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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1998
Commission File Number 33-7106-A
NATURADE, INC.
Delaware 23-2442709
(State of Incorporation) (I.R.S. Employer Identification No.)
7110 East Jackson Street, Paramount, CA. 90723
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (562) 531-8120
Securities registered pursuant to Section 15(d) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $0.0001 par value None
Warrants: None
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ..X.. No .....
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
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to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of December 18, 1998, 5,203,731 shares of the Registrant's Common
Stock were outstanding and the aggregate market value of such Common Stock held
by non-affiliates as of that date was $5,361,351 based on the average of the bid
and asked price on that date.
Exhibit Index on Page 60
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PART I
Item 1. Business
A. Introduction
Naturade, Inc., a Delaware corporation (the "Company" or
"Naturade"), manufactures and distributes a variety of health related products,
including vitamins, nutritional supplements and skin and hair care products. Its
products are sold primarily to distributors who resell to health and natural
food stores. Independent brokers and outside sales representatives are utilized
throughout the United States and internationally.
The Company's plant and executive offices are located at 7110
East Jackson Street, Paramount, California 90723, telephone (562) 531-8120.
B. Historical Development of Naturade, Inc.
Naturade was incorporated in Delaware in 1986 for the purpose of
acquiring other businesses. In April 1989, Naturade acquired Naturade Products,
Inc. ("NPI"), the common stock of which was owned by Allan Schulman, the
Company's President, and other Schulman family members.
C. Historical Development of Naturade's Business
NPI was established in 1926 by Nathan Schulman, the father of
Allan Schulman. The business, which started with one retail health food store,
expanded until in 1970 it operated fourteen retail stores located in Southern
California and manufactured health related products which were distributed
nationally. During the early 1970's, NPI commenced a program to sell its retail
stores and concentrated on product manufacturing and wholesale distribution. The
last four retail stores were sold in 1989. NPI was merged into Naturade on
September 30, 1993. From that date to the present, Naturade has primarily
operated as a manufacturer and national distributor of health-related products.
D. Financial Information About Industry Segment
Currently, the Company's business is focused on the manufacture
and distribution of health-related products, including vitamins, nutritional
supplements, skin care and hair care products. Financial information for the
Company is presented in the financial statements accompanying this report.
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E. Description of Business of Naturade
(i) Products
Naturade is a diversified manufacturer and distributor of
health-related products. Specific product lines include fitness and energy,
herbal formulas, children's supplements, cough and cold formulas and skin and
hair care products.
The Company's fitness and energy line includes a variety of
protein-based formulas. The "N-R-G Protein" supplement has been an industry
leader for over 40 years. The "All Natural Vegetable Protein" powder meets the
needs of vegetarians or people who prefer products that contain no animal
products. The "100% Whey Protein" product is formulated for the serious body
builder and the "100% Soy Protein" is available for those people who want the
health benefits of a high Isoflavones formula. Additional products in this line
are formulated for weight loss and weight gain.
The Company's herbal line includes "The Chinese Way(TM)" group of
products. These products represent the fusion of the traditions of Chinese
Herbalism with more recent Western manufacturing innovations. Additional
products in this line include an herbal diuretic, a natural laxative, natural
fiber supplements and special Aloe Vera drinks fortified with natural
botanicals.
The Company's children's line features a variety of products
under the "Kids Plex(TM)" banner. These products contain vitamins, minerals and
amino acids in formulations designed to "enhance your child's mental
concentration". "Kids Plex(TM)" is currently available in shake mixes as well as
nutrition bars. Both the shakes and the bars are available in assorted flavors.
The Company's cough and cold line includes a variety of syrups
that act as expectorants, helping to reduce excessive coughing and ease sore
throats. Additional products in this line include "Immune Booster" with
echinachea, "Zinc Lozenges", "Herbal Throat Lozenges", "Herbal Sinus Support"
and "Saline/Aloe Nasal Spray".
The Company's skin and hair care line includes the "Aloe Vera 80
Collection" of cleansers, moisturizers, shampoos, conditioners, hair sprays,
bath gels, sun care products, antibacterial soap and other beauty aids. All of
these products contain a high percentage of Aloe Vera gel.
(ii) Harrier Transaction
In November, 1994, the Company entered into a joint venture with
Harrier, Inc. ("Harrier"), to form DermaRay International, LLC, a California
limited liability company ("DermaRay"). The purpose of this venture was to
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develop, market and sell a product called the Bioptron Lamp within the United
States. In June 1997, the Company and Harrier entered into an agreement to
liquidate and dissolve DermaRay. In June 1998, DermaRay's assets, including
100,000 shares of the Company's Common Stock, were distributed to the Company.
Such shares, formerly held by DermaRay, have been canceled and are no longer
issued or outstanding.
(iii) Marketing
For the fiscal year ended September 30, 1998 ("Fiscal 1998"),
Naturade had net sales of $13,506,972 of which 90% were domestic and 10%
international. Total gross profit was $5,712,883, of which $5,159,073 was
generated by domestic sales and $553,810 was generated by international sales.
(a) Domestic Sales
Naturade's domestic branded product business is primarily handled
through a distributor network. There are approximately 15 key distributors and
approximately 15 smaller distributors that service approximately 8,000 retail
health food stores in the United States. Six of such key distributors are
affiliated through Bols Wessanen USA, Inc.; the aggregate purchases of such
affiliated distributors during Fiscal 1998 represented approximately 23% of the
Company's total sales. The loss of these affiliated distributors could have a
material adverse effect on the Company.
Sales in the United States are broken down by geographic regions
as follows:
%
----
Northeast Region 27.0
Southeast Region 15.0
Southwest Region 9.0
Mid-West Region 12.0
Rocky Mountain Region 11.0
California & Hawaii 18.0
Northwest Region 8.0
--------
100.0
Naturade maintains brokerage agreements with certain natural food
brokers in the United States. These agreements have a term of one year and may
be terminated on thirty days' prior written notice. In addition, these
agreements grant the brokers exclusive territories to represent Naturade and
receive a commission on sales generated in such territory.
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(b) Foreign Sales
Naturade's international business is designed to meet each
country's unique cultural and distribution requirements. Naturade will typically
grant an international wholesaler or distributor the right to utilize Naturade's
trademarks and brand names in a specified geographic territory and commit the
wholesaler or distributor to a non-binding sales goal to purchase minimum levels
of Naturade's products. The Company also offers secondary brands in addition to
the Naturade brand and offers private label products to its international
customers.
Approximately 35% of the Company's international sales in 1998
were in Saudi Arabia and 30% were in China, with the remaining 35% in
approximately 15 other countries. The focus of the Company's international
marketing department has been increasing diversification of the Company's
international customer base.
(c) Seasonal Fluctuations
The Company's domestic business is not considered seasonal.
However, international sales tend to fluctuate depending upon economic
conditions, seasonal patterns and cultural differences within each country.
(d) No Government Contract Business
None of Naturade's business relates to government contracts.
(e) Regulatory Matters
The Company's products are subject to regulation by numerous
governmental agencies, principally the U.S. Food and Drug Administration. The
Company's products are also subject to regulation by, among other regulatory
agencies, the Consumer Product Safety Commission, the U.S. Department of
Agriculture, and the Environmental Protection Agency. Advertising of the
Company's products is subject to regulation by the U.S. Federal Trade Commission
Act. The Company's products are also regulated by various state and local
agencies as well as each foreign country to which the Company distributes its
products.
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(iv) Backlogs
Naturade typically does not carry backlog orders and generally
maintains a sufficient supply of its products to meet customer demands. The
Company's policy is to ship product within seven days after an order has been
placed.
(v) Inventory
Naturade's inventory ranged from a low of $1,881,000 to a high of
$2,652,000 during Fiscal 1998. Management conducts weekly sales forecast
meetings to review inventory status. If excess inventory is indicated, the
Company attempts to reduce the excessive inventory as soon as possible. A
complete physical inventory is counted once a year.
(vi) Raw Material
Naturade is primarily a sales and marketing company. As such,
Naturade only manufactures its powder supplements, although the Company intends
to increase outsourcing the manufacture of such powders in the near future.
Naturade began manufacturing its powder supplements in the 1950's in response to
an inability to obtain powders of satisfactory quality from outside suppliers.
Naturade's current powder manufacturing includes a specially designed vacuum
feeder which avoids powder filling problems caused by heavy bags and excessive
powder dust. As an additional safety procedure, all powders pass through a fine
screen before they are packaged.
Quality control is integrated throughout every phase of the
Company's product development and production. Ingredients are selected for
nutritional value, stability and other qualities that will contribute to the
product's worth. Individual ingredients are checked for adherence to industry
and government food standards. To further maintain high standards of control,
up-to-date automated equipment is used to package the Company's vitamin and herb
products.
Powder supplements represent approximately 55% of total sales.
Raw materials are purchased from a variety of leading manufacturers. The Company
has rarely experienced difficulty in obtaining raw materials and anticipates no
significant problems in the future.
(vii) Competition
Marketing research suppliers have recently developed reporting
systems to provide data on market share for the natural food industry. During
Fiscal 1998 Naturade began to buy data on the Powder Supplement Category from
one of these services, SPINS. The Powder Supplement Category accounted for
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approximately 55% of Naturade's sales for Fiscal 1998. The data reported by
SPINS is based on distributor shipments to natural food stores. SPINS collects
data from distributors that SPINS estimates to represent approximately 40% of
the natural products industry. For the twelve-month period ended July/August
1998, this data shows Naturade as the brand ranking first in this product
category, with a 49.8% market share. Such market share is 2.7 times the next
leading brand's market share. Based on this data, Naturade's market share had
increased by 4.0 percentage points over the prior twelve-month period. During
this same twelve-month period, the market share of the Company's next competitor
dropped by 4.3 percentage points.
(viii) Copyrights, Trademarks and Licenses
Naturade maintains registrations on over twenty trademarks in the
U. S. Patent & Trademark Office, as well as California registrations on seven
trademarks. The Company also maintains trademark registrations for a variety of
names in over 25 foreign countries. In addition, Naturade maintains a variety of
copyright registrations and holds certain other intellectual property rights.
(ix) Product Research and Development
Naturade's product research and development expenses were
$279,370, $134,807 and $123,643 for the years ended September 30, 1998, 1997 and
1996, respectively.
The Company devoted significant resources to research and
development during Fiscal 1998. Two product groups dominated the Company's
research and development investment. The first group was "The Chinese Way(TM)"
line. The Company researched and developed several new products in this line;
namely, the "Stay Well Formula", "Head and Chest Formula", "Sinus Formula" and
"Soothing Throat Lozenges". The Company's market research, focus groups and new
packaging relating to this product category were part of the initial research
and development. The "Kids Plex(TM)" line formed the second major product group
for which the Company made substantial research and development expenditures.
New "Kids Plex(TM)" flavors and packaging were researched and developed, as well
as new nutritional bars and displays. In addition, two products in the cough and
cold line were developed and introduced: "Sore Throat Syrup" and "Herbal Sinus
Support".
The majority of investment in product research and development in
the fiscal year ended September 30, 1997 ("Fiscal 1997"), was for the Company's
herbal product category. This included the development of a new herbal product
line (21 items) of standardized and whole herbs. In addition, a "twin-pack" of
herbs and natural fibers called "Herbal Cleanse" was developed. Also in Fiscal
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1997, a new product called "Immune Booster" was added to the cough and cold
category. A new children's sun block was developed and introduced in the "Aloe
Vera 80" category.
The majority of investment in product research and development in
the fiscal year ended September 30, 1996 ("Fiscal 1996"), was devoted to the
repackaging of the Company's Aloe Vera 80 line of skin and hair care products.
This newly expanded line was introduced in the Spring of 1996. Research and
development also continued in the herbal category and in herb-related products.
(x) Environmental Discharge Expenditures
Naturade believes it is in material compliance with applicable
government regulations regarding discharge of materials into the environment.
(xi) Employees
Naturade currently employs 53 people.
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(xii) Financial Information Regarding Export Sales
NET SALES TO KOREA
1998 1997 1996
=======================================
NET SALES 39,648 224,525 431,593
NET INCOME (LOSS) BEFORE INCOME TAXES (4,750) (44,614) 107,668
NET SALES TO CHINA
1998 1997 1996
=======================================
NET SALES 417,975 -- --
NET INCOME (LOSS) BEFORE INCOME TAXES (50,067) -- --
NET SALES TO SAUDI ARABIA
1998 1997 1996
=======================================
NET SALES 482,854 157,956 --
NET INCOME (LOSS) BEFORE INCOME TAXES (57,838) (31,387) --
NET SALES, OTHER EXPORT
1998 1997 1996
=======================================
NET SALES 440,845 570,400 270,800
NET INCOME (LOSS) BEFORE INCOME TAXES (52,807) (113,343) 67,555
DOMESTIC NET SALES
1998 1997 1996
=======================================
NET SALES 12,125,650 11,625,538 9,403,139
NET INCOME (LOSS) BEFORE INCOME TAXES (3,908,903) 602,639 28,935
TOTAL NET SALES, ALL MARKETS
1998 1997 1996
=======================================
NET SALES 13,506,972 12,578,419 10,105,532
=======================================
NET INCOME (LOSS) BEFORE INCOME TAXES (4,074,365) 413,295 204,158
=======================================
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Item 2. Properties
The Company's executive offices, manufacturing, sales, marketing
and product development operations are located in an approximately 54,000 square
foot building (the "Building") located in Paramount, California which is owned
two thirds by the Company and one third by Allan Schulman, the Company's
President and a Director.
Mr. Schulman's one-third interest in the Building is leased to
the Company under a triple net lease (the "Lease") that expired in July of 1998.
Mr. Schulman's interest in the Building continues to be leased to the Company on
substantially the same terms as contained in the Lease on a month to month
basis. The monthly rental paid by the Company to Mr. Schulman is $8,339, which
amount increases with changes in the cost of living index. The Company is
responsible for paying all real estate taxes, maintenance and operating expenses
and insurance relating to the property underlying the Lease. In connection with
the Health Holdings Transaction (as defined in Item 13 below), the Company and
Mr. Schulman entered into a First Amendment to Lease, dated as of December 15,
1997, pursuant to which the Company and Mr. Schulman, in their capacity as joint
landlord, granted the Company, in its capacity as tenant, the right to extend
the original term of the Lease for up to three consecutive two-year terms. The
Company and Mr. Schulman also entered into a Mutual Option Agreement, dated as
of December 15, 1997, pursuant to which the Company and Mr. Schulman each
granted the other the right to purchase their interests in the Building under
certain circumstances. More specifically, the Mutual Option Agreement provides
that the Company may purchase Mr. Schulman's interest in the Building at any
time prior to the expiration of the Lease upon notice and payment to Mr.
Schulman of one-third of the fair market value of the Building. During the
twelve month period following expiration of the Lease, Mr. Schulman may purchase
the Company's interest in the Building following (i) one hundred twenty (120)
days' prior written notice and (ii) payment to the Company of two-thirds of the
fair market value of the Building. In the event that either the Company or Mr.
Schulman exercises its respective right under the Mutual Option Agreement to
purchase the remaining portion of the Building, the Lease shall terminate upon
the closing of such purchase.
The Company intends to sell its interest in the property in the
near future and lease new premises in Southern California. The Company and Mr.
Schulman have waived their respective rights under the Mutual Option Agreement,
pending the outcome of the proposed sale of the Building.
In connection with the Company's acquisition of certain assets of
Performance Nutrition, Inc. ("PNI"), as of August 1, 1997, the Company entered
into a lease for 4,490 square feet in a facility located in Dallas, Texas. The
lease terminates on August 1, 2002, and rent is paid at the rate of $3,256 per
month. The Company subleased this facility as of October 1, 1998 for the
remainder of the lease term at a sublease rental rate equal to the lease rental
rate.
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While management believes that the Company's manufacturing
facilities are suitable and adequate for its current production capacity, the
Company intends to meet its future production demand through a greater use of
outsourcing.
Item 3. Legal Proceedings
The Company is one of two remaining defendants in a proceeding
styled Jeffrey H. Mims, Trustee v. Kennedy Capital Management, Inc., Anthony
Roth, David Wynne and Naturade, Inc., adversary no. 397-3452, in the United
States Bankruptcy Court for the Northern District of Texas, Dallas Division (the
"Proceeding").
The Proceeding was initiated by the Trustee in the Chapter 7
bankruptcy case of PNI on October 3, 1997. The Trustee contends that the Company
wrongfully participated in alleged breaches of fiduciary duty by PNI management
for failing to maximize the value of PNI's assets. The Trustee alleges the
Company aided and abetted a breach of fiduciary duty by PNI management,
conspired to breach fiduciary duty and tortious interference with contract. The
Trustee seeks an unspecified amount of compensatory and exemplary damages from
the Company. The Company has categorically denied any wrongdoing or liability in
this matter and has asserted several affirmative defenses and counterclaims
The trial of the Proceeding ended on October 30, 1998. As of the
date of this report, the bankruptcy court presiding over the Proceeding
continued to consider the matter and no decision had been announced. Management
continues to believe that the Trustee's claims lack substantive merit. However,
all litigation contains an element of uncertainty, and it is not possible for
management to determine at this time whether the ultimate outcome of the
Proceeding will have a material adverse effect on the Company's results of
operations or financial condition.
In addition to the above-described litigation, the Company is
party to various other claims and litigation that arise in the normal course of
business. While any litigation contains an element of uncertainty, management
believes that the ultimate outcome of these claims and litigation will not have
a material adverse effect on the Company's results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
A. Market Information
The Company's common shares began trading on the over-the-counter
securities market in the third quarter of 1991 under the symbol NRDC. The
over-the-counter market quotations reflect interdealer bid prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions. The prices appearing below were obtained from the National
Quotation Bureau.
Common Stock
For Fiscal Year Ended September 30, 1998 High Low
- ---------------------------------------- ---- ---
1st Quarter $5.25 $3.38
2nd Quarter 4.75 3.67
3rd Quarter 4.67 3.25
4th Quarter 4.36 2.61
For Fiscal Year Ended September 30, 1997 High Low
- ---------------------------------------- ---- ---
1st Quarter $2.13 $1.63
2nd Quarter 3.25 2.00
3rd Quarter 3.69 3.13
4th Quarter 4.13 3.50
On December 18, 1998, the last reported price for the Company's
Common Stock was $2.94 bid, $3.13 ask.
B. Holders
To the best knowledge of the Company, the number of record
holders of common stock as of December 16, 1998, was 540. The Company believes
that approximately 744 additional shareholders hold the Company's common stock
in "street name."
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C. Dividends
The Company did not pay a cash dividend on its common stock
during Fiscal 1998, and it is not anticipated that the Company will pay any
dividends in the foreseeable future. As of the date of this Annual Report on
Form 10-K, the Company intends to follow a policy of retaining any future
earnings to provide funds for the expansion of its business.
D. Warrants
The Company presently has outstanding a series of Class B
Warrants which provide for the purchase of one share of the Company's Common
Stock at an exercise price of $3.00 per share. The Board of Directors has
extended the expiration date of the Class B Warrants to March 1, 1999. The
Company previously issued certain Class A Warrants, but such Class A Warrants
expired in accordance with their terms on December 31, 1996. As of December 18,
1998, 325,461 Class B Warrants were outstanding and held of record by 627
holders.
During the 3rd quarter of the fiscal year ended September 30,
1995, a market was established in the Company's Class B Warrants. These
securities are quoted through the facilities of the National Quotation Bureau
"Pink Sheets" and are available on the OTC Bulletin Board under the symbols
NRDCZ.
Class B
Fiscal 1998 Bid Price
----------- ---------
1st Quarter $ 0.10
2nd Quarter $ 0.10
3rd Quarter $ 0.10
4th Quarter $ 0.10
Class B
Fiscal 1997 Bid Price
----------- ---------
1st Quarter $ 0.14
2nd Quarter $ 0.19
3rd Quarter $ 0.19
4th Quarter $ 0.50
On December 18, 1998, the last bid price for the Company's Class B Warrants was
$0.10.
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Item 6. Selected Financial Data
The following tables summarize certain selected financial data
for the periods presented for the Company. The data for Fiscal 1998 should be
read in conjunction with the more detailed audited statements for such year
presented elsewhere herein.
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STATEMENT OF OPERATIONS DATA NATURADE, INC.
YEARS ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
---------------------------------------------------------------
Net Sales 13,506,972 12,578,419 10,105,532 10,094,740 8,108,576
Gross Profit 5,712,883 6,196,624 4,869,105 4,738,852 3,835,249
Income (loss) from operations before (4,074,365) 413,295 204,158 336,808 387,631
income taxes and cumulative effect of
change in accounting principle
Income Tax expense (benefit) 35,450 165,000 38,000 (58,275) (29,000)
Income (loss) before cumulative effect (4,109,815) 248,295 166,158 395,083 416,631
of change in accounting principle
Cumulative effect of change in accounting -- -- -- -- 91,000
principle
Net income (loss) (4,109,815) 248,295 166,158 395,083 507,631
Income (loss) per common and common
equivalent shares:
Basic earnings (loss) per share (0.84) 0.08 0.06 0.14 0.18
Diluted earnings (loss) per share (0.84) 0.08 0.06 0.14 0.18
BALANCE SHEET DATA YEARS ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
---------------------------------------------------------------
Total Assets 9,548,469 7,753,574 5,160,235 4,820,775 2,564,613
Long-Term Obligations 2,011,523 2,235,908 2,418,334 2,555,675 199,060
Preferred Stock 125 -- -- -- --
Common Stock 520 330 259 254 278
Shareholders Equity 4,328,192 2,685,286 1,080,224 897,588 762,800
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Liquidity and Capital Resources
The Company's cash provided by operating activities decreased
$3,321,622 from ($336,384) at September 30, 1997 to ($3,658,006) at September
30, 1998. This decrease was due to the Company's net loss of ($4,109,815), which
resulted in part from the decision to restructure the Company's operating
practices and substantially increase the Company's new product portfolio and
marketing operations in order to build for future growth. Such investment in
future growth was largely focused on the repositioning and expansion of the
Company's "Kids Plex(TM)" line and the development of a several new product
lines, including "The Chinese Way(TM)" line of herbal products. While the
Company has made a substantial investment in the development and expansion of
these product lines, it has not yet realized the benefits of such development
and expansion. The Company also anticipates entering the mass merchandise market
with these two product lines, which will require an increase in inventory.
In addition, the Company is currently transitioning to a system
of outsourcing its protein powder business to subcontractors. This transition
will require a change in production planning, which the Company anticipates will
also result in higher inventory levels.
As of September 30, 1998 the Company's working capital increased
to $3,116,309 from $1,356,135 at September 30, 1997. This was primarily due to
an increase in cash and cash equivalents of $1,817,928 which resulted from
consummation of the transactions contemplated by that certain Stock Purchase
Agreement between the Company and Health Holdings and Botanicals, Inc. ("Health
Holdings"), described in Item 13- Certain Relationships and Related Transactions
(the "Stock Purchase Agreement").
Cash used in investing activities during Fiscal 1998 totaled
$644,061 compared to cash used of $90,102 in Fiscal 1997. This was primarily due
to a short-term loan of $600,000 to the Company's Chief Executive Officer.
The Company's cash provided by financing activities in Fiscal
1998 was $6,119,995 compared to $463,928 in 1997. This was primarily due to
consummation of the transactions contemplated by the Stock Purchase Agreement,
pursuant to which, among other things, proceeds of $6,000,000 were received in
exchange for the issuance of 2,032,222 shares of the Company's Common Stock and
1,250,024 shares of the Company's Preferred Stock, as described in Item 13-
Certain Relationships and Related Transactions.
-17-
The Company has a $1,500,000 open line of credit with South Bay
Bank (the "Bank") available through February 1, 1999. As of September 30, 1998,
$1,450,000 was outstanding on this line, compared to $1,150,000 as of September
30, 1997. Management anticipates that it will be able to extend its line of
credit with the Bank or, alternatively, that it will replace such line of credit
with comparable financing, although no assurances can be given in this regard.
Management is also actively pursuing alternative financing sources to fund
growth during the current fiscal year. However, if the Company is unsuccessful
in obtaining the requisite financing, or if such financing is not available on
favorable terms, such unavailability could have a material adverse effect on the
Company's business operations and financial condition.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Net sales for Fiscal 1998 exceeded prior year's net sales by
$928,552. Domestic branded sales, which represented 87% of total sales,
increased $1,205,374 or 11% to $11,703,979. Private label sales, representing 3%
of total sales, decreased $705,263 or 63% to $421,671. International sales,
which represented the remaining 10% of sales, increased $ 428,442 or 45% to
$1,381,322.
The decline in the Company's private label sales was largely due
to cessation of operations by Performance Nutrition, Inc. ("PNI"), formerly the
Company's largest private label customer.
International sales increased in 1998 primarily due to a
significant new customer in China. The Company continued efforts to develop new
customers in the international marketplace.
Gross profit as a percentage of net sales for Fiscal 1998
decreased to 42.3% from 49.3% in the prior fiscal year. This decrease was
primarily the result of a $463,000 write off and disposal of slow-moving and
obsolete inventory and a reserve of $200,000 for specific slow-moving items that
did not meet the Company's initial sales expectations and which was adversely
effected by changing market conditions.
Selling, general and administrative expenses for Fiscal 1998
increased $3,107,746, or 57.8%, from the prior fiscal year.
During Fiscal 1998, the Company experienced an increase of
$365,000, or 95%, in advertising expenses relating to the Company's products,
not including the "Kids Plex(TM)" or "The Chinese Way(TM)" product lines. Such
increase was due to a substantial investment in the Company's marketing
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operations. Improved packaging was developed for a number of key products, new
advertising was placed and bonus packs were introduced as a promotional vehicle.
Naturade's sales efforts were enhanced during Fiscal 1998 by a
restructuring of the Company's sales department and the hiring of additional
sales personnel. Due to such changes, the Company experienced an increase of
$182,000, or 20%, in salary and payroll expenses, not including salary and
payroll expenses relating to the "Kids Plex(TM)" product lines. The Company
believes that its image with distributors and retailers in the natural products
industry has been enhanced by these changes. The Company also purchased a new
trade show booth to upgrade the Company's presence at key trade shows. Such new
trade show booth, as well as certain other improvements, caused an increase of
$316,000, or 128%, in the Company's expenses relating to samples and trade
shows.
Programs for future growth were a major emphasis in Fiscal 1998.
The "Kids Plex(TM)" product line has become a leading seller in outlets such as
stores owned by General Nutrition Companies, Inc. ("GNC"). The purpose of this
dietary supplement is to ensure that children have a strong nutritional balance.
This product line was repositioned and expanded during the year with the
introduction of the popular bar format and new flavors, as well as new packaging
designed to better highlight the products' benefits. In addition, a new
formulation and packaging were developed for sales to grocery, drug and discount
stores. Selling efforts for this new channel began in September, 1998.
Consultants and marketing expenses relating to the "Kids Plex(TM)" product lines
caused an increase of $50,000, or 475%, with respect to such expenses. In
addition, of the expenditure referenced below of $360,369 relating to product
development consultants and related matters, $112,139 of such amount was paid
for product development and consulting costs incurred with respect to the "Kids
Plex(TM)" product lines. The Company also experienced an increase of $103,000,
or 18%, in salary and payroll expenses relating to the "Kids Plex(TM)" product
lines.
The Company also directed significant resources to the
development of a new product line called "The Chinese Way(TM)". Market research
done by the Company during the year indicated positive consumer acceptance of
traditional Chinese medicine. Such market research and related consulting
expenses resulted in the Company incurring a new expense of $321,000. "The
Chinese Way(TM)" products contain high quality Chinese herbs directly imported
for packaging in the United States. Shipments of this product line began the
last month of Fiscal 1998.
During Fiscal 1998 the Company experienced an increase of
$551,000, or 403%, in expenses relating to advertising of the "Kids Plex(TM)"
and "The Chinese Way(TM)" product lines.
-19-
The Company also experienced an increase of $302,000, or 168%,
for legal and consulting fees during Fiscal 1998.
As more fully described in Footnote 15, of the Naturade, Inc.
Financial Statements included in this report, the Company entered into an
agreement with Health Holdings in which such company acquired 55% of the
Company's stock. As part of this transaction, certain legal fees and consulting
costs were incurred totaling $261,964.
Following the transaction with Health Holdings, as described in
Footnote 15 of the Naturade, Inc. Financial Statements included in this report,
the Company conducted a review and assessment of its business, which resulted in
the establishment of a new strategic direction. Such new strategic direction
called for the Company to make a material investment in products designed for
the mass market. The Company conducted extensive market research and retained
product development consultants and incurred other expenses in this effort.
These expenses included $82,964 incurred with respect to market research and
$360,369 incurred with respect to product development consultants and other
related costs, in addition to the above-referenced $50,000 incurred for
consulting and marketing expenses relating strictly to the "Kids Plex(TM)"
product lines.
As more fully described in Footnote 9, of the Naturade, Inc.
Financial Statements included in this report, the Company is one of two
remaining defendants in adversary proceedings initiated by the Trustee in the
Chapter 7 Bankruptcy case of PNI. The Company has vigorously contested the
Trustee's claims and has incurred certain attorneys' fees and costs in its
defense totaling $527,638 during Fiscal 1998.
Fiscal 1997 Compared to Fiscal 1996
Net sales for Fiscal 1997 exceeded the prior year by $2,472,888.
Domestic branded sales, which represented 83% of total sales, increased
$2,337,861 or 29% to $10,498,605. Private label sales, representing 9% of total
sales, decreased $109,899 or 9% to $1,126,934. International sales, which
represented the remaining 8% of sales, increased $244,926 or 35% to $952,881.
The Company attributed the majority of the 29% domestic branded
sales increase to the continuing effort to expand distribution by increasing
promotional and marketing expenditures. The introduction of new products also
contributed to this increase of sales.
During 1997 the Company introduced a new line of herb products
featuring a blend of standardized herbs and whole herb powders. This product
grouping had 21 items including special formulas and straight herbs. Toward the
end of fiscal 1997 the Company added St. John's Wort to this herb category. Also
in 1997 the Company introduced a "twin-pack" of herbs and natural fibers called
"Herbal Cleanse".
-20-
Another herbal based product was added to the Company's cough and
cold category. This product is called "Immune Booster" and contains Echinacea
Root, Elderberry, Cats Claw and Golden Seal Root, plus vitamins and minerals.
The Company also added a new product to the Aloe Vera 80 Sun Care
category. This product is called "Kids Sunblock" and is a specially formulated
sun protection (SPF 30) and moisturizing product for active kids.
Private label sales decreased due to the Company's purchase of
trademarks in June, 1997, of PNI, previously the Company's largest private label
customer. Sales of these products since the time of such acquisition have been
reported as domestic branded sales.
International sales increased in 1997 primarily because of new
customers. The Company opened markets in Japan, Italy and Spain during 1997. The
Company continued efforts to develop new customers in the international
marketplace.
Gross profit for Fiscal 1997, increased 1.1% to 49.3% from 48.2%
in the prior fiscal year. This increase was primarily the result of the
conversion of the PNI private label product line to domestic branded sales.
Selling, general and administrative expenses increased $1,054,490
or 24.4% from 1996. However, the total percent of sales remained constant at
42.8% from the prior year. Sales and marketing expenses related to domestic
sales increased $180,662 or 9.4% but decreased to 16.7% of sales from 19.1% last
year. Sales and marketing expenses since June, 1997 relating to the PNI branded
line of products were $363,137 or 2.9% of sales. There were no comparable
expenses in fiscal 1996 as these products were recorded as private label sales
with corresponding costs of sales.
General and administrative expenses increased $305,709 or 25.9%,
but only increased sales 0.1% of sales to 11.8% from 11.7% last year. Of this
amount, payroll and related taxes and benefits increased $177,320 and legal
expenses increased $93,531.
Fiscal 1996 Compared to Fiscal 1995
Net sales for Fiscal 1996 exceeded the fiscal year ended
September 30, 1995 ("Fiscal 1995") by $10,792. However, domestic branded sales,
which represented 81% of total sales, increased $1,798,310 or 28% to $8,186,613.
Private label sales, representing 12% of total sales, decreased $761,397 or 39%
to $1,216,526. International sales, which represented the remaining 7% of sales,
decreased $1,026,121 or 59% to $702,393.
-21-
The Company attributed the majority of the 28% domestic branded
sales increase to increased promotional and marketing expenditures in a
concerted effort to expand distribution. On January 1, 1996, the Company
implemented an approximate 5% price increase on selected items representing 15%
of total domestic sales, excluding private label sales. The sales increase was
accomplished primarily by expanded distribution to existing distributors and the
addition of several smaller distributors covering areas in which the Company was
not previously represented.
The Company redesigned its Aloe Vera 80 Skin & Hair Care line and
the "new look" started distribution in the Spring of 1996. The Company also
added eight new products to the line as well as three new Aloe Vera 80 Sun Care
products. In addition to the new Aloe Vera 80 products, the Company developed
and introduced two new protein formulae, one new herbal formula and three new
amino acid formulae.
A new area of distribution for the Company in Fiscal 1996 was the
chain of 2,400 stores owned by GNC. The Company distributes its Aloe Vera 80
Skin and Hair Care products through both the GNC corporate and franchise stores.
In addition to the Aloe Vera 80 products, the Company also sells a variety of
its herbal remedy products to GNC.
Private label sales decreased because a major private label
customer discontinued a product grouping that the Company had manufactured for
them in Fiscal 1995.
International sales decreased because a customer in Saudi Arabia
(who was the Company's largest international customer in Fiscal 1995) completely
reorganized and redesigned its packaging which resulted in no shipments during
Fiscal 1996. As this reorganization and redesign is now completed, the Company
expects shipments to this customer to resume during the first quarter of Fiscal
1997.
Gross profit for Fiscal 1996 increased 1.3% to 48.2% from 46.9%
in the prior fiscal year. This increase was primarily the result of decreased
private label and international sales, both of which carry lower margins, as
well as a price increase discussed above.
Selling, general and administrative expenses increased $474,997
or 12.3% to 42.8% of sales from 38.1% the prior fiscal year. Sales and marketing
expenses related to domestic sales increased $593,319 or 44.5% to 19.1% of sales
from 13.2% during Fiscal 1995, while the remaining expenses in these categories
decreased $118,322. The majority of this $593,319 increase is comprised of the
following: an increase in advertising of $133,640; compensation and related
payroll costs of $197,124; design, production and printing related to the
-22-
packaging upgrade of the Company's skin and hair care products as well as for
new products in the amount of $117,294; and promotional expenses of $97,013.
Year 2000 Issue
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's computer consultant has certified that the Company's Genesys Software
is Year 2000 compliant. In the event that Year 2000 issues cause an
unanticipated problem with the Company's operations, the Company is not
altogether computer dependent and, accordingly, will be able to temporarily
conduct its business on a non-computer basis. While compliance costs to date
have not been material and the Company currently does not anticipate incurring
significant future costs relating to Year 2000 compliance, no assurance can be
given that significant costs will not be incurred in addressing the Year 2000
issue or that the failure to adequately address the Year 2000 issue will not
have a material adverse effect upon the Company.
In addition, the Company is contacting its major suppliers to
determine that they will be able to resolve the Year 2000 issue in matters
affecting the Company. The Company at this time cannot make any predictions as
to the degree of compliance by such third parties or the consequences of their
noncompliance. However, if those third parties with whom the Company conducts
business, including without limitation, both suppliers and customers, are
unsuccessful in implementing timely solutions, the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Forward-Looking Information
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of that term in the Private Securities Litigation
Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with the
Securities Exchange Commission or otherwise. Statements contained herein that
are not historical facts are forward-looking statements made pursuant to the
safe harbor provisions referenced above. Any matters discussed herein including,
without limitation, the Company's introduction of new products, future sales
levels, availability of raw materials, ability to maintain or secure replacement
financing, ability of the Company and its suppliers to address problems
-23-
relating to the "Year 2000 problem" and the potential outcome of pending
litigation involving the Company, are forward-looking statements. In addition,
when used in this discussion, the words "anticipates," "expects," "intends,"
"plans," variations thereof and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements are inherently subject to risk and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained in this Annual Report. Statements in this
Annual Report on Form 10-K, particularly in "Item 1. Business", "Item 3. Legal
Proceedings", the Notes to Financial Statements and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
describe certain factors that could contribute to or cause such differences
including, but not limited to, unanticipated developments in any one or more of
the following areas: the rate of consumer acceptance of new product
introductions, competition, the number and nature of customers and their product
orders, pricing, sourcing and sales (including foreign government regulation,
trade and importation concerns and fluctuation in exchange rates), availability
and costs of borrowing, changes in taxes due to change in the mix of U.S. and
non-U.S. revenue, pending or threatened litigation, the availability of key
personnel, the availability of raw materials, the ability of the Company and its
suppliers to address issues relating to the "Year 2000 problem," the costs to
the Company in addressing the "Year 2000 problem" and other risk factors which
may be detailed from time to time in the Company's Securities and Exchange
Commission filings.
Readers are cautioned not to place undue reliance on any
forward-looking statement contained herein, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unexpected events.
Item 8. Financial Statements and Supplementary Data
Attached as Exhibits are Financial Statements and the
supplementary financial information as required (see Item 14- Exhibits).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On June 11, 1998, the Company filed a Form 8-K reporting a change
in auditors to Deloitte & Touche, LLP, effective June 11, 1998, replacing Rose,
Snyder & Jacobs. The change in auditors was not a result of any disagreement
with the former auditors on the scope, auditing or presentation of the Company's
financial statements.
-24-
PART III
Item 10. Directors and Executive Officers
The names and ages of the directors and executive officers of the
Company as of December 29, 1998, are as follows:1/
Name Age Position Since
---- --- -------- -----
Bill D. Stewart 56 Director,
Chief Executive Officer 1998
Lionel P. Boissiere, Jr. 40 Director 1997
William B. Doyle, Jr. 39 Director 1997
William S. Doyle 54 Director 1997
Allan Schulman 67 President, 1959
Director
Barry M. Zwick 64 Director 1992
Paul D. Shapnick 62 Chief Financial Officer, 1992
Assistant Secretary-
Treasurer
The directors serve until the next annual meeting of
shareholders, or until their successors are elected.
Bill D. Stewart. Mr. Stewart served from 1989 to 1997 as President of The
Thompsons Company. In that capacity Mr. Stewart effected an increase in
Thompsons sales from $20 million to $200 million, led the acquisition of the Red
Devil Coatings Co. from Insilco Co., built the Thompsons waterproofing business
to a greater than 60% market share, launched the national sales effort for
Thompson Exterior Stain, and successfully moved the Do-It-Yourself business into
the mass market sales channel, establishing relationships with Wal*Mart, K-Mart
and Target. Mr. Stewart served as Vice President of Sales with Thompsons from
1986 to 1989. Prior to joining Thompsons, Mr. Stewart served for 16 years with
Richardson Vicks in various capacities.
- --------
1/ Effective as of December 22, 1998, Mr. Ronald Ahrens resigned for personal
reasons from the Company's Board of Directors.
-25-
Lionel P. Boissiere, Jr. During the past five years, Mr. Boissiere has been an
investor and advisor to middle market companies. From 1993 through 1995 he
worked with Berkeley International Capital Corp., and since 1995 Mr. Boissiere
has been a principal at Doyle & Boissiere LLC.
William B. Doyle, Jr. Since 1995 Mr. Doyle [no relation to William S. Doyle]
has served as Managing Director of Doyle & Boissiere LLC. Prior to such time Mr.
Doyle was with Berkeley International Capital Corporation. Mr. Doyle is an
investor and an advisor to middle market companies.
William S. Doyle. Mr. Doyle [no relation to William B. Doyle, Jr.] has an AB
degree from Duke University. Mr. Doyle was chief marketing officer of the Chase
Manhattan Bank in New York, after successive management positions with the bank
in London and Hong Kong. He served as Deputy Commissioner of Commerce for New
York State, and was president of Strategen, Inc., a New York City based
health-care investment bank, from 1992 to 1997, prior to forming Taishan
Holdings, Inc., in December 1997, where he serves as president.
Allan Schulman. Mr. Schulman has attended and completed business courses at
the University of California at Los Angeles, Long Beach State College and the
University of California at Irvine. A veteran of the Korean War, Mr. Schulman
joined NPI (Naturade Products, Inc., the Company's predecessor) in 1953, and was
elected President of NPI in 1959. He was elected to the Board of Directors of
NPI in 1959, and to the Board of Directors of the Company in 1991. Mr. Schulman
served as Chairman of the Board of Directors until 1998.
Barry M. Zwick. Mr. Zwick has a BS Degree from the U.S. Military Academy at
West Point and an MBA from the University of Southern California. Mr. Zwick has
over 25 years experience in the securities business, and was formerly a
registered investment advisor. Mr. Zwick has been a member of the Midwest Stock
Exchange and the Chicago Board of Trade. Since 1989 he has been a private
investor. Prior to this period, Mr. Zwick was a Managing Director of Ladenburg,
Thalmann & Co., Inc.
Paul D. Shapnick. Mr. Shapnick has a BS in Accounting from the University of
California at Los Angeles, and is a CPA. He has been vice president of finance
and chief financial officer of several manufacturing companies, including nine
years as chief financial officer and executive vice president of the one of the
largest health food companies in the industry. Mr. Shapnick joined Naturade in
June 1992. From October of 1990 through May of 1992, Mr. Shapnick operated his
own financial consulting practice. During the preceding five years, he was the
Vice President of Finance for Sandberg Furniture Manufacturing Company.
-26-
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the annual compensation paid and
accrued by the Company during its last three fiscal years to the executive
officers to whom it paid in excess of $100,000, including cash and issuance of
securities.
Annual Compensation
(a) (b) (c) (d) (e) (g) (i)
Securities
Name Other Under- All
and Annual lying Other
Principal Compensation Options/ Compensation
Position Year Salary($) Bonus($) ($) SARs(#) ($)
- -----------------------------------------------------------------------------------------
Bill Stewart
Chief 9/30/96 0 0 0 0 0
Executive 9/30/97 0 0 0 0 0
Officer 9/30/98 117,692 74,700 102,238(1) 255,000(3) 6,786(6)
- -----------------------------------------------------------------------------------------
Allan 9/30/96 188,754 0 0 10,000 14,410
Schulman 9/30/97 192,751 25,366 0 10,000 6,833
President 9/30/98 182,976 0 0 10,000(4) 13,969(7)
- -----------------------------------------------------------------------------------------
Anthony Roth
Vice
President 9/30/96 0 0 0 0 0
Domestic 9/30/97 0 0 0 0 0
Sales 9/30/98 110,423 26,613 38,953(2) 30,000(5) 745(8)
- -----------------------------------------------------------------------------------------
(1) Such amount includes relocation expenses of $37,102 paid by the registrant
on behalf of the indicated executive officer.
(2) Such amount includes relocation expenses of $13,958 and real estate sales
expenses of $24,995 paid by the registrant on behalf of the indicated
executive officer.
(3) Such amount represents stock options which were granted by the Company to
the indicated executive officer during Fiscal 1998. These options vest over
4 years, expire 10 years from the initial grant date, and have an exercise
price of $4.00 per share.
(4) Such amount represents stock options which were granted by the Company to
the indicated executive officer during the indicated fiscal year. These
options vest at the time of grant, expire one year after such executive
officer ceases to serve on the Company's Board of Directors, and have an
exercise price equal to the average bid price of the Company's Common Stock
for the 30 day period ending the December 31 prior to grant.
(5) Such amount represents stock options which were granted by the Company to
the indicated executive officer during Fiscal 1998. These options vest over
5 years, expire 10 years from the initial grant date, and have an exercise
price of $3.00 per share.
-27-
(6) Such amount represents automobile lease payments of $6,250 and life
insurance premiums of $536, each paid on behalf of the indicated executive
officer.
(7) Such amount represents automobile lease payments of $10,692, Company
contributions to the Company's 401(k) Plan of $2,231, and life insurance
premiums of $1,046, each paid on behalf of the indicated executive officer.
(8) Such amount represents life insurance premiums paid by the Company on
behalf of the indicated executive officer.
Option/SAR Grant Table
Options/SAR Grants In Last Fiscal Year
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/SARs
Options/ Granted to Exercise
SARs Employees or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date 5%($) 10%($) 0%($)
- ----------------------------------------------------------------------------------------------------
Bill Stewart 255,000 64% 4.00 3/2/08 $660,450 $1,741,650
Chief Executive
Officer
- ----------------------------------------------------------------------------------------------------
Allan Schulman
President 10,000 3% 4.63 (1) $ 30,000 $ 79,000 -
- ----------------------------------------------------------------------------------------------------
(1) The indicated options do not have a fixed expiration date;
rather, such options expire one year after Mr. Schulman ceases to serve on the
Company's Board of Directors. The Company does not have a mandatory retirement
date for Directors.
Aggregated Option and SAR Exercises and Fiscal Year-End Option/SAR Value Table
No options were exercised by officers or directors during Fiscal 1998.
-28-
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Name # of Shares Underlying Unexercised Value of Unexercised
Options -- Exercisable/Unexercisable In-the-Money Options at
FY Year-End --
Exercisable/Unexercisable
- --------------------------------------------------------------------------------
Bill Stewart 0/255,000 0
- --------------------------------------------------------------------------------
Allan Schulman 110,000/110,000 $215,000/$215,000
- --------------------------------------------------------------------------------
Anthony Roth 0/30,000 0
- --------------------------------------------------------------------------------
Compensation of Directors
The Company's policy is to pay every member of the Board of
Directors a directors' fee of $500 per month. Messrs. Boissiere and W.B. Doyle
have elected not to receive such directors' fees.
Employment Contracts, Termination of Employment and Change-In-Control
Arrangements
On December 12, 1997, the Company entered into a four year
Employment, Consulting and Non-Competition Agreement with Allan Schulman, its
President, providing for, among other things, a base salary of $180,000,
$144,000, $115,200, and $92,169, respectively, for the first, second, third and
fourth years of such agreement, subject to certain adjustments, and a car
allowance of $1,250 per month. The terms of this agreement permit Mr. Schulman
to reduce his involvement with, and responsibilities for, the Company during the
term of the agreement with a proportionate reduction in salary.
The Company has a four year Employment Agreement with Bill
Stewart, its Chief Executive Officer, the term of which commenced March 1998.
Such agreement provides for an annual salary of $200,000, as well as a one-time
bonus of $58,000 for calendar 1998. Future bonus arrangements will be negotiated
on an annual basis and will be based on certain earnings and revenue objectives
with a target bonus amount of approximately one-half of Mr. Stewart's annual
salary. The agreement also provides for a loan of $600,000 and reimbursement of
certain expenses in connection with the sale and purchase of the employee's
residence.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial
ownership as of December 18, 1998, of the Company's outstanding common stock
("Common Shares") by any person who is known to the Company to be the beneficial
owner of more than 5% of the Company's voting securities and the Company's
equity securities held by each director and by officers and directors of the
Company as a group.
-29-
Amount and Nature of
Name & Address Class Beneficial Percent
of Beneficial Owner of Stock Owner of Class
- ------------------- -------- ----- --------
Allan Schulman Common 640,656 (1) 11.86
Naturade, Inc.
7110 E. Jackson St.
Paramount, CA 90723
Barry M. Zwick Common 244,236 (2) 4.65
925 De La Vina St.
Suite 102
Santa Barbara, CA 93101
Health Holdings and Common 2,881,695 (3) 55.38
Botanicals, Inc. Preferred 1,250,024 100.00
318 N. Carson St.
Suite 208
Carson City, NV. 89701
Executive Officers and Common 3,965,087 70.24
Directors As a Group
Consisting of 6 Persons
FOOTNOTES
(1) Total includes 441,545 Common Shares solely owned by Mr. Schulman; 89,111
Common Shares which can be purchased upon exercise of the Company's Class B
Warrants; and 110,000 Common Shares which can be purchased under presently
exercisable options.
(2) Total includes 10,800 Common Shares solely owned by Mr. Zwick; 144,574
Common Shares owned by the Zwick Financial Corp. Profit Sharing Plan, of which
Mr. Zwick is sole trustee and 91% beneficiary; 50,000 Common Shares which can be
purchased by Mr. Zwick under presently exercisable options; and the following
amounts owned by Mr. Zwick's minor children: 38,000 Common Shares, and 862
Common Shares which can be purchased upon exercise of the Company's Class B
Warrants.
(3) Total includes 2,881,695 Common Shares owned by Health Holdings; and
1,250,024 shares of the Company's Series A Convertible Preferred Stock
("Preferred Shares"). Common and preferred shares of Health Holdings are held by
(i) Doyle & Boissiere LLC, a Delaware limited liability company (of which
-30-
Messrs. William B. Doyle, Jr., and Lionel P. Boissiere, Jr., directors of the
Company, are principals), (ii) Mr. Anders Brag, a director of the Company, and
(iii) Taishan Holdings, Inc., a British Virgin Islands corporation (of which
Messrs. William S. Doyle and Anders Brag, each a director of the Company, hold
equity interests). Messrs. William B. Doyle, Jr., William S. Doyle, Anders Brag
and Lionel P. Boissiere, Jr., each disclaim beneficial ownership of the
Company's Common Shares and Preferred Shares held by Health Holdings.
Item 13. Certain Relationships and Related Transactions
On December 15, 1997, the Company, Allan Schulman, L. S. Smith,
Dallas Gold & Silver Exchange, Inc. ("DGSE"), and Barry M. Zwick (Mr. Schulman,
Dr. Smith, DGSE and Mr. Zwick, together, the "Shareholders" and, collectively,
with the Company, "Sellers") entered into a Stock Purchase Agreement (the
"Purchase Agreement") and certain ancillary documents (collectively, the
"Transaction Documents") with Health Holdings. At the time of negotiation and
consummation of the transaction, Mr. Schulman was President, Chief Executive
Officer and Chairman of the Board of the Company; Dr. Smith was a shareholder of
and consultant to the Company; Dr. Smith was Chairman of the Board, Chief
Executive Officer and controlling shareholder of DGSE; DGSE was a shareholder of
the Company; and Mr. Zwick was a former director and shareholder of the Company.
Taishan Holdings, Inc. ("THI") is a British Virgin Islands
corporation. At the time of the transaction, William S. Doyle and Anders Brag
(each then a director of the Company) owned 50% and 25%, respectively, of the
equity interests in THI, and William S. Doyle served as President of THI. Doyle
& Boissiere LLC is a Delaware limited liability company ("D&B") of which William
B. Doyle, Jr. and Lionel Boissiere, Jr. (each a director of the Company) are
principals. As of the date of this Annual Report on Form 10-K, THI and D&B are
not affiliates of each other. At the time of the transaction, D&B and Anders
Brag held shares of convertible preferred stock of Health Holdings representing
approximately 85% of the outstanding stock of Health Holdings on a fully-diluted
basis, and THI held approximately 7.5% of the outstanding shares of Health
Holdings on a fully-diluted basis.
Consummation of the transactions (the "Health Holdings
Transaction") contemplated by the Transaction Documents took place concurrently
with the execution of the Purchase Agreement on December 15, 1997. Accordingly,
as of December 23, 1998, Health Holdings owns approximately 55% of the Company's
Common Shares and 100% of the Preferred Shares. In connection with the execution
and delivery of the Transaction Documents, William S. Doyle, Lionel P.
Boissiere, Jr., Anders Brag and William B. Doyle, Jr. were appointed to the
Company's Board of Directors on December 15, 1997.
-31-
Pursuant to the terms of the Purchase Agreement, the Shareholders
sold to Health Holdings the following numbers of Common Shares: Mr. Schulman
sold 650,473 Common Shares; Dr. Smith sold 50,000 Common Shares; DGSE sold
108,000 Common Shares; and Mr. Zwick sold 50,000 Common Shares. The total
purchase price for the Common Shares sold by the Shareholders was $2,575,419.
Simultaneously, the Company sold to Health Holdings (a) 2,023,222 newly issued
Common Shares and (b) 1,250,024 Preferred Shares for a total purchase price of
$6,000,000.
Through to and until December 15, 2007, each Preferred Share is
convertible into one Common Share in accordance with the following terms. Upon
the issuance by Naturade of 45 Common Shares pursuant to the exercise of any
warrant, option, contract or similar right outstanding on November 21, 1997, 55
Preferred Shares shall immediately become and remain convertible at a conversion
price equal to the average exercise price of the corresponding 45 Common Shares.
Conversely, if any currently outstanding warrant, option, contract or similar
right to purchase Common Shares shall expire unexercised on or prior to December
15, 2007, the corresponding number of Preferred Shares (on a 55 for 45 basis)
shall become redeemable at par.
In the event that, prior to December 15, 2007, (i) any person
other than D&B or an affiliate of D&B acquires 15% or more of the Common Stock,
(ii) the Company is party to any merger, consolidation, in each case into or
with a person other than D&B or its affiliate, (iii) the Company sells all or
substantially all of the assets of the Company to a person other than D&B or its
affiliate, or (iv) the Company makes an offering or offerings of the Company's
securities, the aggregate gross proceeds of which are in excess of $10,000,000,
the Preferred Shares shall become and remain convertible at a conversion price
of $1.45 per share. While convertible, the Preferred Shares shall have full
voting rights with the Common Stock on an "as converted" basis.
The Transaction Documents include a Registration Rights
Agreement, dated as of December 15, 1997, between the Company and Health
Holdings; a Consulting Agreement, dated as of December 12, 1997, between the
Company and D&B; a First Amendment to Lease, dated as of December 15, 1997,
between Allan Schulman and the Company, collectively as landlord, on the one
hand, and the Company, as tenant, on the other; a Mutual Option Agreement, dated
December 15, 1997, between Allan Schulman and the Company; an Employment,
Consulting and Non-Competition Agreement, dated as of December 15, 1997, between
Allan Schulman and the Company; and a Letter Agreement, dated December 11, 1997,
between the Company and DGSE pursuant to which the Company exchanged 108,500
shares of DGSE common stock held by the Company for 48,000 Common Shares held by
DGSE. The Health Holdings Transaction was reported by the Company on Form 8-K
filed by the Company on December 23, 1997, which is incorporated herein by this
reference.
-32-
Pursuant to Option Agreements dated January 25, 1995, each
Director then serving on the Company's Board was granted an option to acquire
20,000 additional Common Shares, at an exercise price equal to the average bid
price of the Common Stock for the thirty day period ending December 30, 1994
(which was $1.07 per share). In addition, the Option Agreements provide that
Directors will be granted options to purchase an additional 10,000 Common Shares
for each year that they serve as a director of the Company after January 1,
1995, at a price equal to the average bid price of the Common Stock for the 30
day period ending December 30th preceding the date on which such option is
granted. These options expire one year after the Director leaves the Board.
During February 1997, five directors each were granted options to acquire 10,000
additional Common Shares, at an exercise price equal to the average bid price of
the common stock for the thirty day period ending December 30, 1996 (which was
$1.96 per share). During January 1998, two directors, Mr. Schulman and Mr. Zwick
were each granted options to acquire 10,000 additional common shares, at an
exercise price equal to its average bid price of the common stock for the thirty
day period ending December 31, 1997 (which was $4.63 per share.) By special
resolution of the Board, Msrs. Schulman and Zwick assigned these options ratably
to three prior directors.
The Company and Allan Schulman, the Company's President, own a
two-thirds and a one-third interest, respectively, in the industrial building
which houses the Company's production facilities and executive offices (the
"Building"). As discussed in Item 2 above, the Company and Mr. Schulman have
entered into a First Amendment to Lease, dated as of December 15, 1997, and a
Mutual Option Agreement, dated as of December 15, 1997. Among other things, the
First Amendment to Lease grants the Company the right to extend the original
term of the Lease for two consecutive three year terms. The Mutual Option
Agreement provides, among other things, that the Company may purchase Mr.
Schulman's interest in the Building at any time prior to the expiration of the
Lease upon notice and payment to Mr. Schulman of one-third of the fair market
value of the Building. The Mutual Option Agreement further provides that during
the twelve-month period following expiration of the Lease, Mr. Schulman may
purchase the Company's interest in the Building following one hundred twenty
days' prior written notice and payment to the Company of two-thirds of the fair
market value of the Building.
The Company has a four year Employment Agreement with Bill D.
Stewart, Chief Executive Officer, dated March 2, 1998. Pursuant to the terms of
such agreement, Mr. Stewart was granted a loan of $600,000 for purposes of
purchasing a residence in Southern California. The loan has an interest rate of
0% and is secured by a deed of trust on the purchased residence. The terms of
the agreement originally contemplated that the loan became due and payable on
the earlier of (a) the sale of Mr. Stewart's prior residence or (b) August 29,
1998. Since the date of the agreement, Mr. Stewart and the Company have agreed
to extend the repayment date for such loan to March 9, 1999.
-33-
On March 2, 1998 the Company granted to Bill D. Stewart, pursuant
to the Company's 1998 Incentive Stock Option Plan (the "Plan"), options to
acquire up to 255,000 shares of the Company's Common Stock. The exercise price
for such options is approximately $4.00 per share (the average closing bid
prices of the shares of Common Stock on the OTC Bulletin Board as quoted by
Bloomberg, LP for the 5 day trading period ending on March 2, 1998). Such
options will vest in four equal portions on each of the first four anniversaries
of the grant date, subject to any limitations on exercise contained in the Plan,
and provided that the term of Mr. Stewart's employment agreement with the
Company shall not have ended prior to such anniversary. Notwithstanding the
foregoing, in the event of any sale (including, without limitation, either a
tender offer or a merger of the Company which results in the shareholders of the
Company holding less than 50% of the stock of the surviving corporation) of the
Company during such term, subject to certain limitations, all of Mr. Stewart's
options not then vested shall immediately vest.
On April 20, 1998 the Company granted to Ronald Ahrens, pursuant
to the Plan, options to acquire up to 51,000 shares of the Company's Common
Stock. At the time of such grant, Mr. Ahrens was a member of the Company's Board
of Directors. These options vested in full on April 20, 1998. The exercise price
for such options is $4.05 per share (the average closing bid prices of the
shares of Common Stock on the OTC Bulletin Board as quoted by Bloomberg, LP for
the 5 day trading period ending on April 20, 1998). These options are otherwise
subject to the provisions of the Plan.
-34-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(A) The following documents are filed as part of this report:
(1) Financial Statements. The following Financial Statements are
included in this report.
Financial Statements
--------------------
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Exhibits. Exhibits required to be filed as part of this
report are listed in the Exhibit Index.
(B) Reports on Form 8-K.
On June 11, 1998, the Company filed a Form 8-K reporting a change
in auditors to Deloitte and Touche, LLP, effective June 11, 1998, replacing
Rose, Snyder & Jacobs. The change in auditors was not a result of any
disagreement with the former auditors on the scope, auditing or presentation of
financial statements.
(C) Financial Statement Schedules.
The following is a list of the financial statement schedules
filed as part of this Annual Report on Form 10-K:
None
Supplemental Information to be furnished with Reports filed
pursuant to Section 15 (d) of the Act by Registrants which have not registered
securities pursuant to Section 12 of the Act:
No annual report or proxy material has been sent to security
holders with respect to Fiscal 1998. Proxy materials will be furnished to
security holders subsequent to the filing of this Form 10-K and copies of such
material will be furnished to the Commission when it is sent.
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NATURADE, INC.
Date: December 28, 1998 /s/ Bill D. Stewart
-----------------------
Bill D. Stewart
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Bill D. Stewart Director
- ------------------- Chief Executive Officer
Bill D. Stewart (Principal Executive Officer) December 28, 1998
/s/ Paul D. Shapnick Chief Financial Officer
- -------------------- (Principal Accounting Officer) December 28, 1998
Paul D. Shapnick
/s/ Lionel P. Boissiere, Jr. Director December 28, 1998
- ----------------------------
Lionel P. Boissiere, Jr.
/s/ William B. Doyle, Jr. Director December 28, 1998
- -------------------------
William B. Doyle, Jr.
/s/ William S. Doyle Director December 28, 1998
- --------------------
William S. Doyle
/s/ Allan Schulman Director
- ------------------ President December 28, 1998
Allan Schulman
/s/ Barry M. Zwick Director December 28, 1998
- ------------------
Barry M. Zwick
-36-
NATURADE, INC.
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 38
FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER 30, 1998, 1997 AND 1996:
Balance Sheets 41
Statements of Operations 42
Statements of Stockholders' Equity 43
Statements of Cash Flows 44
Notes to Financial Statements 45-59
-37-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Naturade, Inc.
Paramount, California:
We have audited the accompanying balance sheet of Naturade, Inc. (the "Company")
as of September 30, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all material
respects, the financial position of Naturade, Inc. as of September 30, 1998, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Los Angeles, California
December 18, 1998
-38-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Naturade, Inc.
Paramount, California
We have audited the accompanying balance sheet of Naturade, Inc. as of
September 30, 1997, and the related statements of income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The balance sheet as
of September 30, 1996, and the related statements of income, stockholders'
equity, and cash flows for the years ended September 30, 1996 and 1995 were
audited by other auditors, whose report dated October 31, 1996, expressed an
unqua1ified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Naturade, Inc. as of
September 30, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Rose, Snyder & Jacobs
- -------------------------
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
November 5, 1997
-39-
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS
To the Board of Directors
Naturade, Inc.
Paramount, California
We have audited the statements of operations, stockholders' equity and cash
flows for Naturade Inc., for the year ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations and its cash flows for the
year ended September 30, 1996, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
- ---------------------------
McGladrey & Pullen, LLP
Anaheim, California
October 31, 1996
-40-
NATURADE, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 1,975,513 $ 157,585
Accounts receivable, net 1,419,293 1,404,661
Related party receivable 600,000
Inventories 1,957,940 2,413,621
Refundable income taxes 163,416
Prepaid expenses and other current assets 208,901 42,149
Deferred income taxes 158,514
----------- -----------
Total current assets 6,325,063 4,176,530
Available-for-sale security 217,000
Property and equipment, net 2,018,147 2,111,806
Intangible assets, net 1,120,588 1,177,506
Other assets 84,671 70,732
----------- -----------
TOTAL $ 9,548,469 $ 7,753,574
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,011,165 $ 1,027,288
Accrued expenses 545,209 341,251
Note payable 1,450,000 1,150,000
Current portion of long-term debt 202,380 194,857
Income taxes payable 106,998
----------- -----------
Total current liabilities 3,208,754 2,820,394
----------- -----------
LONG-TERM DEBT, Less current maturities 2,011,523 2,235,908
----------- -----------
DEFERRED INCOME TAXES 11,986
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $0.0001 per share; authorized, 50,000,000
shares; issued and outstanding, 5,203,731 (1998) and 3,297,223 (1997) 520 330
Preferred stock, par value $0.0001 per share; authorized, 2,000,000
shares; issued and outstanding, 1,250,024 (1998) and 0 (1997) 125
Additional paid-in capital 7,375,708 1,539,902
Retained earnings (accumulated deficit) (3,048,161) 1,061,654
Unrealized gain on available-for-sale security, net 83,400
----------- -----------
Total stockholders' equity 4,328,192 2,685,286
----------- -----------
TOTAL $ 9,548,469 $ 7,753,574
=========== ===========
See notes to financial statements.
-41-
NATURADE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------
1998 1997 1996
NET SALES $ 13,506,972 $ 12,578,419 $ 10,105,532
COST OF SALES 7,794,089 6,381,795 5,236,427
------------ ------------ ------------
GROSS PROFIT 5,712,883 6,196,624 4,869,105
------------ ------------ ------------
COSTS AND EXPENSES:
Selling, general and administrative expenses 8,485,390 5,377,644 4,323,154
New product design costs 443,333
Special legal expenses 527,638
Transaction costs 261,964
Other (income) expense:
Interest expense 397,716 347,760 354,973
Miscellaneous, net (328,793) 57,925 (13,180)
------------ ------------ ------------
Total costs and expenses 9,787,248 5,783,329 4,664,947
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (4,074,365) 413,295 204,158
PROVISION FOR INCOME TAXES 35,450 165,000 38,000
------------ ------------ ------------
NET (LOSS) INCOME $ (4,109,815) $ 248,295 $ 166,158
============ ============ ============
BASIC (LOSS) EARNINGS PER SHARE $ (0.84) $ 0.08 $ 0.06
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN COMPUTATION OF BASIC (LOSS)
EARNINGS PER SHARE 4,874,000 2,945,000 2,578,000
============ ============ ============
DILUTED (LOSS) EARNINGS PER SHARE $ (0.84) $ 0.08 $ 0.06
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN COMPUTATION OF DILUTED
(LOSS) EARNINGS PER SHARE 4,874,000 3,232,000 2,777,000
============ ============ ============
See notes to financial statements.
-42-
NATURADE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------------
Retained Unrealized
Common Additional Earnings Gain on
Common Preferred Stock to Be Paid-in (Accumulated Available-for-
----------------- ------------------ Issued Capital Deficit) Sale Security
Shares Amount Shares Amount
BALANCE, OCTOBER 1, 1995 2,538,461 $ 254 - $ - 100,000 $ 107,420 $ 647,201 $ 42,713
Issuance of common stock 45,662 4 (100,000) 99,996
Contributed capital from
stock option compensation 19,900
Exercise of stock warrants:
Class A 8,849 1 8,848
Class B 33 99
Decrease in unrealized gain on
available-for-sale security, net (12,370)
Net income for the year 166,158
--------- ----- --------- ----- --------- ---------- ----------- --------
BALANCE, SEPTEMBER 30, 1996 2,593,005 259 236,263 813,359 30,343
Issuance of common stock 500,000 50 1,013,950
Contributed capital from
stock option compensation 85,492
Exercise of stock warrants -
Class A 204,218 21 204,197
Increase in unrealized gain on
available-for-sale security, net 53,057
Net income for the year 248,295
--------- ----- --------- ----- --------- ---------- ----------- --------
BALANCE, SEPTEMBER 30, 1997 3,297,223 330 1,539,902 1,061,654 83,400
Issuance of common stock 2,042,222 204 6,000,000
Issuance of preferred stock 1,250,024 125
Repurchase of common stock (48,000) (5) (244,120)
Cancellation of common stock (100,000) (10) (72,117)
Contributed capital from stock
compensation 115,516
Exercise of stock warrants -
Class B 12,286 1 36,527
Net loss for the year (4,109,815)
Decrease in unrealized gain on
available-for-sale security, net (83,400)
--------- ----- --------- ----- --------- ---------- ----------- --------
BALANCE, SEPTEMBER 30, 1998 5,203,731 $ 520 1,250,024 $ 125 - $7,375,708 $(3,048,161) $ -
========= ===== ========= ===== ========= ========== =========== ========
See notes to financial statements.
-43-
NATURADE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(4,109,815) $ 248,295 $ 166,158
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 186,454 156,393 142,530
Deferred income taxes 146,528 (43,898) (27,000)
Undistributed loss on equity investment 8,109
Loss on disposition of property and equipment 8,184 7,350
Compensation expense arising from stock options and issuance of common stock 115,516 85,492 19,900
Net gain on exchange of available-for-sale security (110,125)
Changes in assets and liabilities:
Accounts receivable (14,632) (483,300) (256,545)
Inventories 455,681 (1,080,086) (237,560)
Refundable income taxes (163,416)
Prepaid expenses and other current assets (166,752) (13,860) 161,537
Other assets (86,466) 70,649
Accounts payable, accrued expenses and income taxes payable 80,837 716,581 111,154
Other 7,938
----------- ----------- -----------
Net cash (used in) provided by operating activities (3,658,006) (336,384) 96,221
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Related party receivable (600,000)
Purchase of property and equipment (45,986) (48,884) (147,140)
Proceeds from sale of property and equipment 1,925
Purchase of intangible assets (41,218)
----------- ----------- -----------
Net cash used in investing activities (644,061) (90,102) (147,140)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 300,000 429,062 350,000
Proceeds from issuance of debt 81,560
Payments of long-term debt, including capital lease (216,862) (169,352) (385,890)
Proceeds from sale of stock 6,000,000
Proceeds from exercise of warrants 36,857 204,218 8,948
----------- ----------- -----------
Net cash provided by financing activities 6,119,995 463,928 54,618
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,817,928 37,442 3,699
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 157,585 120,143 116,444
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,975,513 $ 157,585 $ 120,143
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ 396,782 $ 347,000 $ 354,000
Income taxes $ 141,036 $ 61,000 $ 46,000
Noncash investing and financing activities -
Exchange of available-for-sale security with a fair market value of $244,125
for 48,000 shares of Company stock recognizing a net gain of $110,000.
Cancellation of common stock $ 72,128 $ - $ -
See notes to financial statements.
-44-
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Naturade, Inc. (the "Company" or "Naturade") manufactures and distributes
a variety of health related products, including vitamins, nutritional
supplements, and skin and hair care products. Its products are sold
primarily to distributors who resell to health and natural food stores.
Independent brokers and outside sales representative are utilized
throughout the United States and internationally.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with maturities of three months or less when purchased to be
cash equivalents.
Concentration of Credit Risk - Financial instruments that subject Naturade
to credit risk consist primarily of accounts receivable, related party
receivable, and notes receivable. Concentration of credit risk with
respect to trade accounts receivable is generally diversified due to the
large number of entities comprising the Company's customer base and their
geographic dispersion. Naturade performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses. The
Company maintains cash balances in accounts insured by the federal
government up to $100,000. At September 30, 1998 and 1997 the Company had
cash in banks totaling approximately $1,676,000 and $46,000, respectively,
in excess of the insured amount.
Fair Value of Financial Instruments - Pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 107, " Disclosure About Fair Value of
Financial Instruments," the Company has estimated that the carrying value
of its financial instruments, which primarily consist of notes payable and
long-term debt, approximates fair value due to the availability of such
debt at interest rates similar to rates currently paid by the Company.
Accounts Receivable - Accounts receivable are presented net of an
allowance for doubtful accounts of $51,000 and $5,000 at September 30,
1998 and 1997, respectively, and net of an allowance for returns of
$90,000 and $75,000 at September 30, 1998 and 1997, respectively.
Available-for-Sale Security - In the 1997 fiscal year the Company held
securities that consisted of 108,500 shares of common stock of a publicly
held company. The publicly held company also owned 48,000 shares of
Naturade. During fiscal year 1998 the two companies exchanged the stock
each held in the other company. A gain of $166,125 was recorded on the
transaction based on the market value on the exchange date and is included
in other income.
The security was presented at the fair market value of $217,000 at
September 30, 1997, based on quoted market prices as of that date. The
original cost of the security was $78,000, and the gross unrealized gain
included in stockholders' equity amounted to $139,000 at September 30,
1997.
-45-
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation and amortization, which are computed using the
straight-line method over the lesser of related lease terms or the
estimated useful lives of such assets as set forth in the following table:
Classifications Life
--------------- ----
Building and improvements 5-27 Years
Machinery and equipment 5-10 Years
Furniture and fixtures 5 Years
Vehicles 5 Years
Intangible Assets - Intangible assets consist of trademarks, copyrights
and other intangible assets with a total combined cost of $1,335,052 at
September 30, 1998 and 1997. These intangible assets are being amortized
using the straight-line method over lives ranging from 15 to 25 years.
Accumulated amortization at September 30, 1998 and 1997 amounted to
$214,464 and $157,546, respectively.
Income Taxes - Income taxes are provided for in accordance with SFAS No.
109, "Accounting for Income Taxes." Under SFAS No. 109, income tax expense
includes income taxes payable for the current year and certain deferred
income taxes resulting from temporary differences between assets and
liabilities for income tax purposes and for financial statement purposes.
The carrying value of deferred income tax assets is determined based on an
evaluation of whether the realization of such assets is more likely than
not.
Impairment of Long-Lived Assets - The Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying value of such assets may not be recoverable based on
undiscounted future cash flows. If long-lived assets are impaired, the
Company recognizes an impairment loss measured as the amount by which the
carrying value of the assets exceeds the estimated fair value of the
assets.
Income (Loss) per Share -The Financial Accounting Standards Board ("FASB")
has issued Statement No. 128, "Earnings Per Share ("EPS")," which became
effective for periods ending after December 15, 1997. This statement
requires restatement of all prior period EPS data presented. This
statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS
with the presentation of basic EPS and requires dual presentation of
diluted EPS on the face of the income statement for all entities with
potential common shares. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15.
Research and Development - Research and development costs are included in
costs and expenses when incurred and amounted to $279,370, $134,807 and
$123,643 for the years ended September 30, 1998, 1997 and 1996,
respectively.
-46-
Advertising - The Company expenses the cost of advertising as incurred.
Advertising expense amounted