<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number 33-7106-A
NATURADE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
--------
(State or other jurisdiction of
incorporation or organization)
23-2442709
----------
(I. R. S. Employer
Identification No.)
14370 MYFORD RD., IRVINE, CALIFORNIA 92606
------------------------------------------
(Address of principal executive offices)
(714) 573-4800
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- --------
Indicate by number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 7,347,389 shares as of
November 1, 2000.
Exhibit Index on Page 21
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Balance Sheets at September 30, 2000 3
(unaudited) and December 31, 1999
Statements of Operations for the three and nine month periods 4
ended September 30, 2000 (unaudited) and September 30, 1999
(unaudited)
Statements of Cash Flows for the nine month periods ended 5
September 30, 2000 (unaudited) and September 30, 1999 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securitie 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE>
NATURADE, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
September 30, 2000 December 31, 1999
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $107,557 $1,056,240
Accounts receivable, net 1,682,090 1,217,323
Inventories 1,929,140 2,225,289
Prepaid expenses and other current assets 329,807 178,603
---------- ----------
Total current assets 4,048,594 4,677,455
Property and equipment, net 281,917 326,317
Other assets 87,851 99,178
---------- ----------
Total assets $4,418,362 $5,102,950
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $1,626,349 $2,035,862
Accrued expenses 676,499 547,573
Current portion of long-term debt 1,531,951 2,743,949
---------- -----------
Total current liabilities 3,834,799 5,327,384
Long-term debt, less current maturities 4,704,254 3,778,528
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, par value $0.0001 per share; authorized, 50,000,000
shares; issued and outstanding, 7,347,389 at September 30, 2000
and 5,349,084 at December 31, 1999 697 535
Preferred stock, par value $0.0001 per share; authorized, 2,000,000
shares; issued and outstanding, 1,250,024 125 125
Additional paid-in capital 11,311,743 9,688,025
Accumulated deficit (15,433,256) (13,691,647)
----------- ------------
Total stockholders' deficit (4,120,691) (4,002,962)
----------- -----------
Total liabilities and stockholders' deficit $4,418,362 $5,102,950
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
NATURADE, INC
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 3,839,867 $ 3,298,259 $ 10,898,650 $ 8,432,184
Cost of sales 2,084,990 1,874,417 5,789,927 5,100,343
------------ ------------ ------------ ------------
Gross profit 1,754,877 1,423,842 5,108,723 3,331,841
------------ ------------ ------------ ------------
Costs and expenses:
Selling, general and administrative expenses 2,105,350 2,022,637 6,184,074 5,963,585
Depreciation and amortization 40,508 3,093 122,576 94,538
Other operating expense (income) - (7,494) - 2,766,506
------------ ------------ ------------ ------------
Total operating costs and expenses 2,145,858 2,018,236 6,306,650 8,824,629
------------ ------------ ------------ ------------
Operating loss (390,981) (594,394) (1,197,927) (5,492,788)
Other expense:
Interest expense 131,261 1,412,723 520,018 1,636,209
Other expense (income) (1,673) 72,951 22,864 (93,965)
------------ ------------ ------------ ------------
Loss before provision for income taxes (520,569) (2,080,068) (1,740,809) (7,035,032)
Provision for income taxes - 537 800 2,937
------------ ------------ ------------ ------------
Net loss ($ 520,569) ($ 2,080,605) ($ 1,741,609) ($ 7,037,969)
============ ============ ============ ============
Basic and Diluted Loss per share ($ 0.07) ($ 0.39) ($ 0.25) ($ 1.32)
============ ============ ============ ============
Weighted Average Number of Shares used in Computation 7,347,389 5,349,084 6,864,394 5,345,012
of Basic and Diluted Loss per Share ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
NATURADE, INC
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30,1999
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,741,609) ($7,037,969)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 122,576 94,538
Provision for bad debt expense (187,177) 202,293
Provision for excess and obsolete inventories 29,527 367,750
(Gain) on disposition of property and equipment - (146,757)
Writeoff of intangible assets 992,506
Writeoff of debt discount 174,481 -
Issuance of warrants 1,288,115
Legal settlement payable under terms of a note 424,000
Changes in assets and liabilities:
Accounts receivable (277,590) (293,960)
Inventories 266,622 (894,225)
Prepaid expenses and other current assets (211,622) 114,581
Other assets 11,327 12,815
Refundable income taxes 163,416
Accounts payable and accrued expenses (280,587) 542,666
----------- ----------
Net cash used in operating activities: (2,094,052) (4,170,231)
Cash flows from investing activities:
Purchase of property and equipment (21,316) (186,479)
Proceeds from sale of property and equipment 3,558 538,307
---------- ----------
Net cash (used in) provided by investing activities: (17,758) 351,828
Cash flows from financing activities:
Net borrowings under line of credit (payments) 519,402 (469,692)
Payments of long-term debt, including capital lease (306,275) (35,333)
Proceeds from issuance of debt to related party 950,000 4,600,000
Proceeds from sale of stock 38,800
Proceeds from exercise of stock options/warrants - 1,059
---------- ----------
Net cash provided by financing activities: 1,163,127 4,134,834
Net increase (decrease) in cash and cash equivalents (948,683) 316,431
Cash and cash equivalents, beginning of period 1,056,240 842,029
---------- ----------
Cash and cash equivalents, end of period $107,557 $1,158,460
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $255,946 $242,275
Taxes $800 $2,937
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NATURADE, INC.
Notes to Financial Statements
1. The results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year.
In the opinion of management, the information contained herein includes all
adjustments necessary for fair presentation of the financial statements.
All such adjustments are of a normal recurring nature. These financial
statements do not include all disclosures associated with the Company's
annual financial statements on Form 10-K and accordingly, should be read in
conjunction with such statements.
2. Inventories are stated at the lower of weighted average cost or market.
Weighted average cost is determined on a first-in, first-out basis.
Inventories at September 30, 2000 and December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(Unaudited)
--------- ---------
<S> <C> <C>
Raw Materials $245,837 $ 180,174
Finished Goods 2,307,297 2,639,582
--------- ---------
Subtotal 2,553,134 2,819,756
Less: Reserve for Excess and Obsolete Inventories (623,994) (594,467)
--------- ---------
$ 1,929,140 $ 2,225,289
</TABLE>
3. As previously reported, 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, payable over 12 months at 5%
interest, which has been completely paid off by September 30, 2000, and (3)
a contingent promissory note (the obligations under which have lapsed
without payment by the Company). Consequently, the adjusted total cost to
the Company of the settlement is $1,774,000, exclusive of interest on the
promissory note.
6
<PAGE>
4. 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 September 30, 2000 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
----- -------
<S> <C>
2000 (October 1 - December 31) 107,353
2001 454,054
2002 432,795
2003 428,510
2004 415,266
Thereafter 743,072
-----------
Total $ 2,581,050
</TABLE>
5. In March 1999, the Company entered into a Finance Agreement (the "Finance
Agreement") with Health Holdings and Botanicals, Inc., a majority
stockholder of the Company ("Health Holdings"). The Finance Agreement
provided that the Company was entitled to borrow up to $1 million at an
interest rate of 8% per annum. The Finance Agreement further provided that
for each dollar borrowed, the Company would 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 provided that for
each dollar borrowed over $1 million, the Company would 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 were secured by the assets of the Company. All
borrowings made prior to June 1, 1999 were due on March 7, 2000; those made
after May 31, 1999 were scheduled to be 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 amortized this discount over the life of the debt. The Finance
Agreement further provided 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.
7
<PAGE>
In March 2000, Health Holdings converted the entire outstanding balance
under the Finance Agreement of $1,600,000 plus accrued interest of $23,145
into 1,997,717 shares of restricted common stock of the Company based on
the then fair market value of the Company's common stock of $.812.
Effective with this conversion, the Finance Agreement terminated and is no
longer in effect.
6. In August 1999, the Company entered into a Credit Agreement (the "Credit
Agreement") with Health Holdings. 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 September 30, 2000, the Company has borrowed
$4,000,000 under this facility. 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. On October 1, 2000, Health Holdings agreed to
convert the interest earned from April 1 to September 30, 2000 of $153, 788
to the outstanding principal amount as a payment-in-kind (PIK). With this
PIK amount added to the original September 30, 2000 borrowings of $4M, the
October 1, 2000 borrowings total $4,153,788.
7. In August 2000, the Company entered into a Loan Agreement (the "Loan
Agreement") with Health Holdings and other investors (the "Lender
Group"). The Loan Agreement allows for advances (the "Loan Advances") of
up to $1.2 million at an interest rate of 8% per annum with a due date of
August 31, 2003. Interest only payments are required on a quarterly
basis. As of September 30, 2000, the Company has borrowed $600,000 under
this facility. The Loan Agreement further provides that the Lender Group
may convert all or any part of the Loan Advances into shares of the
Company's common stock at a conversion price equal to the lower of (a) the
average closing bid of the Company's common stock for the ten trading
days prior to the making of a Loan Advance or (b) the average closing
bid of the Company's common stock for the ten trading days prior to the
date of receipt of notice of conversion.
8. On January 27, 2000, the Company entered into a three year Credit and
Security Agreement with Wells Fargo Business Credit (Wells Fargo) 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 and Security Agreement bear interest at the
prime rate plus 1.5%. Borrowings under the Credit and Security Agreement
are collateralized by substantially all assets of the Company. The Credit
and Security Agreement contains covenants which, among other things,
require that certain financial ratios are met. As of September 30, 2000,
the Company borrowed $1,499,710 under the Credit and Security Agreement.
As of June 30, 2000, the Company was not in technical compliance with the
minimum net income covenant. On October 23, 2000, Wells Fargo waived their
default rights as of June 30, 2000 with respect to the breach of the
minimum net income covenant. As of September 30, 2000, the Company was
also not in technical compliance with the minimum net income covenant
as its net income for the nine months ended September 30, 2000 was
$816,609 below the net income required by such covenant.
8
<PAGE>
The Company is pursuing a waiver from Wells Fargo similar to the one
received for the June 30, 2000 period.
9. As part of a restructuring of the Company in 1991, equity holders exchanged
their shares for new common stock and Class A and Class B Warrants. The
Class A Warrants expired at December 31, 1996. The Class B Warrants allowed
for the purchase of one share of common stock for $1.25 per share. In
January 2000, 588 warrants were exercised and the remaining 324,520
unexercised Class B warrants expired.
10. 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.
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.
Operating segment data for the three and nine months ended September 30,
2000 and September 30, 1999 was as follows:
<TABLE>
<CAPTION>
Distribution Channels
Health Food Mass Market Total
----------- ----------- -----------
<S> <C> <C> <C>
Three months ended September 30, 2000
Sales $ 2,621,168 $ 1,218,699 $ 3,839,867
Cost of Sales 1,476,176 608,814 2,084,990
----------- ----------- -----------
Gross Profit 1,144,992 609,885 1,754,877
Nine months ended September 30, 2000
Sales $ 7,880,913 $ 3,017,737 $10,898,650
Cost of Sales 4,270,329 1,519,598 5,789,927
----------- ----------- -----------
Gross Profit 3,610,584 1,498,139 5,108,723
<CAPTION>
Three months ended September 30, 1999
Sales $ 2,965,298 $ 332,961 $ 3,298,259
Cost of Sales 1,739,681 134,736 1,874,417
----------- ----------- -----------
Gross Profit 1,225,617 198,225 1,423,842
Nine months ended September 30, 1999
Sales $ 7,945,186 $ 486,998 $ 8,432,184
Cost of Sales 4,889,165 211,178 5,100,343
----------- ----------- -----------
Gross Profit 3,056,021 275,820 3,331,841
</TABLE>
9
<PAGE>
Sales are attributed to geographic areas based on the location of the entity to
which the products were sold. Geographic segment data for the three and nine
months ended September 30, 2000 and September 30, 1999 is as follows:
<TABLE>
<CAPTION>
United States International Total
------------- ----------- -----------
<S> <C> <C> <C>
Three months ended September 30, 2000
Sales $ 3,733,721 $ 106,146 $ 3,839,867
Cost of Sales 2,015,909 69,081 2,084,990
------------ ----------- -----------
Gross Profit 1,717,812 37,065 1,754,877
Nine months ended September 30, 2000
Sales $10,536,588 $ 362,062 $10,898,650
Cost of Sales 5,568,216 221,711 5,789,927
----------- ----------- -----------
Gross Profit 4,968,372 140,351 5,108,723
United States International Total
------------- ----------- -----------
Three months ended September 30, 1999
Sales $3,164,627 $133,632 $ 3,298,259
Cost of Sales 1,780,652 93,765 1,874,417
---------- ----------- -----------
Gross Profit 1,383,975 39,867 1,423,842
Nine months ended September 30, 1999
Sales $ 8,009,521 $422,663 $ 8,432,184
Cost of Sales 4,688,359 411,984 5,100,343
---------- ----------- -----------
Gross Profit 3,321,162 10,679 3,331,841
</TABLE>
During the three and nine months ended September 30, 2000 one customer which
includes six distribution centers accounted for 23.7% and 22.5%, respectively,
of total net sales. During the three and nine months ended September 30, 1999,
this same customer accounted for 23.7% and 25.7%, respectively, of total net
sales.
12. 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues in financial
statements. Implementation of SAB 101 is required by the fourth quarter
of 2000. The implementation of SAB 101 did not have a material impact on
the Company's financial condition or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44")
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for the purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. The Company adopted the provisions of FIN 44 in the
third quarter of 2000. The adoption of FIN 44 did not have a material
impact on the Company's financial condition or results of operations.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although Naturade, Inc. (the
"Company" or the "Registrant") believes that the expectations reflected in such
forward looking statements are reasonable, such statements are inherently
subject to risk and the Company can give no assurances that such expectations
will prove to be correct. Such forward looking statements involve risks and
uncertainties and actual results could differ from those described herein and
future results may be subject to numerous factors, many of which are beyond the
control of the Company. Such risk factors include, without limitation, the risk
of changes or developments in the regulatory framework or product liability
principles applicable to the Company and its products, and the risk of
consolidation in the distribution channels expected to be used by the Company to
distribute its products. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unexpected events.
All comparisons below are for the three and nine month period ended September
30, 2000 compared to the three and nine months ended September 30, 1999.
RESULTS OF OPERATIONS
Total net sales for the three months ended September 30, 2000 increased
$541,608 or 16% to $3,839,867 from $3,298,259 for the three months ended
September 30, 1999. Total net sales for the nine months ended September 30, 2000
increased $2,466,466 or 29.3% to $10,898,650 from $8,432,184 for the nine months
ended September 30, 1999. For the three months ended September 30, 2000,
domestic sales increased $569,094 or 18% to $3,733,721 from $3,164,627 for the
three months ended September 30, 1999 and for the nine months ended September
30, 2000, increased $2,527,067 or 31.6% to $10,536,588 from $8,009,521 for the
nine months ended September 30, 1999. For the three months ended September 30,
2000, international sales decreased $27,477 or 20.6% to $106,146 from $133,623
for the three months ended September 30, 1999 and for the nine months ended
September 30, 2000, decreased $60,601 or 14.3% to $362,062 from $422,663 for the
nine months ended September 30, 1999.
For the three months ended September 30, 2000, the top 40 customers
accounted for $3.5 million or 92.1% of sales, with 25 health food customers
contributing $2.4 million or 63.5% of sales, 13 mass market customers
contributing $1.1 million or 28.9% of sales, and two international customers
contributing $49,000 or 1.3% of sales. For the three months ended September
30, 2000, the Company continued its rollout of Naturade Total Soy products,
with twelve powder products contributing $1.1 million or 30% of sales. During
the quarter, the Company launched the Naturade Total Soy Bars which
contributed $101,700 or 2.7%. Overall, the top 25 products represented
$2,118,000 or 55% of sales with thirteen protein powders contributing
$961,000 or 25% of sales, seven Naturade Total Soy products contributing
$917,000 or 24% of sales and five Aloe Vera products representing $240,000 or
6% of sales.
11
<PAGE>
Gross profit as a percentage of sales for the three months ended September
30, 2000 increased 2.5% to 45.7% of sales from 43.2% for the three months ended
September 30, 1999. Gross profit as a percentage of sales for the nine months
ended September 30, 2000 increased 7.4% to 46.9% of sales from 39.5% for the
nine months ended September 30, 1999. The gross profit percentage for the three
months ended September 30, 1999 was adversely impacted by a $160,000 inventory
reserve while the three months ended September 30, 2000 was adversely impacted
by a $70,000 inventory reserve. Additionally, the gross profit percentage for
the nine months ended September 30, 1999 was also impacted by the March 1999
sale of $148,164 of raw materials to copackers. Since this sale was at cost, it
produced no gross margin, thus lowering the gross margin for the nine months
ended September 30, 1999.
Selling, general and administrative expenses for the three months ended
September 30, 2000 increased $82,713 to $2,105,350 or 54.8% of sales from
$2,022,637 or 61.3% for the three months ended September 30, 1999. Selling,
general and administrative expenses for the nine months ended September 30, 2000
increased $220,489 to $6,184,074 or 56.7% of sales from $5,963,585 or 70.7% for
the nine months ended September 30, 1999.
Within selling, general and administrative expenses, for the three months
ended September 30, 2000, variable marketing, commissions and freight out costs
were $493,568, $136,239 and $216,721, respectively, compared to $507,389,
$148,029 and $161,822 for the three months ended September 30, 1999. For the
nine months ended September 30, 2000, variable marketing, commissions and
freight out costs were $1,535,094, $430,314 and $656,732, respectively compared
to $1,249,671, $370,921 and $494,315 for the nine months ended September 30,
1999. For the nine months ended September 30, 2000, the increase of $285,423 in
variable marketing costs is attributable to costs associated with increased
trade promotions. Commissions and freight out costs as a percent of sales were
3.5% and 5.6%, respectively, for the three months ended September 30, 2000
compared to 4.5% and 4.9%, respectively, for the three months ended September
30, 1999 and 3.9 and 6.0%, respectively, for the nine months ended September 30,
2000 compared to 4.4% and 5.9%, respectively, for the nine months ended
September 30, 1999. For the three and nine months ended September 30, 2000,
these higher variable marketing, commissions and freight-out costs were
partially offset by lower general and administrative expenses resulting in a net
selling, general and administrative expense increase of $82,713 and $220,489,
respectively, compared to the three and nine months ended September 30, 1999.
Other operating expense for the three months ended September 30, 1999
consisted of the write off of $992,506 of intangible assets related to the
acquisition of the Performance Nutrition assets in 1997 and a $1,000,000
reversal relating to the PNI Judgment. Other operating expense for the nine
months ended September 30, 1999 consisted of the same write off of $992,506 of
intangible assets and a net $1,774,000 relating to the PNI Judgment. See Note 3
to the Financial Statements. There was no comparable amount for the nine months
ended September 30, 2000.
Interest expense for the three months ended September 30, 2000 decreased
$1,281,462 compared to the three months ended September 30, 1999 and decreased
$1,116,192 for the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999. This
12
<PAGE>
decrease was due primarily to the granting of warrants and the issuance of debt
with a beneficial conversion feature in 1999 for which there is no comparable
activity in Yr 2000. See Notes 5 and 6 to the Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $2,094,052 in operating activities in the nine
months ended September 30, 2000 compared to $4,170,231 for operating activities
for the nine months ended September 30, 1999.
The Company's working capital increased from a deficit of ($649,929) at
December 31, 1999 to $213,795 at September 30, 2000. This increase was
largely due to the conversion of $1.6 million due to Health Holdings into the
Company's common stock in March 2000. See Note 5 to the Financial Statements.
This increase was offset by the Company's operating losses for the nine
months ended September 30, 2000.
Cash used in investment activities during the nine months ended September
30, 2000 was $17,758 compared to cash provided by investing activities during
the nine months ended September 30, 1999 of $351,828.
The Company's cash provided by financing activities was $1,163,127 for
the nine months ended September 30, 2000 compared to cash provided in
financing activities of $4,134,434 for the nine months ended September 30,
1999. The September 30, 2000 amount was the result of an increase in
borrowings under the Credit and Security Agreement, borrowings under the
Credit Agreement, borrowings under the Loan Agreement and the final repayment
under the Settlement Agreement. See Notes 3, 6, 7 and 8 to the Financial
Statements.
As of June 30, 2000, the Company was not in technical compliance with
the minimum net income covenant of the Credit and Security Agreement with
Wells Fargo. On October 23, 2000, Wells Fargo waived their default rights as
of June 30, 2000 with respect to the breach of the minimum net income
covenant. As of September 30, 2000, the Company was also not in technical
compliance with the minimum net income covenant of the Credit and Security
Agreement with Wells Fargo requiring that the net loss of the Company for the
nine months ended September 30, 2000 not exceed $925,000. The Company has
notified Wells Fargo of the foregoing and is in discussions with Wells Fargo
regarding a potential waiver of this covenant. However, there can be no
assurance that the Company will be successful in having this covenant waived.
In such event, Wells Fargo would be entitled to exercise certain remedies
under the Credit and Security Agreement including termination of this
agreement.
The Company believes that its existing cash balances and financing
arrangements will provide it with sufficient funds to finance its operations
during the next twelve months provided that Wells Fargo does not exercise its
right to terminate, or demand immediate payment of all amounts outstanding
under, the Credit and Security Agreement. However, the Company may seek to
raise 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 the Company or its
stockholders.
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.
13
<PAGE>
Dependence on Current and Ongoing Financing
The Company's success is dependent on its current financing as well as new
financing to support its working capital requirements and fund its operating
losses. Currently, the Company is not in technical compliance with the minimum
net income covenant of the Credit and Security Agreement with Wells Fargo
Business Credit which, if not waived by Wells Fargo Business Credit, could
result in termination of this agreement. See "Management's Discussion and
Analysis of Financing Condition and Results of Operations - Liquidity and
Capital Resources." Although the Company is seeking additional third party
financing, no assurance can be given that the Company will have access to
additional funds or, if funds can be obtained, that the terms on which they can
be obtained will be satisfactory. In such event, the Company's business and
results of operations, and its ability to continue as a going concern, will be
materially adversely affected. See Financial Statements to the Company's Form
10-K for the fiscal year ended December 31, 1999, Note 1 - Going Concern.
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 U.S. Food and Drug Administration (FDA) and Federal Trade
Commission (FTC). 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.
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 the Dietary Supplement Health and Education
Act (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.
14
<PAGE>
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.
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.
15
<PAGE>
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 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.
16
<PAGE>
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.
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.
17
<PAGE>
RECENTLY ISSUED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements.
Implementation of SAB 101 is required by the fourth quarter of 2000. The
implementation of SAB 101 did not have a material impact on the Company's
financial condition or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44")
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for the purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
Company adopted the provisions of FIN 44 in the third quarter of 2000. The
adoption of FIN 44 did not have a material impact on the Company's financial
condition or results of operations.
18
<PAGE>
PART II. Other Information
ITEM 1. Legal Proceedings
As previously reported, 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 $0 is outstanding at September 30, 2000, payable over 12
months at 5% interest, and (3) a contingent promissory note (the obligations
under which have lapsed resulting in the termination of this note without
payment by the Company). Consequently, the adjusted total cost to the Company of
the settlement is $1,774,000, exclusive of interest on the promissory note.
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults upon Senior Securities
As of June 30, 2000, the Company was not in technical compliance
with the minimum net income covenant of the Credit and Security Agreement
with Wells Fargo. On October 23, 2000, Wells Fargo waived their default
rights as of June 30, 2000 with respect to the breach of the minimum net
income covenant. As of September 30, 2000, the Company was also not in
technical compliance with the minimum net income covenant of the Credit and
Security Agreement with Wells Fargo requiring that the net loss of the
Company for the nine months ended September 30, 2000 not exceed $925,000. The
Company has notified Wells Fargo of the foregoing and is in discussions with
Wells Fargo regarding a potential waiver of this covenant. However, there can
be no assurance that the Company will be successful in having this covenant
waived. In such event, Wells Fargo would be entitled to exercise certain
remedies under the Credit and Security Agreement including termination of
this agreement.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on July 31, 2000, the following
proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until their successors
are elected and qualified:
<TABLE>
<CAPTION>
Number of Shares
For Against Abstain
<S> <C> <C> <C>
Lionel P. Boissiere, Jr. 6,521,384 847 16,122
William B. Doyle, Jr. 6,521,384 847 16,122
Derek Hall 6,521,384 847 16,122
Bill D. Stewart 6,521,384 847 16,122
David Weil 6,521,384 847 16,122
</TABLE>
19
<PAGE>
2. To approve an amendment of the 1998 Incentive Stock Option Plan
increasing from 575,000 to 850,000 the number of shares of the
Company's Common Stock which may be subject to awards granted
pursuant thereto:
For 6,509,884
Against 18,325
Abstain 1,111
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
Exhibits
Number Description Page
------ ----------- ----
27 Financial Data Schedule 23
Reports on Form 8-K
NONE
20
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NATURADE, INC.
-----------------------
(Registrant)
DATE: November 14, 2000 By /s/ Bill D. Stewart
------------------------
Bill D. Stewart
Chief Executive Officer
DATE: November 14, 2000 By /s/Lawrence J. Batina
------------------------
Lawrence J. Batina
Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
Number Description Page
27 Financial Data Schedule 23
22
