<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 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 23-2442709
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
14370 Myford Rd. Irvine, California 92606
-----------------------------------------
(Address of principal executive offices)
(714) 573-4800
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate by number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 7,347,389 shares
as of May 1, 2000.
Exhibit Index on Page 19
1
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FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 2000 3
(unaudited) and December 31, 1999 (audited)
Statements of Operations for the three month period ended 4
March 31, 2000 (unaudited) and March 31, 1999
(unaudited)
Statements of Cash Flows for three month periods ended 5
March 31, 2000 (unaudited) and March 31,1999 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
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NATURADE, INC.
BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $173,183 $1,056,240
Accounts receivable, net 1,343,185 1,217,323
Inventories 1,983,751 2,225,289
Prepaid expenses and other current assets 459,299 178,603
--------------- ----------------
Total current assets 3,959,418 4,677,455
Property and equipment, net 316,476 326,317
Other assets 97,140 99,178
--------------- ----------------
Total assets $4,373,034 $5,102,950
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $1,688,347 $2,035,862
Accrued expenses 652,856 547,573
Current portion of long-term debt 1,367,138 2,743,949
--------------- ----------------
Total current liabilities 3,708,341 5,327,384
Long-term debt, less current maturities 3,770,434 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 March 31, 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 (14,418,306) (13,691,647)
--------------- ----------------
Total stockholders' deficit (3,105,741) (4,002,962)
--------------- ----------------
Total liabilities and stockholders' deficit $4,373,034 $5,102,950
================ ================
</TABLE>
See accompanying notes to financial statements.
3
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NATURADE, INC
STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2000 AND MARCH 31, 1999
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $3,386,534 $2,352,808
Cost of sales 1,841,593 1,384,629
------------- -------------
Gross profit 1,544,941 968,179
------------- -------------
Costs and expenses:
Selling, general and administrative expenses 1,953,116 1,894,285
Depreciation and amortization 42,084 46,780
Other operating expense - 2,774,000
------------- -------------
Total operating costs and expenses 1,995,200 4,715,065
------------- -------------
Operating loss (450,259) (3,746,886)
Other expense:
Interest expense 270,407 89,251
Other expense (income) 5,193 (56,265)
------------- -------------
Loss before provision for income taxes (725,859) (3,779,872)
Provision for income taxes 800 2,400
------------- -------------
Net loss ($726,659) ($3,782,272)
============= =============
Basic and Diluted Loss per share ($0.12) ($0.71)
============= =============
Weighted Average Number of Shares used in Computation of
Basic and Diluted Loss per Share 5,898,405 5,336,733
============= =============
</TABLE>
See accompanying notes to financial statements
4
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NATURADE, INC
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND MARCH 31, 1999
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($726,658) ($3,782,272)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Depreciation and amortization 42,084 46,780
Provision for bad debt expense - 61,445
Provision for excess and obsolete inventories - (83,465)
Loss on disposition of property and equipment 6,973 -
Writeoff of Intangible Assets - (49,580)
Changes in assets and liabilities:
Accounts receivable (125,862) 203,872
Inventories 241,538 105,631
Prepaid expenses and other current assets (300,607) (119,104)
Other assets 2,038 26,279
Lawsuit judgement payable 2,774,000
Accounts payable and accrued expenses (242,232) 240,799
------------ -------------
Net cash used in operating activities: (1,102,726) (575,615)
Cash flows from investing activities:
Related Party Receivable - -
Purchase of property and equipment (21,155) (53,822)
Proceeds from sale of property and equipment 1,849 55,000
------------ -------------
Net cash (used in) provided by investing activities: (19,306) 1,178
Cash flows from financing activities:
Net borrowings under line of credit 178,138 285,719
Payments of long-term debt, including capital lease (113,644) (48,831)
majority shareholder into equity
Amortization of debt discount 174,481
Proceeds from sale of stock 38,794
Proceeds from exercise of stock options/warrants - 1,065
------------ -------------
Net cash provided by financing activities: 238,975 276,747
Net decrease in cash and cash equivalents (883,057) (297,690)
Cash and cash equivalents, beginning of period 1,056,240 842,029
------------ -------------
Cash and cash equivalents, end of period $173,183 $544,339
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest $133,647 $87,880
Taxes $0 $0
</TABLE>
See accompanying notes to financial statements
5
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NATURADE, INC.
Notes to Financial Statements
1. The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal
year. In the opinion of management, the information contained herein
includes all adjustments necessary for fair presentation of the financial
statements. All such adjustments are of a normal recurring nature. These
financial statements do not include all disclosures associated with the
Company's annual financial statements and accordingly, should be read in
conjunction with such statements.
2. 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 March 31, 2000 and December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(Unaudited) (Audited)
------------ -------------
<S> <C> <C>
Raw Materials $ 188,597 $ 180,174
Finished Goods 2,389,621 2,639,582
------------ -------------
Subtotal 2,578,218 2,819,756
Less: Reserve for Excess and Obsolete Inventories (594,467) (594,467)
------------ -------------
$1,983,751 $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, of which
$176,667 is outstanding at March 31, 2000, payable over 12 months at 5%
interest, 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 March 31, 2000 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
----- ------
<S> <C>
2000 (April 1 - December 31) 304,606
2001 435,420
2002 417,113
2003 412,828
2004 399,584
Thereafter 734,052
------------
Total $ 2,703,603
</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.
6. 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>
7. 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 March 31, 2000, the Company has borrowed $3,650,000
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.
8. 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.
9. On January 27, 2000, the Company entered into a three year Credit and
Security Agreement with Wells Fargo Business Credit 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 March 31, 2000, the Company
borrowed $1,158,446 under the Credit and Security Agreement and based on
eligible accounts receivables and inventory the additional availability
as of March 31, 2000 is approximately $1,100,000.
10. 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. Subsequent to December 31, 1999, 588 warrants were exercised.
On January 15, 2000, the remaining 324,520 unexercised Class B warrants
expired.
11. 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.
8
<PAGE>
Operating segment data for the three months ended March 31, 2000 and
March 31, 1999 was as follows:
<TABLE>
<CAPTION>
Distribution Channels
Health Food Mass Market Total
------------- ----------- ------------
<S> <C> <C> <C>
Three months ended March 31, 2000
Sales $ 2,451,827 $ 934,707 $ 3,386,534
Cost of Sales 1,328,719 512,874 1,841,593
------------- ---------- ------------
Gross Profit 1,123,108 421,833 1,544,941
Three months ended March 31, 1999
Sales $ 2,291,638 $ 61,170 $ 2.352,808
Cost of Sales 1,350,883 33,746 1,384,629
------------- ---------- ------------
Gross Profit 940,755 27,424 968,179
</TABLE>
Sales are attributed to geographic areas based on the location of the
entity to which the products were sold. Geographic segment data for the
three months ended March 31, 2000 and March 31, 1999 is as follows:
<TABLE>
<CAPTION>
United States International Total
------------- ------------- ------------
<S> <C> <C> <C>
Three months ended March 31, 2000
Sales $ 3,247,724 $ 138,810 $ 3,386,534
Cost of Sales 1,757,689 83,904 1,841,593
------------- ------------- ------------
Gross Profit 1,490,035 54,906 1,544,941
<CAPTION>
United States International Total
------------- ------------- ------------
<S> <C> <C> <C>
Three months ended March 31, 1999
Sales $ 2,331,925 $ 20,883 $ 2,352,808
Cost of Sales 1,358,005 26,624 1,384,629
------------- ------------- ------------
Gross Profit 973,920 (5,741) 968,179
</TABLE>
During the three months ended March 31, 2000 and 1999 one customer
which includes six distribution centers accounted for 23.6% and 26.2%,
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.
9
<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 month period ended March 31, 2000
compared to the three months ended March 31, 1999.
RESULTS OF OPERATIONS
Total net sales for the three months ended March 31, 2000 increased
$1,033,726 or 43.9%% to $3,386,534 from $2,352,808 for the three months ended
March 31 ,1999. Of this amount, domestic sales increased $1,187,160 or 58.6%
to $3,211,915 from $2,024,755 for the three months ended March 31, 1999. Kids
Plex-tm sales decreased $69,364 or 92.4% to $5,698 from $75,062 for the three
months ended March 31, 1999. International sales increased $117,928 or 564%
to $138,811 from $20,883 for the three months ended March 31, 1999. Partially
offsetting this sales increase in the three months ended March 31, 2000 was
the sale in the March 1999 quarter of $148,164 of raw materials to copackers
(the "Raw Material Sale") for which there were no comparable sales in the
three months ended March 31, 2000. Finally, private label sales for the three
months ended March 31, 2000 declined $57,032 to $15,466 from $72,498 for the
three months ended March 31, 1999 as the Company continued to deemphasize
private label business due to its low profit margins and small volume.
For the three months ended March 31, 2000, the top 40 customers
accounted for $3.1 million or 91% of sales, with 22 health food customers
contributing $2.1 million or 60.7% of sales, 16 mass market customers
contributing $927,000 or 27.5% of sales, and 2 international customers
contributing $99,000 or 2.9% of sales. For the three months ended March 31,
2000, the Company continued its rollout of Naturade Total Soy products, with
twelve products comprising the product family contributing $1,249,000 or 37%
of sales. Overall, the top 25 products represented $2,207,000 or 65.2% of
sales of which twelve protein powder products contributed $898,000 or 26.5%
or sales, seven Naturade Total Soy products contributed $1,055,000 or 31.2%
of sales,
10
<PAGE>
four Aloe Vera products represented $182,000 or 5.4% of sales and two
expectorant products represented $72,000 or 2.1% of sales.
Gross profit as a percentage of sales increased 4.5% to 45.6% of sales
for the three months ended March 31, 2000 from 41.1% for the three months
ended March 31, 1999. The increase in gross profit for the March 31, 2000
period is due to lower production expenses incurred because of the complete
outsourcing of all production by the end of March 2000 and the Raw Material
Sale at cost to copackers. Since this sale was at cost, it produced no gross
margin and thus distorted the March 1999 quarter gross margin by
approximately 2.7%.
Selling, general and administrative expenses increased $58,831 to
$1,953,116 or 57.7% of sales for the three months ended March 31, 2000, from
$1,894,285 or 80.5% for the three months ended March 31, 1999. Variable
marketing, commissions and freight out costs were $428,638, $142,528 and
$214,512 for the three months ended March 31, 2000 compared to $403,935,
$99,144 and $160,927 for the three months ended March 31,1999. The increase
of $24,703 in variable marketing costs is attributable to costs associated
with increased trade promotions. Commissions and freight out costs as a
percent of sales were 4.2% and 6.3%, respectively, for the three months ended
March 31, 2000 compared to 4.2% and 6.8%, respectively, for the three months
ended March 31, 1999. For the three months ended March 31, 2000, these higher
variable marketing, commissions and freight-out costs were partially offset
by lower general and administrative expenses resulting in a net increase of
$59,000 compared to the three months ended March 31, 1999.
Other operating expense for the three months ended March 31, 1999
consisted of $2,774,000 relating to the PNI Judgment. See Note 3 to the
Financial Statements. There was no comparable amount for the three months
ended March 31, 2000.
Interest expense for the three months ended March 31, 2000 increased
$181,156 compared to the three months ended March 31, 1999. This increase was
due to additional cash interest costs of $30,555 attributable to borrowings
under the Credit Agreement and Finance Agreement and non-cash interest costs
of $150,601 related to the amortization of the debt discount. See Note 8 to
the Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $1,102,726 in operating activities in the
three months ended March 31, 2000 compared to $575,615 for operating
activities for the three months ended March 31, 1999.
The Company's working capital increased from ($649,929) at December
31, 1999 to $251,077 at March 31, 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 8 to the Financial Statements. This increase
was offset by the Company's operating losses for the three months ended March
31, 2000.
11
<PAGE>
Cash used in investment activities during the three month period ended
March 31, 2000 was ($19,306) compared to cash provided by investing
activities during the three months ended March 31, 1999 of $1,178.
The Company's cash provided by financing activities was $238,975 for
the three month period ended March 31, 2000 compared to cash provided by
financing activities of $276,747 for the three month period ended March 31,
1999. The March 31, 2000 amount was the result of an increase in borrowings
under the Credit and Security Agreement, the net impact of the conversion of
$1.6 million due to Health Holdings into equity and the quarterly repayment
under the Settlement Agreement. See Note 3 to the Financial Statements.
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 U.S. Food and Drug Administration (FDA) and
Federall 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.
12
<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.
13
<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. 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.
14
<PAGE>
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.
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.
15
<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 $176,667 is outstanding
at March 31, 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
In March 2000, the Company issued 1,997,717 shares of its common stock
to its majority stockholder, Health Holdings, upon conversion of indebtedness
owed by the Company to Health Holdings. See Note 8 to Financial Statements.
The Company relied on Regulation D and/or Section 4(2) of the Securities Act
of 1933 with respect to the securities issuance described in this Item 2.
ITEM 3. Defaults upon Senior Securities
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
NONE
ITEM 5. Other Information
NONE
16
<PAGE>
ITEM 6. Exhibits & Reports on Form 8-K
<TABLE>
<CAPTION>
Exhibits
Number Description Page
-------- ----------- ----
<S> <C> <C>
10.1 Amendment No. 2 to Finance Agreement 20
27 Financial Data Schedule 21
</TABLE>
Reports on Form 8-K
On March 3, 2000, the Company filed Form 8-K dated March 1, 2000
relating to the execution by the Company of a Credit and Security Agreement
with Wells Fargo Business Credit.
17
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
NATURADE, INC.
(Registrant)
DATE: By /s/ Bill D. Stewart
-------------------- ----------------------------
May 15, 2000 Bill D. Stewart
Chief Executive Officer
DATE: By /s/Lawrence J. Batina
-------------------- ----------------------------
May 15, 2000 Lawrence J. Batina
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Page
<S> <C> <C>
10.1 Amendment No. 2 to Finance Agreement 20
27 Financial Data Schedule 21
</TABLE>
19
<PAGE>
AMENDMENT NO. 2 to
FINANCE AGREEMENT
This AMENDMENT NO. 2 TO FINANCE AGREEMENT (this "Amendment"), dated as
of March 17, 2000, by and between NATURADE, INC., a Delaware corporation
(the "Borrower"), and HEALTH HOLDINGS AND BOTANICALS, INC. a California
corporation (the "Lender").
RECITALS
WHEREAS, Borrower and Lender (collectively, the "Parties") are parties
to that certain Finance Agreement, dated as of March 17, 1999 (the "Finance
Agreement"; capitalized terms used appearing herein have the meanings
specified in the Finance Agreement), as amended by that certain Amendment No.
1 to Finance Agreement dated as of June 1, 1999 ("Amendment No. 1"), pursuant
to which the Borrower executed a Promissory Note dated March 17, 1999, in
favor of the Lender (the "Note");
WHEREAS, pursuant to the Finance Agreement and Amendment No. 1, (i) the
Lender has made Advances to Borrower in the aggregate principal amount of
$1,600,000, and (ii) the Borrower has issued to Lender an aggregate of
600,000 Warrants; and
WHEREAS, the Parties desire to convert the principal amount of all
Advances (together with accrued interest through the effective date of such
conversion (the "Conversion Date")) into shares of common stock of the
Borrower ("Common Stock");
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Parties agree as follows:
1. CONVERSION OF ADVANCES. All Advances, together with accrued
interest through the Conversion Date (the "Conversion Amount"), shall be
converted into that number of shares of Common Stock ("Shares") equal to the
Conversion Amount divided by the lower of (i) $1.00, or (ii) the average of
the Fair Market Value of the Common Stock for the ten (10) trading days
preceding the Conversion Date. No fraction of a share of Common Stock will be
issued, but in lieu thereof, the Lender shall receive from the Borrower an
amount of cash (rounded to the nearest whole cent)
-1-
<PAGE>
equal to the product of (i) that fraction, multiplied by (ii) the Fair Market
Value of Common Stock on the trading day preceding the Conversion Date.
2. UCC TERMINATION STATEMENT; RELEASE OF COLLATERAL; DELIVERY OF NOTE.
Simultaneously with the execution of this Agreement, Lender shall (i) execute
a UCC Termination Statement releasing its security interest in the Collateral
and Lender agrees that effective on the Conversion Date it shall no longer
have any interest whatsoever therein, and (ii) deliver the original Note
marked "cancelled."
3. LENDER REPRESENTATIONS. This Agreement is made with Lender in
reliance upon Lender's representation to the Borrower, which by its execution
of this Agreement it hereby confirms, that the Shares will be acquired for
investment for its own account, not as a nominee or agent, and not with a
view to the resale or distribution of any part thereof in contravention of
applicable law, and that Lender does not have any present intention of
selling, granting any participation in, or otherwise distributing the same in
contravention of applicable law. Lender has received all the information that
it considers necessary or appropriate for deciding whether to acquire the
Shares. Lender further represents that it has had an opportunity to ask
questions and receive answers from the Borrower regarding the terms and
conditions of the offering of the Shares. Lender acknowledges that it is able
to fend for itself, can bear the economic risk of its investment and has such
knowledge and experience in financial or business matters that it is capable
of evaluating the merits and risks of the investment in the Shares. Lender
understands that the Shares are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from
the Borrower in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), only in certain limited circumstances. In this connection, Lender
represents that it is familiar with Securities and Exchange Commission Rule
144, as presently in effect, and understands the resale limitations imposed
thereby and by the Securities Act. Lender acknowledges that its investment in
the Shares may be an illiquid investment requiring it to bear the economic
risk of the investment for an indefinite period. Lender acknowledges and
consents to the inclusion on any certificates representing the Shares such
legends as shall be required by applicable law.
4. TERMINATION OF FINANCE AGREEMENT AND NOTE. The Parties agree that
upon the Conversion Date, (i) the Finance Agreement, Amendment No. 1 and the
Note shall be deemed terminated for all purposes and of no further force and
effect, and (ii) the Parties hereafter shall have no obligations to each
other whatsoever
-2-
<PAGE>
thereunder, except that Sections 7.02 through 7.10 of the Finance Agreement
shall remain in full force and effect so long as any Warrants are outstanding.
5. MISCELLANEOUS.
(a) EXPENSES. Each of the Parties shall bear its own respective
costs and expenses arising out of the negotiation, execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein.
(b) COOPERATION. Each of the Parties shall use its best efforts to
take or cause to be taken all actions, to execute such documents, to
cooperate with each other with respect to all actions, and to do or cause to
be done all things necessary, proper or advisable, in each case to consummate
and make effective the transactions contemplated by this Agreement.
(c) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding of the parties with respect to the subject matter
hereof and supersedes all prior oral or written agreements, arrangements, and
understandings with respect thereto. No representation, promise, inducement,
statement or intention has been made by any party hereto that is not embodied
herein, and no party shall be bound by or liable for any alleged
representation, promise, inducement, or statement not so set forth herein.
(d) AMENDMENT. This Agreement may be modified, amended, superseded,
or canceled only by a written instrument signed by each of the Parties, and
any of the terms, covenants, representations, warranties or conditions hereof
may be waived only by a written instrument executed by the party to be bound
by any such waiver.
(e) SEVERABILITY. Nothing contained herein shall be construed to
require the commission of any act contrary to law. Should there be any
conflict between any provisions hereof and any present or future statute,
law, ordinance, regulation, or other pronouncement having the force of law,
the latter shall prevail, but the provision of this Agreement affected
thereby shall be curtailed and limited only to the extent necessary to bring
it within the requirements of the law, and the remaining provisions of this
Agreement shall remain in full force and effect.
(f) HEADINGS. The section and other headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning and interpretation of this Agreement.
-3-
<PAGE>
(g) COUNTERPARTS. This Agreement may be executed in several
counterparts and all documents so executed shall constitute one agreement,
binding on all of the parties hereto, notwithstanding that all of the parties
did not sign the original or the same counterparts. Delivery of an executed
counterpart of the signature page to this Agreement by facsimile shall be as
effective as delivery of a manually executed counterpart of this Agreement;
provided, that any party so delivering an executed counterpart by facsimile
shall thereafter promptly deliver a manually executed counterpart of this
Agreement to the other party, but failure to deliver such manually executed
counterpart shall not affect the validity, enforceability and binding effect
of this Agreement.
(h) SUCCESSORS. This Agreement shall be binding upon and inure to
the benefit of the Parties and their respective permitted assignees or
successors in interest.
(i) GOVERNING LAW. This Agreement is made under and shall be
construed pursuant to the laws of the State of California (excluding
principles of conflict of laws). In construing this Agreement, none of the
parties hereto shall have any term or provision construed against such party
solely by reason of such party having drafted the same.
(j) ATTORNEYS' FEES AND COSTS. In the event of any dispute arising
out of the subject matter of this Agreement, the prevailing party shall
recover, in addition to any other damages assessed, its reasonable attorneys'
fees and costs incurred in litigating, arbitrating, or otherwise settling or
resolving such dispute.
(k) NO THIRD PARTY BENEFICIARIES. Nothing herein expressed or
implied is intended to confer upon any person, other than the Parties hereto
and their respective permitted assignees, any rights, obligations or
liabilities under or by reason of this Agreement.
(l) WAIVER. The waiver by any of the parties, express or implied,
of any right under this Agreement or any failure to perform under this
Agreement by the other party, shall not constitute or be deemed a waiver of
any other right under this Agreement by the other party, whether of a similar
or dissimilar nature.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereunto set their hands to this
Agreement as of the date and year first above written.
NATURADE, INC.
By: /s/ Bill D. Stewart
Name: Bill D. Stewart
Title: Chief Executive Officer
HEALTH HOLDINGS AND BOTANICALS, INC.
By: /s/ Lionel P. Boissiere, Jr.
Name: Lionel P. Boissiere, Jr.
Title: President
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 173,183
<SECURITIES> 0
<RECEIVABLES> 1,357,092
<ALLOWANCES> 0
<INVENTORY> 1,983,751
<CURRENT-ASSETS> 3,959,418
<PP&E> 668,743
<DEPRECIATION> 352,268
<TOTAL-ASSETS> 4,373,034
<CURRENT-LIABILITIES> 3,661,701
<BONDS> 0
0
125
<COMMON> 697
<OTHER-SE> 3,104,919
<TOTAL-LIABILITY-AND-EQUITY> 4,373,034
<SALES> 3,386,534
<TOTAL-REVENUES> 3,386,534
<CGS> 1,841,593
<TOTAL-COSTS> 1,952,353
<OTHER-EXPENSES> 48,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 270,406
<INCOME-PRETAX> (725,858)
<INCOME-TAX> 800
<INCOME-CONTINUING> (726,659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (726,659)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
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