204,218
----------------- ------------------ ------------------ ------------------
Net cash provided by financing activities: 2,530,629 21,304 5,875,870 1,477,928
Net increase (decrease) in cash and cash equivalents 214,211 (1,133,484) 1,817,928 37,442
Cash and cash equivalents, beginning of period 842,029 1,975,513 157,585 120,143
----------------- ------------------ ------------------ ------------------
Cash and cash equivalents, end of period $1,056,240 $842,029 $1,975,513 $157,585
================= ================== ================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest $432,816 $91,095 $396,782 $347,000
Taxes $800 - $141,036 $61,000
</TABLE>
See accompanying notes to financial statements
52
<PAGE>
NATURADE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, SEPTEMEBER 30, 1998 AND 1997 AND
QUARTER ENDED DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Naturade, Inc., a Delaware corporation (the "Company" or "Naturade"), is a
leading provider of low carbohydrate, high protein powders, aloe vera based
health and beauty aids, nutritional and herbal supplements, aloe drinks and
soy protein based powders. Its products are sold to the health food and mass
market channels through distributors and directly to retailers. Independent
brokers and outside sales representatives are utilized throughout the United
States and internationally.
GOING CONCERN - The accompanying financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At December
31, 1999, the Company has an accumulated deficit of $13,961,647, a net
working capital deficiency of $649,929 and a stockholders' capital deficiency
of $4,002,962 and has incurred recurring net losses. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
In response to these conditions, the Company, under new management has
undertaken a major restructuring. This restructuring has included financial
and organizational changes and a detailed analysis of the Company's core
competencies, the nutraceutical market, competition, specific product
categories and externally available resources. Based on this analysis, the
new management team has targeted growth-oriented health food and mass market
segments, outsourced manufacturing, reduced overhead costs, eliminated excess
inventory, arranged a new line of credit, streamlined the product offerings
by eliminating over 100 skus and implemented a new inventory control system.
The Company's continuation as a going concern is dependent on its ability to
achieve profitable operations and positive cash flow and to obtain additional
financing as needed to fund its operations.
CHANGE IN FISCAL YEAR - Effective October 1, 1998, the Company changed its
reporting period from a fiscal year ending September 30th to December 31st.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents.
CONCENTRATION OF CREDIT RISK - Financial instruments that subject Naturade to
concentration of credit risk consist primarily of cash, accounts receivables,
related party receivables, and notes receivable. Concentration of credit risk
with respect to trade accounts receivable is generally diversified due to the
large number of entities comprising the Company's customer base and their
geographic dispersion. Naturade performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses. The Company
maintains cash balances with financial institutions that are in excess of
federally insured limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's balance sheets include
the following financial instruments: cash and cash equivalents, trade
accounts receivable, trade accounts payable and long-term debt. The Company
considers the carrying amounts in the financial statements to approximate
fair value of these financial instruments due to the relatively short period
of time between the origination of the instruments and their expected
realization or the interest rates which approximate current market rates.
53
<PAGE>
ACCOUNTS RECEIVABLE - Accounts receivable are presented net of an allowance
for doubtful accounts of $291,387 and $51,000 at December 31, 1999 and
September 30, 1998, respectively, and net of an allowance for returns of
$225,479 and $90,000 at December 31, 1999 and September 30, 1998,
respectively. The allowance for doubtful accounts and returns includes the
following:
<TABLE>
<S> <C>
Balance as of October 1, 1997 $ 80,000
Provision for doubtful accounts and returns 129,810
Deductions (68,810)
---------
Balance as of September 30, 1998 141,000
Provision for doubtful accounts and returns 59,800
Deductions -
---------
Balance as of December 31, 1998 200,800
Provision for doubtful accounts and returns 437,396
Deductions (121,330)
---------
Balance as of December 31, 1999 $ 516,866
</TABLE>
INVENTORIES - Inventories are valued at the lower of cost or market. The
weighted average method is used to determine cost. The reserve for excess
and obsolete inventories includes the following:
<TABLE>
<S> <C>
Balance as of October 1, 1997 $ 0
Provision for excess and obsolete inventory 200,000
Write-offs -
---------
Balance as of September 30, 1998 $ 200,000
Provision for excess and obsolete inventory 350,629
Write-offs (350,629)
---------
Balance as of December 31, 1998 $ 200,000
Provision for excess and obsolete inventory 874,571
Write-offs (480,104)
---------
Balance as of December 31, 1999 $ 594,467
</TABLE>
INVESTMENTS - In 1997, the Company held securities that consisted of 108,500
shares of common stock of a publicly held company. The securities were
classified as available for sale and presented at the fair market value of
$217,000 at September 30, 1997, based on quoted market prices as of that
date. The original cost of the securities were $78,000, and the gross
unrealized gain included in stockholders' equity amounted to $83,400 at
September 30, 1997.
The publicly held company also owned 48,888 shares of Naturade. During fiscal
year 1998 the two companies exchanged the stock each held in the other
company. A gain of $110,125 was recorded on the transaction based on the
market value of the other company's stock on the exchange date and is included
in other income.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less
accumulated depreciation and amortization, which are computed using the
straight-line method over the estimated useful lives of the related assets
ranging from five to ten years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the lease term or estimated useful
life. Expenditures for maintenance and repairs are charged to operations as
incurred.
INTANGIBLE ASSETS - Intangible assets consist of trademarks, copyrights and
other intangible assets and are being amortized using the straight-line
method over lives ranging from 15 to 25 years.
IMPAIRMENT OF LONG-LIVED ASSETS - In accordance SFAS No. 121: "Accounting for
the Impairment of Long-Lived Assets", the Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. If long-lived assets
become impaired, the Company recognizes an impairment loss measured as the
amount by which the carrying value of the assets exceeds the estimated fair
value of the assets. During 1999, the Company determined that impairment had
occurred with respect to its intangible assets and recognized a loss on the
remaining net carrying values.
INCOME TAXES - The Company accounts for income taxes under the provisions of
SFAS No. 109: "Accounting for Income Taxes". Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized.
NET INCOME (LOSS) PER SHARE - Basic earnings per share (EPS) excludes
dilution and is computed by dividing net income or loss attributable to
common stockholders by the weighted average of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (i.e. convertible
preferred stock, warrants to purchase common stock and common stock options
using the treasury stock method) were exercised or converted into common
stock. Potential common shares in the diluted EPS computation are excluded in
net loss periods as their effect would be antidilutive.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed when
incurred and amounted to $326,946, $62,474, $279,370 and $134,807 for the
year ended December 31,1999, the three months ended December 31, 1998 and for
the years ended September 30, 1998 and September 30, 1997.
54
<PAGE>
ADVERTISING - The Company expenses the cost of advertising as incurred.
Advertising expenses amounted to $667,155, $185,213, $1,448,390 and $519,811
for the year ended December 31, 1999, the three months ended December 31,
1998 and for the years ended September 30, 1998 and September 30, 1997.
DEFERRED RENT - Deferred rent totaling $35,877 at December 31, 1999 is
included in accrued expenses and other current liabilities. Deferred rent
represents rental expense (recorded on a straight-line basis) in excess of
actual rental payments to date.
MAJOR CUSTOMER - During the fiscal year ended December 31, 1999, the three
months ended December 31, 1998, and the fiscal years ended September 30, 1998
and September 30, 1997, the Company had sales to a customer in excess of 10%
of the Company's total net sales. Sales to this customer were $2,875,942,
$626,681, $2,915,524 and $3,056,147 for the fiscal year ended December 31,
1999, the three months ended December 31, 1998 and the years ended September
30, 1998 and September 30, 1997, respectively. Accounts receivable from this
customer were $403,169 and $415,950 at December 31, 1999 and September 30,
1998.
ACCOUNTING FOR STOCK-BASED COMPENSATION - SFAS No. 123: "Accounting for
Stock-Based Compensation", requires disclosure of the fair value method of
accounting for stock options and other equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period which is
usually the vesting period. The Company has chosen, under the provisions of
SFAS No. 123, to continue to account for employee stock-based transactions
using the intrinsic value method under Accounting Principles Board (APB)
Opinion No. 25: "Accounting for Stock Issued to Employees."
NEW ACCOUNTING PRONOUNCEMENTS - In 1998, the FASB issued SFAS No. 133:
"Accounting for Derivatives and Hedging Activities", which the Company will
adopt in fiscal 2001. SFAS No. 133 requires that all derivatives be reported
at fair value. Management has not yet determined the impact of the adoption
of SFAS No. 133 on the financial statements of the Company.
USE OF ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS - Certain reclassifications were made to prior statements
to conform to the current year presentation.
2. INVENTORIES
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, 1999 and September 30, 1998 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 1998
<S> <C> <C>
Raw Materials 180,174 $1,477,853
Finished Goods 2,639,582 680,087
--------- -------
Subtotal 2,819,756 2,157,940
Less: Reserve for Excess and Obsolete Inventories (594,467) (200,000)
-------- --------
$2,225,289 $1,957,940
========== ==========
</TABLE>
55
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and September 30, 1998 consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 1998
<S> <C> <C>
Land $- $ 318,533
Building and improvements 148,581 1,909,628
Machinery and equipment 417,038 510,049
Automobiles 101,344 81,113
------- ------
Total 666,963 2,819,323
Less accumulated depreciation and amortization (340,646) (801,176)
-------- --------
Property and equipment, net $ 326,317 $ 2,018,147
=========== ===========
</TABLE>
4. DEBT
Long-term debt consists of the following at December 31, 1999 and September 30,
1998:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1998
<S> <C> <C>
Line of Credit $ 980,308 $ 1,450,000
Credit Agreement with majority shareholder 3,650,000
Finance Agreement with majority stockholder, net of debt discount 1,449,399
Notes Payable due to South Bay Bank, repaid during 1999 - 1,316,437
Note Payable to Performance Nutrition, Inc (Note 7) 282,667 -
Notes Payable due to a former stockholder's estate,
Borrowings bear interest at 8% and are due in monthly
installments of $2,832 143,434 614,990
Capitalized lease obligation, repaid during 1999 - 251,080
Other notes payable 16,669 31,396
----------- -----------
Total 6,522,477 3,663,903
Less line of credit and current portion of long-term debt (2,743,949) (1,652,380)
----------- -----------
Long-term debt $ 3,778,528 $ 2,011,523
=========== ===========
</TABLE>
A summary of long-term debt maturities as of December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- ------
<S> <C>
2000 $ 2,743,949
2001 33,739
2002 27,391
2003 29,664
2004 3,682,126
thereafter 5,608
--------
Total $ 6,522,477
===========
</TABLE>
LINE OF CREDIT - The Company had a line of credit with a financial
institution which allowed for a maximum borrowing of up to $1,000,000.
Interest on borrowings under this agreement, which is payable monthly, is
charged at the prime rate (8.5% at December 31, 1999) plus 1%. The agreement
is collateralized by
56
<PAGE>
substantially all of the Company's assets. Borrowings under this agreement
totaled $980,308 and $1,450,000 at December 31, 1999 and September 30, 1998,
respectively.
Amounts due under the line of credit were repaid subsequent to year-end with
new financing obtained on January 27, 2000 (Note 11).
CREDIT AGREEMENT WITH MAJORITY SHAREHOLDER - In August 1999, the Company
entered into a Credit Agreement (the "Credit Agreement") with Health Holdings
and Botanicals, Inc. ("Health Holdings"), a majority stockholder of the
Company. The Credit Agreement allows for advances (the "Advances") of $4
million at an interest rate of 8% per annum with a due date of July 31, 2004.
Interest only payments are required on a quarterly basis. As of December 31,
1999, the Company has borrowed $3,650,000 on this Credit Agreement. The
Credit Agreement further provides that any time upon written notice, Health
Holdings may convert any portion of the Advances into shares of the Company's
common stock at a conversion price equal to the lower of $.75 per share or
the then fair market value of the Company's common stock. The Company
recorded interest expense of approximately $1,501,000 during the year ended
December 31, 1999 related to the beneficial conversion feature representing
the aggregate difference between the fair market value of the shares that
would be issued upon conversion and the conversion price of $.75 per share on
the date of debt issuance.
FINANCE AGREEMENT WITH MAJORITY SHAREHOLDER - In March 1999, the Company
entered into a Finance Agreement (the "Finance Agreement") with Health
Holdings. The Finance Agreement provides that the Company may borrow up to $1
million at an interest rate of 8% per annum. The Finance Agreement further
provides that for each dollar borrowed, the Company shall issue a 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. As of June 30, 1999,
the Company had issued 300,000 warrants under the Finance Agreement prior to
the Amendment referred to below. The warrants are exercisable for a period of
ten years commencing on the date of grant.
In June 1999, the Finance 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 million; the Company shall issue a warrant to Health Holdings to
purchase one-half (1/2) of a share of common stock of the Company at an
exercise price of $1.00 per share. Further, the exercise price of the 300,000
warrants previously issued under the Finance Agreement prior to the Amendment
was reset to $1.00 per share. All borrowings under the Finance 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 December 31,1999, the Company borrowed $1,600,000 under the
Finance Agreement and the Amendment and issued a total of 600,000 warrants to
Health Holdings. The Company recorded the fair value of the warrants issued
as a debt discount and will amortize this discount over the life of the debt.
Interest expense of approximately $429,000 was recorded related to the
warrant grants for the fiscal year ended December 31, 1999. The Finance
Agreement further provides that at any time upon written notice, Health
Holdings may convert any portion of the advances into shares of the Company's
common stock at a conversion price equal to the lower of $1.00 per share or
the then fair market value of the Company's common stock.
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK - During fiscal year ended September 30, 1998,
the Company issued 1,250,024 shares of its preferred stock to Health
Holdings. The shares pay no dividends except in the event of a liquidation or
reorganization of the Company. While convertible, the preferred shares have
full voting rights with the common stock on as "as converted' basis.
Through and until December 15, 2007, each preferred share is convertible in
accordance with the following terms. Upon the issuance by Naturade of one
common share pursuant to the exercise of any warrant, option, contract or
similar right, outstanding on November 21, 1997, 1.22 preferred shares shall
immediately become and remain convertible at a conversion price equal to the
average exercise price of the corresponding one common share issued.
Conversely, if any outstanding warrant, option, contract or similar right to
purchase
57
<PAGE>
common shares expires unexercised on or prior to December 15, 2007, the
corresponding number of preferred shares (on a 1.22 for one basis) shall
become redeemable at par at the Company's option.
In the event that, prior to December 15, 2007, (1) any person other than the
majority stockholder of Health Holdings or an affiliate acquires 15% or more
of the common stock, (2) the Company is party to any merger, consolidation,
in each case into or with a person other than Health Holding's majority
stockholder or affiliate, (3) the Company sells all or substantially all of
the assets of the Company to a person other than the majority stockholder of
Health Holdings or an affiliate, (4) the Company makes an offering or
offerings of the Company's securities, the aggregate gross proceeds of which
are in excess of $10,000,000, the preferred shares become and remain
convertible at an exercise price of $1.45 per share.
EMPLOYEE STOCK OPTION PLAN - In February 1998, the Company adopted an
Incentive Stock Option Plan (the "Plan") to enable participating employees to
acquire shares of the Company's common stock. The Plan provides for the
granting of incentive stock options up to an aggregate of 575,000 shares. The
actual amount of incentive stock options that may be granted to employees is
determined by the Administrative Committee based on the parameters set forth
in the Plan. Under the terms of the Plan, incentive stock options may be
granted at not less than 100% of the fair market value at the date of the
grant (110% in the case of 10% shareholders). Incentive options granted under
the Plan vest over a four-year period from the date of grant. The Company has
granted 435,000 incentive options under the Plan at the weighted average
price of $1.12 as of December 31, 1999. These options expire seven years from
the date of grant.
DIRECTOR STOCK OPTIONS - In January 1998, 19,998 options were issued to board
members who served a full year at an exercise price of $4.63. During April
1998, options to acquire an additional 51,000 shares were issued to a board
member at an exercise price of $4.05. In October 1999, 50,000 options were
issued to each of the two new board members at an exercise price of $1.031.
WARRANTS - In 1999, the Company has granted warrants in conjunction with
certain financing agreements. These warrants expire ten years from the date
of grant.
58
<PAGE>
A summary of the Company's outstanding stock options and warrants activity is
as follows:
<TABLE>
<CAPTION>
WEIGHTED AVE.
NUMBER OF EXERCISE
OPTION OR WEIGHTED OPTIONS/WARRANTS PRICE FOR
NUMBER OF WARRANT PRICE AVERAGE PRICE EXERCISABLE EXERCISABLE
SHARES PER SHARE PER SHARE AS OF PERIOD END OPTIONS
<S> <C> <C> <C> <C> <C>
Outstanding at September 30, 1996 777,747 $0.50 - $3.00 $1.90 777,747 $ 1.90
Granted 110,000 $1.50 - $2.56 $1.94
Outstanding at September 30, 1997 887,747 $0.50 - $3.00 $1.90 887,747 $ 1.90
Granted 395,998 $2.83 - $4.63 $3.78
Exercised (12,286) $3.00 $3.00
Expired (80,000) $1.50 $1.50
Outstanding at September 30, 1998 1,191,459 $.50 - $4.63 $2.54 906,459 $ 2.06
Exercised (70,000) $.875 - $1.72 $1.11
Expired (104,998) $1.72 - $4.63 $3.38
Outstanding at December 31, 1998 1,016,461 $.50 - $4.63 $1.78 731,461 $ 2.00
Granted 949,000 $.72 - $1.134 $1.00
Exercised (60,353) $.50 - $.94 $.65
Expired (30,000) $3.00 $3.00
---------
Outstanding at December 31, 1999 1,875,108 $.60 - $3.30 $1.10 1,330,358 $ 1.12
</TABLE>
The following table summaries information about stock options and warrants
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
OPTIONS AND REMAINING AVERAGE OPTIONS AND EXERCISE PRICE
RANGE OF WARRANTS CONTRACT LIFE EXERCISE WARRANTS FOR EXERCISABLE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE OPTIONS
<S> <C> <C> <C> <C> <C>
$.60-.875 195,000 2 $ .71 120,000 $ .70
$1.00 600,000 9 $1.00 600,000 $1.00
$1.03 -1.22 635,000 5 $1.11 165,250 $1.12
$1.25 325,108 1 $1.25 325,108 $1.25
$1.62-1.96 60,000 1 $1.77 60,000 $1.77
$2.56-3.30 60,000 2 $2.90 60,000 $2.90
--------- ---------
1,875,108 1,330,358
</TABLE>
The estimated weighted average fair value of options granted during the years
ended December 31, 1999, September 30, 1998 and 1997 are $1.14, $2.09 and
$1.42, respectively. No options were granted during the three months ended
December 31, 1998. Pursuant to SFAS No. 123, the Company has elected to
continue using the intrinsic value method of accounting for stock-based
awards granted to employees and directors in accordance with APB Opinion No.
25 and related interpretations in accounting for its stock option plan. Had
the compensation cost for the Company stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent
with the method of SFAS No. 123, the Company's net loss and loss per share
would have been the pro forma amounts presented below:
59
<PAGE>
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended Year Ended
December 31, 1999 December 31, 1998 September 30, 1998 September 30, 1997
<S> <C> <C> <C> <C>
Net (loss) income: As reported $(9,696,813) $(946,673) $(4,109,815) $248,295
Pro forma (9,944,695) $(993,116) $(4,295,585) $205,385
Basic and Diluted
earnings (loss) per share: As reported $(1.81) $(0.18) $(0.84) $0.08
Pro forma $(1.88) $(0.19) $(0.88) $0.06
</TABLE>
The fair value for each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1999 September 30, 1998 September 30, 1997
<S> <C> <C> <C>
WEIGHTED AVERAGE 5.45 to 5.62% 5.39 to 5.88% 6.45 to 6.58%
RISK-FREE INTEREST RATE
EXPECTED LIFE OF 7 years 3 years 2 years
AN OPTION
EXPECTED STOCK 64% 45% 61%
VOLATILITY
</TABLE>
For the three months ended December 31, 1998, there were no options or
warrants granted.
6. INCOME TAXES
The provision for income taxes for the year ended December 31, 1999, the three
months ended December 31, 1998 and the fiscal years ended September 30, 1998 and
1997 consists of the following:
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended Year Ended
December 31, 1999 December 31, 1998 September 30, 1998 September 30, 1997
<S> <C> <C> <C> <C>
Current:
Federal - - $(113,967) $ 115,400
State 800 - 2,889 20,600
----------------- ----------------- ------------------ ------------------
Total current 800 - (111,078) 136,000
------------------ ------------------
Deferred:
Federal - - 124,202 24,600
State - - 22,326 4,400
----------------- ----------------- ------------------ ------------------
Total deferred - - 146,528 29,000
------------------ ------------------
Total provision 800 - $ 35,450 $ 165,000
================= ================= ================== ==================
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to income before income taxes due
to the following:
60
<PAGE>
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended Year Ended
December 31, 1999 December 31, 1998 September 30, 1998 September 30, 1997
<S> <C> <C> <C> <C>
Computed tax (benefit) expense $(3,393,605) $ (321,869) $(1,426,038) $ 141,000
Increase (decrease) in income taxes
resulting from:
Nondeductible expenses 6,157 2,832 6,800 6,000
State income taxes, net of
federal tax benefit 528 16,642 46,000
Other (800) (43,560) (28,000)
Change in valuation allowance 3,387,720 319,837 1,481,606 -
----------- ----------- ----------- -----------
$ 800 $ - $ 35,450 $ 165,000
=========== =========== =========== ===========
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1998
Deferred Income Tax Deferred Income Tax
----------------------------- ----------------------------
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Current:
Uniform capitalization $ 78,096 $ - $ 64,712 $ -
Allowance for bad debt 108,135 21,849
Allowance for returns 96,595 38,556
Accrued vacation 14,512 15,959
Accrued bonuses 5,683 21,119
Inventory reserve 111,156 85,680
State taxes --- 272
Other (196,907) --
Valuation allowance (217,270) - (248,147) -
----------- --------- ---------- --------
Total current - - - -
Noncurrent:
Net operating losses and credit
carryforwards 4,868,906 1,165,962
Depreciation 16,959 (18,530)
Stock options 86,028 86,027
Valuation allowance (4,971,893) - (1,233,459) -
----------- --------- ---------- --------
Total noncurrent - - 18,530 (18,530)
----------- --------- ---------- --------
Total $ - $ - $ 18,530 $(18,530)
=========== ========= ========== ========
</TABLE>
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $12.4 million, which begin expiring in December
2017 and state net operating loss carryforwards of $6.5 million, which begin
expiring in December 2002.
61
<PAGE>
7. COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS
EMPLOYMENT AGREEMENTS - The Company has a four-year employment agreement with
its chief executive officer (CEO) that began in March 1998. The agreement
provides for an annual salary of $200,000 and a bonus. The bonus arrangement
will be negotiated each year and will be based on certain earnings and
revenue objectives with a target amount of approximately one-half of the
employee's annual salary. The Company entered into a four year employment,
consulting and non-competition agreement with Allan Schulman that began in
December 1997. This agreement was terminated as part of the Health Holdings
v. Schulman lawsuit settlement. (See Legal Proceedings)
CONSULTING AGREEMENTS - The Company is committed to a consulting agreement
with an affiliate of Health Holdings for $300,000 per year payable quarterly.
The agreement is automatically renewable for successive one-year terms so
long as Health Holdings or any of its affiliates owns 25% or more of the
Company.
OPERATING LEASES - The Company rents property and equipment under certain
noncancellable operating leases expiring in various years through 2006.
Future minimum commitments under operating leases as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31 Amount
- ----------------------- -------
<S> <C>
2000 465,230
2001 442,207
2002 423,900
2003 416,222
2004 399,584
Thereafter 734,052
-------
Total $ 2,881,195
</TABLE>
Rent expense charged to operations was $486,622, $20,426, $124,000 and
$51,088 for the year ended December 31, 1999, for the three months ended
December 31, 1998 and the fiscal years ended September 30, 1998 and September
30, 1997, respectively.
LEGAL PROCEEDINGS - 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
August 5, 1999, the Bankruptcy Court approved a settlement agreement between
the Company and the PNI Trustee (the "Settlement Agreement"). The Settlement
Agreement provided the Company with a full release of the Judgment and
required the Company to deliver to the PNI Trustee (1) a cash payment of
$1,350,000 which was made in 1999, (2) a promissory note in the amount of
$424,000, of which $282,667 is outstanding at December 31, 1999, payable over
12 months at 5% interest, and (3) a contingent promissory note in the amount
of $226,000, which becomes payable only to the extent that the Company's
sales for the second, third and fourth quarters of 1999 exceeded specified
targets. As the Company's sales did not meet the specified targets, no amount
is payable under the contingent promissory note. Consequently, the adjusted
total cost to the Company of the settlement is $1,774,000, exclusive of
interest on the promissory note.
On January 15, 1999, Health Holdings filed an action against Allan Schulman
(Schulman, former President of the Company) seeking damages for breach of the
warranties and representations contained in the Stock Purchase Agreement,
executed December 15, 1997, whereby Schulman and certain others agreed to
sell a portion of their shares of the Company to Health Holdings. Schulman
filed a cross-complaint against the Company for, among other things,
indemnification. The cross-complaint has been dismissed. This lawsuit was
settled on December 31, 1999. As part of the settlement of this lawsuit,
Schulman agreed to resign from the Company as an employee, officer and
director effective November 29, 1999.
62
<PAGE>
In addition to the above-described litigation, the Company is party to
various other claims and litigation that arise in the normal course of
business. While any litigation contains an element of uncertainty, management
believes that the ultimate outcome of these claims and litigation will not
have a material adverse effect on the Company's results of operations or
financial condition.
8. REVIEW OF INTANGIBLES
During 1999, the Company conducted a review of its trademarks, copyrights and
other intangible assets in accordance with SFAS 121 which states that long
lived assets are to be reviewed for impairment whenever circumstances and
situations change such that there is an indication that the carrying amount
may not be recoverable. In 1999, the Company stopped selling to a significant
customer for its Kids Plex product line and has been exploring new customers
and distribution channels. As a result, the Company believes that an
impairment of the related trademarks that were acquired in 1997 has occurred
and that the full carrying amount should be written off. Consequently, the
Company recorded a write down of the net carrying value of $1,070,344 during
1999.
9. 401(k) PLAN
The Company has a 401(k) plan that is available to all employees of the
Company who meet certain age and length of service requirements. The plan
provides for Company matching contributions equal to 25% of each employee
participant's contribution not to exceed 6% of the employee participant's
compensation. The Company's contribution to the plan was $3,963, $2,005,
$11,393 and $11,831 for the year ended December 31, 1999, for the three
months ended December 31, 1998 and for the fiscal years ended September 30,
1998 and September 30, 1997, respectively.
10. OPERATING SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the Company's chief operating decision-maker, or decision-making group, in
deciding how to allocate resources and in assessing performance.
Commencing in January 1999, the Company's reportable operating segments
include heath food specialty stores and mass market categories. The Company
does not allocate operating expenses to these segments, nor does it allocate
specific assets to these segments. Therefore, segment information reported
includes only sales, cost of sales and gross profit. Operating segment data
for the year ended December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Distribution Channels
Health Food Mass Total
----------- ------- ---------
<S> <C> <C> <C>
Year ended December 31, 1999
Sales $10,652,697 $1,294,005 $11,946,702
Cost of Sales 6,533,649 843,255 7,376,904
--------- ------- ---------
Gross Profit 4,119,048 450,750 4,569,798
========= ======= =========
</TABLE>
Prior to January 1999, the Company's sales to the mass market segment were
not significant.
63
<PAGE>
The Company exports products to several international customers. A summary of
net sales classified by geographic area is as follows:
<TABLE>
<CAPTION>
NET SALES FOR THE SAUDI
PERIODS ENDED DOMESTIC ARABIA CANADA KOREA CHINA INTERNATIONAL TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999 $11,356,797 $139,658 $137,916 $123,124 - $189,207 $11,946,702
Three Months ended December 31, 1998 2,903,631 191,446 - 18,866 395,091 88,121 3,597,155
Year ended September 30, 1998 12,125,650 482,854 - 39,648 417,975 440,845 13,506,972
Year ended September 30, 1997 11,625,538 157,956 - 224,525 - 570,400 12,578,419
</TABLE>
11. SUBSEQUENT EVENTS
CREDIT FACILITY - On January 27, 2000, the Company entered into a three year
Credit Agreement with a financial institution that allows for maximum
borrowings of up to $3,000,000, based on certain percentages of eligible
accounts receivable and inventories as defined. Amounts due under the Credit
Agreement bear interest at the prime rate plus 1.5%. Borrowings under the
Credit Agreement are collateralized by substantially all assets of the
Company. The Credit Agreement contains covenants which, among other things,
require that certain financial ratios are met. As of March 31, 2000, the
Company has borrowed $1,149,022 against this Credit Agreement and based on
eligible accounts receivables and inventory the additional availability is
approximately $700,000.
DEBT CONVERSION - In March 2000, Health Holdings converted advances of
$1,600,000 plus accrued interest of $23,145 into 1,997,717 shares of
restricted common stock of the Company.
WARRANT CONVERSION/EXPIRATION - Subsequent to December 31, 1999, 588 warrants
were exercised. On January 15, 2000, the remaining 324,520 unexercised Class
B warrants expired.
64
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Document PG #
-------- ----
<S> <C> <C>
2 Stock Purchase Agreement, dated as of December 15, 1997 (the N/A
"Stock Purchase Agreement"), by and among the Company, Allan
Schulman, L.S. Smith, Dallas Gold & Silver Exchange, Inc.
("DGSE"), Barry M. Zwick and Health Holdings and Botanicals,
Inc. ("HHB"), incorporated by reference to the Company's
Current Report on Form 8-K filed on December 23, 1997.
3.1 Certificate of Incorporation of Naturade, Inc., together with N/A
Amendments and Certificate of Designations relating thereto
incorporated by reference to the Company's Form 10-K Annual
Report filed for fiscal 1997 and the exhibits and attachments
thereto.
3.2 Bylaws of Naturade, Inc., as Amended incorporated by reference N/A
to the Company's Form 10-K Annual Report filed for fiscal 1997
and the exhibits and attachments thereto.
4.1 Registration Rights Agreement, dated as of December 15, 1997, N/A
by and between the Company and HHB, incorporated by reference
to the Company's Current Report on Form 8-K as filed on
December 23, 1997.
4.2 Form of Class B Warrant Certificate, incorporated by reference N/A
to the Company's Form 10-K Annual Report filed for Fiscal 1991
and the Exhibits and Attachments thereto.
10.1 Consulting Agreement, dated as of December 12, 1997, by and N/A
between the Company and Doyle & Boissiere LLC, incorporated by
reference to the Company's Current Report on Form 8-K filed
December 23, 1997.
10.2 Mutual Option Agreement, dated as of December 15, 1997, by and N/A
between the Company and Allan Schulman, incorporated by
reference to the Company's Current Report on Form 8-K as filed
December 23, 1997.
10.3 Employment, Consulting and Non-Competition N/A
</TABLE>
65
<PAGE>
<TABLE>
<S> <C> <C>
Agreement, dated as of December 12, 1997, by and between the
Company and Allan Schulman, incorporated by reference to the
Company's Current Report on Form 8-K as filed December 23,
1997.
10.4 Form of Option Agreement for Purchase of Naturade, Inc. Common N/A
Stock for Directors, incorporated by reference to the Company's
Form 10-K Annual Report filed for Fiscal 1995 and the Exhibits
and Attachments thereto.
10.5 Form of Broker Agreement between NPI and Domestic Brokers, N/A
incorporated by reference to the Company's Form 10-K Annual
Report filed for Fiscal 1991 and the Exhibits and Attachments
thereto.
10.6 Consulting Agreement with Dr. L.S. Smith, incorporated by N/A
reference to the Company's Form 10-Q Report filed for the
quarterly period ended March 31,1994 and the Exhibits and
Attachments thereto.
10.7 Addendum to Consulting Agreement with L.S. Smith dated as of N/A
November 13, 1996, incorporated by reference to the Company's
Form 10-K Annual Report filed for fiscal 1997 and the exhibits
and attachments thereto.
10.8 Amendment dated May 2, 1995 to Agreement For Purchase of Stock N/A
and Real Property dated January 1, 1995, incorporated by
Reference to the Company's Form 10-Q Report filed for quarterly
period ended December 31, 1994 and Exhibits and Attachments
thereto.
10.9 Open Line of Credit with South Bay Bank, incorporated by N/A
reference to the Company's Form 10-K Annual Report filed for
Fiscal 1995 and the Exhibits and Attachments thereto.
10.10 Open Line of Credit with South Bay Bank dated as of N/A
February 21, 1997, in the principal amount of $1,200,000
incorporated by reference to the Company's Form 10-K Annual
Report filed
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C>
for fiscal 1997 and the exhibits and attachments thereto.
10.11 Open Line of Credit with South Bay Bank dated as of N/A
September 24, 1997, in the principal amount of $1,500.000,
incorporated by reference to the Company's Form 10-K Annual
Report filed for fiscal 1997 and the exhibits and attachments
thereto.
10.12 Settlement Agreement with Neal D'Agostino dated November 30, N/A
1995, incorporated by reference to the Company's Form 10-K
Annual Report filed for Fiscal 1995 and the Exhibits and
Attachments thereto.
10.13 Lease Agreement between NPI and Messrs. Schulman and Becker, N/A
incorporated by reference to the Company's Form 10-K Annual
Report filed for Fiscal 1991 and the Exhibits and Attachments
thereto, and the First Amendment to Lease, dated as of December
15, 1997, by and among Allan Schulman and the Registrant
(collectively as landlord) and the Company (as tenant),
incorporated by reference to the Company's Current Report on
Form 8-K as filed December 23, 1997.
10.14 Asset Transfer Agreement and Plan of Liquidation and N/A
Dissolution, dated as of June 30, 1997, by and among Harrier,
Inc., a Delaware corporation, the Company and DermaRay
International, L.L.C., a California limited liability company
incorporated by reference to the Company's Form 10-K Annual
Report filed for fiscal 1997 and the exhibits and attachments
thereto.
10.15 Naturade, Inc. 1998 Incentive Stock Option Plan, incorporated N/A
by reference to the Company's Form 10-Q Report filed for the
quarterly period ended March 31, 1998 and the exhibits and
attachments thereto.
10.16 Incentive Stock Option Plan with Bill D. Stewart dated March 2, N/A
1998, incorporated by reference
</TABLE>
67
<PAGE>
<TABLE>
<S> <C> <C>
to the Company's Form 10-Q Report filed for the quarterly
period ended March 31, 1998 and the exhibits and attachments
thereto.
10.17 Incentive Stock Option Plan with Ronald Ahrens dated April 20, N/A
1998, incorporated by reference to the Company's Form 10-Q
Report filed for the quarterly period ended March 31, 1998 and
the exhibits and attachments thereto.
10.18 Employment Contract with Bill D. Stewart, CEO dated March 2, N/A
1998 incorporated by reference to the Company's Form 10-Q
Report filed for the quarterly period ended March 31, 1998 and
the exhibits and attachments thereto.
10.19 Finance Agreement by and Between Naturade, Inc. and Health N/A
Holdings and Botanicals, Inc. dated March 17, 1999,
incorporated by reference to the Company's Form 10-Q Report
filed for the quarterly period ended March 31, 1999
10.20 Amendment No. 1 to Finance Agreement by and between Naturade, N/A
Inc. and Health Holdings and Botanicals, Inc. dated June 1,
1999, incorporated by reference to the Company's Form 10-Q
Report filed for the quarterly period ended September 30, 1999
10.21 Credit Agreement by and Between Naturade, Inc. and Health N/A
Holdings and Botanicals, Inc. dated August 9, 1999,
incorporated by reference to the Company's Form 10-Q Report
filed for the quarterly period ended June 30, 1999
Settlement Agreement between Naturade, Inc. and the PNI
10.22 Trustee, August 1999, incorporated by reference to the N/A
Company's Form 10-Q Report filed for the quarterly period ended
June 30, 1999
10.23 Employment Contract with Lawrence J. Batina, COO/CFO dated N/A
February 1, 1999, incorporated
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C>
by reference to the Company's Form 10-Q Report filed for the
quarterly period ended March 31, 1999.
10.24 Credit and Security Agreement by and Between Naturade, Inc. and Document 2
Wells Fargo Business Credit, Inc. dated January 27, 2000
23.1 Consent of Rose, Snyder & Jacobs, dated N/A
December 22, 1998 incorporated by reference.
23.2 Consent of McGladry & Pullen, LLP, dated December 28, 1998 N/A
incorporated by reference.
23.3 Consent of Rose, Snyder & Jacobs, dated Document 3
March 27, 2000
27 Financial Data Schedule Document 4
</TABLE>
69
<PAGE>
----------------------------------------------
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
NATURADE, INC.
AND
WELLS FARGO BUSINESS CREDIT, INC.
Dated as of: January 27, 2000
----------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS...........................................................................1
Section 1.1 Definitions...........................................................................1
Section 1.2 Cross References......................................................................9
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY...............................................9
Section 2.1 Revolving Advances....................................................................9
Section 2.2 Interest; Minimum Interest Charge; Default Interest; Participations; Usury...........10
Section 2.3 Fees.................................................................................11
Section 2.4 Computation of Interest and Fees; When Interest Due and Payable......................12
Section 2.5 Capital Adequacy.....................................................................12
Section 2.6 Maturity Date........................................................................13
Section 2.7 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit
Facility by the Borrower.............................................................13
Section 2.8 Termination and Line Reduction fees; Waiver of Termination and Line Reduction Fees...13
Section 2.9 Mandatory Prepayment.................................................................13
Section 2.10 Payment..............................................................................14
Section 2.11 Payment on Non-Baking Days...........................................................14
Section 2.12 Use of Proceeds......................................................................14
Section 2.13 Liability Records....................................................................14
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF.................................................15
Section 3.1 Grant of Security Interest...........................................................15
Section 3.2 Notification of Account Debtors and Other Obligors...................................15
Section 3.3 Assignment of Insurance..............................................................15
Section 3.4 Occupancy............................................................................15
Section 3.5 License..............................................................................16
Section 3.6 Financing Statement..................................................................16
Section 3.7 Setoff...............................................................................16
ARTICLE IV CONDITIONS OF LENDING................................................................17
Section 4.1 Conditions Precedent to the Initial Revolving Advance................................17
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 4.2 Conditions Precedent to All Advances.................................................19
ARTICLE V REPRESENTATIONS AND WARRANTIES.......................................................20
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and
Equipment Locations; Tax Identification Number.......................................20
Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements......................20
Section 5.3 Legal Agreements.....................................................................21
Section 5.4 Subsidiaries.........................................................................21
Section 5.5 Financial Condition; No Adverse Change...............................................21
Section 5.6 Litigation...........................................................................21
Section 5.7 Regulation U.........................................................................21
Section 5.8 Taxes................................................................................21
Section 5.9 Titles and Liens.....................................................................22
Section 5.10 Plans................................................................................22
Section 5.11 Default..............................................................................22
Section 5.12 Environmental Matters................................................................22
Section 5.13 Submissions to Lender................................................................23
Section 5.14 Financing Statements.................................................................23
Section 5.15 Rights to Payment....................................................................23
Section 5.16 Bank Accounts........................................................................24
Section 5.17 Financial Solvency...................................................................24
ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS.....................................................24
Section 6.1 Reporting Requirements...............................................................24
Section 6.2 Books and Records; Inspection and Examination........................................27
Section 6.3 Account Verification.................................................................27
Section 6.4 Compliance with Laws.................................................................27
Section 6.5 Payment of Taxes and Other Claims....................................................28
Section 6.6 Maintenance of Properties............................................................28
Section 6.7 Insurance............................................................................28
Section 6.8 Preservation of Existence............................................................29
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 6.9 Delivery of Instruments, etc.........................................................29
Section 6.10 Collateral Account...................................................................29
Section 6.11 Performance by Lender................................................................29
Section 6.12 Minimum Book net Worth Plus Subordinated Convertible Debt............................30
Section 6.13 Minimum Net income...................................................................30
Section 6.14 New Covenants Service Coverage Ratio.................................................30
ARTICLE VII NEGATIVE COVENANTS...................................................................31
Section 7.1 Liens................................................................................36
Section 7.2 Indebtedness.........................................................................36
Section 7.3 Guaranties...........................................................................36
Section 7.4 Investments and Subsidiaries.........................................................37
Section 7.5 Dividends............................................................................37
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations........................37
Section 7.7 Consolidation and Merger; Asset Acquisitions.........................................38
Section 7.8 Sale and Leaseback...................................................................38
Section 7.9 Restrictions on Nature of Business...................................................38
Section 7.10 Capital Expenditures.................................................................38
Section 7.11 Accounting...........................................................................38
Section 7.12 Discounts, etc.......................................................................38
Section 7.13 Defined Benefit Pension Plans........................................................38
Section 7.14 Other Defaults.......................................................................38
Section 7.15 Place of Business; Name..............................................................38
Section 7.16 Organizational Documents; S Corporation Status.......................................39
Section 7.17 Salaries.............................................................................39
Section 7.18 Change in Ownership..................................................................39
ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES...............................................39
Section 8.1 Events of Default....................................................................39
Section 8.2 Rights and Remedies..................................................................41
Section 8.3 Certain Notices......................................................................42
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE IX MISCELLANEOUS........................................................................42
Section 9.1 No Waiver; Cumulative Remedies.......................................................42
Section 9.2 Amendments, Etc......................................................................42
Section 9.3 Addresses for Notices, Etc...........................................................42
Section 9.4 [Servicing of Credit Facility........................................................43
Section 9.5 Further Documents....................................................................44
Section 9.6 Collateral...........................................................................44
Section 9.7 Costs and Expenses...................................................................44
Section 9.8 Indemnity............................................................................45
Section 9.9 Participants.........................................................................45
Section 9.10 Execution in Counterparts............................................................46
Section 9.11 Binding Effect; Assignment; Complete Agreement; Exchanging Information...............46
Section 9.12 Severability of Provisions...........................................................46
Section 9.13 Headings.............................................................................46
Section 9.14 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.............................46
</TABLE>
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<PAGE>
CREDIT AND SECURITY AGREEMENT
Dated as of January 27, 2000
NATURADE, INC., a Delaware corporation (the "BORROWER"), and
WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "LENDER"),
hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with GAAP.
"ACCOUNTS" means all of the Borrower's accounts, as such term
is defined in the UCC, including without limitation the aggregate
unpaid obligations of customers and other account debtors to the
Borrower arising out of the sale or lease of goods or rendition of
services by the Borrower on an open account or deferred payment basis.
"Adjusted Book Net Worth" means Minimum Book Net Worth plus
Subordinated Convertible Debt.
"ADVANCE" means a Revolving Advance.
"AFFILIATE" or "AFFILIATES" means any Person controlled by,
controlling or under common control with the Borrower, including
(without limitation) any Subsidiary of the Borrower. For purposes of
this definition, "CONTROL," when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"AGREEMENT" means this Credit and Security Agreement, as
amended, supplemented or restated from time to time.
"AVAILABILITY" means the difference of (i) the Borrowing Base
and (ii) the then outstanding principal balance of the Revolving Note.
"AVAILABILITY RESERVE" means as of any date of determination,
such amount or amounts as Lender may from time to time establish and
revise in good faith reducing the
<PAGE>
amount of Revolving Advances which would otherwise be available to
Borrower under the lending formula(s) provided for herein: (a) to
reflect events, conditions, contingencies or risks which, as determined
by Lender in good faith, do or may affect either (i) the Collateral or
its value, (ii) the assets, business or prospects of Borrower, or (iii)
the security interests and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof), or (b)
to reflect Lender's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower to Lender
is or may have been incomplete, inaccurate or misleading in any
material respect, or (c) in respect of any state of facts which Lender
determines in good faith constitutes an Event of Default or may, with
notice or passage of time or both, constitute an Event of Default.
"BANKING DAY" means a day other than a Saturday, Sunday or
other day on which banks are generally not open for business in
Pasadena, California.
"BASE RATE" means the rate of interest publicly announced from
time to time by Wells Fargo Bank, N.A., San Francisco, California, as
its "prime rate" or, if such bank ceases to announce a rate so
designated, any similar successor rate designated by the Lender.
"BOOK NET WORTH" means the aggregate of the common and
preferred stockholders' equity in the Borrower, determined in
accordance with GAAP.
"BORROWING BASE" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's
sole discretion, the sum of:
(i) seventy five percent (75%) of Eligible
Accounts PLUS
(ii) the lesser of One Million Two Hundred
Thousand Dollars ($1,200,000) or fifty
percent (50%) of Eligible Inventory, and
MINUS
(iii) any Availability Reserves.
"CAPITAL EXPENDITURES" for a period means any expenditure of
money for the purchase or construction of assets, or for improvements
or additions thereto, which are capitalized on the Borrower's balance
sheet or for the lease, purchase or other acquisition of any capital
asset, or for the lease of any other asset whether payable currently or
in the future.
"COLLATERAL" means all current or hereafter acquired or
arising Equipment, General Intangibles, Inventory, Receivables,
Investment Property, deposit accounts, letters of
-2-
<PAGE>
credit, proceeds of letters of credit, chattel paper and all sums on
deposit in any Collateral Account, and any items in any Lockbox;
together with (i) all substitutions and replacements for and
products of any of the foregoing; (ii) proceeds of any and all of
the foregoing; (iii) in the case of all tangible goods, all
accessions; (iv) all accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or used in
connection with any tangible goods; (v) all warehouse receipts,
bills of lading and other documents of title now or hereafter
covering such goods; and (vi) the Life Insurance Policy.
"COLLATERAL ACCOUNT" means the "Lender Account" as defined in
the Lockbox Agreement.
"COMMITMENT" means the Lender's commitment to make Advances
to or for the Borrower's account pursuant to Article II.
"CREDIT FACILITY" means the credit facility being made
available to the Borrower by the Lender pursuant to Article II.
"CURRENT MATURITIES OF LONG TERM DEBT" as of a given date
means the amount of the Borrower's long-term debt and capitalized
leases which will become due during the period ending on the designated
date.
"DEBT" of any Person means all items of indebtedness or
liability which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of a
balance sheet of that Person as at the date as of which Debt is to be
determined. For purposes of determining a Person's aggregate Debt at
any time, "DEBT" shall also include the aggregate payments required to
be made by such Person at any time under any lease that is considered a
capitalized lease under GAAP.
"DEFAULT" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"DEFAULT PERIOD" means any period of time beginning on the
first day of any month during which a Default or Event of Default has
occurred and ending on the date the Lender notifies the Borrower in
writing that such Default or Event of Default has been waived.
"DEFAULT RATE" means an annual rate equal to three percent
(3%) over the Floating Rate, which rate shall change when and as the
Floating Rate changes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ELIGIBLE ACCOUNTS" means all unpaid Accounts, net of any
credits, except the following shall not in any event be deemed Eligible
Accounts:
-3-
<PAGE>
(i) That portion of Accounts unpaid 90 days
or more after the invoice date or, if the Lender in its
discretion has determined that a particular dated Account
may be eligible, that portion of such Account which is
unpaid more than sixty (60) days past the stated due date
or more than one hundred fifty (150) days past the shipping
date;
(ii) That portion of Accounts that is disputed
or subject to a claim of offset or a contra account;
(iii) That portion of Accounts not yet earned
by the final delivery of goods or rendition of services, as
applicable, by the Borrower to the customer;
(iv) Accounts owed by any federal unit of
government, whether foreign or domestic (provided, however,
that there shall be included in Eligible Accounts that
portion of Accounts owed by such units of government for
which the Borrower has provided evidence satisfactory to
the Lender that (A) the Lender has a first priority
perfected security interest and (B) such Accounts may be
enforced by the Lender directly against such unit of
government under all applicable laws, including, without
limitation, the Federal Assignment of Claims Act of 1940,
as amended, or any similar law);
(v) Accounts owed by an account debtor
located outside the United States or Canada which are not
(A) backed by a bank letter of credit naming the Lender as
beneficiary or assigned to the Lender, in the Lender's
possession and acceptable to the Lender in all respects, in
its sole discretion, or (B) covered by a foreign
receivables insurance policy acceptable to the Lender in
its sole discretion;
(vi) Accounts owed by an account debtor that
is insolvent, the subject of bankruptcy proceedings or has
gone out of business;
(vii) Accounts owed by a shareholder,
Subsidiary, Affiliate, officer or employee of the Borrower;
(viii) Accounts not subject to a duly perfected
security interest in the Lender's favor or which are
subject to any lien, security interest or claim in favor of
any Person other than the Lender including without
limitation any payment or performance bond;
(ix) That portion of Accounts that has been
restructured, extended, amended or modified;
(x) That portion of Accounts that constitutes
advertising, finance charges, service charges or sales or
excise taxes;
-4-
<PAGE>
(xi) Accounts owed by an account debtor,
regardless of whether otherwise eligible, if ten percent
(10%) or more of the total amount due under Accounts from
such debtor is ineligible under clauses (i), (ii) or (ix)
above, except such percentage shall be fifteen percent
(15%) as to Accounts owed by Tree of Life, Inc.;
(xii) That portion of Accounts of a single
debtor or its affiliates which constitute more than fifteen
percent (15%) of all Accounts, except such percentage shall
be twenty five percent (25%) as to Accounts owed by Tree of
Life, Inc.; and
(xiii) Accounts, or portions thereof, otherwise
deemed ineligible by the Lender in its sole discretion.
"ELIGIBLE INVENTORY" means all Inventory of the Borrower,
at the lower of cost or market value as determined in accordance
with GAAP; provided, however, that the following shall not in any
event be deemed Eligible Inventory:
(xiv) Inventory that is: in-transit; located at
any warehouse, job site or premises other than Borrower's
Premises located in Irvine, California; located outside of
the states, or localities, as applicable, in which the
Lender has filed financing statements to perfect a first
priority security interest in such Inventory; covered by
any negotiable or non-negotiable warehouse receipt, bill of
lading or other document of title; on consignment from any
Person; on consignment to any Person or subject to any
bailment unless such consignee or bailee has executed an
agreement with the Lender;
(xv) Supplies, packaging, parts or sample
Inventory;
(xvi) Work-in-process Inventory;
(xvii) Inventory that is damaged, obsolete, slow
moving or not currently saleable in the normal course of
the Borrower's operations;
(xviii) Inventory that the Borrower has returned,
has attempted to return, is in the process of returning or
intends to return to the vendor thereof;
(xix) Inventory that is perishable or live;
(xx) Inventory purchased or manufactured by
the Borrower pursuant to a license;
(xxi) Inventory that is subject to a security
interest in favor of any Person other than the Lender; and
(xxii) Inventory otherwise deemed ineligible by
the Lender in its sole discretion.
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"ENVIRONMENTAL LAWS" has the meaning specified in Section
5.12.
"EQUIPMENT" means all of the Borrower's equipment, as such
term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts, tools,
supplies, and including specifically (without limitation) the goods
described in any equipment schedule or list herewith or hereafter
furnished to the Lender by the Borrower.
"EVENT OF DEFAULT" has the meaning specified in Section 8.1.
"FLOATING RATE" means an annual rate equal to the sum of
the Base Rate plus one and one-half percent (1.5%), which annual
rate shall change when and as the Base Rate changes; PROVIDED
HOWEVER, if no Event of Default exists or has occurred and is
continuing, such Floating Rate shall be reduced as follows: (a) if
Borrower generates Net Income of not less than Zero Dollars ($0) for
a consecutive three (3) month period, the Floating Rate shall be
reduced to an annual rate equal to the sum of the Base Rate plus one
and one-quarter percent (1.25%) and (b) if Borrower generates Net
Income of One Hundred Thousand Dollars ($100,000) or more for a
consecutive six (6) month period, the Floating Rate shall be reduced
to an annual rate equal to the sum of the Base Rate plus one percent
(1.0%). Each such reduction in the Floating Rate shall be effective
as of the first day of the month following Lender's receipt of
Borrower's monthly financial statements pursuant to Section 6.1(b)
hereof reflecting such minimum Net Income amounts for the applicable
periods.
"FUNDING DATE" has the meaning specified in Section 2.1.
"GAAP" means generally accepted accounting principles,
applied on a basis consistent with the accounting practices applied
in the financial statements described in Section 5.5, except for any
change in accounting practices to the extent that, due to a
promulgation of the Financial Accounting Standards Board changing or
implementing any new accounting standard, the Borrower either (i) is
required to implement such change, or (ii) for future periods will
be required to and for the current period may in accordance with
generally accepted accounting principles implement such change, for
its financial statements to be in conformity with generally accepted
accounting principles (any such change is herein referred to as a
"REQUIRED GAAP CHANGE"), provided that (1) the Borrower shall fully
disclose in such financial statements any such Required GAAP Change
and the effects of the Required GAAP Change on the Borrower's
income, retained earnings or other accounts, as applicable, and (2)
the Borrower's financial covenants set forth in Sections 6.12, 6.13,
and 7.10 shall be adjusted as necessary to reflect the effects of
such Required GAAP Change.
"GENERAL INTANGIBLES" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned
or hereafter acquired, including (without limitation) all present
and future patents, patent applications, copyrights, trademarks,
trade names, trade secrets, customer or supplier lists and
contracts, manuals, operating
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instructions, permits, franchises, the right to use the Borrower's
name, and the goodwill of the Borrower's business.
"HAZARDOUS SUBSTANCE" has the meaning specified in Section
5.12.
"INVENTORY" means all of the Borrower's inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired,
whether consisting of whole goods, spare parts or components,
supplies or materials, whether acquired, held or furnished for sale,
for lease or under service contracts or for manufacture or
processing, and wherever located.
"INVESTMENT PROPERTY" means all of the Borrower's
investment property, as such term is defined in the UCC, whether now
owned or hereafter acquired, including but not limited to all
securities, security entitlements, securities accounts, commodity
contracts, commodity accounts, stocks, bonds, mutual fund shares,
money market shares and U.S. Government securities.
"LOAN DOCUMENTS" means this Agreement, the Note, any
Subordination Agreement and the Security Documents.
"LOCKBOX" has the meaning given in the Lockbox Agreement.
"LOCKBOX AGREEMENT" means the Lockbox and Collection
Account Agreement by and among the Borrower, Wells Fargo Bank,
National Association, Regulus West LLC and the Lender, of even date
herewith.
"MATURITY DATE" has the meaning specified in Section 2.6.
"MAXIMUM LINE" means Three Million Dollars ($3,000,000),
unless said amount is reduced pursuant to Section 2.7, in which
event it means the amount to which said amount is reduced.
"MINIMUM INTEREST CHARGE" has the meaning specified in
Section 2.2(a).
"NET INCOME" means fiscal year-to-date after-tax net
income, DECREASED by the sum of any extraordinary, non-operating or
non-cash income recorded by the Borrower and INCREASED by any
extraordinary, non-cash or non-operating expense or loss recorded by
the Borrower, as determined in accordance with GAAP.
"NOTE" means the Revolving Note.
"OBLIGATIONS" means the Note and each and every other debt,
liability and obligation of every type and description which the
Borrower may now or at any time hereafter owe to the Lender, whether
such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving
the Lender alone or in a transaction involving other creditors of
the Borrower, and whether it is direct or indirect, due or to become
due, absolute or contingent, primary or secondary, liquidated
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or unliquidated, or sole, joint, several or joint and several, and
including specifically, but not limited to, all indebtedness of the
Borrower arising under this Agreement, the Note or any other loan or
credit agreement or guaranty between the Borrower and the Lender,
whether now in effect or hereafter entered into.
"PERMITTED LIEN" has the meaning specified in Section 7.1.
"PERSON" means any individual, corporation, partnership,
joint venture, limited liability company, association, joint-stock
company, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"PLAN" means an employee benefit plan or other plan
maintained for the Borrower's employees and covered by Title IV of
ERISA.
"PREMISES" means all premises where the Borrower conducts
its business and has any rights of possession, including (without
limitation) the premises legally described in EXHIBIT C attached
hereto.
"RECEIVABLES" means each and every right of the Borrower to
the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises out of a
sale, lease or other disposition of goods or other property, out of
a rendering of services, out of a loan, out of the overpayment of
taxes or other liabilities, or otherwise arises under any contract
or agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other person who subsequently
transfers such person's interest to the Borrower, whether such right
to payment is or is not already earned by performance, and howsoever
such right to payment may be evidenced, together with all other
rights and interests (including all liens and security interests)
which the Borrower may at any time have by law or agreement against
any account debtor or other obligor obligated to make any such
payment or against any property of such account debtor or other
obligor; all including but not limited to all present and future
accounts, contract rights, loans and obligations receivable, chattel
papers, bonds, notes and other debt instruments, tax refunds and
rights to payment in the nature of general intangibles.
"REPORTABLE EVENT" shall have the meaning assigned to that
term in Title IV of ERISA.
"REVOLVING ADVANCE" has the meaning specified in Section
2.1.
"REVOLVING NOTE" means the Borrower's revolving promissory
note, payable to the order of the Lender in substantially the form
of EXHIBIT A hereto, as the same may hereafter be amended,
supplemented or restated from time to time, and any note or notes
issued in substitution therefor, as the same may hereafter be
amended, supplemented or restated from time to time and any note or
notes issued in substitution therefor.
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"SECURITY DOCUMENTS" means this Agreement, the Lockbox
Agreement, Trademark Security Agreement, and any other document
delivered to the Lender from time to time to secure the Obligations,
as the same may hereafter be amended, supplemented or restated from
time to time.
"SECURITY INTEREST" has the meaning specified in Section
3.1.
"SUBORDINATION AGREEMENTS" means collectively the
Subordination Agreement of even date herewith, executed by
Performance Nutrition, Inc. and the Subordination Agreement of even
date herewith, executed by Health Holdings and Botanicals, Inc.,
both in the Lender's favor and acknowledged by the Borrower, and any
other subordination agreement accepted by the Lender from time to
time, as the same may hereafter be amended, supplemented or restated
from time to time.
"SUBORDINATED CONVERTIBLE DEBT" means debt that is
convertible into common stock of Borrower and is subordinated to
indebtedness to financial institutions for borrowed money including
Obligations.
"SUBORDINATED CREDITORS" means Performance Nutrition, Inc.
and Health Holdings and Botanicals, Inc.
"SUBSIDIARY" means any corporation of which more than fifty
percent (50%) of the outstanding shares of capital stock having
general voting power under ordinary circumstances to elect a
majority of the board of directors of such corporation, irrespective
of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of
any contingency, is at the time directly or indirectly owned by the
Borrower, by the Borrower and one or more other Subsidiaries, or by
one or more other Subsidiaries.
"TERMINATION DATE" means the earliest of (i) the Maturity
Date, (ii) the date the Borrower terminates the Credit Facility, or
(iii) the date the Lender demands payment of the Obligations after
an Event of Default pursuant to Section 8.2.
"TRADEMARK SECURITY AGREEMENT" means the Trademark Security
Agreement by the Borrower in favor of the Lender of even date
herewith.
"UCC" means the Uniform Commercial Code as in effect from
time to time in the state designated in Section 9.13 as the state
whose laws shall govern this Agreement, or in any other state whose
laws are held to govern this Agreement or any portion hereof.
Section 1.2 CROSS REFERENCES. All references in this
Agreement to Articles, Sections and subsections, shall be to Articles, Sections
and subsections of this Agreement unless otherwise explicitly specified.
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ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1 REVOLVING ADVANCES. The Lender agrees, on the
terms and subject to the conditions herein set forth, to make advances to the
Borrower from time to time from the date all of the conditions set forth in
Section 4.1 are satisfied (the "FUNDING DATE") to the Termination Date (the
"REVOLVING ADVANCES"). The Lender shall have no obligation to make a Revolving
Advance if, after giving effect to such requested Revolving Advance, the sum of
the outstanding and unpaid Revolving Advances would exceed the Borrowing Base.
The Borrower's obligation to pay the Revolving Advances shall be evidenced by
the Revolving Note and shall be secured by the Collateral as provided in Article
III. Within the limits set forth in this Section 2.1, the Borrower may borrow,
prepay pursuant to Section 2.6 and reborrow. The Borrower agrees to comply with
the following procedures in requesting Revolving Advances under this Section
2.1:
(a) The Borrower shall make each request for a Revolving
Advance to the Lender before 10:30 a.m. (Los Angeles time) of the day
of the requested Revolving Advance. Requests may be made in writing or
by telephone, specifying the date of the requested Revolving Advance
and the amount thereof. Each request shall be by (i) any officer of the
Borrower; or (ii) any person designated as the Borrower's agent by any
officer of the Borrower in a writing delivered to the Lender; or (iii)
any person whom the Lender reasonably believes to be an officer of the
Borrower or such a designated agent.
(b) Upon fulfillment of the applicable conditions set
forth in Article IV, the Lender shall disburse the proceeds of the
requested Revolving Advance by crediting the same to the Borrower's
demand deposit account maintained with Wells Fargo Bank, National
Association, unless the Lender and the Borrower shall agree in writing
to another manner of disbursement. Upon the Lender's request, the
Borrower shall promptly confirm each telephonic request for an Advance
by executing and delivering an appropriate confirmation certificate to
the Lender. The Borrower shall repay all Advances even if the Lender
does not receive such confirmation and even if the person requesting an
Advance was not in fact authorized to do so. Any request for an
Advance, whether written or telephonic, shall be deemed to be a
representation by the Borrower that the conditions set forth in Section
4.2 have been satisfied as of the time of the request.
Section 2.2 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT
INTEREST; PARTICIPATIONS; USURY.
(a) REVOLVING NOTE. Except as set forth in Sections
2.2(c) and 2.2(e), the outstanding principal balance of the Revolving
Note shall bear interest at the Floating Rate.
(b) MINIMUM INTEREST CHARGE. Notwithstanding the interest
payable pursuant to Section 2.2(a), the Borrower shall pay to the
Lender interest of not less than
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Twenty Thousand Dollars ($20,000) per calendar quarter (the "MINIMUM
INTEREST CHARGE") during the term of this Agreement, and the
Borrower shall pay any deficiency between the Minimum Interest
Charge and the amount of interest otherwise calculated under
Sections 2.2(a) and 2.2(d) quarterly in arrears on the first day of
each calendar quarter and on the Termination Date and on the date
and in the manner provided in Section 2.4.
(c) DEFAULT INTEREST RATE. At any time during any Default
Period, in the Lender's sole discretion and without waiving any of its
other rights and remedies, the Obligations outstanding from time to
time shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(d) PARTICIPATIONS. If any Person shall acquire a
participation in the Advances under this Agreement, the Borrower shall
be obligated to the Lender to pay the full amount of all interest
calculated under Section 2.2(a), along with all other fees, charges and
other amounts due under this Agreement, regardless if such Person
elects to accept interest with respect to its participation at a lower
rate than the Floating Rate, or otherwise elects to accept less than
its prorata share of such fees, charges and other amounts due under
this Agreement.
(e) USURY. In any event no rate change shall be put into
effect which would result in a rate greater than the highest rate
permitted by law. Notwithstanding anything to the contrary contained in
any Loan Document, all agreements which either now are or which shall
become agreements between the Borrower and the Lender are hereby
limited so that in no contingency or event whatsoever shall the total
liability for payments in the nature of interest, additional interest
and other charges exceed the applicable limits imposed by any
applicable usury laws. If any payments in the nature of interest,
additional interest and other charges made under any Loan Document are
held to be in excess of the limits imposed by any applicable usury
laws, it is agreed that any such amount held to be in excess shall be
considered payment of principal hereunder, and the indebtedness
evidenced hereby shall be reduced by such amount so that the total
liability for payments in the nature of interest, additional interest
and other charges shall not exceed the applicable limits imposed by any
applicable usury laws, in compliance with the desires of the Borrower
and the Lender. This provision shall never be superseded or waived and
shall control every other provision of the Loan Documents and all
agreements between the Borrower and the Lender, or their successors and
assigns.
Section 2.3 FEES.
(a) ORIGINATION FEE. The Borrower hereby agrees to pay
the Lender a fully earned and non-refundable origination fee of Thirty
Thousand Dollars ($30,000) due and payable upon the execution of this
Agreement.
(b) UNUSED LINE FEE. For the purposes of this Section
2.3(b), "UNUSED AMOUNT" means the Maximum Line reduced by outstanding
Revolving Advances . The Borrower agrees to pay to the Lender an unused
line fee at the rate of one-quarter of one
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percent (0.25%) per annum on the average daily Unused Amount from
the date of this Agreement to and including the Termination Date,
due and payable quarterly in arrears on the first day of the
calendar quarter and on the Termination Date.
(c) AUDIT FEES. The Borrower hereby agrees to pay the
Lender, on demand, audit fees in connection with any audits or
inspections conducted by the Lender of any Collateral or the Borrower's
operations or business at the rates established from time to time by
the Lender as its audit fees (which fees are currently Seventy Five
Dollars ($75) per hour per auditor), together with all actual
out-of-pocket costs and expenses incurred in conducting any such audit
or inspection.
Section 2.4 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST
DUE AND PAYABLE. Interest accruing on the outstanding principal balance of the
Advances and fees hereunder outstanding from time to time shall be computed on
the basis of actual number of days elapsed in a year of 360 days. Interest shall
be due and payable in arrears on the first day of each month and on the
Termination Date.
Section 2.5 CAPITAL ADEQUACY. If any Related Lender
determines at any time that its Return has been reduced as a result of any Rule
Change, such Related Lender may require the Borrower to pay it the amount
necessary to restore its Return to what it would have been had there been no
Rule Change. For purposes of this Section 2.5:
(a) "CAPITAL ADEQUACY RULE" means any law, rule,
regulation, guideline, directive, requirement or request regarding
capital adequacy, or the interpretation or administration thereof by
any governmental or regulatory authority, central bank or comparable
agency, whether or not having the force of law, that applies to any
Related Lender. Such rules include rules requiring financial
institutions to maintain total capital in amounts based upon
percentages of outstanding loans, binding loan commitments and letters
of credit.
(b) "RETURN", for any period, means the return as
determined by such Related Lender on the Advances based upon its total
capital requirements and a reasonable attribution formula that takes
account of the Capital Adequacy Rules then in effect. Return may be
calculated for each calendar quarter and for the shorter period between
the end of a calendar quarter and the date of termination in whole of
this Agreement.
(c) "RULE CHANGE" means any change in any Capital
Adequacy Rule occurring after the date of this Agreement, but the term
does not include any changes in applicable requirements that at the
Closing Date are scheduled to take place under the existing Capital
Adequacy Rules or any increases in the capital that any Related Lender
is required to maintain to the extent that the increases are required
due to a regulatory authority's assessment of the financial condition
of such Related Lender.
(d) "RELATED LENDER" includes (but is not limited to) the
Lender, any parent corporation of the Lender and any assignee of any
interest of the Lender hereunder and any participant in the loans made
hereunder.
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Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.5, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
Section 2.6 MATURITY DATE. This Agreement and the other Loan
Documents shall become effective as of the date set forth on the first page
hereof and shall continue in full force and effect for a term ending on January
27, 2003 (the "MATURITY DATE"), unless earlier terminated by Lender or Borrower
pursuant to the terms hereof. Upon the Termination Date, Borrower shall
immediately pay to Lender, in full, all outstanding and unpaid Obligations and
shall furnish cash collateral to Lender in such amounts as Lender determines are
reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any contingent
Obligations, including checks and other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment.
Section 2.7 VOLUNTARY PREPAYMENT; REDUCTION OF THE MAXIMUM
LINE; TERMINATION OF THE CREDIT FACILITY BY THE BORROWER. Except as otherwise
provided herein, the Borrower may prepay the Advances in whole at any time or
from time to time in part. The Borrower may terminate the Credit Facility or
reduce the Maximum Line at any time if it (i) gives the Lender at least thirty
(30) days' prior written notice and (ii) pays the Lender termination or line
reduction fees in accordance with Section 2.8. Any reduction in the Maximum Line
must be in an amount not less than Two Hundred Fifty Thousand Dollars ($250,000)
or an integral multiple thereof. If the Borrower reduces the Maximum Line to
zero, all Obligations shall be immediately due and payable. Upon termination of
the Credit Facility and payment and performance of all Obligations, the Lender
shall release or terminate the Security Interest and the Security Documents to
which the Borrower is entitled by law.
Section 2.8 TERMINATION AND LINE REDUCTION FEES; WAIVER OF
TERMINATION AND LINE REDUCTION FEES.
(a) TERMINATION AND LINE REDUCTION FEES. If the Credit
Facility is terminated for any reason as of a date other than the
Maturity Date, or the Borrower reduces the maximum Line, the Borrower
shall pay to the Lender a fee in an amount equal to a percentage of the
Maximum Line or the reduction, as the case may be as follows: (A) three
percent (3.0%) if the termination or reduction occurs on or before the
first anniversary of the Funding Date; (B) two percent (2.0%) if the
termination or reduction occurs after the first anniversary of the
Funding Date but on or before the second anniversary of the Funding
Date; and (C) one percent (1.0%) if the termination or reduction occurs
after the second anniversary of the Funding Date.
(b) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The
Borrower will not be required to pay the termination or line reduction
fees otherwise due under this Section
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2.8 if such termination or line reduction is made because of
refinancing by an affiliate of the Lender.
Section 2.9 MANDATORY PREPAYMENT. Without notice or demand,
if the outstanding principal balance of the Revolving Advances shall at any time
exceed the Borrowing Base, the Borrower shall immediately prepay the Revolving
Advances to the extent necessary to eliminate such excess. Any payment received
by the Lender under this Section 2.9 or under Section 2.6 may be applied to the
Obligations, in such order and in such amounts as the Lender, in its discretion,
may from time to time determine.
Section 2.10 PAYMENT. For purposes of calculating the amount
of Revolving Advances available to Borrower, each payment will be applied
(conditional upon final collection) to the outstanding principal balance of the
Revolving Note on the Banking Day of receipt by Lender of advices of deposit in
the Collateral Account, if such advices are received within sufficient time (in
accordance with Lender's usual and customary practices as in effect from time to
time) to credit Borrower's loan account on such day, and if not, then on the
next Banking Day. Such payment shall be applied in any order or manner of
application satisfactory to Lender. For purposes of calculating interest, Lender
shall be entitled to charge Borrower for one (1) Banking Day of clearance at the
Floating Rate on all payments deposited into the Collateral Account, whether or
not such payments are applied to reduce the outstanding principal balance of the
Revolving Note. This clearance charge is acknowledged to constitute an integral
part of the pricing of the loans and financial accommodations contemplated
herein, and shall apply whether or not the amount of payments deposited exceeds
the obligations outstanding. Notwithstanding anything in Section 2.1, the
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time without the Borrower's request and even if the conditions set forth
in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable. At
Lender's option, all principal, interest, fees, costs, expenses and other
charges provided for in this Agreement or the other Loan Documents may be
charged directly to the loan account(s) of Borrower.
Section 2.11 PAYMENT ON NON-BANKING DAYS. Whenever any
payment to be made hereunder shall be stated to be due on a day which is not a
Banking Day, such payment may be made on the next succeeding Banking Day, and
such extension of time shall in such case be included in the computation of
interest on the Advances or the fees hereunder, as the case may be.
Section 2.12 USE OF PROCEEDS. The Borrower shall use the
initial proceeds of Advances only for: (a) payment to each of the Persons listed
in the disbursement direction letter furnished by Borrower to Lender on or about
the date hereof and (b) costs, expenses and fees in connection with the
preparation, negotiation, execution and delivery of this Agreement and the other
Loan Documents. All other Advances made to Borrower shall be used by Borrower
only for general operating, working capital and other proper corporate purposes
of Borrower not otherwise prohibited by the terms hereof.
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Section 2.13 LIABILITY RECORDS. The Lender may maintain from
time to time, at its discretion, liability records as to the Obligations. All
entries made on any such record shall be presumed correct until the Borrower
establishes the contrary. Upon the Lender's demand, the Borrower will admit and
certify in writing the exact principal balance of the Obligations that the
Borrower then asserts to be outstanding. Any billing statement or accounting
rendered by the Lender shall be conclusive and fully binding on the Borrower
unless the Borrower gives the Lender specific written notice of exception within
thirty (30) days after receipt.
ARTICLE III
SECURITY INTEREST; OCCUPANCY; SETOFF
Section 3.1 GRANT OF SECURITY INTEREST. The Borrower hereby
pledges, assigns and grants to the Lender a security interest (collectively
referred to as the "SECURITY INTEREST") in the Collateral, as security for the
payment and performance of the Obligations.
Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER
OBLIGORS. The Lender may at any time (whether or not a Default Period then
exists) notify any account debtor or other person obligated to pay the amount
due that such right to payment has been assigned or transferred to the Lender
for security and shall be paid directly to the Lender. The Borrower will join in
giving such notice if the Lender so requests. At any time after the Borrower or
the Lender gives such notice to an account debtor or other obligor, the Lender
may, but need not, in the Lender's name or in the Borrower's name, (a) demand,
sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such right to payment, or grant any
extension to, make any compromise or settlement with or otherwise agree to
waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor; and (b) as the
Borrower's agent and attorney-in-fact, notify the United States Postal Service
to change the address for delivery of the Borrower's mail to any address
designated by the Lender, otherwise intercept the Borrower's mail, and receive,
open and dispose of the Borrower's mail, applying all Collateral as permitted
under this Agreement and holding all other mail for the Borrower's account or
forwarding such mail to the Borrower's last known address.
Section 3.3 ASSIGNMENT OF INSURANCE. As additional security
for the payment and performance of the Obligations, the Borrower hereby assigns
to the Lender any and all monies (including, without limitation, proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of the Borrower with respect to, any and all policies of insurance
now or at any time hereafter covering the Collateral or any evidence thereof or
any business records or valuable papers pertaining thereto, and the Borrower
hereby directs the issuer of any such policy to pay all such monies directly to
the Lender. At any time, whether or not a Default Period then exists, the Lender
may (but need not), in the Lender's name or in the Borrower's name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
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Section 3.4 OCCUPANCY.
(a) The Borrower hereby irrevocably grants to the Lender
the right to take possession of the Premises at any time during a
Default Period.
(b) The Lender may use the Premises only to hold,
process, manufacture, sell, use, store, liquidate, realize upon or
otherwise dispose of goods that are Collateral and for other purposes
that the Lender may in good faith deem to be related or incidental
purposes.
(c) The Lender's right to hold the Premises shall cease
and terminate upon the earlier of (i) payment in full and discharge of
all Obligations and termination of the Commitment, and (ii) final sale
or disposition of all goods constituting Collateral and delivery of all
such goods to purchasers.
(d) The Lender shall not be obligated to pay or account
for any rent or other compensation for the possession, occupancy or use
of any of the Premises; provided, however, that if the Lender does pay
or account for any rent or other compensation for the possession,
occupancy or use of any of the Premises, the Borrower shall reimburse
the Lender promptly for the full amount thereof. In addition, the
Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or
imposed upon the Lender by reason of the execution, delivery,
existence, recordation, performance or enforcement of this Agreement or
the provisions of this Section 3.4.
Section 3.5 LICENSE. Without limiting the generality of the
Patent Security Agreement, Copyright Security Agreement, Trademark Security
Agreement, the Borrower hereby grants to the Lender a non-exclusive, worldwide
and royalty-free license to use or otherwise exploit all trademarks, franchises,
trade names, copyrights and patents of the Borrower for the purpose of selling,
leasing or otherwise disposing of any or all Collateral during any Default
Period.
Section 3.6 FINANCING STATEMENT. A carbon, photographic or
other reproduction of this Agreement or of any financing statements signed by
the Borrower is sufficient as a financing statement and may be filed as a
financing statement in any state to perfect the security interests granted
hereby. For this purpose, the following information is set forth:
Name and address of Debtor:
Naturade, Inc.
14370 Myford Rd.
Irvine, California 92606
Federal Tax Identification No. 23-2442709
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Name and address of Secured Party:
Wells Fargo Business Credit, Inc.
245 South Los Robles Avenue, Suite 600
Pasadena, California 91101
Section 3.7 SETOFF. The Borrower agrees that the Lender may
at any time or from time to time, at its sole discretion and without demand and
without notice to anyone, setoff any liability owed to the Borrower by the
Lender, whether or not due, against any Obligation, whether or not due.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING
ADVANCE. The Lender's obligation to make the initial Revolving Advance hereunder
shall be subject to the condition precedent that the Lender shall have received
all of the following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Note, properly executed by the Borrower.
(c) A true and correct copy of any and all leases
pursuant to which the Borrower is leasing the Premises, together with a
landlord's disclaimer and consent with respect to each such lease.
(d) A true and correct copy of any and all mortgages
pursuant to which the Borrower has mortgaged the Premises, together
with a mortgagee's disclaimer and consent with respect to each such
mortgage.
(e) A true and correct copy of any and all agreements
pursuant to which the Borrower's property is in the possession of any
Person other than the Borrower, together with, in the case of any goods
held by such Person for resale, (i) a consignee's acknowledgment and
waiver of liens, (ii) UCC financing statements sufficient to protect
the Borrower's and the Lender's interests in such goods, and (iii) UCC
searches showing that no other secured party has filed a financing
statement against such Person and covering property similar to the
Borrower's other than the Borrower, or if there exists any such secured
party, evidence that each such secured party has received notice from
the Borrower and the Lender sufficient to protect the Borrower's and
the Lender's interests in the Borrower's goods from any claim by such
secured party.
(f) An acknowledgment and waiver of liens from each
warehouse in which the Borrower is storing Inventory.
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(g) A true and correct copy of any and all agreements
pursuant to which the Borrower's property is in the possession of any
Person other than the Borrower, together with, (i) an acknowledgment
and waiver of liens from each subcontractor who has possession of the
Borrower's goods from time to time, (ii) UCC financing statements
sufficient to protect the Borrower's and the Lender's interests in such
goods, and (iii) UCC searches showing that no other secured party has
filed a financing statement covering such Person's property other than
the Borrower, or if there exists any such secured party, evidence that
each such secured party has received notice from the Borrower and the
Lender sufficient to protect the Borrower's and the Lender's interests
in the Borrower's goods from any claim by such secured party.
(h) The Lockbox Agreement, properly executed by the
Borrower, Wells Fargo Bank, National Association and Regulus West LLC.
(i) Trademark Security Agreement, properly executed by
the Borrower.
(j) The Subordination Agreements properly executed by the
Subordinated Creditors and acknowledged by Borrower.
(k) Current searches of appropriate filing offices
showing that (i) no state or federal tax liens have been filed and
remain in effect against the Borrower, (ii) no financing statements or
assignments of patents, trademarks or copyrights have been filed and
remain in effect against the Borrower except those financing statements
and assignments of patents, trademarks or copyrights relating to
Permitted Liens or to liens held by Persons who have agreed in writing
that upon receipt of proceeds of the Advances, they will deliver UCC
releases and/or terminations and releases of such assignments of
patents, trademarks or copyrights satisfactory to the Lender, and (iii)
the Lender has duly filed all financing statements necessary to perfect
the Security Interest, to the extent the Security Interest is capable
of being perfected by filing.
(l) A certificate of the Borrower's Secretary or
Assistant Secretary certifying as to (i) the resolutions of the
Borrower's directors and, if required, shareholders, authorizing the
execution, delivery and performance of the Loan Documents, (ii) the
Borrower's articles of incorporation and bylaws, and (iii) the
signatures of the Borrower's officers or agents authorized to execute
and deliver the Loan Documents and other instruments, agreements and
certificates, including Advance requests, on the Borrower's behalf.
(m) A current certificate issued by the Secretary of
State of Delaware, certifying that the Borrower is in compliance with
all applicable organizational requirements of the State of Delaware.
(n) Evidence that the Borrower is duly licensed or
qualified to transact business in all jurisdictions where the character
of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary
(except in those jurisdictions where the failure to so qualify will not
have a materially
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adverse effect on the Borrower, its financial condition, or ability
to repay the Obligations under this Agreement).
(o) A certificate of an officer of the Borrower
confirming, in his personal capacity, the representations and
warranties set forth in Article V.
(p) Receipt of background checks on Borrower's principals
satisfactory to Lender at its sole discretion.
(q) An opinion of counsel to the Borrower, addressed to
the Lender.
(r) Certificates of the insurance required hereunder,
with all hazard insurance containing a lender's loss payable
endorsement in the Lender's favor and with all liability insurance
naming the Lender as an additional insured.
(s) Evidence of the settlement of the action arising
under the Performance Nutrition, Inc. bankruptcy on terms and
conditions satisfactory to Lender, and completion of payments according
to the terms of such settlement.
(t) Payment of the fees and commissions due through the
date of the initial Advance under Section 2.3 and expenses incurred by
the Lender through such date and required to be paid by the Borrower
under Section 9.6, including all legal expenses incurred through the
date of this Agreement.
(u) Evidence that Availability as of the Funding Date is
not less than One Million Two Hundred Fifty Thousand Dollars
($1,250,000) after giving effect to the amount paid or to be paid to
Borrower's prior lender to retire Borrower's line of credit with such
prior lender and bringing all other obligations to a current status
satisfactory to Lender.
(v) At Borrower's cost, an appraisal of all Inventory,
issued by an appraiser acceptable to Lender and in form, substance and
reflecting values satisfactory to Lender in its sole discretion.
(w) Completion of a field review of the books and records
of Borrower and such other information with respect to the Collateral
as Lender may require and a review of Borrower's projections, budgets,
business plans, cash flows and such other financial information as
Lender may require, the results of all of which shall be satisfactory
to Lender in its sole discretion.
(x) Evidence that there has been no material adverse
change, as determined by Lender, in the financial condition or business
of Borrower, nor any material decline, as determined by Lender, in the
market value of any Collateral or a substantial or material portion of
the assets of Borrower since the date of the latest financial
statements of Borrower delivered to Lender prior to the Funding Date.
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(y) Evidence that Borrower has opened bank accounts of a
type mutually acceptable to Borrower and Lender, including, without
limitation, the Collateral Account and any other account contemplated
by the Lockbox Agreement.
(z) Such other documents as the Lender in its sole
discretion may require.
Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The
Lender's obligation to make each Advance shall be subject to the further
conditions precedent that on such date:
(a) the representations and warranties contained in
Article V are correct on and as of the date of such Advance as
though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date;
(b) no material adverse change, as determined by
Lender, shall have occurred in the financial condition or business
of Borrower nor any material decline, as determined by Lender, in
the market value of any Collateral or a substantial or material
portion of the assets of Borrower since the date of the latest
financial statements delivered to Lender prior to the Funding Date;
and
(c) no event has occurred and is continuing, or would
result from such Advance which constitutes a Default or an Event of
Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF
EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER.
The Borrower is a corporation, duly organized, validly existing and in good
standing under the laws of the State of Delaware and is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary, except where the failure to so
qualify would not have a materially adverse effect on the Borrower, its
financial condition, or ability to repay the Obligations under this Agreement.
The Borrower has all requisite power and authority, corporate or otherwise, to
conduct its business, to own its properties and to execute and deliver, and to
perform all of its obligations under, the Loan Documents. During its existence,
the Borrower has done business solely under the names set forth in SCHEDULE 5.1
hereto. The Borrower's chief executive office and principal place of business is
located at the address set forth in SCHEDULE 5.1 hereto, and all of the
Borrower's records relating to its business or the Collateral are kept at that
location. All Inventory and Equipment is located at that location or at one of
the other locations set forth in SCHEDULE 5.1 hereto. The Borrower's tax
identification number is correctly set forth in Section 3.6 hereto.
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Section 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW
OR AGREEMENTS. The execution, delivery and performance by the Borrower of the
Loan Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's stockholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Borrower's articles of incorporation or bylaws; (iv)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 5.3 LEGAL AGREEMENTS. This Agreement constitutes and,
upon due execution by the Borrower, the other Loan Documents will constitute the
legal, valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms.
Section 5.4 SUBSIDIARIES. Except as set forth in SCHEDULE
5.4, the Borrower has no Subsidiaries.
Section 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. The
Borrower has heretofore furnished to the Lender audited financial statements of
the Borrower for its fiscal year ended December 31, 1998 and unaudited financial
statements of the Borrower for the fiscal year-to-date period ended October 31,
1999, and those statements fairly present the Borrower's financial condition on
the dates thereof and the results of its operations and cash flows for the
periods then ended and were prepared in accordance with GAAP. Since the date of
the most recent financial statements, there has been no material adverse change
in the Borrower's business, properties or condition (financial or otherwise).
Section 5.6 LITIGATION. There are no actions, suits or
proceedings pending or, to the Borrower's knowledge, threatened against or
affecting the Borrower or the properties of the Borrower before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower, would have
a material adverse effect on the financial condition, properties or operations
of the Borrower.
Section 5.7 REGULATION U. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of
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Regulation U of the Board of Governors of the Federal Reserve System, as
amended), and no part of the proceeds of any Advance will be used to purchase
or carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock or to retire any indebtedness which
was originally incurred to purchase or carry any margin stock or for any
other purpose which might cause any of the Advances to be considered a
"purpose credit" within the meaning of Regulation U of the Board of Governors
of the Federal Reserve System, as amended.
Section 5.8 TAXES. The Borrower has paid or caused to be paid
to the proper authorities when due all federal, state and local taxes required
to be withheld by each of them. The Borrower has filed all federal, state and
local tax returns which to the knowledge of the officers of the Borrower, are
required to be filed, and the Borrower has paid or caused to be paid to the
respective taxing authorities all taxes as shown on said returns or on any
assessment received by it to the extent such taxes have become due.
Section 5.9 TITLES AND LIENS. The Borrower has good and
absolute title to all Collateral described in the collateral reports provided to
the Lender and all other Collateral, properties and assets reflected in the
latest financial statements referred to in Section 5.5 and all proceeds thereof,
free and clear of all mortgages, security interests, liens and encumbrances,
except for Permitted Liens. No financing statement naming the Borrower as debtor
is on file in any office except to perfect only Permitted Liens.
Section 5.10 PLANS. Except as disclosed to the Lender in
writing prior to the date hereof, the Borrower does not maintain or has not
maintained any Plan. The Borrower has not received any notice and has no
knowledge to the effect that it is not in full compliance with any of the
requirements of ERISA. No Reportable Event or other fact or circumstance which
may have an adverse effect on the Plan's tax qualified status exists in
connection with any Plan. The Borrower does not have:
(a) Any accumulated funding deficiency within the meaning
of ERISA; or
(b) Any liability or knows of any fact or circumstances
which could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued
benefits which or which may become payable to participants or
beneficiaries of any such Plan).
Section 5.11 DEFAULT. The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.
Section 5.12 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. As used in this Agreement, the following
terms shall have the following meanings:
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(i) "ENVIRONMENTAL LAW" means any federal,
state, local or other governmental statute, regulation, law
or ordinance dealing with the protection of human health
and the environment.
(ii) "HAZARDOUS SUBSTANCES" means pollutants,
contaminants, hazardous substances, hazardous wastes,
petroleum and fractions thereof, and all other chemicals,
wastes, substances and materials listed in, regulated by or
identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not
present in, on or under the Premises any Hazardous Substances in such
form or quantity as to create any liability or obligation for either
the Borrower or the Lender under common law of any jurisdiction or
under any Environmental Law, and no Hazardous Substances have ever been
stored, buried, spilled, leaked, discharged, emitted or released in, on
or under the Premises in such a way as to create any such liability.
(c) To the Borrower's best knowledge, the Borrower has
not disposed of Hazardous Substances in such a manner as to create any
liability under any Environmental Law.
(d) There are not and there never have been any requests,
claims, notices, investigations, demands, administrative proceedings,
hearings or litigation, relating in any way to the Premises or the
Borrower, alleging liability under, violation of, or noncompliance with
any Environmental Law or any license, permit or other authorization
issued pursuant thereto. To the Borrower's best knowledge, no such
matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's
businesses are and have in the past always been conducted in accordance
with all Environmental Laws and all licenses, permits and other
authorizations required pursuant to any Environmental Law and necessary
for the lawful and efficient operation of such businesses are in the
Borrower's possession and are in full force and effect. No permit
required under any Environmental Law is scheduled to expire within 12
months and there is no threat that any such permit will be withdrawn,
terminated, limited or materially changed.
(f) To the Borrower's best knowledge, the Premises are
not and never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and Liability
Information System or any similar federal, state or local list,
schedule, log, inventory or database.
(g) The Borrower has delivered to Lender all
environmental assessments, audits, reports, permits, licenses and other
documents describing or relating in any way to the Premises or
Borrower's businesses.
Section 5.13 SUBMISSIONS TO LENDER. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's
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request for the credit facilities contemplated hereby is true and correct in
all material respects and, as to projections, valuations or pro forma
financial statements, present a good faith opinion as to such projections,
valuations and pro forma condition and results.
Section 5.14 FINANCING STATEMENTS. The Borrower has provided
to the Lender signed financing statements sufficient when filed to perfect the
Security Interest and the other security interests created by the Security
Documents. When such financing statements are filed in the offices noted
therein, the Lender will have a valid and perfected security interest in all
Collateral and all other collateral described in the Security Documents which is
capable of being perfected by filing financing statements. None of the
Collateral or other collateral covered by the Security Documents is or will
become a fixture on real estate, unless a sufficient fixture filing is in effect
with respect thereto.
Section 5.15 RIGHTS TO PAYMENT. Each right to payment and
each instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
Section 5.16 BANK ACCOUNTS. All of the deposit accounts,
investment accounts or other accounts in the name of or used by Borrower
maintained at any bank or other financial institution are set forth on SCHEDULE
5.16 hereto.
Section 5.17 FINANCIAL SOLVENCY. Both before and after giving
effect to all of the transactions contemplated in the Loan Documents, Borrower
will not:
(a) be or was not insolvent, as that term is used and
defined in Section 101(32) of the United States Bankruptcy Code and
Section 2 of the Uniform Fraudulent Transfer Act;
(b) have unreasonably small capital or is not engaged or
about to engage in a business or a transaction for which any remaining
assets of the Borrower are unreasonably small;
(c) by executing, delivering or performing its
obligations under the Loan Documents or other documents to which it is
a party or by taking any action with respect thereto, intends to, nor
believes that it will, incur debts beyond its ability to pay them as
they mature;
(d) by executing, delivering or performing its
obligations under the Loan Documents or other documents to which it is
a party or by taking any action with respect thereto, intends to
hinder, delay or defraud either its present or future creditors; and
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(e) at this time contemplates filing a petition in
bankruptcy or for an arrangement or reorganization or similar
proceeding under any law any jurisdiction, nor, to the best knowledge
of the Borrower, is the subject of any actual, pending or threatened
bankruptcy, insolvency or similar proceedings under any law of any
jurisdiction.
ARTICLE VI
BORROWER'S AFFIRMATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 REPORTING REQUIREMENTS. The Borrower will
deliver, or cause to be delivered, to the Lender each of the following, which
shall be in form and detail acceptable to the Lender:
(a) as soon as available, and in any event within ninety
(90) days after the end of each fiscal year of the Borrower, the
Borrower's audited financial statements with the unqualified opinion of
independent certified public accountants selected by the Borrower and
acceptable to the Lender, which annual financial statements shall
include the Borrower's balance sheet as at the end of such fiscal year
and the related statements of the Borrower's income, retained earnings
and cash flows for the fiscal year then ended, all in reasonable detail
and prepared in accordance with GAAP, together with (i) copies of all
management letters prepared by such accountants; (ii) a report signed
by such accountants stating that in making the investigations necessary
for said opinion they obtained no knowledge, except as specifically
stated, of any Default or Event of Default hereunder and all relevant
facts in reasonable detail to evidence, and the computations as to,
whether or not the Borrower is in compliance with the requirements set
forth in Sections 6.12, 6.13, and 7.10; and (iii) a certificate of the
Borrower's chief financial officer stating that such financial
statements have been prepared in accordance with GAAP and whether or
not such officer has knowledge of the occurrence of any Default or
Event of Default hereunder and, if so, stating in reasonable detail the
facts with respect thereto;
(b) as soon as available and in any event within twenty
(20) days after the end of each month, an unaudited/internal balance
sheet and statements of income and retained earnings of the Borrower as
at the end of and for such month and for the year to date period then
ended, in reasonable detail and stating in comparative form the figures
for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit
adjustments; and accompanied by a certificate of the Borrower's chief
financial officer, substantially in the form of Exhibit B hereto
stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, (ii)
whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder not theretofore reported and
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remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the requirements set forth in Sections 6.12, 6.13, and
7.10;
(c) No later than Monday of each week, as of the end of
the prior calendar week, or more frequently if the Lender so requires,
reports of Borrower's sales, credit memos, collections, and other
accounts receivable activity;
(d) within fifteen (15) days after the end of each month
or more frequently if the Lender so requires, agings of the Borrower's
accounts receivable and its accounts payable, an inventory
certification report, reports of inventory levels, and a calculation of
the Borrower's Accounts, Eligible Accounts, Inventory and Eligible
Inventory as at the end of such month or shorter time period;
(e) at least thirty (30) days before the beginning of
each fiscal year of the Borrower, the projected balance sheets and
income statements for each month of such year, each in reasonable
detail, representing the Borrower's good faith projections and
certified by the Borrower's chief financial officer as being the most
accurate projections available and identical to the projections used by
the Borrower for internal planning purposes, together with such
supporting schedules and information as the Lender may in its
discretion require;
(f) promptly upon knowledge thereof, notice in writing of
all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower of the type described in
Section 5.12 or which seek a monetary recovery against the Borrower in
excess of Twenty Five Thousand Dollars ($25,000);
(g) as promptly as practicable (but in any event not
later than five business days) after an officer of the Borrower obtains
knowledge of the occurrence of any breach, default or event of default
under any Security Document or any event which constitutes a Default or
Event of Default hereunder, notice of such occurrence, together with a
detailed statement by a responsible officer of the Borrower of the
steps being taken by the Borrower to cure the effect of such breach,
default or event;
(h) as soon as possible and in any event within thirty
(30) days after the Borrower knows or has reason to know that any
Reportable Event with respect to any Plan has occurred, the statement
of the Borrower's chief financial officer setting forth details as to
such Reportable Event and the action which the Borrower proposes to
take with respect thereto, together with a copy of the notice of such
Reportable Event to the Pension Benefit Guaranty Corporation;
(i) as soon as possible, and in any event within ten (10)
days after the Borrower fails to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, the statement of the Borrower's chief
financial officer setting forth details as to such failure and the
action
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which the Borrower proposes to take with respect thereto, together with
a copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation;
(j) promptly upon knowledge thereof, notice of (i) any
disputes or claims by the Borrower's customers exceeding Twenty Five
Thousand Dollars ($25,000) individually or Fifty Thousand Dollars
($50,000) in the aggregate during any fiscal year; (ii) credit memos;
(iii) any goods returned to or recovered by the Borrower; and (iv) any
change in the persons constituting the Borrower's officers and
directors;
(k) promptly upon knowledge thereof, notice of any loss
of or material damage to any Collateral or other collateral covered by
the Security Documents or of any substantial adverse change in any
Collateral or such other collateral or the prospect of payment thereof;
(l) promptly upon their distribution, copies of all
financial statements, reports and proxy statements which the Borrower
shall have sent to its stockholders;
(m) promptly after the sending or filing thereof, copies
of all regular and periodic reports which the Borrower shall file with
the Securities and Exchange Commission or any national securities
exchange;
(n) promptly upon knowledge thereof, notice of the
Borrower's violation of any law, rule or regulation, the non-compliance
with which could materially and adversely affect the Borrower's
business or its financial condition; and
(o) from time to time, with reasonable promptness, any
and all receivables schedules, collection reports, deposit records,
equipment schedules, copies of invoices to account debtors, shipment
documents and delivery receipts for goods sold, and such other
material, reports, records or information as the Lender may request,
including, without limitation, daily or weekly borrowing base
certificates.
Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION.
The Borrower will keep accurate books of record and account for itself
pertaining to the Collateral and pertaining to the Borrower's business and
financial condition and such other matters as the Lender may from time to time
request in which true and complete entries will be made in accordance with GAAP
and, upon the Lender's request, will permit any officer, employee, attorney or
accountant for the Lender to audit, review, make extracts from or copy any and
all corporate and financial books and records of the Borrower at all times
during ordinary business hours, to send and discuss with account debtors and
other obligors requests for verification of amounts owed to the Borrower, and to
discuss the Borrower's affairs with any of its directors, officers, employees or
agents. The Borrower will permit the Lender, or its employees, accountants,
attorneys or agents, to examine and inspect any Collateral, other collateral
covered by the Security Documents or any other property of the Borrower at any
time during ordinary business hours.
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Section 6.3 ACCOUNT VERIFICATION. The Lender may at any time
and from time to time send or require the Borrower to send requests for
verification of accounts or notices of assignment to account debtors and other
obligors. The Lender may also at any time and from time to time telephone
account debtors and other obligors to verify accounts.
Section 6.4 COMPLIANCE WITH LAWS.
(a) The Borrower will (i) comply with the requirements of
applicable laws and regulations, the non-compliance with which would
materially and adversely affect its business or its financial condition
and (ii) use and keep the Collateral, and require that others use and
keep the Collateral, only for lawful purposes, without violation of any
federal, state or local law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the
Borrower specifically agrees that it will comply with all applicable
Environmental Laws and obtain and comply with all permits, licenses and
similar approvals required by any Environmental Laws, and will not
generate, use, transport, treat, store or dispose of any Hazardous
Substances in such a manner as to create any liability or obligation
under the common law of any jurisdiction or any Environmental Law.
Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower
will pay or discharge, when due, (a) all taxes, assessments and governmental
charges levied or imposed upon it or upon its income or profits, upon any
properties belonging to it (including, without limitation, the Collateral) or
upon or against the creation, perfection or continuance of the Security
Interest, prior to the date on which penalties attach thereto, (b) all federal,
state and local taxes required to be withheld by it, and (c) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
or charge upon any properties of the Borrower; provided, that the Borrower shall
not be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.
Section 6.6 MAINTENANCE OF PROPERTIES.
(a) The Borrower will keep and maintain the Collateral,
the other collateral covered by the Security Documents and all of its
other properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from
time to time replace or repair any worn, defective or broken parts;
provided, however, that nothing in this Section 6.6 shall prevent the
Borrower from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the Lender's judgment,
desirable in the conduct of the Borrower's business and not
disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against all
claims or demands of all persons (other than the Lender) claiming the
Collateral or any interest therein.
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(c) The Borrower will keep all Collateral and other
collateral covered by the Security Documents free and clear of all
security interests, liens and encumbrances except Permitted Liens.
Section 6.7 INSURANCE. The Borrower will obtain and at all
times maintain insurance with insurers believed by the Borrower to be
responsible and reputable, in such amounts and against such risks as may from
time to time be required by the Lender, but in all events in such amounts and
against such risks as is usually carried by companies engaged in similar
business and owning similar properties in the same general areas in which the
Borrower operates. Without limiting the generality of the foregoing, the
Borrower will at all times maintain business interruption insurance including
coverage for force majeure and keep all tangible Collateral insured against
risks of fire (including so-called extended coverage), theft, collision (for
Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender's loss payable endorsement for the Lender's benefit acceptable
to the Lender. All policies of liability insurance required hereunder shall name
the Lender as an additional insured.
Section 6.8 PRESERVATION OF EXISTENCE. The Borrower will
preserve and maintain its existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
Section 6.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the
Lender, the Borrower will promptly deliver to the Lender in pledge all
instruments, documents and chattel papers constituting Collateral, duly endorsed
or assigned by the Borrower.
Section 6.10 COLLATERAL ACCOUNT.
(a) If, notwithstanding the instructions to debtors to
make payments to the Lockbox, the Borrower receives any payments on
Receivables, the Borrower shall deposit such payments into the
Collateral Account. Until so deposited, the Borrower shall hold all
such payments in trust for and as the property of the Lender and shall
not commingle such payments with any of its other funds or property.
(b) Amounts deposited in the Collateral Account shall not
bear interest and shall not be subject to withdrawal by the Borrower,
except after full payment and discharge of all Obligations. All
deposits in the Collateral Account shall constitute proceeds of
Collateral and shall not constitute payment of the Obligations.
(c) All items deposited in the Collateral Account shall
be subject to final payment. If any such item is returned uncollected,
the Borrower will immediately pay the Lender, or, for items deposited
in the Collateral Account, the bank maintaining such account, the
amount of that item, or such bank at its discretion may charge any
uncollected item to the Borrower's commercial account or other account.
The Borrower
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shall be liable as an endorser on all items deposited in the Collateral
Account, whether or not in fact endorsed by the Borrower.
Section 6.11 PERFORMANCE BY THE LENDER. If the Borrower at
any time fails to perform or observe any of the foregoing covenants contained in
this Article VI or elsewhere herein, and if such failure shall continue for a
period of ten (10) calendar days after the Lender gives the Borrower written
notice thereof (or in the case of the agreements contained in Sections 6.7 and
6.10, immediately upon the occurrence of such failure, without notice or lapse
of time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of the Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 6.11.
Section 6.12 MINIMUM BOOK NET WORTH PLUS SUBORDINATED
CONVERTIBLE DEBT. The Borrower will maintain, during each period described
below, its Book Net Worth plus Subordinated Convertible Debt ("Adjusted Book Net
Worth"), determined as at the end of each month, at an amount not less than the
amount set forth opposite such period:
<TABLE>
<CAPTION>
Period Adjusted Book Net Worth
------ -----------------------
<S> <C>
through 1/31/2000 $0
2/29/2000 through 3/31/2000 ($225,000)
4/30/2000 through 6/30/2000 ($450,000)
7/31/2000 through 9/30/2000 ($475,000)
10/31/2000 through 12/31/2000 ($500,000) and thereafter
</TABLE>
Section 6.13 MINIMUM NET INCOME. The Borrower will maintain
during each period described below, Minimum Net Income determined as at the end
of each calendar quarter measured on a year-to-date basis, of not less than the
amount set forth opposite such period:
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<TABLE>
<CAPTION>
Quarter Ending Minimum Net Income
-------------- ------------------
<S> <C>
3/31/2000 ($675,000)
6/30/2000 ($900,000)
9/30/2000 ($925,000)
12/31/2000 ($950,000)
</TABLE>
Section 6.14 NEW COVENANTS. On or before January 1 of each
year Lender shall set new covenant levels for Sections 6.12, 6.13, and 7.10 for
periods after such date. The new covenant levels will be based on the Borrower's
projections for such periods received by Lender pursuant to Section 6.1(e) and
shall be no less stringent than the present levels.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
Section 7.1 LIENS. The Borrower will not create, incur or
suffer to exist any mortgage, deed of trust, pledge, lien, security interest,
assignment or transfer upon or of any of its assets, now owned or hereafter
acquired, to secure any indebtedness; EXCLUDING, HOWEVER, from the operation of
the foregoing, the following (collectively, "PERMITTED LIENS"):
(a) in the case of any of the Borrower's property which
is not Collateral or other collateral described in the Security
Documents, covenants, restrictions, rights, easements and minor
irregularities in title which do not materially interfere with the
Borrower's business or operations as presently conducted;
(b) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in
SCHEDULE 7.1 hereto;
(c) the Security Interest and liens and security
interests created by the Security Documents; and
(d) purchase money security interests relating to the
acquisition of machinery and equipment of the Borrower not exceeding
the cost or fair market value thereof, not exceeding Fifty Thousand
Dollars ($50,000) for any one purchase or One Hundred Thousand Dollars
($100,000) in the aggregate during any fiscal year and so long as no
Default Period is then in existence and none would exist immediately
after such acquisition.
Section 7.2 INDEBTEDNESS. The Borrower will not incur,
create, assume or permit to exist any indebtedness or liability on account of
deposits or advances or any
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indebtedness for borrowed money or letters of credit issued on the Borrower's
behalf, or any other indebtedness or liability evidenced by notes, bonds,
debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date
hereof and listed in SCHEDULE 7.2 hereto; and
(c) indebtedness relating to liens permitted in
accordance with Section 7.1.
Section 7.3 GUARANTIES. The Borrower will not assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the
Borrower for deposit or collection or similar transactions in the
ordinary course of business; and
(b) guaranties, endorsements and other direct or
contingent liabilities in connection with the obligations of other
Persons, in existence on the date hereof and listed in SCHEDULE 7.2
hereto.
Section 7.4 INVESTMENTS AND SUBSIDIARIES.
(a) The Borrower will not purchase or hold beneficially
any stock or other securities or evidences of indebtedness of, make or
permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including
specifically but without limitation any partnership or joint venture,
except:
(i) investments in direct obligations of the
United States of America or any agency or instrumentality
thereof whose obligations constitute full faith and credit
obligations of the United States of America having a
maturity of one year or less, commercial paper issued by
U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service
or certificates of deposit or bankers' acceptances having a
maturity of one year or less issued by members of the
Federal Reserve System having deposits in excess of One
Hundred Million Dollars ($100,000,000) (which certificates
of deposit or bankers' acceptances are fully insured by the
Federal Deposit Insurance Corporation);
(ii) travel advances or loans to the
Borrower's officers and employees not exceeding at any one
time an aggregate of Ten Thousand Dollars ($10,000); and
(iii) advances in the form of progress
payments, prepaid rent not exceeding three (3) months or
security deposits.
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(b) The Borrower will not create or permit to exist any
Subsidiary.
Section 7.5 DIVIDENDS. Except as set forth below, the
Borrower will not declare or pay any dividends (other than dividends payable
solely in stock of the Borrower) on any class of its stock or make any payment
on account of the purchase, redemption or other retirement of any shares of such
stock or make any distribution in respect thereof, either directly or
indirectly.
Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF
BUSINESS OPERATIONS. The Borrower will not sell, lease, assign, transfer or
otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial
part of its assets, or (iii) any Collateral or any interest therein (whether in
one transaction or in a series of transactions) to any other Person other than
the sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The
Borrower will not consolidate with or merge into any Person, or permit any other
Person to merge into it, or acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or substantially all the assets of any
other Person.
Section 7.8 SALE AND LEASEBACK. The Borrower will not enter
into any arrangement, directly or indirectly, with any other Person whereby the
Borrower shall sell or transfer any real or personal property, whether now owned
or hereafter acquired, and then or thereafter rent or lease as lessee such
property or any part thereof or any other property which the Borrower intends to
use for substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower
will not engage in any line of business materially different from that presently
engaged in by the Borrower and will not purchase, lease or otherwise acquire
assets not related to its business.
Section 7.10 CAPITAL EXPENDITURES. The Borrower will not
incur or contract to incur Capital Expenditures of more than One Hundred
Thousand Dollars ($100,000) in the aggregate during any fiscal year, or more
than Fifty Thousand Dollars ($50,000) in any one transaction.
Section 7.11 ACCOUNTING. The Borrower will not adopt any
material change in accounting principles other than as required by GAAP. The
Borrower will not adopt, permit or consent to any change in its fiscal year.
Section 7.12 DISCOUNTS, ETC. The Borrower will not, after
notice from the Lender, grant any discount, credit or allowance to any customer
of the Borrower or accept any return of goods sold, or at any time (whether
before or after notice from the Lender) modify, amend, subordinate, cancel or
terminate the obligation of any account debtor or other obligor of the Borrower
(collectively referred to herein as "Discounts"); provided, however, that
Borrower
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may grant such Discounts in manner and amount which are in accordance with
Borrower's past practice.
Section 7.13 DEFINED BENEFIT PENSION PLANS. The Borrower will
not adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10.
Section 7.14 OTHER DEFAULTS. The Borrower will not permit any
breach, default or event of default to occur under any note, loan agreement,
indenture, lease, mortgage, contract for deed, security agreement or other
contractual obligation binding upon the Borrower.
Section 7.15 PLACE OF BUSINESS; NAME. The Borrower will not
transfer its chief executive office or principal place of business, or move,
relocate, close or sell any business location. The Borrower will not permit any
tangible Collateral or any records pertaining to the Collateral to be located in
any state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.
Section 7.16 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS.
The Borrower will not amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation.
Section 7.17 SALARIES. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than ten percent (10%) in any one year, either
individually or for all such persons in the aggregate, or pay any such increase
from any source other than profits earned in the year of payment.
Section 7.18 CHANGE IN OWNERSHIP. The Borrower will not issue
or sell any stock of the Borrower in amounts so that Health Holdings and
Botanicals, Inc. ceases to own in excess of fifty percent (50%) of the issued
and outstanding shares of common stock of the Borrower.
Section 7.19 TRANSACTIONS WITH AFFILIATES. Borrower shall not
enter into any transaction for the purchase, sale or exchange of property or the
rendering of any service to or by any Affiliate, except in the ordinary course
of and pursuant to the reasonable requirements of Borrower's business and upon
fair and reasonable terms no less favorable to Borrower than Borrower would
obtain in a comparable arms length transaction with an unaffiliated Person.
Section 7.20 ADDITIONAL BANK ACCOUNTS. Borrower shall not,
directly or indirectly, open, establish or maintain any deposit account,
investment account or any other account with any bank or other financial
institution, other than the Collateral Account and the accounts set forth in
SCHEDULE 5.16 hereto.
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ARTICLE VIII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 8.1 EVENTS OF DEFAULT. "EVENT OF DEFAULT", wherever
used herein, means any one of the following events, which Event of Default shall
exist or continue or be continuing until such Event of Default is waived in
accordance with Section 9.2 hereof:
(a) Default in the payment of the Obligations when they
become due and payable;
(b) Default in the payment of any fees, commissions,
costs or expenses required to be paid by the Borrower under this
Agreement;
(c) Borrower shall fail to comply with any covenant or
agreement of the Borrower contained in this Agreement and such failure
shall continue for five (5) days; provided, that, such five (5) day
period shall not apply in the case of: (i) any failure to observe any
such covenant or agreement which is not capable of being cured at all
or within such five (5) day period or which has been the subject of a
prior failure within a twelve (12) month period or (ii) an intentional
breach of Borrower of any such covenant or agreement;
(d) The Borrower or any Guarantor shall be or become
insolvent, or admit in writing its or his inability to pay its or his
debts as they mature, or make an assignment for the benefit of
creditors; or the Borrower or any Guarantor shall apply for or consent
to the appointment of any receiver, trustee, or similar officer for it
or him or for all or any substantial part of its or his property; or
such receiver, trustee or similar officer shall be appointed without
the application or consent of the Borrower or such Guarantor, as the
case may be; or the Borrower or any Guarantor shall institute (by
petition, application, answer, consent or otherwise) any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt,
dissolution, liquidation or similar proceeding relating to it or him
under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the Borrower
or any such Guarantor; or any judgment, writ, warrant of attachment or
execution or similar process shall be issued or levied against a
substantial part of the property of the Borrower or any Guarantor;
(e) A petition shall be filed by or against the Borrower
or any Guarantor under the United States Bankruptcy Code naming the
Borrower or such Guarantor as debtor;
(f) The Life Insurance Policy shall be terminated, by the
Borrower or otherwise; or the Life Insurance Policy shall be scheduled
to terminate within thirty (30) days and the Borrower shall not have
delivered a satisfactory renewal thereof to the Lender; or the Borrower
shall fail to pay any premium on the Life Insurance Policy when due; or
the Borrower shall take any other action that impairs the value of the
Life Insurance Policy.
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(g) Any representation or warranty made by the Borrower
in this Agreement, by any Guarantor in any guaranty delivered to the
Lender, or by the Borrower (or any of its officers) or any Guarantor in
any agreement, certificate, instrument or financial statement or other
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement or any such guaranty shall prove to have
been incorrect in any material respect when deemed to be effective;
(h) The rendering against the Borrower of a final
judgment, decree or order for the payment of money in excess of Fifty
Thousand Dollars ($50,000) (not covered by insurance or for which an
insurer has reserved its rights) and, absent procurement of a stay of
execution, such judgment, decree or order unsatisfied and in effect for
any period of thirty (30) consecutive days without a stay of execution;
(i) A default under any bond, debenture, note or other
evidence of indebtedness of the Borrower owed to any Person other than
the Lender, or under any indenture or other instrument under which any
such evidence of indebtedness has been issued or by which it is
governed, or under any lease of any of the Premises, and the expiration
of the applicable period of grace, if any, specified in such evidence
of indebtedness, indenture, other instrument or lease;
(j) Any Reportable Event, which the Lender determines in
good faith might constitute grounds for the termination of any Plan or
for the appointment by the appropriate United States District Court of
a trustee to administer any Plan, shall have occurred and be continuing
thirty (30) days after written notice to such effect shall have been
given to the Borrower by the Lender; or a trustee shall have been
appointed by an appropriate United States District Court to administer
any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or the Borrower shall have filed for a distress
termination of any Plan under Title IV of ERISA; or the Borrower shall
have failed to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as
amended, which the Lender determines in good faith may by itself, or in
combination with any such failures that the Lender may determine are
likely to occur in the future, result in the imposition of a lien on
the Borrower's assets in favor of the Plan;
(k) An event of default shall occur under any Security
Document or under any other security agreement, mortgage, deed of
trust, assignment or other instrument or agreement securing any
obligations of the Borrower hereunder or under any note;
(l) The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its
business in the ordinary course, or sell all or substantially all of
its assets, without the Lender's prior written consent;
(m) The Borrower shall fail to pay, withhold, collect or
remit any tax or tax deficiency when assessed or due (other than any
tax deficiency which is being contested in good faith and by proper
proceedings and for which it shall have set aside on its books
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adequate reserves therefor) or notice of any state or federal tax liens
shall be filed or issued;
(n) Default in the payment of any amount owed by the
Borrower to the Lender other than any indebtedness arising hereunder;
(o) Any Guarantor shall repudiate, purport to revoke or
fail to perform any such Guarantor's obligations under such Guarantor's
guaranty in favor of the Lender, any individual Guarantor shall die or
any other Guarantor shall cease to exist;
(p) The Borrower shall take or participate in any action
which would be prohibited under the provisions of any Subordination
Agreement or make any payment on the Subordinated Indebtedness (as
defined in the Subordination Agreement) that any Person was not
entitled to receive under the provisions of the Subordination
Agreement;
Section 8.2 RIGHTS AND REMEDIES. During any Default Period,
the Lender may exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare
the Commitment to be terminated, whereupon the same shall forthwith
terminate;
(b) the Lender may, by notice to the Borrower, declare
the Obligations to be forthwith due and payable, whereupon all
Obligations shall become and be forthwith due and payable, without
presentment, notice of dishonor, protest or further notice of any kind,
all of which the Borrower hereby expressly waives;
(c) the Lender may, without notice to the Borrower and
without further action, apply any and all money owing by the Lender to
the Borrower to the payment of the Obligations;
(d) the Lender may exercise and enforce any and all
rights and remedies available upon default to a secured party under the
UCC, including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (without a prior hearing or notice
thereof, which the Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and,
in connection therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both
parties;
(e) the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(f) the Lender may exercise any other rights and remedies
available to it by law or agreement.
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Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (d) or (e) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3 CERTAIN NOTICES. If notice to the Borrower of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9.3) at least ten (10)
calendar days before the date of intended disposition or other action.
ARTICLE IX
MISCELLANEOUS
Section 9.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or
delay by the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 9.2 AMENDMENTS, ETC. No amendment, modification,
termination or waiver of any provision of any Loan Document or consent to any
departure by the Borrower therefrom or any release of a Security Interest shall
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. No notice to or demand on the Borrower
in any case shall entitle the Borrower to any other or further notice or demand
in similar or other circumstances.
Section 9.3 ADDRESSES FOR NOTICES, ETC. Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below:
If to the Borrower:
Naturade, Inc.
14370 Myford Rd.
Irvine, California 92606
Telecopier: (714) 573-4816
Attention: Larry Batina
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If to the Lender:
Wells Fargo Business Credit, Inc.
245 South Los Robles Avenue, Suite 600
Pasadena, California 91101
Telecopier: (626) 844-9063
Attention: Tom Makowski
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.4 FURTHER DOCUMENTS. The Borrower will from time to
time execute and deliver or endorse any and all instruments, documents,
conveyances, assignments, security agreements, financing statements and other
agreements and writings that the Lender may reasonably request in order to
secure, protect, perfect or enforce the Security Interest or the Lender's rights
under the Loan Documents (but any failure to request or assure that the Borrower
executes, delivers or endorses any such item shall not affect or impair the
validity, sufficiency or enforceability of the Loan Documents and the Security
Interest, regardless of whether any such item was or was not executed, delivered
or endorsed in a similar context or on a prior occasion).
Section 9.5 COLLATERAL. This Agreement does not contemplate a
sale of accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.6 COSTS AND EXPENSES. The Borrower agrees to pay on
demand all costs and expenses, including (without limitation) attorneys' fees,
incurred by the Lender in connection with the Obligations, this Agreement, the
Loan Documents, and any other document or agreement related hereto or thereto,
and the transactions contemplated hereby, including without limitation all such
costs, expenses and fees incurred in connection with the negotiation,
preparation, execution, amendment, administration, performance, collection and
enforcement of the Obligations and all such documents and agreements and the
creation, perfection, protection, satisfaction, foreclosure or enforcement of
the Security Interest.
-39-
<PAGE>
Section 9.7 INDEMNITY. In addition to the payment of
expenses pursuant to Section 9.6, the Borrower agrees to indemnify, defend
and hold harmless the Lender, and any of its participants, parent
corporations, subsidiary corporations, affiliated corporations, successor
corporations, and all present and future officers, directors, employees,
attorneys and agents of the foregoing (the "INDEMNITEES") from and against
any of the following (collectively, "INDEMNIFIED LIABILITIES"):
(i) any and all transfer taxes, documentary
taxes, assessments or charges made by any governmental
authority by reason of the execution and delivery of the
Loan Documents or the making of the Advances;
(ii) any claims, loss or damage to which any
Indemnitee may be subjected if any representation or
warranty contained in Section 5.12 proves to be incorrect
in any respect or as a result of any violation of the
covenant contained in Section 6.4(b); and
(iii) any and all other liabilities, losses,
damages, penalties, judgments, suits, claims, costs and
expenses of any kind or nature whatsoever (including,
without limitation, the reasonable fees and disbursements
of counsel) in connection with the foregoing and any other
investigative, administrative or judicial proceedings,
whether or not such Indemnitee shall be designated a party
thereto, which may be imposed on, incurred by or asserted
against any such Indemnitee, in any manner related to or
arising out of or in connection with the making of the
Advances and the Loan Documents or the use or intended use
of the proceeds of the Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.7 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
Section 9.8 PARTICIPANTS. The Lender and its participants,
if any, are not partners or joint venturers, and the Lender shall not have
any liability or responsibility for any obligation, act or omission of any of
its participants. All rights and powers specifically conferred upon the
Lender may be transferred or delegated to any of the Lender's participants,
successors or assigns.
Section 9.9 EXECUTION IN COUNTERPARTS. This Agreement and
other Loan Documents may be executed in any number of counterparts, each of
which when so executed and
-40-
<PAGE>
delivered shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same instrument.
Section 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE
AGREEMENT; EXCHANGING INFORMATION. The Loan Documents 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 thereunder or any interest therein without the Lender's
prior written consent. This Agreement, together with the Loan Documents,
comprises the complete and integrated agreement of the parties on the subject
matter hereof and supersedes all prior agreements, written or oral, on the
subject matter hereof. Lender agrees to hold any confidential information
that it may receive from the Borrower in confidence, except for disclosure:
(1) to affiliates of lender; (b) to legal counsel and accountants for the
Lender; (c) to professional advisors to the Lender; (d) to another financial
institution in connection with a disposition or proposed disposition to that
financial institution of all or part of Lender's interests hereunder or a
participation interest in the Revolving note, provided that the recipient has
accepted such information subject to a confidentiality agreement
substantially similar to this Section; (e) to regulatory officials having
jurisdiction over Lender; and (f) as required by law or legal process.
Section 9.11 SEVERABILITY OF PROVISIONS. Any provision of
this Agreement which is prohibited or unenforceable shall be ineffective to
the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.12 HEADINGS. Article and Section headings in
this Agreement are included herein for convenience of reference only and
shall not constitute a part of this Agreement for any other purpose.
Section 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF
JURY TRIAL. This Agreement and the other Loan Documents shall be governed by
and construed in accordance with the substantive laws (other than conflict
laws) of the State of California. The Guaranty shall be governed by and
construed in accordance with the substantive laws (other than conflict laws)
of the State of California. Each of the parties hereto hereby (i) consents to
the personal jurisdiction of the state and federal courts located in the
State of California in connection with any controversy related to this
Agreement or the other Loan Documents; (ii) waives any argument that venue in
any such forum is not convenient, (iii) agrees that any litigation initiated
by the Lender or the Borrower in connection with this Agreement or the other
Loan Documents shall be venued in either the State Courts of the County of
Los Angeles, State of California, or the United States District Court for the
Central District of California; and (iv) agrees that a final judgment in any
such suit, action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided
by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
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.
-41-
<PAGE>
WELLS FARGO BUSINESS CREDIT, INC., NATURADE, INC.
a Minnesota corporation a Delaware corporation
By By
--------------------------------- ------------------------------
Name: Name:
------------------------------ ---------------------------
Its Its
--------------------------- ------------------------
-42-
<PAGE>
TABLE OF EXHIBITS AND SCHEDULES
Exhibit A Form of Revolving Note
Exhibit B Compliance Certificate
Exhibit C Premises
-------------------------------------------------------------------------
Schedule 5.1 Trade Names, Chief Executive Office, Principal
Place of Business, and Locations of Collateral
Schedule 5.4 Subsidiaries
Schedule 5.16 Bank Accounts
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
<PAGE>
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$3,000,000 Pasadena, California
January 27, 2000
For value received, the undersigned, NATURADE, INC., a Delaware
corporation (the "BORROWER"), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below), to the order of WELLS FARGO
BUSINESS CREDIT, INC., a Minnesota corporation (the "LENDER"), at its main
office in Pasadena, California, or at any other place designated at any time
by the holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Three Million Dollars
($3,000,000) or, if less, the aggregate unpaid principal amount of all
Revolving Advances made by the Lender to the Borrower under the Credit
Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the
Credit and Security Agreement of even date herewith (as the same may hereafter
be amended, supplemented or restated from time to time, the "CREDIT
AGREEMENT") by and between the Lender and the Borrower. The principal hereof
and interest accruing thereon shall be due and payable as provided in the
Credit Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Revolving Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or
more other security agreements, mortgages, deeds of trust, assignments or
other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when
due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
NATURADE, INC.,
a Delaware corporation
By:
--------------------------------
Its:
-------------------------------
A-1
<PAGE>
Exhibit B to Credit and Security Agreement
COMPLIANCE CERTIFICATE
To:
----------------------------------------------
Wells Fargo Business Credit, Inc.
Date: __________________, 200__
Subject: Naturade, Inc.
Financial Statements
--------------------
In accordance with our Credit and Security Agreement dated as
of January 27, 2000 (the "CREDIT AGREEMENT"), attached are the financial
statements of NATURADE, INC. (the "BORROWER") as of and for ________________,
200__ (the "REPORTING Date") and the year-to-date period then ended (the
"CURRENT FINANCIALS"). All terms used in this certificate have the meanings
given in the Credit Agreement.
I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly
present the Borrower's financial condition and the results of its operations
as of the date thereof.
Events of Default. (Check one):
|_| The undersigned does not have knowledge of the
occurrence of a Default or Event of Default under the
Credit Agreement.
|_| The undersigned has knowledge of the occurrence of a
Default or Event of Default under the Credit
Agreement and attached hereto is a statement of the
facts with respect to thereto.
I hereby certify to the Lender as follows:
|_| The Reporting Date does not mark the end of one of
the Borrower's fiscal quarters, hence I am completing
only paragraph __ below.
|_| The Reporting Date marks the end of one of the
Borrower's fiscal quarters, hence I am completing all
paragraphs below except paragraph __.
|_| The Reporting Date marks the end of the Borrower's
fiscal year, hence I am completing all paragraphs
below.
FINANCIAL COVENANTS. I further hereby certify as follows:
1. MINIMUM BOOK NET WORTH PLUS SUBORDINATED CONVERTIBLE DEBT.
Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting
Date, the Borrower's Minimum
B-1
<PAGE>
Book Net Worth Plus Subordinated Convertible Debt ("Adjusted Book Net
Worth") was ___________ which |_| satisfies |_| does not satisfy the
requirement that such amount be no less than ________ as set forth in the
table below:
Period Adjusted Book Net Worth
------ -----------------------
through $________
through $________
through $________
through $________
through $________
2. MINIMUM NET INCOME. Pursuant to Seciton 6.13 of the Credit
Agreement, as of the Reporting Date, the Borrower's Net Income was
__________ which |_| satisfies |_| does not satisfy the requirement that
such amount be not less than $________ as set forth in the table below:
Quarter Ending Minimum Net Income
-------------- ------------------
$--------
$--------
$--------
$--------
3. CAPITAL EXPENDITURES. Pursuant to Section 7.10 of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the _____________
year ended ______________, 199___, for Capital Expenditures,
$__________________ in the aggregate and at most $______________ in any
one transaction, which |_| satisfies |_| does not satisfy the requirement
that such expenditures not exceed $__________ in the aggregate and
$___________ for any one transaction during such year.
4. SALARIES. As of the Reporting Date, the Borrower |_| is |_| is
not in compliance with Section 7.17 of the Credit Agreement concerning
salaries.
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
NATURADE, INC.,
a Delaware corporation
By
-------------------------------
Its Chief Financial Officer
B-2
<PAGE>
Exhibit C to Credit and Security Agreement
PREMISES
The Premises referred to in the Credit and Security Agreement are
legally described as follows:
Parcel Number: 432-391-46
<PAGE>
Schedule 5.1 to Credit and Security Agreement
TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF
BUSINESS, AND LOCATIONS OF COLLATERAL
TRADE NAMES
Naturade Products, Inc.
Scientific Botanicals
Pure Life
Health Life Products Ltd.
FORMER CORPORATE NAME OF BORROWER:
Springton Capital Corp.
(changed by amendment to Borrower's Certificate of
Incorporation on April 13, 1989)
----------------------------------------------------------------------
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
14370 Myford Rd.
Irvine, California 92606
OTHER INVENTORY AND EQUIPMENT LOCATIONS
Inventory not to exceed One Hundred Fifty Thousand Dollars ($150,000)
at any one time may be from time to time turned over to
various co-packers and processors for the Borrower.
Schedule 5.1
<PAGE>
Schedule 5.4 to Credit and Security Agreement
SUBSIDIARIES
Schedule 5.1
<PAGE>
Schedule 5.16 to Credit and Security agreement
BANK ACCOUNTS
Bank Purpose Account
---- ------- -------
South Bay Bank General Account 0002-110946
South Bay Bank 401K 0002-118602
South Bay Bank Payroll Account 0002-110954
Wells Fargo Bank Money Market 2202102139
Pacific Century Bank Petty Cash 0213070535
Schedule 5.1
<PAGE>
Schedule 7.1 to Credit and Security Agreement
PERMITTED LIENS
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
See attached UCC Financing Statements.
Schedule 7.1 - 1
<PAGE>
Schedule 7.2 to Credit and Security Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
INDEBTEDNESS
<TABLE>
<CAPTION>
Creditor Principal Amount Maturity Date Monthly Payment Collateral
-------- ---------------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Health Holdings Secured $1,467,362; 3/7/00: $1M; 8% Interest: Substantially all of
Debt with Warrants monthly debt the Company's assets
discount amort 5/31/00: $600K $10,900
of $34k. Will
cap out at
$1.6M by 4/00
Health Holdings $3,650,000 July 31, 2004 8% Interest; Unsecured
Convertible Debt $24,500 (approx)
PNI Trustee $282,666 August 1, 2000 $36,500 Substantially all of
the Company's assets
Thelma Becker $143,434 February 2005 8% Interest; Unsecured
$2,832
Crown Credit Co. $14,135 March 2002 9.5%; 603 Equipment
Crown Credit Co. $2,534 March 2001 11.5% Equipment
</TABLE>
GUARANTIES
<TABLE>
<CAPTION>
Amount and Description of
Primary Obligor Obligation Guaranteed Beneficiary of Guaranty
--------------- ------------------------- -----------------------
<S> <C> <C>
None
</TABLE>
Schedule 7.2
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use of our audit report, dated November 5, 1997, in
this Annual report on Form 10-K to be filed on behalf of Naturade, Inc.
/s/ Rose, Snyder & Jacobs
- --------------------------
Rose, Snyder & Jacobs
Encino, CA
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,056,240
<SECURITIES> 0
<RECEIVABLES> 1,230,822
<ALLOWANCES> 0
<INVENTORY> 2,225,289
<CURRENT-ASSETS> 4,677,455
<PP&E> 666,963
<DEPRECIATION> 340,646
<TOTAL-ASSETS> 5,102,950
<CURRENT-LIABILITIES> 5,327,384
<BONDS> 0
0
125
<COMMON> 535
<OTHER-SE> 4,002,302
<TOTAL-LIABILITY-AND-EQUITY> 5,102,950
<SALES> 11,946,702
<TOTAL-REVENUES> 11,946,702
<CGS> 7,376,904
<TOTAL-COSTS> 11,768,176
<OTHER-EXPENSES> 145,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,351,992
<INCOME-PRETAX> (9,696,013)
<INCOME-TAX> 800
<INCOME-CONTINUING> (9,696,813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,696,813)
<EPS-BASIC> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>
