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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004 Commission File Number: 33-7106-A   NATURADE, INC.  Delaware
    
    23-2442709(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)14370 Myford Road, Irvine, CA
    
    92606(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (714) 573-4800 Securities registered pursuant to Section 12(b) of the Act: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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o No þ As of June 30, 2004, the last business day of the registrants most recently completed second
fiscal quarter, the aggregate market value of such Common Stock held by non-affiliates was $154,995
based on the average of the bid and asked price on that date. As of March 26, 2005, 44,533,886 shares of the registrants Common Stock were outstanding.




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TABLE OF CONTENTS PART IItem 1.
    
    BusinessItem 2.
    
    PropertiesItem 3.
    
    Legal ProceedingsItem 4.
    
    Submission of Matters to a Vote of Security HoldersPART IIItem 5.
    
    Market for the Registrants Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity SecuritiesItem 6.
    
    Selected Financial DataItem 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 8.
    
    Financial Statements and Supplementary DataItem 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem9A.
    
    Controls and ProceduresItem9B.
    
    Other InformationPART III.Item 10.
    
    Directors and Executive Officers of the RegistrantItem 11.
    
    Executive CompensationItem 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13.
    

    Certain Relationships and Related TransactionsItem 14.
    
    Principal Accountant Fees and ServicesPART IV.Item 15.
    
    Exhibits and Financial StatementsEXHIBIT 10.56EXHIBIT 10.57EXHIBIT 10.58EXHIBIT 10.59EXHIBIT 10.60EXHIBIT 10.61EXHIBIT 10.62EXHIBIT 10.63EXHIBIT 10.64EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
    2




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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 and 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. In addition, the reader may identify forward-looking
statements by the use of the words anticipates, expects, intends, plans, variations thereof
and similar expressions. All such forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. 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 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations, and the Notes to Financials Statements 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 fact that our accountants have
expressed doubt about the Companys ability to continue as a going concern, the Companys
expectation of further losses, the Companys need for additional financing and access to borrowing,
the Companys dependence on key customers, the Companys dependence on third-party manufacturers,
government regulations that could affect the Companys products, the Companys ability to identify
suitable strategic partners, competition, the Companys dependence on key personnel, labeling or
promotion risks associated with the mass market, the effect of closely controlled stock, the pace
of technological change, possible interruptions in the Companys business resulting from the U.S.
Governments response to terrorism, variability of quarterly results, product liability exposure,
reduced sales in the dietary supplement industry, the effect of adverse publicity, the Companys
ability to protect the Companys intellectual property, the rate of consumer acceptance of new
product introductions, stock price volatility, 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 update any
these forward-looking statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unexpected events. NATURADE®, NATURADE TOTAL SOY®, THE DELICIOUS WAY TO GIVE HEART DISEASE THE SHAKE, THE DELICIOUS
CHOLESTEROL FIGHTER! ®, NATURADE 100% SOY, NATURADE 100% WHEY, NATURADE VEG, NATURADE SOY-FREE
VEG, NATURADE MILK & EGG, NATURADE N-R-G, NATURADE PURE SOY, DIET LEAN, POWER SHAKE®, FEEL
ALIVE®, RIBOTEIN, REVIVEX, HEAD START and EXPEC® are trademarks or service marks of
Naturade, Inc.   3




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PART I 
 Item 1. Business General Naturade, Inc. (the Company or Naturade) was founded in 1926. The Company is a leading
marketer of scientifically supported natural products formulated to improve the health and
well-being of consumers and sold to supermarkets, mass merchandisers, club stores and drug stores
(collectively, the mass market), health food stores and natural food supermarkets (collectively,
the health food market) and the military. The Companys products are generally marketed under the
trademarks Naturade®, Naturade Total Soy®, Diet Lean, SportPharma® and ReVivex. The Company also
markets its products in the health food market and mass market in Canada and selectively in other
international markets. Naturade is known for its expertise in soy protein based products, having pioneered the soy
protein powder category in 1950. It has long held a leading market share of soy protein booster
powders sold through health food distributors. In 1999, Naturade introduced its Naturade Total Soy®
meal replacement powders and by 2000 had become a leading brand name in soy protein powders for all
trade classes combined, capitalizing on the 1999 U.S. Food and Drug Administration (FDA)
announcement of a heart disease health claim for soy protein. Weight loss is a major marketing focus for the Company encompassing its Naturade Total Soy®
line of meal replacements for cholesterol reduction and weight management and its Naturade® line of
protein boosters for low carbohydrate dieters. In 2003, the Company introduced Diet Lean carb
blocker, a product to help block absorption of starch calories. In 2004, the Diet Lean line was
extended with five additional Stock Keeping Units (SKUs) to broaden appeal to dieters regardless
of the particular weight loss regimen they are following. Naturade
anticipates growth in the joint health category based on new
technology that offers greater relief than has previously
been available. In October 2004, Naturade became the first company to offer products for sale in
U.S. retail outlets with a new dietary supplement ingredient, Celadrin. These products are
marketed under a new brand name, ReVivex. Clinical test results show that Celadrin offers the
promise of faster relief than is currently available from other dietary supplement ingredients for
promotion of joint health and mobility. Unlike, other joint health supplements, Celadrin works on
muscles and tissues as well as joints. In
addition, in 2004 Naturade introduced a topical analgesic under the
ReVivex brand name which is targeted to the over 66 million arthritis pain sufferers. In 2004, the Company entered the sports nutrition segment of the market with the introduction
of the SportPharma® line of sports nutrition products. This line is targeted to the sports
enthusiasts who want an all-natural alternative. The SportPharma brand is licensed under an
exclusive agreement for sales to health food stores and the natural
food section of supermarkets. In order to focus its resources on its core soy powder brands and new products and to raise
working capital, the Company sold its aloe vera brands in 2004. The aloe vera products were
focused primarily on the natural health and beauty segment and it was determined they were outside
the Companys current strategic focus and were considered not to be a strategic area for the
company to devote its resources to. The Company offers additional all-natural brands and product lines, including laxatives,
digestive aids, cough/cold products, and provides private label products to a limited number of
customers. History and Recent Developments Until 1999, the Company focused on sales to health food stores and natural supermarkets. In
1999, Naturade entered the mass market with the introduction of its first line of meal replacement
products, Naturade Total Soy®. In 1999, the U.S. Food and Drug Administration (FDA) authorized a heart health claim for soy
protein which allows qualifying products to claim on their label 25 grams of soy protein daily, in
a diet low in saturated fat and cholesterol, may reduce the risk of heart disease. Naturade began
shipping products that prominently featured this claim on the first day allowed by the FDA and
believes that it has materially benefited from the FDA decision through increased shelf
distribution and increased consumer trial. Naturade currently markets 26 different SKUs featuring
this claim.   4




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In 2002, Naturade broadened its focus to target the large and rapidly growing opportunity in
weight loss. Initially, this was accomplished by repositioning its Naturade Total Soy® meal
replacements under the slogan reduce cholesterol and manage your weight. In 2003, the weight loss focus was accelerated as the Company repositioned its long
established line of high protein boosters to target dieters who were concerned about reducing
carbohydrate intake. In 2003, the Company also introduced the Diet Lean brand name through the
introduction of a white kidney bean extract ingredient shown in clinical studies to help people
lose weight by blocking the absorption of starch calories. This line was extended in early 2004
with the introduction of two meal replacement powder SKUs and three additional dietary supplement
SKUs, including Diet Lean Body Fat Regulator with Tonalin® brand CLA. In early 2004, Naturade made an aggressive effort to establish a significant position in the
sports nutrition category with the introduction of 4 powder SKUs under the brand name SportPharma®.
In addition to gaining placement in health food retailers throughout the U.S. and in the natural
section of mass supermarkets, the company used SportPharma® to open distribution with GNC stores Anticipating growth in the
 joint health category based on new
technology, Naturade introduced, in late 2004, a new line of products under the brand name
ReVivex. This launch built on the companys expertise in gaining distribution in mass market and
health food retailers. The ReVivex family of products includes three oral dietary supplement SKUs. ReVivex
dietary supplements offer alternatives to competitive products
currently available as the first brand sold in retail stores that are made with Celadrin®.
Celadrin®, is a new dietary supplement ingredient, that cushions bones and joints to promote flexibility and mobility. Clinical
test results published in the Journal of Rheumatology showed that an oral dosage of Celadrin®
delivered benefits in just 30 days. This compares favorably to glucosamine that can take 6 to 8 weeks or longer to work. Celadrin® is further
differentiated from glucosamine and other dietary supplement ingredients such as chondroitin, MSM
or SAMe since it works on muscles and tissues as well as on joints. ReVivex Pain Relief Lotion
is a menthol-based topical analgesic that works in 30 minutes or less to relieve pain. ReVivex
lotion can be used for pain from arthritis or backache as well as by athletes or others who suffer
pain from over exertion or injuries. Business Strategy The mission of the Company is to market innovative natural products that nourish and improve
the health and well being of consumers. Naturade focuses on building consumer brands that can be
marketed in both the mass market and the health food market and for which there is strong
scientific support of efficacy. Naturades management is committed to profitable growth through the
following business strategies. Increase focus on weight loss Naturade is strongly focused on the growth potential of the weight loss category, including
high consumer interest in low carbohydrate diets. More than ten human clinical studies demonstrate
weight management benefits for soy protein as part of a reduced calorie diet including improved
satiety (feeling of fullness), increased lean muscle mass and protection against oxidative stress
(a particular concern to people involved in athletic performance). The Companys new Diet Lean
brand of products, which includes products that assist weight loss by helping to block the
absorption of starch calories, offers a launching pad for new, complementary healthy weight loss
products. Capitalize on health benefits of soy protein The Company believes significant growth potential exists in the soy protein foods category
with over 50 clinical studies demonstrating that soy protein reduces cholesterol, while consumer
awareness of this important benefit remains well below 50%. The FDA, the American Heart Association
and the Mayo Clinic all support daily intake of 25 grams of soy protein as part of a diet low in
saturated fat and cholesterol. In addition, FDA is currently reviewing a petition for a health
claim for soy protein-based foods and reduced risk of breast, prostate, and colon cancer. The
petition is based on evidence presented from 58 different studies.   5




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Become a leader in all natural joint health and arthritis pain relief Naturades introduction of the ReVivex line is focused on providing safe, all natural
ingredients backed by science as alternatives to current joint health
products. ReVivex joint support products are the first products to market the dietary supplement ingredient Celadrin in major
retail stores throughout the U.S. and the Company believes this market is currently in a growth stage. ReVivex Pain Relief Lotion, which contains the active ingredient menthol, works quickly to
temporarily relieve joint, muscle and tissue pain from backache, sprains, strains and over exertion
and even from arthritis. Excel in relationships with consumers and retailers The Company has used its expertise in consumer packaged goods to build a strong relationship
with its retail customers. Naturade complements its broad sales and marketing efforts with programs
focused on direct-to-consumer communication to generate trial use, cross-promote products and build
brand loyalty. Focus resources on nutraceutical supplements The Company has elected to focus its resources on nutraceutical supplements. As a result, the
Company sold its aloe vera brands in 2004 that were primarily targeted to the natural health and
beauty segment. Because of numerous competitors the Company was not positioned to take full
advantage of this segment. Pursue innovation through science-based new products Naturade continues to emphasize new products as a long-term growth strategy. These include
further exploitation of soy proteins demonstrated ability to lower cholesterol, support weight
loss, reduce bone loss, reduce hot flashes and enhance performance. In addition future products will be released based on other promising
health benefits verified by scientific investigations in the weight loss and joint health
categories. The Companys marketing and research and development departments spearhead new product
development; overseeing product formulation, testing and sample production runs carried out by the
Companys third party manufacturers. Focus promotional spending to improve profitability by account The Company maintains account-by-account profit and loss budgets to improve the efficiency of
promotional spending. The Company manages its spending plans based on each accounts potential,
and then develops its promotional programs to optimize sales growth while limiting Naturades brand
expense. The Company selectively pursues new distribution where initial investment in start-up
costs has a strong expectation of delivering a near-term payback. Similarly, management has
elected to exit accounts where minimum profit standards cannot be met. As a result, Naturade is
currently selling to a consolidated U.S. account base of approximately 20,000 stores compared to
approximately 11,000 in 2003 and 15,000 in 2002. Expansion into the Canadian market with a
streamlined offering of best selling products is being pursued with the same targeted spending
strategy. Identify and solicit strategic partners for growth The Company continues to focus on external growth making use of the resources of its major
investors to help identify beneficial strategic alliances. The Company is currently engaged in a
strategic alliance in natural sports nutrition products. The effort to identify additional funding
in support of internal and external growth is ongoing.   6




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Industry Naturade has sought to position itself for long-term growth by designing products that address
specific conditions where strong scientific evidence of tangible health benefits has created
marketing opportunities. There are also a number of demographic trends that support the Companys
belief that the current growth for the categories in which it competes will be long-lived,
including the following:  
    During 2005, nearly 70 million, or nearly one in three adults, will suffer from
arthritis or chronic joint symptoms according to the Arthritis Foundation. This number
is up over 50% since 1998.
    Arthritis is the nations leading cause of disability among Americans over age 15.
    Baby boomers are now at prime risk for arthritis; more than half those affected are under age 65.
    64% of the U.S. population is classified as
overweight.
    There is an increasing consumer awareness of weight loss and
healthy eating due to an estimated 64% of the U.S. population being
described as overweight.
    Heart disease remains as the number one killer of men and women in the U.S.
    100 million Americans have high cholesterol.
    Significant health risks are associated with obesity, including heart disease,
high blood pressure and diabetes.
    A trend towards healthier, more active lifestyles continues.
    Preventative/alternative medicines and therapies are increasingly popular.
    Demand has increases for safe, all natural joint health and arthritis pain
relief products to replace pharmaceutical products shown to have a high risk of side
effects.
    An increasing number and credibility of scientific studies and clinical trials
support the efficacy of non-drug health products. There can, however, be no assurance that these trends will continue or that they will result
in greater sales revenue for the Company. Naturade competes in the overall market for natural, nutritional supplements. Nutrition
Business Journal(NBJ), a San Diego-based research publication that specializes in this industry,
reports that sales for the overall $58 billion Nutrition industry were up 7% in 2004 versus 2003.
Naturade primarily competes in the $19 billion segment defined by NBJ as Supplements. The
Supplement category, which is broken down as follows, grew 4% in 2004: 2004 Sales
    
    
    Growth Percentage($ Billions)
    
    
    Over 2003Vitamins
    
    $
    6.2
    
    
    3%Herbs/Botanicals
    
    
    4.3
    
    
    (3%)Meal Replacements
    
    
    2.6
    
    
    12%Sports Nutrition Powders/ Supplements
    
    
    1.8
    
    
    6%Minerals
    
    
    1.5
    
    
    9%Other (including joint health and
pain relief)
    
    
    2.4
    
    
    7%Total
    
    $
    18.8
    
    
    4%
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Weight
loss continues to create ongoing front page news through the major media outlets.
According to the Centers for Disease Control, two thirds of the U.S. population is overweight. Both the nature of the problem and the continuing news
coverage support the perspective that demand for weight loss products will continue to increase for
years to come. In addition to weight control, Naturade competes in the soyfoods market. In 2003, that
category grew by 7.2% to an estimated $3.9 billion according to Spins/Soyatech. According to the
report entitled Soyfoods: The U.S. Market 2004, soyfoods grew at a rate of more than 14% per year
for the past 10 years, but slowed considerably since 2001. The report points out that shelf stable
juices, functional drinks, soymilk and energy bars have been the growth categories while other
segments have not performed as well. Most recently, Naturade has entered the joint health category which NBJ categorizes under the
$20 billion supplement segment of the $63 billion Nutrition Industry. Overall, supplements grew
6% in 2003, led by 14% growth from specialty/other products, including supplements for joint
health. The specialty/other segment is expected to grow at a compound annual rate of 9.5% through
2008. Joint Health supplements, including glucosamine, chondroitin, MSM and SAMe delivered sales
of $946 million, according to NBJ, up 11% in 2003 versus 2002. Brands & Product Lines Weight loss brands Naturade Total Soy® is the largest selling Naturade brand, positioned for weight loss and
cholesterol reduction. It is distributed in virtually all of the retail outlets serviced by
Naturade or its distributors. These products include shake mix powder products available in a
variety of flavors in all natural and low carbohydrate formulation including original Naturade
Total Soy® powder, Calcium Shake and Naturade Low Carb Dieters Shake®. First introduced in 1950, Naturade protein boosters are high protein, low carbohydrate powders
offering consumers a range of protein choices. These powders are typically added to smoothies to
make high protein drinks, but are also used to add protein to other foods prepared at home such as
cereal, sauces or casseroles. The Company offers a broad selection of protein booster powders
based on alternate protein sources, including Naturade 100% Soy, Naturade Veg, Naturade N-R-G,
Naturade 100% Whey, Naturade Soy-Free Veg and Naturade Milk & Eggwhite. Diet Lean is a new Naturade weight loss brand introduced in 2003/2004. Diet Lean offers four
different dietary supplement SKUs plus 2 meal replacement powders that can be used to support any
weight loss plan. The dietary supplement products are backed by scientific research in support of
benefits such as blocking digestion of carbohydrates and stimulating metabolism to helping to
reduce fat. These products include Diet Lean® Body Fat Regulator with CLA®, Diet Lean® Weight Loss
Multivitamin, Diet Lean® Fiber Supplement and Diet Lean® Low Carb Dieters Shake. The introduction
of this brand and the subsequent introduction of products focused on the low carb dieter addresses
the needs of consumers who will no longer be able to purchase ephedra-based products and will be
looking for safe and effective dietary supplements that will help them lose weight. Calcium Shake is a soy protein-based meal replacement for weight loss that is positioned to
support bone health with the full daily value of 1000 mg of Calcium per serving. Soy protein-based products for heart health In 1999, the FDA authorized a heart health claim for soy protein. Naturade markets 26
different soy protein SKUs that qualify to carry the FDA approved claim that 25 grams of soy
protein daily, in a diet low in saturated fat and cholesterol, may reduce the risk of heart
disease.These products accounted for approximately 53% of Naturade net sales in 2004. Naturade
Total Soy® was the first soy protein powder brand in the U.S. to carry this claim on the front of
retail package labels and differentiates itself from competitors by continuing to emphasize this
life-saving health message on its packages as well as in its advertising and promotional messages
as the delicious cholesterol fighter®. Naturade offers two soy protein-based nutritional
supplement products positioned as energy enhancers, Power Shake® and Ribo-tein, plus Naturade Pure
Soy, the only widely distributed meal replacement powder made with certified organic ingredients.
In addition, three of the six low carbohydrate protein boosters are made with soy protein and carry
the FDA heart health claim.   8




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Joint health care products In late 2004, Naturade introduced ReVivex, a line of joint health products
that utilize Celadrin®, a proprietary compound that studies show offers benefits not found in glucosamine based
products, currently the standard for natural joint health supplements. The active ingredient in Naturades ReVivex line,
available in several oral (tablet) applications, has properties
which cushions bones and joints to increase mobility and promote flexibility. Arthritis Pain Relief Products In 2004, Naturade introduced ReVivex Pain Relief Lotion. ReVivex lotion contains menthol
and has demonstrated in clinical studies to
temporarily relieve pain from arthritis, muscle soreness and backache in 30 minutes or less.
ReVivex lotion expands the Companys target market to over 66 million consumers who suffer from
arthritis. Aloe vera-based products During 2004, the Company sold its Aloe vera brands for approximately $1.2 million in cash in
order to raise working capital and focus its resources on meal replacements, diet products, sports
nutrition and joint health care products. The aloe vera based products accounted for approximately
10%, of Naturade 2004 and 2003 net sales. Other products and private label The Company offers additional all-natural brands and product lines including sports nutrition
powders, laxatives, digestive aids, cough/cold products and a healthy breakfast product (Head
Start) which, cumulatively, account for approximately 15% of 2004 net sales. These are distributed
almost exclusively through independent health food stores and natural supermarkets. In addition,
the Company provides private label products to a limited number of customers. Competition In light of the 2004 withdrawal of Slim Fasts soy protein powders, Naturade faces only one
significant competitor in the mass market powder sector, Genisoy® from MLO Products, Inc. Many
other companies have entered the category since 1999 but hold only small market shares, including,
Twinlab, Amerifit, Kashi, Balance, EAS, Natrol, Rexall Sundown, Schiff (Weider) and Country Life
(Hain). Naturade also competes with Genisoy® and Kashi in the health food segment where the
Company believes that it holds the leading share of soy protein products positioned for weight loss
and heart health. In the health food sector Naturade competes indirectly with Spiru-tein®, a brand
from Natures Plus, Inc. Unlike Naturade Total Soy®, Spiru-tein® does not emphasize soy protein
content in marketing its products and positions them as energy boosters rather than products for
weight loss or cholesterol reduction. Spiru-tein® holds a substantial lead over Naturades entries
in the energy category, Power Shake® and Ribo-tein. Naturade was first to market with its Celadrin based brand, ReVivex. However, the Company
does not have exclusive rights to the active ingredient and it is possible that other companies
will introduce Celadrin based products. ReVivex currently competes with a wide array of dietary
supplement products for joint health. The market leader is the glucosamine based Osteo-BiFlex
brand from NBTY (Rexall). Other competitors include Weider (Move Free), Pharmavite (Nature Made),
Natrol, Arthritis Research Corporation (Flexamin), Contract Pharmacal Corporation (ArthX) and
Nutramax Labs (Cosamin DS). These companies all offer glucosamine based product lines while most
also offer alternate SKUs with MSM or SAMe. Weider has recently introduced a new product under the
Lubriflex brand name which offers a novel joint health ingredient, hylauronic acid. ReVivex Pain
Relief Lotion is a topical analgesic competing with numerous companies in this over-the-counter
(OTC) drug category. Topical competitors include Naturopathic Labs (Joint-ritis), Pfizer
(BenGay), Chattem (Capzasin, Icy Hot & Aspercreme) and Haw Par Healthcare Ltd. (Tiger Balm).
Numerous small companies offer similar products for joint health and arthritis pain relief through
health food stores.   9




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Sales, Marketing and Distribution In fiscal 2004, the breakdown of Naturade sales by channel was 46.1% to the mass market, 51.1%
to the health food market and 2.8% in international channels. Naturades products are sold to both
the health food market and the mass market using a sales management team augmented by independent
brokers. Health food sales are primarily through distributors, while most mass market sales are
direct to retailers. Naturade sales and distribution in Canada is also handled through distributors
and brokers. The Companys major customers include: Major Customers by Channel Mass Market
    
    Health Food MarketKroger, Fred Meyer, Safeway, Wal-Mart
    
    The Vitamin Shoppe, Whole FoodsAlbertsons, American Drug
    
    Wild Oats, Natures BestSams Club, Costco, BJs Wholesale
    
    Tree of Life, United Natural Foods
 Naturades direct sales force supervises broker sales organizations in the health food market
and mass market. While headquarters sales calls are primarily the responsibility of Naturades
sales management, over 76 health food broker personnel and an additional 35 mass market broker
personnel carry out follow-up calls and retail activity. Naturade maintains brokerage agreements
with its health food and mass market brokers throughout the U. S. These agreements have a term of
one year and may be terminated on 30 days prior written notice by either party. In addition, these
agreements grant the brokers exclusive territories to represent Naturade and receive commissions on
sales generated in these territories. Brokers do not take title to the Companys products. Naturade sells its products in the health food market through a network of 20 key distributors
and approximately 15 smaller distributors, who together service approximately 5,000 retail health
food stores and natural supermarkets in the United States. These distributors take title to the
Companys products, combining these products with other companies products to serve the health
food stores in their geographic area. Ten of these key distributors are divisions of United Natural
Foods, Inc. (UNFI), a national health food distributor, while seventeen other distributors are
divisions of Tree of Life, Inc, another national health food distributor. Combined, these two
principal health food distributors account for 31% of the Companys total sales during fiscal 2004.
Often the Companys direct sales force, along with brokers, will solicit business from health food
stores who then acquire the Companys products from these distributors. While each of these
national health food distributors is a corporate legal entity, their divisions independently make
purchasing decisions on the Companys products and are separately invoiced by the Company.
Accordingly, in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, the Company treats these divisions as separate customers for purposes of determining
the top 40 customers. In 2004, Naturade broke distribution with GNC stores on several different
brands. The Naturade direct sales force sells this account and product is shipped direct to GNC
distribution points throughout the country. Mass market products are sold directly to mass market retailers or their designated
distributors. One mass market customer, Wal-Mart, represented approximately 23% of Company total
sales in 2004. While this mass market customer is part of a single corporate legal entity, its
retail operations are independent operations, have separate buying departments and are separately
invoiced by the Company. Thus, in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, the Company treats them as separate customers for purposes of
determining the top 40 customers. In the second half of 2003, the Wal-Mart stores division, a top ten customer of the Company,
revamped its weight loss shelving to make room for additional low carbohydrate products. In the
process, they eliminated their entire soy protein powder offering including both Naturade and the
major competitor, Slim Fast. The lost business accounted for approximately 6% of 2003 sales.
Company management has focused on re-establishing distribution of the Companys products in the
Wal-Mart division and was successful in late 2004 with the introduction of the ReVivex line of
joint health care products. The loss of any one of its major customers could have a material
adverse effect on the Company.   10




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Third-Party Manufacturers The Company outsources all of its manufacturing and as a result, is significantly dependent on
third-party manufacturers. Naturade currently contracts with third-party manufacturers who
specialize in powder, liquid, tablet/capsule, bar and over-the counter drug (OTC) production.
Naturade selects its third-party manufacturers based upon several criteria, including quality,
capacity, location and cost. Under the direction of the Companys product development team, these
third-party manufacturers create product formulations and develop sample production runs of
prototype products. Naturade requires that a certificate of analysis that indicates tested levels
of key microbiological measures accompany every batch of product received from a third-party
manufacturer. Raw Material Supplies Due to outsourcing of production, Naturade has eliminated most of its raw material inventory.
At December 31, 2004 raw material inventory approximated $204,000. This amount includes bottles,
labels, corrugated boxes and shippers. The Company believes that the raw materials used by its
third-party manufacturers are readily available from multiple supply sources. The Company has not
experienced significant delays due to supply problems. Quality Control The Company has established quality control standards for its third-party manufacturers,
including lists of approved raw material suppliers, agreed upon production batch sizes,
microbiological and other contaminant testing criteria, utilization of industry-specific
independent laboratories for sample analysis and a formal incubation period for finished products,
among other requirements. Seasonal Fluctuations As the Naturade Total Soy® brand has emphasized weight loss in connection with its meal
replacement products, sales have become somewhat more seasonal, affected by higher December and
first quarter demand due to intense consumer interest in dieting and healthy lifestyle following
the holiday season, with a softening of sales in the beginning of the fourth quarter. Because
individual products have seasonal variations, as the Companys product mix changes, the Company may
experience more seasonality in the future. In addition, international sales tend to fluctuate
depending upon economic conditions, seasonal patterns and cultural differences within each country. Trademarks, Copyrights and Other Intellectual Property Naturade maintains registrations on 20 trademarks with the United States Patent and Trademark
Office and has applied for four additional trademarks. Naturade also maintains trademark
registrations for a variety of marks in approximately eleven foreign countries. In addition,
Naturade holds other intellectual property rights. Federally registered trademarks have perpetual
life, provided they are renewed on a timely basis and used properly as trademarks, subject to the
rights of third parties to seek cancellation of the marks. The Company regards its trademarks and
other proprietary rights as valuable assets and believes that they have significant value in the
marketing of its products. Because of its limited financial resources, the Company cannot in all
cases exhaustively monitor the marketplace for trademark violations. It will evaluate and pursue
potential infringements on a case-by-case basis in accordance with its business needs and financial
resources. If the Company is not aware of some infringing uses or elects not to pursue them, the
value of its trademarks could be substantially weakened. In 2004, the Company sold its aloe vera
brands including the rights to the Aloe Vera80 trademark. Private Equity Transaction In January 2002, the Company (i) sold Series B Convertible Preferred Stock and Warrants to
Westgate Equity Partners, L.P. (Westgate) for a total of $2.5 million, (ii) issued 36 million
shares of Common Stock and (iii) amended its bank credit facility. The Series B Convertible
Preferred Stock is convertible into 13.5 million shares of Common Stock (subject to adjustment) and
bears dividends at the rate of 10% per annum. The Warrants, which were not exercised and expired
on December 31, 2004, entitled the holder to purchase additional shares of Series B Convertible
Preferred Stock convertible into 33.6 million shares of Common Stock (subject to adjustment) for
$3.5 million.   11




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In April 2003, the Company entered into a loan agreement (the Loan Agreement), with Health
Holdings and Botanicals, LLC, a principal shareholder of the Company, and certain other lenders
(the Lender Group), pursuant to which the Lender Group agreed to lend the Company $450,000 and
subject to the discretion of the Lender Group, up to an additional $300,000. In 2004, the Company
and the Lender group agreed to the Joinder of Bill D. Stewart, CEO of the Company, to the Loan
Agreement as an additional lender and increased the maximum advance to $950,000. All advances under
the Loan Agreement bear interest at the rate of 15% per annum, were originally due on December 31,
2004 and were in default on December 31, 2004, are secured by substantially all of the assets of
the Company, and are subordinated to Companys indebtedness to Wells Fargo Business Credit, Inc.
(Wells Fargo). On January 16, 2005, the Lender Group extended the due date on the Loan Agreement
to December 31, 2005. The net proceeds from the sale of Series B Convertible Preferred Stock and Warrants, and the
advances under the Loan Agreement, have been used for the Company for working capital and general
corporate purposes. For a more complete description of these transactions see Notes 4 and 5 of
Notes to Financial Statements. Regulatory Matters The Companys products are subject to regulation by numerous governmental agencies,
principally the U.S. Food and Drug Administration (the FDA). The Companys products are also
subject to regulation by 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. Various state and local agencies, as
well as each foreign country in which the Company distributes its products also regulate the
Companys products. Many Naturade products, including Naturade Total Soy® and protein powders, are food products
that are not subject to regulation by the FDAs drug regulations or the DSHEA of 1994. These food
products are regulated under the general FDA food regulations and may use structure/function
claims or health claims under appropriate circumstances, but unlike dietary supplements, are not
required to carry a disclaimer regarding an FDA evaluation or disease. Effective October 26, 1999,
the FDA approved a health claim for soy protein allowing the following product label claim: 25 grams of soy protein daily, in a diet low in saturated fat and cholesterol, may
reduce the risk of heart disease. To carry this claim, one serving of a product must deliver at least 6.25 grams of soy protein
with no more than three grams of fat and no more than one gram of saturated fat. The Company is
currently shipping products that carry this heart disease claim under the brand names of Naturade
Total Soy®, Naturade 100% Soy, Naturade Veg, Naturade N-R-G, and Power Shake®. The Company believes that its products currently are in substantial compliance with the latest
regulations in product labeling, including food (Nutritional Labeling Education Act of 1991 or
NLEA), dietary supplement (DSHEA), over-the-counter drug (OTC Monographs) and cosmetic packaging
guidelines. In addition, the Company has implemented registration and compliance procedures as
required by the recently enacted FDA Bioterrorism Act. The Company retains control of all labels
in-house and manages label development and usage as an element of quality assurance. In addition,
all formula specifications are developed under the direction of Naturades management. Backlog Naturade typically does not carry significant backlog orders and generally maintains a
sufficient supply of its products to meet customer demands. The Companys policy is to ship product
within seven days of the order being placed. Product Research and Development The Company devotes substantial resources to new product development and reformulation. The
Company initiates new product development efforts with third-party manufacturers who create product
formulations, test and develop sample production runs of prototype products. Due to industry
practice, the third-party manufacturers who then negotiate with the Company on final lot sizes and
production costs often absorb these costs. Consequently, the Companys direct expenses in this area
do not reflect the full cost of product research and development.   12




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##### Table of Contents



Naturades direct product research and development expenses were $274,057, $216,185 and
$210,985 in the fiscal years ended December 31, 2004, 2003 and 2002, respectively. The Company introduced a carbohydrate blocker in September 2003 under the brand name Diet
Lean. The active ingredient in the product is a white kidney bean extract developed by Pharmachem
Labs and marketed under the brand name Phase 2®. Diet Lean Carb Blocker is intended to be the
first in a series of products to target the weight loss category and to be marketed by Naturade
under the Diet Lean name. In 2004, the Company introduced a body fat
regulator incorporating Tenalin® brand Conjugated
Linoleic Acid (CLA) that reduces the number of fat cells in the
body. Diet Lean® Body Fat Regulator is
intended to assists low carb dieters. Naturade
introduced in late 2004, the ReVivex family of products including 3 oral
SKUs containing Celadrin. Celadrin, a proprietary compound owned by an unrelated party,
is a dietary supplement ingredient comprised of novel, targeted cetylated fatty acid esters,
Celadrin enhances cell membranes throughout the body and
restores fluids that cushions bones and
joints to promote flexibility and mobility. Naturade also introduced ReVivex lotion in late 2004. Containing menthol, ReVivex lotion is
an OTC product that is designed to temporarily relieve pain from arthritis, backache and injuries. Employees As of December 31, 2004, Naturade employed 27 people, including four in administration, 11 in
sales and marketing, two in product development, six in finance, accounting and information
technology and four in warehouse and distribution. The Company considers its relations with its
employees to be good. Risk Factors The short and long-term success of the Company is subject to certain risks, many of which are
substantial in nature. Shareholders and prospective shareholders in the Company should consider
carefully the following risk factors, in addition to other information contained herein. This
Annual Report on Form 10-K contains forward-looking statements, which are subject to a variety of
risks and uncertainties. The Companys actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors, including those set
forth below. Future losses and ability to continue as a going concern At December 31, 2004, the Company had an accumulated deficit of $22,023,470, a net working
capital deficit of $1,859,320 and a stockholders capital deficiency of $3,031,547. The Company
anticipates that it will incur net losses for the foreseeable future and will need access to
additional financing for working capital and to expand its business. If unsuccessful in those
efforts, Naturade could be forced to cease operations and investors in Naturades Common Stock
could lose their entire investment. Based on this situation, the Companys independent registered
public accounting firm qualified their opinion on the Companys December 31, 2004 financial
statements by including an explanatory paragraph in which they expressed substantial doubt about
the Companys ability to continue as a going concern. The financial statements provided with this
report have been prepared on the assumption that the Company will continue as a going concern and
do not include material adjustments that would be necessary if it were to cease operation. Dependence on current and ongoing financing The Companys success is dependent on its current financing as well as new financing to
support its working capital requirements and fund its operating losses. As of December 31, 2004,
the Company was in compliance with all loan covenants of its Credit Agreement however; it was in
default of the payment provisions of the Investor Notes and the Loan Agreement. On January 26,
2005, the due date on the Loan Agreement was extended to December 31, 2005. On March 25, 2005, the
payment provisions of the Investor Notes was amended to require a principal payment of $20,000 plus
accrued interest on July 15, 2005 with the remaining principal of $92,345 plus accrued interest due
December 31, 2005. See Item 2. Managements Discussion and Analysis of Financial Condition and
Results of OperationsLiquidity and Capital Resources and Notes 4 and 5 to the Financial
Statements.   13




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Dependence on continued business from the Companys key customers The Companys three largest customers together account for 54% of sales revenue for the fiscal
year ended December 31, 2004. One mass market customer represented approximately 23% of Naturades
total sales, and two health food distributors accounted for 31% of total sales during the year
ended December 31, 2004. The loss of any of these customers could have a material adverse effect on
the Companys results of operations. From time to time, major customers of Naturade have
experienced financial difficulties. Naturade does not have long-term contracts with any of its
customers and, accordingly, there can be no assurance that any customer will continue to place
orders with Naturade to the same extent it has in the past, or at all. Dependence on third-party manufacturers The use of contract manufacturers and the resulting loss of direct control over production
could result in the Companys failure to receive timely delivery of products of acceptable quality.
Although the Company believes that alternative sources of contract manufacturing services are
available, the loss of one or more contract manufacturers could have a material adverse effect on
the Companys results of operations until an alternative source is located and has commenced
producing the Companys products. The Companys use of contract manufacturers could also reduce its
gross profits if the manufacturers raise prices and management cannot find alternative, less costly
sources or pass price increases on to customers. Although the Company requires that its contract manufacturers comply with the U.S. Food and
Drug Administration (the FDA) manufacturing guidelines, Naturade cannot assure that these
third-party companies will always act in accordance to these regulations. If the manufacturing
facilities used by the Companys third-party manufacturers did not meet those standards, the
production of the Companys products could be delayed until the necessary modifications are made to
comply with those standards or alternate manufacturers are located. Furthermore, the potential
exists for circumstances to arise which would require Naturade to seek out alternate manufacturers
who operate in compliance with the FDAs requirements. Impact of government regulation The Companys operations, properties and products are subject to regulation by various
foreign, federal, state and local government entities and agencies, including the FDA and the U.S.
Federal Trade Commission (the FTC). Among other matters, such regulation is concerned with
statements and claims made in connection with the packaging, labeling, marketing and advertising of
the Companys products. The governmental agencies have a variety of processes and remedies
available to them, including initiating investigations, issuing warning letters and cease and
desist orders, requiring corrective labeling or advertising, requiring consumer redress, seeking
injunctive relief or product seizure, imposing civil penalties and commencing criminal prosecution. Weight loss products are subject to increased regulatory scrutiny due to intensified campaigns
by both FTC and FDA. FTC has specifically launched a nation-wide law enforcement sweep against
companies making false weight-loss claims. This initiative was created to stop deceptive
advertising, provide refunds to consumers harmed by unscrupulous weight-loss advertisers, encourage
media outlets not to carry advertisements containing bogus weight-loss claims and to educate
consumers to be on their guard against companies promising miraculous weight loss without diet or
exercise. The FTC campaign identifies 7 specific claims that they consider suspect, including:
Lose weight without diet or exercise; Eat what you want and lose weight; Weight loss will be
permanent (even when the user stops using the product); Block the absorption of fat or calories,
and lose substantial weight; Safely lose more than three pounds per week for a period of more
than four weeks; Substantial weight loss for all users; and Diet patches, creams, wraps,
earrings and other products worn on the body or rubbed into the skin that cause substantial weight
loss. If the FDA and FTC move beyond their current focus and more closely scrutinize weight loss
products in the retail marketplace, there can be no assurance that this change in focus would not
have an adverse effect on the sale of Naturade products. As a result of the Companys efforts to comply with changes in applicable statutes and
regulations, the Company has from time to time reformulated, eliminated or relabeled certain of its
products and revised certain aspects of its sales, marketing and advertising programs. The Company
may be subject in the future to additional laws or regulations administered by federal, state,
local or foreign regulatory authorities, the repeal or amendment of laws or regulations which the
Company considers favorable, such as the Dietary Supplement Health and Education Act (DSHEA), or
more stringent interpretations of current laws or regulations. The Company cannot predict the
nature of future laws, regulations, interpretations or applications, nor can the Company predict
what effect additional governmental regulations or administrative orders, when and if promulgated,
would have on the Companys business in the future. Such future laws and regulations could,
however, require the reformulation of products to meet new standards, the recall or discontinuance
of products that cannot be reformulated, the imposition of additional record keeping requirements,
expanded documentation of product efficacy, expanded or modified labeling and scientific
substantiation, including health warnings or restrictions on benefits described for the Companys
products. Any of or all of such requirements could hurt sales of the Companys products or increase
the Companys costs, resulting in material harm to the Companys results of operations and
financial condition.   14




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Naturade may not be able to identify suitable strategic partners to realize the Companys growth
strategy. In addition to internal expansion of its existing business, The Company has a strategy to
expand its business externally by identifying compatible companies for strategic alliances and
strategic investments in The Company. The Company may not succeed in identifying these potential
strategic partners or may be unable to conclude agreements with them. If so, The Companys future
growth may be limited, and it may be unable to achieve profitability. Competition The market for nutraceutical products is highly competitive. Many of the Companys competitors
have substantially greater capital resources, research and development capabilities, and
manufacturing and marketing resources, capabilities and experience than the Company. The Companys
competitors may succeed in developing products that are more effective or less costly than any
products developed by the Company. Future sales of equity securities could dilute the Companys Common Stock The Company may seek to obtain new financing from various sources, including the sale of its
securities. Future sales of Common Stock or securities convertible into Common Stock at or below
recent market prices could result in dilution of the Common Stock. In addition, the potential
conversion of the 13.5 million shares of Series B Convertible Preferred Stock sold to Westgate on
January 2, 2002, for $2 million, has resulted in dilution of the Common Stock. The perceived risk
of dilution may cause some of the Companys stockholders to sell their shares, which could further
reduce the market price of the Common Stock. Dependence on qualified personnel The Companys success depends upon its ability to attract and retain qualified sales,
marketing, scientific and executive management personnel. To commercialize its products and product
candidates, the Company must maintain and expand its personnel, particularly in the areas of
product sales and marketing. The Company faces intense competition for such personnel from other
companies, academic institutions, government entities and other research organizations. There can
be no assurance that the Company will be successful in hiring or retaining qualified personnel.
Moreover, managing the integration of such new personnel could pose significant risks to the
Companys development and progress and increase its operating expenses. Expanding the Companys sales in the mass market resulted in less stable demand for the Companys
products. The Company, traditionally a marketer for the health food market, has recently built a
presence in the mass market. While yielding increased revenue, selling to the mass market has also
resulted in significant risks for the Company. Compared to sales in the health food market, the
aggregate volume of mass market orders can vary significantly from period to period and tends to be
more sensitive to short term or local variations in market conditions. The instability can make
planning difficult and can cause unexpected reductions in sales, or in orders that exceed the
Companys short-term capacity, in either case resulting in lost revenue. Failure to manage the
costs and risks associated with the mass market could cause material adverse harm to the Companys
business. Closely controlled stock At December 31, 2004, Westgate beneficially owned, if converted, approximately 24.1% of the
Companys Common Stock, Health Holdings beneficially owned 92.2% of the Companys Common Stock, and
executive officers and directors of the Company as a group beneficially owned 95.9% of the
Companys Common Stock. Shares beneficially owned include shares that a person owns or has a
right to acquire within 60 days, either directly or through affiliates. Accordingly, Westgate and
Health Holdings have the ability to control the outcome on all matters requiring stockholder
approval, including, but not limited to, the election and removal of directors, any merger, sale,
consolidation or sale of substantially all of the assets of the Company, and to control the
Companys management and affairs.  15




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##### Table of Contents



Technological changes The Company currently is engaged in developing nutraceuticals, which are characterized by
extensive and costly research and rapid technological progress and change. New process developments
are expected to continue at a rapid pace in both industry and academia. The Companys future
success will depend on its ability to develop and commercialize its existing product candidates and
to develop new products. There can be no assurance that the Company will successfully complete the
development of any of its existing product candidates or that any of its future products will be
commercially viable or achieve market acceptance. In addition, research and development and
discoveries by others could render some or all of the Companys programs or potential product
candidates uncompetitive or obsolete. The Company may face interruption of production and services due to increased security measures in
response to terrorism The Companys business depends on the free flow of products and services through the channels
of commerce. Recently, in response to terrorist activities and threats aimed at the U.S.,
transportation, mail, financial and other services have been slowed or stopped altogether. Further
delays or stoppages in transportation, mail, financial or other services could have a material
adverse effect on the Companys business, results of operations and financial condition.
Furthermore, the Company may experience an increase in operating costs, such as costs for
transportation, insurance and security, as a result of the terrorist activities and potential
terrorist activities. The Company may also experience delays in receiving payments from payers that
have been affected by terrorist activities and potential terrorist activities. The U.S. economy in
general is being adversely affected by the terrorist activities and potential terrorist activities
and any economic downturn could adversely impact the Companys results of operations, impair its
ability to raise capital or otherwise adversely affect its ability to grow its business. Variability of quarterly results The Company has experienced, and expects to continue to experience, variations in its net
sales and operating results from quarter to quarter. The Company believes that the factors that
influence this variability of quarterly results include the timing of the Companys introduction of
new product lines, the level of consumer acceptance of each product line, general economic and
industry conditions that affect consumer spending and retailer purchasing, the availability of
manufacturing capacity, the timing of trade shows, the product mix of customer orders, the timing
of placement or cancellation of customer orders, the weather, transportation delays, the occurrence
of chargebacks in excess of reserves and the timing of expenditures in anticipation of increased
sales and actions of competitors. Accordingly, a comparison of the Companys results of operations
from period to period is not necessarily meaningful, and the Companys results of operations for
any period are not necessarily indicative of future performance. Product liability exposure Product liability risk is inherent in the testing, manufacture, marketing and sale of the
Companys products and product candidates, and there can be no assurance that the Company will be
able to avoid significant product liability exposure. The Company may be subject to various product
liability claims, including, among others, that its products include inadequate instructions for
use or inadequate warnings concerning possible side effects and interactions with other substances.
The Company currently maintains a general liability insurance policy and a product liability
insurance policy. There can be no assurance that the Company will be able to maintain insurance in
sufficient amounts to protect the Company against such liabilities at a reasonable cost. Any future
product liability claim against the Company could result in the Company paying substantial damages,
which may not be covered by insurance and may have a material adverse effect on the business and
financial condition of the Company. The dietary supplement industry as a whole is experiencing a decline in sales The Companys business consists primarily of selling natural products and functional foods,
including soy protein-based products. The soy foods category as a whole has recently experienced
decreased sales. Other categories of dietary supplements have experienced reduced sales in recent
periods after several years of dramatic growth. In particular, revenues in both the herbal and
health food store categories have had periods of significant decline. There can be no assurance
that this general consumer trend will not be experienced by the Companys product categories as
well. Even if the Company is successful in increasing sales within its market category, a decline
in the overall market for natural products or functional foods could have a material adverse affect
on the Companys business.   16




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##### Table of Contents



Effect of adverse publicity The Companys products are formulated with vitamins, minerals, herbs and other ingredients
that the Company regards as safe when taken as recommended by the Company and that scientific
studies have suggested may involve health benefits. While the Company conducts extensive quality
control testing on its products, the Company generally does not conduct or sponsor clinical studies
relating to the benefits of its products. The Company is highly dependent upon consumers
perception of the overall integrity of its business, as well as the safety and quality of its
products and similar products distributed by other companies that may not adhere to the same
quality standards as the Company. The Company could be adversely affected if any of the Companys
products, or any similar products distributed by other companies, should prove harmful or be
asserted to be harmful to consumers, or should scientific studies provide unfavorable findings
regarding the effectiveness of such products. The Companys ability to attract and retain
distributors could be adversely affected by negative publicity relating to it or to other direct
sales organizations or by the announcement by any governmental agency of investigatory proceedings
regarding the business practices of the Company or other direct sales organizations. Intellectual property protection The Companys success depends in part on its ability to preserve its trade secrets and
know-how, and operate without infringing on the property rights of third parties. The Company does
not have any patents, and as a result another company could replicate one or more of the Companys
products. The Companys policy is to pursue registrations for all of the trademarks associated with
its key products. The Company relies on common law trademark rights to protect its unregistered
trademarks as well as its trade dress rights. Common law trademark rights generally are limited to
the geographic area in which the trademark is actually used, while a U.S. federal registration of a
trademark enables the registrant to stop the unauthorized use of the trademark by any third party
anywhere in the U. S. The Company intends to register its trademarks in certain foreign
jurisdictions where the Companys products are sold. However, the protection available, if any, in
such jurisdictions may not be as extensive as the protection available to the Company in the U.S. Currently, the Company has U.S. trademarks as well as a California registration on four
trademarks. The Company also maintains trademark registrations in approximately eleven foreign
countries. Because of its limited financial resources, the Company cannot in all cases exhaustively
monitor the marketplace for trademark violations. It will evaluate and pursue potential
infringement on a case-by-case basis in accordance with its business needs and financial resources.
If the Company is not aware of some infringing uses or elects not to pursue them, the value of its
trademarks could be substantially weakened. If the Company takes action to enforce its intellectual
property rights, litigation may be necessary. Any such litigation could be very costly and could
distract the Companys personnel. Due to limited financial resources, The Company may be unable to
pursue some litigation matters. In matters it does pursue, the Company can provide no assurance of
a favorable outcome. An unfavorable outcome in any proceeding could have a material adverse effect
on the Companys business, financial condition and results of operations. New products are expensive to introduce and may not be successful Each year, the Company introduces new products to meet consumer demands and counter
competitive threats. These new products include product line extensions, such as new flavors of
currently existing products, as well as new formulations or configurations, such as ready-to-drink
products and bars. The Company experiences significant costs in formulating new products, designing
packaging and merchandising. While the Company conducts extensive market research to determine
consumer trends in both the mass market and health food market, there can be no assurance that
consumers and retailers will accept the Companys new products. In addition, there can be no
assurance that once new products are initially distributed to mass market and health food
retailers, there will be repeat orders for these new products. Furthermore, expensive introductory
retailer charges for additional shelf space may negate any initial increase in sales. Stock price Trading in the Companys Common Stock is low in volume. The market price of the Companys
Common Stock is likely to be volatile and could be subject to significant fluctuations in response
to factors such as quarterly variations in operating results, operating results which vary from the
expectations of securities analysts and investors, changes in financial estimates, changes in
market valuations of competitors, announcements by the Company or its competitors of a material
nature, loss of one or more customers, additions or departures of key personnel, future sales of
Common Stock and stock market price and volume fluctuations. Also, general political and economic
conditions such as recession, or interest rate or currency rate fluctuations may adversely affect
the market price of the Companys Common Stock.   17




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##### Table of Contents



Internal Controls Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), Naturade will be
required, beginning in its fiscal year 2006, to perform an evaluation of the Companys internal
control over financial reporting and have the Companys independent registered public accounting
firm test and evaluate the design and operating effectiveness of such internal controls and
publicly attest to such evaluation. The Company has prepared an internal plan of action for
compliance with the requirements of section 404, although as of the date of this filing, the
Company has not yet completed its effectiveness evaluation. Although the Company believes its
internal controls are operating effectively, the Company cannot guarantee that it will not have a
material weakness as reported by the Companys independent registered public accounting firm. If
the Company fails to complete this evaluation in a timely manner, or if the Companys independent
registered public accounting firm cannot timely attest to the Companys evaluation, the Company
could be subject to regulatory scrutiny and a loss of public confidence in internal controls. In
addition, any failure to implement required new or improved controls, or difficulties encountered

in their implementation, could harm the Companys operating results or cause the Company to fail to
meet its reporting obligations. 
 Item 2. Properties In December 1998, the Company signed a 7 1/2 year lease for a facility
including new executive offices, sales and marketing offices and warehouse located in Irvine,
California. This 50,000 square foot facility includes a 40,000 square foot finished goods warehouse
area configured with a high-density steel rack and frame storage floor plan. This maximum cubic
space utilization provides the Company with reasonably sufficient warehousing capacity for the term
of the lease, specifically in light of the Companys decision to outsource production, thereby
eliminating the need for any manufacturing space. The rent expense related to this lease for fiscal
year ended December 31, 2004 was $388,704. The lease agreement includes an approximate 9% rent
increase after the second, fourth and sixth year of the lease period, with a 60-month extension
after the initial lease term at the prevailing market rental rate. The Company has not begun an
evaluation of alternative facilities to replace this facility at the end of its lease. The Company
believes this facility is sufficient for its needs for the foreseeable future. 
 Item 3. Legal Proceedings From time to time, the Company is party to various claims and litigation that arise in the
ordinary course of business. While any litigation contains an element of uncertainty, management
believes that the ultimate outcome of any pending claims and litigation will not have a material
effect on the Companys results of operations or financial condition. 
 Item 4. Submission of Matters to a Vote of Security Holders None   18




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PART II 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Market Information The Companys Common Stock began trading on the over-the-counter securities market in the
third quarter of 1991 under the symbol NRDC.OB. 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. Fiscal 2004
    
    High
    
    
    Low1st Quarter
    
    $
    .35
    
    
    $
    .012nd Quarter
    
    
    .40
    
    
    
    .063rd Quarter
    
    
    .07
    
    
    
    .014th Quarter
    
    
    .12
    
    
    
    .02
 Fiscal 2003
    
    High
    
    
    Low1st Quarter
    
    $
    .07
    
    
    $
    .062nd Quarter
    
    
    .03
    
    
    
    .033rd Quarter
    
    
    .03
    
    
    
    .014th Quarter
    
    
    .04
    
    
    
    .01
 On March 24, 2005, the last reported price for the Companys Common Stock was $0.05.
Stockholders are urged to obtain current market quotations for the Companys Common Stock. Holders To the best knowledge of the Company, the number of record holders of Common Stock as of December
31, 2004 was 508. According to information obtained by the Company, approximately 439 additional
shareholders hold the Companys Common Stock in street name. Dividends The Company did not pay a cash dividend on its Common Stock during 2004 and 2003, and the
Company does not anticipate paying any cash 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. The declaration and payment of cash
dividends in the future will depend upon the Companys earnings, financial condition, capital needs
and other factors deemed relevant by the Board of Directors. The Companys ability to pay dividends
is limited by the provisions of Delaware law, by its Credit and Security Agreement with Wells Fargo
Business Credit and under the Certificate of Designation of the Series B Convertible Preferred
Stock. Recent Sales of Unregistered Securities None   19




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##### Table of Contents



Item 6. Selected Financial Data The following tables summarize certain selected financial data for the periods presented and
should be read in conjunction with the more detailed information and financial statements,
including notes thereto, presented elsewhere herein. STATEMENT OF OPERATIONS DATA Years Ended December 31,2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    2000Net Sales
    
    $
    14,141,481
    
    
    
    100.0
    %
    
    $
    16,326,296
    
    
    
    100.0
    %
    
    $
    14,416,351
    
    
    
    100.0
    %
    
    $
    16,641,109
    
    
    
    100.0
    %
    
    $
    15,503,182
    
    
    
    100.0
    %Gross profit
    
    
    6,338,679
    
    
    
    44.8
    %
    
    
    7,663,997
    
    
    
    46.9
    %
    
    
    6,258,744
    
    
    
    43.4
    %
    
    
    7,350,882
    
    
    
    44.2
    %
    
    
    7,157,279
    
    
    
    46.2
    %Selling, general
and administrative
expenses
    
    
    7,216,930
    
    
    
    51.0
    %
    
    
    7,883,398
    
    
    
    48.3
    %
    
    
    8,069,382
    
    
    
    56.0
    %
    
    
    9,522,932
    
    
    
    57.2
    %
    
    
    8,626,072
    
    
    
    55.6
    %Operating loss
    
    
    (878,251
    )
    
    
    (6.2
    )%
    
    
    (219,401
    )
    
    
    (1.3
    )%
    
    
    (1,810,638
    )
    
    
    (12.6
    )%
    
    
    (2,172,050
    )
    
    
    (13.1
    )%
    
    
    (1,468,793
    )
    
    
    (9.5
    )%Other Income (loss):Gain on sale of
brand
    
    
    1,055,647
    
    
    
    7.5
    %
    
    
    -0-
    
    
    
    
    
    
    
    -0-
    
    
    
    
    
    
    
    -0-
    
    
    
    
    
    
    
    -0-Gain on expiration
of warrants
    
    
    500,000
    
    
    
    3.5
    %
    
    
    -0-
    
    
    
    
    
    
    
    -0-
    
    
    
    
    
    
    
    -0-
    
    
    
    
    
    
    
    -0-Interest Expense
and other
    
    
    (308,122
    )
    
    
    (2.2
    )%
    
    
    (181,514
    )
    
    
    (1.1
    )%
    
    
    (85,180
    )
    
    
    (0.6)
    %
    
    
    (549,172
    )
    
    
    (3.3
    )%
    
    
    (661,499
    )
    
    
    (4.3
    )%Income (loss)
before provision
for income taxes
    
    
    369,274
    
    
    
    2.6
    %
    
    
    (400,915
    )
    
    
    (2.5
    )%
    
    
    (1,895,818
    )
    
    
    (13.2)
    %
    
    
    (2,721,222
    )
    
    
    (16.4
    )%
    
    
    (2,130,292
    )
    
    
    (13.7
    )%Provision for
income taxes
    
    
    800
    
    
    
    0.0
    %
    
    
    800
    
    
    
    0.0
    %
    
    
    800
    
    
    
    0.0
    %
    
    
    5,931
    
    
    
    0.0
    %
    
    
    800
    
    
    
    0.0
    %Net income (loss)
    
    
    368,474
    
    
    
    2.6
    %
    
    
    (401,715
    )
    
    
    (2.5
    )%
    
    
    (1,896,618
    )
    
    
    (13.2)
    %
    
    
    (2,727,153
    )
    
    
    (16.4
    )%
    
    
    (2,131,092
    )
    
    
    (13.7
    )%Less:Preferred Stock
Dividends
    
    
    (252,670
    )
    
    
    
    
    
    
    (228,908
    )
    
    
    
    
    
    
    (205,000
    )
    
    
    
    
    
    
    -0-
    
    
    
    
    
    
    
    -0-Deemed Dividends
    
    
    (285,714
    )
    
    
    
    
    
    
    (285,714
    )
    
    
    
    
    
    
    (285,714
    )
    
    
    
    
    
    
    -0-
    
    
    
    
    
    
    
    -0-Net Loss
Attributable to
Common Shareholders
    
    $
    (169,910
    )
    
    
    
    
    
    $
    (916,337
    )
    
    
    
    
    
    $
    (2,387,332
    )
    
    
    
    
    
    $
    (2,727,153
    )
    
    
    
    
    
    $
    (2,131,092
    )Basic and diluted
net loss per share
    
    $
    (0.00
    )
    
    
    
    
    
    $
    (0.02
    )
    
    
    
    
    
    $
    (0.05
    )
    
    
    
    
    
    $
    (0.36
    )
    
    
    
    
    
    $
    (0.30
    )Weighted average
number of shares
used in computation
of basic and
diluted net loss
per share
    
    
    44,651,170
    
    
    
    
    
    
    
    44,651,170
    
    
    
    
    
    
    
    44,117,284
    
    
    
    
    
    
    
    7,600,000
    
    
    
    
    
    
    
    7,000,000
   20




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##### Table of Contents



BALANCE SHEET DATA As
of December 31,2004
    
    

2003
    
    

2002
    
    

2001
    
    

2000Cash and cash equivalents
    
    $
    210,573
    
    
    $
    144,102
    
    
    $
    722,583
    
    
    $
    55,388
    
    
    $
    202,648Working capital (deficiency)
    
    
    (1,859,320
    )
    
    
    (1,789,482
    )
    
    
    (1,429,771
    )
    
    
    (1,864,116
    )
    
    
    226,869Total assets
    
    
    4,401,391
    
    
    
    4,076,557
    
    
    
    4,222,224
    
    
    
    3,993,495
    
    
    
    5,389,819Long term debt
    
    
    -0-
    
    
    
    5,609
    
    
    
    37,735
    
    
    
    5,507,382
    
    
    
    5,049,770Total stockholders deficit
    
    $
    (3,301,548
    )
    
    $
    (2,861,638
    )
    
    $
    (1,945,301
    )
    
    $
    (7,009,373
    )
    
    $
    (4,472,397
    )
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with Item 6. Selected Financial Data and the financial
statements and related notes attached to this report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. The Companys actual
results may differ materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited, to those set forth under Item 1.
BusinessRisk Factors Affecting the Company and elsewhere in this report. General The Company is a branded natural products marketing company focused on growth through
innovative, scientifically supported products designed to nourish the health and well being of
consumers. Naturade s. The Company primarily competes in the overall market for natural,
nutritional supplements. Nutrition Business Journal(NBJ), a San Diego-based research publication
that specializes in this industry, reports that sales for the overall $58 billion Nutrition
industry were up 7% in 2004 versus 2003. Naturade primarily competes in the $19 billion segment
defined by NBJ as Supplements, which grew 3.8% in 2004. In addition, the report points out that
sales of supplements were growing at similar rates in both the mass market channel and health food
/ natural product stores at approximately 3.5%. Within the broad soy foods market, segments such as meal replacement drinks, soy milk and bars
have outperformed other categories. With many brands entering the market and reduced spending by
Slim Fast®, the soy protein powder category flattened in 2003. The Companys products include
Naturade Total Soy®, a full line of nutritionally complete meal replacements for weight loss and
cholesterol reduction available in several flavors of powders, Naturade® protein powders, ReVivex
healthy joint and arthritis pain relief products, Diet Lean® products focused on the low carb
dieter, SportPharma® sports nutrition products and other niche dietary supplements. The Companys
products are sold in supermarkets (e.g., Kroger, Fred Meyer, Safeway, Albertsons and Ahold), mass
merchandisers (e.g., Wal-Mart and Shopko), club stores (e.g., Sams Clubs, Costco and BJs
Wholesale), drug stores (e.g., American Drug and Snyder Drug), natural food supermarkets (e.g.,
Whole Foods and Wild Oats) and over 5,000 independent health food stores.   21




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##### Table of Contents



Results of Operations The following table sets forth, for the periods indicated, the percentage which certain items
in the statement of operations data bear to net sales and the percentage dollar increase (decrease)
of such items from period to period. Percent of Net Sales
    
    
    Percentage Dollar Increase (Decrease)Year Ended December 31,
    
    
    Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    (13.4
    )%
    
    
    13.2
    %
    
    
    (13.4
    )%Gross profit
    
    
    44.8
    %
    
    
    46.9
    %
    
    
    43.4
    %
    
    
    (17.3
    )%
    
    
    22.5
    %
    
    
    (14.9
    )%Selling, general and
administrative expenses
    
    
    51.0
    %
    
    
    48.3
    %
    
    
    56.0
    %
    
    
    (8.4
    )%
    
    
    (2.3
    )%
    
    
    (15.3
    )%Operating loss
    
    
    (6.2
    )%
    
    
    (1.3
    )%
    
    
    (12.6
    )%
    
    
    (300.3
    )%
    
    
    (87.9
    )%
    
    
    (16.6
    )%Interest Expense
    
    
    (2.2
    )%
    
    
    (1.2
    )%
    
    
    (0.8
    )%
    
    
    61.1
    %
    
    
    67.0
    %
    
    
    (79.6
    )%Gain on sale of brand
    
    
    7.5
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %Gain on expiration of warrants
    
    
    3.5
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %Other income (loss)
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    61.1
    %
    
    
    113.1
    %
    
    
    (84.5
    )%Income (loss) before
provision for income taxes
    
    
    2.6
    %
    
    
    (2.5
    )%
    
    
    (13.2
    )%
    
    
    192.1
    %
    
    
    (78.9
    )%
    
    
    (30.3
    )%Provision for income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.3
    %Net income (loss)
    
    
    2.6
    %
    
    
    (2.5
    )%
    
    
    (13.2
    )%
    
    
    191.7
    %
    
    
    (78.8
    )%
    
    
    (30.5
    )%
 Major trends that affected the Companys results of operations in 2004  
    Low carbohydrate trend driving consumers purchasing patterns throughout most of
2004 requiring the Company to modify certain product formulations to lower carbohydrate
content
    General softness in grocery segment related to competition from Wal-Mart and
Club stores moving consumers from historical purchasing patterns
    Brand support and promotional spending was focused on areas that provide a
direct return to the company resulting in reduced promotional costs per dollar of
revenue generated. 2004 Compared to 2003 Net SalesNet sales for 2004 decreased $2,184,815, or 13.4%, to $14,141,481 from $16,326,296
for 2003 reflecting a general decline in sales of core protein powders related to low carb consumer
trends in 2004. The decline in core protein powder purchasing by consumers resulted in the Company
losing distribution to one key mass market customer and a reduction in promotional programs by a
second key mass market customer in 2004. This combined for a $2,100,200 decline in revenues from 2003 or
96% of the total decline for the period. Domestic sales for 2004 decreased $2,344,751, or 14.6%,
to $13,747,245 from $16,091,996 for 2003 principally due to the loss of distribution referred to
above. International sales for 2004 increased $159,936, or 68.3%, to $394,237 from $234,300 for
2003. Mass market net sales for 2004 decreased $1,828,371, or 24.1%, to $6,921,198 from $8,749,569
for 2003. This decrease was primarily a result of the loss of distribution in the mass market
described above. For 2004, the percentage of mass market net sales to the Companys total net
sales decreased to 48.9% as compared to 53.6% in 2003. For 2004, health food net sales decreased
$356,444, or 4.7%, to $7,220,283 from $7,576,727 for 2003 primarily as a result of a reduction in
core protein powder consumption related to low carb consumer trends during 2004. For 2004, the
percentage of health food net sales to the Companys total net sales increased to 51.1% as compared
to 46.4% in 2003.   22




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##### Table of Contents



For 2004, the top 40 customers accounted for $12,946,000, or 91.6%, of net sales, with 21
health food customers contributing $6,326,100 or 44.7%, of net sales, 18 mass market customers
contributing $6,528,900 or 46.2%, of net sales, and one international customer contributing
$91,000, or 0.7%, of net sales. This compares to the top 40 customers accounting for $15,478,500,
or 94.8%, of net sales, with 21 health food customers contributing $7,123,000, or 43.6%, of net
sales, 17 mass market customers contributing $8,163,300 or 50.0%, of net sales, and two
international customers contributing $192,200, or 1.2%, of net sales for 2003. For both periods, the Company considers the 10 divisions of one major health food distributor
and the 17 divisions of a second major health food distributor as separate customers for purposes
of this top 40 list, because of their ability to make independent purchasing decisions regarding
the Companys products. In addition, two divisions of a mass market customer are one corporate
legal entity, however they operate independently with separate buying departments and, thus, the
Company considers them separate customers for purposes of this top 40 list. This analysis differs
from that shown in Item 1. BusinessGeneral in which the divisions of these three entities are
combined under their corporate parent to reflect three major customers. For 2004, the top 40 products represented $10,767,900 or 76.1%, of net sales, with 15 Naturade
Total Soy® products contributing $5,706,900 or 40.4%, of net sales, 12 protein powders contributing
$3,059,000 or 21.6% of net sales, three ReVivex products contributing $605,100 or 4.3% of net
sales, two Diet Lean products contributing $513,200 or 3.6% of net sales and eight aloe vera and
other products representing $883,700, or 6.2%, of net sales. The aloe vera brands were sold in
November of 2004 and represented approximately 10% of fiscal 2004 net sales. This compares to the
top 40 products representing $12,965,100 or 79.4%, of net sales, with 19 Naturade Total Soy®
products contributing $8,522,400, or 52.2%, of net sales, 11 protein powders contributing
$2,910,800, or 17.8%, of net sales and 10 aloe vera and other products representing $1,513,900, or
9.4%, of net sales for 2003. Gross MarginGross profit as a percentage of sales for 2004 decreased to 44.8% from 46.9% in
2003. This decrease in gross profit percentage is primarily due to lower fixed cost absorption
related to lower net sales partially offset by product costs reductions related to the change in
third party manufacturers in the second quarter of 2004. Selling, General and Administrative ExpensesSelling, general and administrative expenses for
the fiscal year ended December 31, 2004 decreased $666,468, or 8.5%, to $7,216,930, or 51.0% of net
sales, from $7,883,398, or 48.3%, of net sales, for 2003. This decrease was principally related to
a reduction in brand expenses executed by management to offset revenue reductions during the year.
For 2004, brand expenses decreased $460,400, or 21.3%, compared to 2003, to $1,701,100 or 12.0% of
net sales for 2004 from $2,161,500 or 13.2% of net sales for 2003. The Companys focus on the
support of retail programs that provide direct consumer consumption benefits has resulted in this
decrease as a percent of sales. This decrease is coupled with a decrease of $206,068 in overhead
expenses, principally related to lower freight expense of $185,500 and a decrease in commissions
expense of $117,100 related to revenue reductions, partially offset by an increase in marketing
$20,600, new product development $62,900 and administrative expenses of $13,032. Other Income (Expense)Other income (expense) consists of two components, interest expense and
other expense. Interest expense consists of bank and other interest related to notes as shown in Note 4 to
the Financial Statements. For 2004, interest expense increased $115,803 to $305,265, or 2.2% of net
sales, as compared to 2003 of $189,462, or 1.2% of net sales. This increase is principally related
to an increase in the borrowing rate on the Companys line of credit and interest on the Loan
Agreement as more fully explained in Note 4 to the Financial Statements. The other expense category consists of unusual or non-recurring charges net of other income.
For 2004 this other income was principally composed of a $1,055,647 gain on sale of the aloe vera
brands, and a $500,000 gain on the expiration of warrants as more fully explained in Note 5 to the
Financial Statements as compared to other income for 2003 of $7,948 for a net increase of
$1,544,843.   23




---



##### Table of Contents



2003 Compared to 2002 Net SalesNet sales for 2003 increased $1,909,945, or 13.2%, to $16,326,296 from $14,416,351
for 2002 reflecting a turnaround in the health food channel coupled with consistent growth in the
mass market channel. Domestic sales for 2003 increased $1,897,937, or 13.4%, to $16,091,995 from
$14,194,058 for 2002. International sales for 2002 increased $12,008, or 5.4%, to $234,301 from
$222,293 for 2002. Mass market net sales for 2003 increased $1,699,351, or 24.1%, to $8,749,569 from $7,050,218
for 2002. This increase was primarily a result of an increase in turn distribution sales in 2003 as
compared to 2002 coupled with an increase in club business in 2003. For 2003, the percentage of
mass market net sales to the Companys total net sales increased to 53.6%, as compared to 48.9% in
2002. For 2003, health food net sales increased $210,591, or 2.9%, to $7,576,727 from $7,366,133 for
2002 primarily as a result of the Companys strong relationships with key health food distributors
and retailers. These relationships have provided the Company with the ability to introduce new
product SKUs into distribution and ultimately into retail. For 2003, the percentage of health food
net sales to the Companys total net sales decreased to 46.4% as compared to 51.1% in 2002. For 2003, the top 40 customers accounted for $15,478,500, or 94.8%, of net sales, with 21
health food customers contributing $7,123,000, or 43.6%, of net sales, 17 mass market customers
contributing $8,163,300, or 50.0%, of net sales, and two international customers contributing
$192,200, or 1.2%, of net sales. This compares to the top 40 customers accounting for $13,857,300,
or 96.1%, of net sales, with 22 health food customers contributing $7,155,200, or 49.6%, of net
sales, 17 mass market customers contributing $6,603,600, or 45.8%, of net sales, and one
international customer contributing $98,500, or 0.7%, of net sales for 2002. For both periods, the Company considers the eight divisions of one major health food
distributor and the seven divisions of a second major health food distributor as separate customers
for purposes of this top 40 list, because of their ability to make independent purchasing decisions
regarding the Companys products. In addition, two divisions of a mass market customer are one
corporate legal entity, however they operate independently with separate buying departments and,
thus, the Company considers them separate customers for purposes of this top 40 list. This analysis
differs from that shown in Item 1. BusinessGeneral in which the divisions of these three
entities are combined under their corporate parent to reflect three major customers. For 2003, the top 40 products represented $12,965,100, or 79.4%, of net sales, with 19
Naturade Total Soy® products contributing $8,522,400, or 52.2%, of net sales, 11 protein powders
contributing $2,910,800, or 17.8%, of net sales and 10 aloe vera and other products representing
$1,513,900, or 9.4%, of net sales. This compares to the top 40 products representing $12,129,900,
or 84.1%, of net sales, with 17 Naturade Total Soy® products contributing $7,555,700, or 52.4%, of
net sales, 13 protein powders contributing $3,015,600, or 20.9%, of net sales and ten aloe vera and
other products representing $1,558,600, or 10.8%, of net sales for 2002. Gross MarginGross profit as a percentage of sales for 2003 increased to 46.9% from 43.4% in
2002. This increase in gross profit percentage is primarily due to the reformulation of Naturade
Total Soy® and several other products which resulted in a product costs decrease which more than
offset small price increases implemented by a key supplier. In addition, increased efficiencies in
distribution related to increased consistency of order flow resulting in lower product distribution
costs. Selling, General and Administrative ExpensesSelling, general and administrative expenses for
the fiscal year ended December 31, 2003 decreased $185,984, or 2.3%, to $7,886,398, or 48.3% of net
sales, from $8,069,382, or 56.0%, of net sales, for 2002. For 2003, brand expenses decreased
$52,100, or 2.4%, compared to 2002, to $2,161,500 or 13.2% of net sales for 2003 from $2,213,600,
or 15.4% of net sales for 2002. The Companys focus on the support of retail programs that provide
direct consumer consumption benefits has resulted in this decrease as a percent of sales. This
decrease is coupled with a decrease of $256,100 in overhead expenses, principally from manpower
and consulting fee reductions partially offset by increases related to freight and commission
expense of $95,200 and $37,700, respectively, resulting from increased sales volume.   24




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##### Table of Contents



Other Income (Expense)Other income (expense) consists of two components, interest expense and
other expense. Interest expense consists of bank and other interest related to notes as shown in Note 4 to
the Financial Statements. For 2003, interest expense increased $75,982 to $189,462, or 1.2% of net
sales, as compared to $113,480, or 0.8% of net sales in 2002. This increase is principally related
to an increase in the borrowing rate on the Companys line of credit and interest on the Loan
Agreement as more fully explained in Note 4 to the Financial Statements. The other expense category consists of unusual or non-recurring charges net of other income.
For 2003 this other income was $7,948 compared to other income for 2002 of $28,300 for a net
decrease of $20,352. Liquidity and Capital Resources The Companys sources of cash in 2004 came principally from operations supported by drawings
on its line of credit from Wells Fargo and a Loan Agreement with a principal shareholder and other
shareholders coupled with the sale of the aloe vera brand. Based on the current operating plan,
the Company believes that its existing cash balances and financing arrangements will provide it
with sufficient funds to finance its operations for at least the next twelve months. In the past,
the Company has utilized both operating and capital lease financing for certain equipment used in
our operations and expects to continue to selectively do so in the future. The Company may in the
future require additional funds to support its working capital requirements or for other purposes,
and may seek to raise such additional funds through the sale of public or private equity and/or
debt financings or from other sources. No assurance can be given that additional financing will be
available in the future or that if available, such financing will be obtainable on terms favorable
to the Companys stockholders or us when we may require it. The Companys credit facility consists of a three year Credit and Security Agreement (the
Credit Agreement) with Wells Fargo Business Credit, Inc. (Wells Fargo), which allows for
maximum borrowings of up to $3,500,000, based on certain percentages of eligible accounts
receivable and inventories and pays interest at prime plus 4.5% per annum. Available borrowings
under the Credit Agreement were $278,434 at December 31, 2004 and averaged $254,103 during 2004. The Company was in default on the payment of the Investor Notes of $112,345 at December 31,
2004. On March 25, 2005, the payment provisions of the Investor Notes was amended to require a
principal payment of $20,000 plus accrued interest on July 15, 2005 with the remaining principal of
$92,345 plus accrued interest due December 31, 2005. The financial statements accompanying this Annual Report on Form 10-K have been prepared on a
going-concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At December 31, 2004, the Company had an accumulated
deficit of $22,023,470, a net working capital deficit of $1,859,320, a stockholders capital
deficiency of $3,031,547, and has incurred recurring net losses. These factors, among others,
raise substantial doubt about the Companys ability to continue as a going concern. In addition,
the Companys independent certified public accountants have issued an opinion that substantial
doubt exists as to the Companys ability to continue as a going concern. The financial statements
do not include any adjustments that might result from a negative outcome of this uncertainty. The Company used cash of $1,223,943 in operating activities in the year ended December 31,
2004, compared to a use of cash of $1,393,881 in operating activities for the year ended December
31, 2003. This decrease in cash used in operating activities is primarily due to an increase in the
Companys accounts payable of $963,443 principally related to new products purchased late in 2004
and a significant reduction in payables at the end of 2003 combined with a reduction in receivables
of $1,053,299 principally related to lower fourth quarter sales partially offset by a increase in
inventories related to new products of $833,103 compared to the same period in 2003. Net cash used by inventories was $614,284 for the year ended December 31, 2004 compared to net
cash provided by inventories of $421,592 for the year ended December 31, 2003 primarily due to
lower than normal sales in the fourth quarter of 2004 coupled with additional inventory required
for new product introductions. Net cash provided by accounts receivable was $171,963 for the year ended December 31, 2004
compared to net cash used by accounts receivable of $906,336 for the same period of 2003,
principally due to lower fourth quarter sales volume in 2004 as compared to sales volume in 2003.
Customer terms have remained constant; however there is a slight increase in days sales
outstanding due to extended terms granted for new product introductions. Net cash provided by accounts payable and accrued expenses was $394,365 for the year ended
December 31, 2004 compared to net cash used of $569,068 the same period of 2003, principally due a
higher level of accounts payable related to new products purchased late in the fourth quarter of
2004 with extended terms from vendors.   25




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##### Table of Contents



The provision for excess and obsolete inventory provided $59,197 for the year ended December
31, 2004 compared to $21,168 the same period of 2003 principally due to the discontinuance of
ready-to-drink product in 2004. Net cash used by prepaid expenses was $115,307 for the year ended December 31, 2004 compared
to net cash used in the same period of 2003 of $43,368. The increase in prepaid expenses in 2004
was principally due to slotting fees paid to introduce ReVivex in 2004, which are amortized over a
12-month period. The Company incurred minimal slotting fees in 2003 and they were expensed as
incurred. The Companys working capital deficit increased $69,838 from ($1,789,482) at December 31, 2003
to ($1,859,320) at December 31, 2004. This increase was largely due to increase in inventory and
prepaid expenses coupled with a reduction in outstanding amounts under the Companys credit
facility offset by a decrease in receivables and an increase in borrowings on the Loan Agreement
with certain shareholders. Cash provided by investment activities during the year ended December 31, 2004 was $1,228,420
compared to cash used of $9,716 for the year ended December 31, 2003. This increase is
principally related to the net proceeds on the sale of the aloe vera brand in 2004. The Companys cash provided by financing activities was $61,994 for the year ended December
31, 2004, compared to cash provided by financing activities of $825,117 for the same period of
2003. The source of cash in 2004 was the result of borrowings from related parties partially offset
by borrowings under the Loan Agreement (described in Note 4). Critical Accounting Policies and Use of Estimates The Companys significant accounting policies are described in Note 1 of the Companys
Financial Statements for the year ended December 31, 2004, which have been prepared in accordance
with accounting principles generally accepted in the United States. In preparing the financial
statements, the Company is required to make estimates and judgments which affect the results of
its operations and the reported value of assets and liabilities. Actual results may differ from
these estimates. The Company believes that the following summarizes critical accounting policies
which require significant judgments and estimates in the preparation of its financial statements. Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition in Financial Statements, requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4)
collectibility is reasonably assured. Determination of criteria (3) and (4) require managements
judgments regarding the fixed nature of the fee charged for services rendered and products
delivered and the collectibility of those fees. To satisfy the criteria, we: (1) input orders
based upon receipt of a customer purchase order; (2) record revenue upon shipment of goods when
risk of loss and title transfer under the Companys arrangements with customers or otherwise
complying with the terms of the purchase order; (3) confirm pricing through the customer purchase
order and; (4) validate creditworthiness through past payment history, credit agency reports and
other financial data. Other than through warranty rights, the Companys customers do not have
explicit or implicit rights of return. Should changes in conditions cause management to determine
the revenue recognition criteria are not met for certain future transactions, such as a
determination that an outstanding account receivable has become uncollectible, revenue recognized
for any reporting period could be adversely affected. Inventory Valuation. Merchandise inventories are stated at the lower of cost (first-in,
first-out basis) or market. The Company considers cost to include the direct cost of finished
goods provided by co-packers as well as the cost of those components supplied to the co-packers.
At each balance sheet date, we evaluate the Companys ending inventories for excess quantities and
obsolescence. This evaluation includes analyses of forecast sales levels by product and
historical demand. We write off inventories that are considered obsolete. Remaining inventory
balances are adjusted to approximate the lower of the Companys cost or market value and result in
a new cost basis in such inventory until sold. If future demand or market conditions are less
favorable than the Companys projections, additional inventory write-down may be required, and
would be reflected in cost of sales in the period the revision is made. Accounts Receivable and Allowances for Uncollectible Accounts. Accounts receivable are
unsecured, and we are at risk to the extent such amounts become uncollectible. Accounts
receivable is stated net of applicable reserves for returns and allowances, billbacks and doubtful
accounts. The Company regularly reviews and monitors individual account receivable balances to
determine if the reserve amounts are appropriate and provides for an allowance for uncollectible
accounts by considering historical customer buying patterns, invoice aging, specific promotions
and seasonal factors.   26




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##### Table of Contents



Impact of Contractual Obligations and Commercial Commitments The following summarizes the Companys contractual obligations at December 31, 2004 and the
effects such obligations are expected to have on liquidity and cash flow in future periods. Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsLong-Term Debt
    
    $
    2,943,851
    
    
    $
    2,943,851
    
    
    $
    
    
    
    $Operating Leases
    
    
    740,241
    
    
    
    441,813
    
    
    
    298,428Employment Contracts
    
    
    1,940,000
    
    
    
    568,000
    
    
    
    686,000
    
    
    
    686,000
    
    
    
    (a
    )Consulting Agreements
    
    
    800,000
    
    
    
    400,000
    
    
    
    400,000
    
    
    
    -0-Total Contractual Cash Obligations
    
    
    6,424,092
    
    
    
    4,353,664
    
    
    
    1,384,428
    
    
    
    686,000Series B Convertible RedeemablePreferred Stock
    
    
    2,000,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    $
    2,000,000Total
    
    $
    8,424,092
    
    
    $
    4,353,664
    
    
    $
    1,384,428
    
    
    $
    2,686,000
   (a)
    
    The employment agreements for the Chief Financial Officer and Executive VP of Sales have an
indefinite term. Impact of Inflation From time to time, the Company experiences price increases from third-party manufacturers and
these increases cannot always be passed on to the Companys customers. While these price increases
have not had a material impact on the Companys historical operations or profitability in the past,
they could affect sales in the future. New Accounting Pronouncements In December 2004, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 123R
Share Based Payment. This statement is a revision of SFAS Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS 123R addresses all forms of share based
payment (SBP) awards including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that
will be measured at fair value on the awards grant date, based on the estimated number of awards
that are expected to vest. Under this method, compensation expense is recognized for all
share-based payments granted after July 1, 2005 and also for all awards granted prior to July 1,
2005 that remain unvested on the effective date. The adoption of this pronouncement will increase
compensation expense under the modified prospective approach (e.g., the impact of outstanding
grants which continue to vest plus future grants will result in more compensation expense relative
to their previous approach under APB 25). The Company is still evaluating the amount of the
increase to compensation expense. In November 2004, the FASB issued SFAS No. 151 Inventory Costs (SFAS 151). This statement
amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS 151 requires that those items be recognized as current-period charges. In addition, this
Statement requires that allocation of fixed production overheads to costs of conversion be based
upon the normal capacity of the production facilities. The provisions of SFAS 151 are effective for
inventory cost incurred in fiscal years beginning after June 15, 2005. As such, the Company is
required to adopt these provisions at the beginning of fiscal 2006. The adoption of this
pronouncement is not expected to have material effect on the Companys financial statements.   27




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##### Table of Contents



In December 2004, the FASB issued Statement Accounting Standard (SFAS) No. 153 Exchanges of
Nonmonetary Assets. This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December 16, 2004. The
provisions of this Statement should be applied prospectively. The adoption of this pronouncement is
not expected to have material effect on the Companys financial statements. In October 2004, the American Jobs Creation Act of 2004 (Act) became effective in the U.S. Two
provisions of the Act may impact the Companys provision (benefit) for income taxes in future
periods, namely those related to the Qualified Production Activities Deduction (QPA) and Foreign
Earnings Repatriation (FER). The QPA will be effective for the Companys U.S. federal tax return year beginning after
December 31, 2004. In summary, the Act provides for a percentage deduction of earnings from
qualified production activities, as defined, commencing with an initial deduction of 3 percent for
tax years beginning in 2005 and increasing to 9 percent for tax years beginning after 2009, with
the result that the Statutory federal tax rate currently applicable to the Companys qualified
production activities of 35 percent could be reduced initially to 33.95 percent and ultimately to
31.85 percent. However, the Act also provides for the phased elimination of the Extraterritorial
Income Exclusion provisions of the Internal Revenue Code. Due to the interaction of the law
provisions noted above as well as the particulars of the Companys tax position, the ultimate
effect of the QPA on the Companys future provision (benefit) for income taxes has not been
determined at this time. The FASB issued FASB Staff Position FAS 109-1, Application of FASB
Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004, (FSP 109-1) in December 2004. FSP
109-1 requires that tax benefits resulting from the QPA should be recognized no earlier than the
year in which they are reported in the entitys tax return, and that there is to be no revaluation
of recorded deferred tax assets and liabilities as would be the case had there been a change in an
applicable statutory rate. The FER provision of the Act provides generally for a one-time 85 percent dividends received
deduction for qualifying repatriations of foreign earnings to the U.S. Qualified repatriated funds
must be reinvested in the U.S. in certain qualifying activities and expenditures, as defined by the
Act. In December 2004, the FASB issued FASB Staff Position FAS 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FSP 109-2). FSP 109-2 allows additional time for entities potentially impacted by the FER
provision to determine whether any foreign earnings will be repatriated under said provisions. The
Company has no foreign earnings at this time and accordingly, has not undertaken an evaluation of
the application of the FER provision and any potential benefits of effecting repatriations under
said provision. Numerous factors, including previous actual and deemed repatriations under federal
tax law provisions, are factors impacting the availability of the FER provision to the Company and
its potential benefit to the Company, if any. The Company will examine this issue prior to
undertaking any operations resulting in foreign source earnings. 
 Item 7A. Quantitative and Qualitative Disclosure About Market Risk In the normal course of business, the Company is exposed to a variety of risks including
market risk associated with interest rate movements. The Companys exposure to market risk for
changes in interest rates relates primarily to the Companys long-term debt. The Companys long-term debt primarily consists of a (i) $3.5 million line of credit with
Wells Fargo originally entered into on January 27, 2000 and subsequently amended, with the latest
amendment dated November 2, 2004, (i) $112,345 outstanding under Investor Notes with investors
entered into on August 31, 2000 and (ii) $950,000 borrowed under a Loan Agreement with investors
entered into on April 14, 2003. The line of credit bears interest at prime rate plus 4.5%. The
Investor Notes bear interest at 15% per annum. Payment in full including accrued interest was due
on December 31, 2004. The Company was in default on Investor Notes ad December 31, 2004. On March
25, 2005, the payment provisions of the Investor Notes was amended to require a principal payment
of $20,000 plus accrued interest on July 15, 2005 with the remaining principal of $92,345 plus
accrued interest due December 31, 2005. The Loan Agreement bears interest at 15% per annum with
an original due date of December 31, 2004. The Company and the Lender Group have agreed to an
extension of the payment date on the Loan Agreement to December 31, 2005.   28




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##### Table of Contents



Given the fixed interest rate on the Loan Agreements, interest rate changes generally will
have no effect on the interest rates under the Loan Agreements or on the Companys results of
operations. However, given the variable interest rate on the line of credit, the impact of interest
rate changes on the line of credit could have a material impact on the Companys results of
operations. For the fiscal year ended December 31, 2004, the interest expense on the line of credit
was $177,876. If the interest rate on the line of credit were to increase by one percent, this
would result in an interest expense of $213,451 for the fiscal year ended December 31, 2004. 
 Item 8. Financial Statements and Supplementary Data The Companys financial statements and the notes thereto, and the Report of Independent
Registered Public Accounting Firm, filed with this Annual Report on Form 10-K in a separate
section, Part IV, as shown in the index under Item 15(a). 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure None 
 Item 9A. Controls and Procedures The Companys Chief Executive Officer, Bill D. Stewart, and Chief Financial Officer, Stephen
M. Kasprisin, with the participation of the Companys management, carried out an evaluation of the
effectiveness of the Companys disclosure controls and procedures pursuant to Exchange Act Rule
15d-14(c). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer
believe that, as of the end of the period covered by this report, the Companys disclosure controls
and procedures are effective in making known to them material information relating to the Company
(including its consolidated subsidiaries) required to be included in this report. Disclosure controls and procedures, no matter how well designed and implemented, can provide
only reasonable assurance of achieving an entitys disclosure objectives. The likelihood of
achieving such objectives is affected by limitations inherent in disclosure controls and
procedures. These include the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures such a simple errors or mistakes
or intentional circumvention of the established process. There was no change in the Companys internal control over financial reporting, known to the
Chief Executive Officer or the Chief Financial Officer that occurred during the last quarter of the
fiscal year covered by the report that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 
 Item 9B. Other Information None   29




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers The names and ages of the directors and executive officers of the Company as of March 22,
2005, are as follows: Name
    
    Age
    
    Position
    
    SinceBill D. Stewart
    
    
    62
    
    
    Director, Chairman of the Board and Chief Executive Officer
    
    
    1998Lionel P. Boissiere, Jr.
    
    
    46
    
    
    Director
    
    
    1997William B. Doyle, Jr.
    
    
    45
    
    
    Director
    
    
    1997David A. Weil
    
    
    66
    
    
    Director
    
    
    1999Jay W. Brown
    
    
    59
    
    
    Director
    
    
    2002Robert V. Vitale
    
    
    39
    
    
    Director
    
    
    2002Stephen M. Kasprisin
    
    
    51
    
    
    Chief Financial Officer & Chief Operating Officer
    
    
    2003Marwan Zreik
    
    
    31
    
    
    Executive Vice President of Sales
    
    
    2003
 The directors serve until the next annual meeting of stockholders, or until their successors are elected. Bill D. Stewart.Mr. Stewart served from 1989 to 1997 as President of The Thompsons Minwax
Company. Mr. Stewart served as Vice President of Sales with Thompsons from 1986 to 1989. Prior to
joining Thompsons, Mr. Stewart served for 16 years with pharmaceutical company Richardson Vicks in
various capacities. Lionel P. Boissiere, Jr.During the past eight years, Mr. Boissiere has been an investor and
advisor to middle market companies. From 1993 through 1995, he worked with Govett Ltd., and since
1995, Mr. Boissiere has been a Managing Member at Doyle & Boissiere LLC. William B. Doyle, Jr.Since 1995, Mr. Doyle has served as a Managing Member of Doyle &
Boissiere LLC. Prior to such time, Mr. Doyle was with Govett Ltd. Mr. Doyle is an investor and an
advisor to middle market companies. David A. Weil.Mr. Weil has been an investor and advisor to early stage companies during the
past five years. Mr. Weil currently serves as co-Chief Executive Officer of two private companies.
Mr. Weil holds engineering and law degrees from Washington University and an LLM degree from New
York University. Jay W. Brown.For the last five years, Mr. Brown has been a principal with Westgate Group,
LLC, a related entity to Westgate Equity Partners, LLC. Prior to forming Westgate, Mr. Brown was a
senior executive with the Ralston Purina Company, running several divisions of that
multi-dimensional food and agribusiness company. From 1995 to 1998, Mr. Brown was President and
Chief Executive Officer of Protein Technologies International, Inc., the worlds largest supplier
of soy-based protein to the food and paper processing industries. Prior to that, Mr. Brown was
Chairman and Chief Executive Officer of Continental Baking Company from 1984 to 1995 and President
of Van Camp Seafood Company from 1983 to 1984. Robert V. Vitale.Mr. Vitale is a principal with Westgate Group, LLC with primary
responsibility for acquisitions and divestitures. From 1994 to 1996, Mr. Vitale was a Vice
President of the Boatmens Capital Markets and of NationsBank (after NationsBanks 1997 acquisition
of Boatmens). At Boatmens, Mr. Vitale was responsible for corporate finance activities including
private placements of senior and subordinated debt as well as multi-tiered bank debt financing.
Previously, Mr. Vitale was a Senior Associate with KPMG Peat Marwick from 1988 to 1993 where he was
responsible for merger and acquisition engagements. Mr. Vitale is a certified public accountant. Stephen M. Kasprisin.Mr. Kasprisin served as Chief Financial Officer of Outsource Merchandising
Corporation, a distributor of consumer products to grocery and drug stores, from 1999 to 2001.
From 1989 to 1999, he served as Chief Financial Officer of Acorn Products, Inc., a public consumer
products manufacturer. Mr. Kasprisin is a Certified Public Accountant and was on the audit staff
of Coopers & Lybrand, now PriceWaterhouseCoopers, from 1976 to 1980. He has a Bachelor of Arts
from Baldwin-Wallace College, with a major in Business Administration.   30




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##### Table of Contents



Marwan Zreik.A Certified Clinical Nutritionist, Mr. Zreik joined Naturade in 1997 and is
responsible for all aspects of the Companys distribution, purchasing, customer service, research &
development and quality control. He was previously Research Coordinator for Gero Vita
International, Inc. and was a Research Assistant at the University of California, San Diego while
attending school there. He received his BS degree in animal physiology and neuroscience from UC
San Diego and an MS degree in physiology and biophysics from Georgetown University. He received
his MBA from the University of Southern California in June of 2004. None of the directors or executive officers were selected pursuant to any arraignment or
understanding, other than with the directors and executive officers of the Company acting within
their capacity as such. There are no family relationships among directors or executive officers of
the Company and no directorships are held by any director which has a class of securities
registered pursuant to Section 12 of the Securities and Exchange Act of 1934, as amended (the
Exchange Act), or subject to requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940. Officers serve at
the discretion of the Board. Code of Ethics The Company has adopted a Code of Ethics applicable to the principal executive officer and
senior financial executives, including the chief financial officer and the controller, as well as
all employees of the Company. The Code of Ethics of the Company is available on request by writing
to the Secretary of the Company. Audit Committee The current members of the Audit Committee are composed of Lionel P. Boissiere, Jr., Robert V.
Vitale and David Weil. The Company has determined that Robert V. Vitale qualifies as an audit
committee financial expert as defined in Item 401(h) of Regulation S-K. Each member of the Audit
Committee is independent within the meaning of Rule 4200(a)(15) of the National Association of
Securities Dealers. Nominating Procedures and Criteria The Company does not have a nominating committee. The Board of Directors has determined that
this is appropriate in light of the fact that the two principal stockholders of the Company have
sufficient voting power to elect all of the directors of the Company and, like all stockholders of
the Company, have the power to nominate candidates at meetings of stockholders. Each of the
directors takes part in the nomination of candidates for election as directors at the annual
meeting.   31




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##### Table of Contents



Item 11. Executive Compensation The following table sets forth, as to the Chief Executive Officer and as to the two other most
highly compensated officers whose compensation exceeded $100,000 during the last fiscal year (the
Named Executive Officers), information concerning all cash and non-cash compensation awarded,
earned or paid for services to the Company in all capacities for each of the three years ended
December 31, 2004, 2003 and 2002. Summary Compensation Table Long Term CompensationAwardsName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Restricted
    
    
    Securities
    
    
    Payouts
    
    
    AllPrincipal
    
    
    
    
    
    Annual Compensation
    
    
    Annual
    
    
    Stock
    
    
    Underlying
    
    
    LTIP
    
    
    OtherPosition
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Compensation
    
    
    Award(s)
    
    
    Options/SAR
    
    
    Payouts
    
    
    Compensation($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Bill Stewart,
Chief Executive
Officer (1), (4)
    
    
    12/31/02
    
    
    
    225,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    15,114
    (5)12/31/03
    
    
    
    236,755
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    15,096
    (5)12/31/04
    
    
    
    225,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    15,096
    (5)Stephen M.
Kasprisin, Chief
Financial Officer
and Chief Operating
Officer (1), (2),
(4)
    
    
    12/31/03
    
    
    
    114,586
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    186
    (6)12/31/04
    
    
    
    177,049
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-

    
    
    
    -0-
    
    
    
    -0-
    
    
    
    4,915
    (8)Marwan Zreik,
Executive Vice
President of Sales
(1), (3), (4)
    
    
    12/31/02
    
    
    
    98,241
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    30,943
    (7)12/31/03
    
    
    
    119,247
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    21,338
    (7)12/31/04
    
    
    
    142,620
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    16,350
    (9)
   (1)
    
    For a description of the employment agreements between certain Named Executive Officers and
the Company, see Employment Contracts, Termination of Employment and Change in Control
Arrangements.(2)
    
    Mr. Kasprisin was appointed Chief Financial Officer on March 25, 2003 and promoted to Chief
Operating Officer in June of 2004.(3)
    
    Mr. Zreik was appointed Chief Operating Officer on February 1, 2003 and promoted to Executive
Vice President of Sales in June 2004.(4)
    
    Mr. Stewart, Mr. Kasprisin and Mr. Zreik participated with other full-time employees in the
Companys group health and life insurance program.(5)
    
    Such amount represents automobile lease payments ($14,400 in 2004,2003 and 2002) and life
insurance premiums ($696 in 2004 and 2003, and $716 in 2002), respectively, paid on behalf of
Mr. Stewart.(6)
    
    Such amount represents life insurance premiums paid on behalf of Mr. Kasprisin.(7)
    
    Such amount represents Company contributions to the Companys 401(k) Plan ($1,903 in 2003,
and $1,567 in 2002), tuition reimbursement ($19,000 in 2003 and $29,000 in 2002) and life
insurance premiums ($435 in 2003 and $376 in 2002), paid on behalf of Mr. Zreik.(8)
    
    Such amount represents automobile allowance ($1,800), Company contributions to the Companys
401(k) ($2,530) and life insurance premiums ($585), paid on behalf of Mr. Kasprisin.(9)
    
    Such amount represents automobile allowance ($1,800), Company contributions to the Companys
401(k) Plan ($2,094), tuition reimbursement ($12,000) and life insurance premiums ($456), paid
on behalf of Mr. Zreik.   32




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##### Table of Contents



Options/SAR Grants In Last Fiscal Year The following table sets forth common stock options issued to named executives during 2003: Potential realizableIndividual Grants
    
    
    value at assumedNumber of
    
    
    Percent of total
    
    
    
    
    
    
    annual rates of stocksecurities
    
    
    options/SARs
    
    
    
    
    
    
    price appreciation forunderlying
    
    
    granted to
    
    
    Exercise
    
    
    option termoptions/SARs
    
    
    employees in
    
    
    price
    
    
    Expiration
    
    
    5%
    
    
    10%Name
    
    granted (#)
    
    
    fiscal year
    
    
    ($/Sh)
    
    
    Date
    
    
    ($)
    
    
    ($)Bill Stewart
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    
    
    
    
    -0-
    
    
    
    -0-Stephen M. Kasprisin
    
    
    50,000
    
    
    
    50
    %
    
    $
    0.08
    
    
    
    5/31/11
    
    
    $
    5,628
    
    
    $
    7,795Marwan Zreik
    
    
    50,000
    
    
    
    50
    %
    
    $
    0.08
    
    
    
    5/31/11
    
    
    $
    5,628
    
    
    $
    7,795
 Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values Value of Unexercised In-the-MoneyNumber of Securities
    
    
    Options/SARs atShares Acquired
    
    
    
    
    
    
    Underlying Unexercised
    
    
    FY-Endon
    
    
    
    
    
    
    Options/SARs at FY-End (#)
    
    
    ($)(1)Name
    
    Exercise (#)
    
    
    Value Realized ($)
    
    
    Exercisable/Unexercisable
    
    
    Exercisable/UnexercisableBill Stewart
    
    
    -0-
    
    
    
    -0-
    
    
    
    502,500/162,500
    
    
    $
    5,250/$5,250Stephen M. Kasprisin
    
    
    -0-
    
    
    
    -0-
    
    
    
    200,000/90,000
    
    
    $
    5,250/$1,750Marwan Zreik
    
    
    -0-
    
    
    
    -0-
    
    
    
    125,000/75,000
    
    
    $
    3,938/$1,313
   (1)
    
    The value of unexercised in-the-money options is the difference between the closing
sale price of Common Stock on December 31, 2004 ($0.06 per share) and the exercise price of
the option, multiplied by the number of shares subject to the option. The following table sets forth certain information as of December 31, 2004 with respect to all
compensation plans under which equity securities of the Company may be issued. Equity Compensation Plan Information Number of securitiesremaining available for futureNumber of securities to be
    
    
    Weighted-average
    
    
    issuance under equityissued upon exercise of
    
    
    exercise price of
    
    
    compensation plans (excludingoutstanding options,
    
    
    outstanding options,
    
    
    securities reflected in columnPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    
    (a)).(a)
    
    
    (b)
    
    
    (c)Equity
compensation plans
approved by
security holders
    
    
    1,543,500
    
    
    $
    0.14
    
    
    
    369,000Equity compensation
plans not approved
by security holders
    
    
    87,500
    
    
    
    1.03
    
    
    
    0Total
    
    
    1,631,000
    
    
    $
    0.19
    
    
    
    369,000
   33




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##### Table of Contents



Compensation of Directors Effective June 2002, all non-management directors except Messrs. Boissiere, Doyle, Brown and
Vitale received directors fees of $3,000 for each meeting attended. Employment Contracts, Termination of Employment and Change-In-Control Arrangements On February 18, 1998, the Company and Bill D. Stewart entered into an employment agreement
under which the Company retained Mr. Stewart as Chief Executive Officer and a member of the
Companys Board of Directors for an initial term of 48 months. Under the employment agreement, as
amended, Mr. Stewart receives an annual salary of $225,000, automobile lease payments and life
insurance payable as directed by Mr. Stewart. On March 2, 1998, the Company granted to Mr. Stewart, pursuant to the Companys 1998 Incentive
Stock Option Plan, options to acquire up to 255,000 shares of Common Stock at $4.00 per share (the
average closing bid price of the shares of Common Stock on the NASD OTC Bulletin Board as quoted by
Bloomberg, LP for the five (5) day trading period ending on March 2, 1998). These options were
repriced to 110% of the market price of the Common Stock on October 14, 1999 ($1.13). On February
1, 2000, the Company granted to Mr. Stewart, pursuant to the Companys 1998 Incentive Stock Option
Plan, options to acquire up to 60,000 shares of Common Stock at $0.875 per share (the closing bid
price of the shares of Common Stock on the NASD OTC Bulletin Board, as quoted by Bloomberg, LP).
Furthermore, on January 26, 2001, the Company granted to Mr. Stewart, pursuant to the Companys
1998 Incentive Stock Option Plan, options to acquire up to 50,000 shares of Common Stock at $0.44
per share (the closing bid price of the shares of Common Stock on the NASD OTC Bulletin Board, as
quoted by Bloomberg, LP). All options will vest in four equal portions on each of the first four
anniversaries of the grant date, subject to any limitations on exercise contained in the 1998
Incentive Stock Option Plan and provided that the term of Mr. Stewarts employment with the Company
shall not have ended prior to such anniversary. In the event of any sale (including, pursuant to
either a tender offer or a merger of the Company which results in the shareholders of the Company
holding less than fifty percent (50%) of the stock of the surviving corporation) of the Company
during such term, subject to certain limitations, all of Mr. Stewarts options not then vested
shall immediately vest. As part of the Private Equity Transaction on January 2, 2002, as described more fully in Note
5 to the Financial Statements and Item 1. BusinessPrivate Equity Transaction, the employment
agreement with Mr. Stewart was amended and restated to extend the term until December 31, 2003 and
allow for the immediate vesting of options to purchase 365,000 shares of Common Stock, 297,500 of
which would have vested by March 2, 2002, the four-year anniversary of the original employment
agreement, at an exercise price reduced to $0.1477 per share, the purchase price in the Private
Equity Transaction. The amended and restated employment agreement also reconfirmed the
understanding that all options become fully vested in the event of any sale of the Company and
extended the term of employment to December 31, 2003 which in turn, has been extended to December
31, 2005. In July 2003, Mr. Kasprisin, Chief Financial Officer, entered into an employment agreement
with the Company that can be terminated without cause by either party upon 30 days notice. Mr.
Kasprisin is entitled to severance equal to six months base pay should he be terminated without
cause by the Company. Pursuant to the employment agreement, Mr. Kasprisin was entitled to a base
salary of $160,000 per year and a bonus based upon his base salary. In addition, Mr. Kasprisin has
been granted options to purchase up to 150,000 shares of Common Stock, which options vest in equal
quarterly amounts on each of the first eight quarters of his employment. In June 2004, Mr.
Kasprisins employment agreement was amended in connection with his promotion to Chief Operating
Officer, increasing the base compensation to $178,000 per year, adding a vehicle allowance of $300
per month and granting options to purchase an additional 50,000 of Common Stock, which options vest
in eight equal quarterly amounts. In June 2004, Mr. Zreik, Chief Operating Officer, was promoted to Executive Vice President of
Sales. In connection therewith, Mr. Zreik entered into an employment agreement with the Company,
which can be terminated without cause by either party upon 30 days notice. Mr. Zreik is entitled
to severance equal to six months base pay should he be terminated without cause by the Company.
Pursuant to the employment agreement, Mr. Zreik is entitled to a base salary of $160,000 per year,
a vehicle allowance of $300 per month and a bonus based upon his base salary. In addition, Mr.
Zreik has been granted options to purchase up to 50,000 shares of Common Stock, which options vest
in eight equal quarterly amounts.   34




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##### Table of Contents



Incentive Stock Option Plan In 1998, the Company adopted the 1998 Incentive Stock Option Plan (the Incentive Plan). The
Incentive Plan provides for the issuance of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the Code). The purpose of the Incentive
Plan is to enable the Company to attract, retain and motivate its employees by providing for
performance-based benefits. At the 2000 annual stockholders meeting, the number of shares of the
Companys Common Stock that may be subject to awards granted under the Incentive Plan was increased
to 850,000. At the 2001 annual stockholders meeting, the number was further increased to
2,000,000. As of December 31, 2004 options to purchase 1,543,500 shares of the Companys Common
Stock were outstanding under the Incentive Plan, of which options to purchase 1,146,375 shares
(subject to adjustment to prevent dilution) had vested, and 369,000 shares were available for
future awards under the Incentive Plan. The Incentive Plan is administered by a committee consisting of three members of the Board of
Directors or administered by the full Board of Directors. The administrator has the power to
construe and interpret the Incentive Plan and, subject to provisions of the Incentive Plan, to
determine the persons to whom and the dates on which awards will be granted, the number of shares
to be subject to each award, the times during the term of each award within which all or a portion
of the award may be exercised, the exercise price, the type of consideration and other terms and
conditions of the award. The exercise price of stock options under the Incentive Plan may not be
less than the fair market value of the Common Stock subject to the option on the date of the option
grant and in some cases may not be less that 110% of fair market value. The maximum term of the
Incentive Plan is ten years, except that the Board may terminate the Incentive Plan earlier. The
term of each individual award will depend upon the written agreement between the Company and the
grantee setting forth the terms of the awards. In addition to options issued under the Incentive Stock Option Plan, options to purchase
87,500 shares of Common Stock have been issued to directors and a consultant of the Company under
individual agreements. 401(k) Plan The Company maintains a 401(k) profit sharing plan (401(k) Plan) for the benefit of all
employees who meet certain age and length of service requirements. The 401(k) Plan provides for
Company matching contributions equal to 25% of each employee participants contribution not to
exceed 6% of the employee participants compensation.   35




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##### Table of Contents



REPORT OF THE MANAGEMENT COMPENSATION COMMITTEE The Report of the Management Compensation Committee of the Board of Directors shall not be
deemed filed under the Securities Act of 1933, as amended or under the Securities Exchange Act of
1934, as amended. The Management Compensation Committee (the Committee) reviews and recommends to the Board of
Directors the compensation and other terms and conditions of employment of the executive officers
of the Company, as well as incentive plan guidelines for Company employees generally. The policies underlying the Committees compensation decisions are designed to attract and
retain the best-qualified management personnel available. The Company compensates its executive
officers primarily through salaries. The Company, at its discretion, may, as it has in other
years, reward executive officers through bonus programs based on profitability and other
objectively measurable performance factors. Additionally, the Company uses stock options to
compensate its executives and other key employees. The compensation of the Chief Executive Officer is determined in accordance his employment
agreement, which was negotiated between Mr. Stewart and the non-employee members of the Board of
Directors. Mr. Stewarts employment agreement is described above under the caption Employment
Contracts, Termination of Employment and Change-In-Control Arrangements. In establishing executive compensation, the Committee evaluates individual performance as it
affects overall Company performance with particular focus on an individuals contribution to the
realization of operating profits and the achievement of strategic business goals, including the
timely development and introduction of products and the creation of markets in new geographic
territories. The Committee further attempts to rationalize a particular executives compensation
with that of other executive officers of the Company in an effort to distribute compensation fairly
among the executive officers. Although the components of executive compensation (salary, bonus and option grants) are
reviewed separately, compensation decisions are made based on a review of total compensation. The
number of shares covered by option grants is determined in the context of this review. The Committee held one meeting during fiscal 2004 whereby stock options were granted to key
management employees. There were no modifications to existing executive employment agreements, and
no bonuses or extraordinary compensation was paid. THE MANAGEMENT COMPENSATION COMMITTEEWilliam B. Doyle, Jr.Jay W. BrownBill D. Stewart
   36




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##### Table of Contents



Compensation Committee Interlocks and Insider Participation During 2004, Bill Stewart, William B. Doyle, Jr. and Jay W. Brown served on the Companys
Compensation Committee. Except for Mr. Stewart, none of the members of the Management Compensation Committee is or has
been an employee of the Company. Mr. Doyle, who serves on the Management Compensation Committee, and Mr. Boissiere are managers
and members of Doyle & Boissiere LLC (D&B). Under a Consulting Agreement between D&B and the
Company, as long as affiliates of D&B own at least 25% of the outstanding equity interests of the
Company, D&B will provide consulting services to the Company and receive a total annual fee of
$300,000, payable quarterly. D&B has deferred receipt of $165,000 of its fees for fiscal 2002 for
an indefinite period, and has permanently waived the payment of its entire consulting fee for
fiscal 2003 and 2004 as services under the contract were not required
or performed for these periods. Mr. Brown, who also serves on the Management Compensation Committee, and Mr. Vitale are
managers and members of Westgate Group, LLC (Westgate Group), which is the general partner of
Westgate. Under a Management Services Agreement between Westgate Group and the Company, as long as
Westgate owns 10% or more of the voting stock of the Company, Mr. Vitale and Mr. Brown and two
other principals of Westgate Group are to provide management services to the Company and the
Company is to pay Westgate Group an annual fee of $100,000, payable quarterly. Westgate Group has
agreed to permanently waive its fees for fiscal 2003 and 2004 as
services under the contract were not required or performed for these periods.   37




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters The following table sets forth information regarding beneficial ownership, as of February 28,
2005, of the Companys outstanding Common Stock by (i) any person who is known to the Company to be
the beneficial owner of more than 5% of the Companys voting securities, (ii) each director and
each of the Named Executive Officers, and (iii) by the directors and executive officers of the
Company as a group. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or will become exercisable within 60
days are deemed outstanding but are not deemed to be outstanding as to any other person. The Companys Series B Convertible Preferred Stock votes with the Common Stock on all matters
presented to the stockholders, on as as-converted-to-Common Stock basis. Each share of Series B
Convertible Preferred Stock is convertible into one share of Common Stock (subject to adjustment
for antidilution), at any time at the option of the holder. Amount andName and Address of
    
    
    
    
    
    Nature
    
    
    PercentBeneficial Owner(1)
    
    Class of Stock
    
    
    of Beneficial Owner
    
    
    of Class (2)Lionel P. Boissiere, Jr.
    
    Common
    
    
    41,054,267
    (3)
    
    
    92.2
    %Jay W. Brown
    
    Series B Preferred
    
    
    13,540,723
    (4)
    
    
    100.0
    %Common
    
    
    14,154,831
    (5)
    
    
    22.0
    %William B. Doyle, Jr.
    
    Common
    
    
    41,054,267
    (3)
    
    
    92.2
    %Health Holdings and Botanicals, LLC. Suite 500 330
Primrose Rd. Burlingame, CA 94010
    
    Common
    
    
    41,054,267
    (3)
    
    
    92.2
    %Bill D. Stewart
    
    Common
    
    
    335,000
    (7)
    
    
    *Stephen M. Kasprisin
    
    Common
    
    
    112,500
    (8)
    
    
    *Robert V. Vitale
    
    Series B Preferred
    
    
    13,540,723
    (4)
    
    
    100.0
    %Common
    
    
    14,154,831
    (5)
    
    
    22.0
    %David Weil
    
    Common
    
    
    1,093,517
    (6)
    
    
    2.5
    %Westgate Equity Partners, L.P. One Magna Place Suite
650 1401 South Brentwood Blvd. St. Louis, MO 63144
    
    Series B Preferred
    
    
    13,540,723
    (4)
    
    
    100.0
    %Common
    
    
    14,154,831
    (5)
    
    
    22.0
    %Executive officers and directors as a group (7 persons)
    
    Common
    
    
    56,940,115
    (9)
    
    
    95.9
    %Marwan Zreik
    
    Common
    
    
    190,000
    (10)
    
    
    *
   *
    
    Less than 1%(1)
    
    Except as otherwise indicated, the address of each person named in the above table is in care
of Naturade, Inc., 14370 Myford Road, Irvine, CA. 92606.(2)
    
    Common Stock includes Series B Convertible Preferred Stock, which is convertible ant any time
at the option of the holder, on as as-converted-to-Common Stock basis.(3)
    
    Total includes 5,064,412 shares of Common Stock owned by Health Holdings and 35,989,855
shares of Common Stock received in exchange for $5,315,702 owed under the Companys credit
agreement and loan agreement as discussed under Item 13 and as more fully explained under Note
4 to the Financial Statements. Under the terms of the Private Equity Transaction, the 600,000
shares of Common Stock exercisable under warrants related to the Companys Finance Agreement
were modified to make the warrants exercisable for Non-Voting Common Stock rather than Common
Stock. Common shares of Health Holdings are held by (i) Doyle & Boissiere Fund I, LLC, a
Delaware limited liability company (of which Messrs. William B. Doyle, Jr. and Lionel P.
Boissiere, directors of the Company, are principals and managing members), (ii) Mr. Anders
Brag and (iii) Taishan Holdings, Inc., a British Virgin Islands corporation (of which Messrs.
William S. Doyle (no relation to William B. Doyle, Jr.) and Anders Brag hold equity
interests). Messrs. William B. Doyle, Jr. and Lionel P. Boissiere each disclaim beneficial
ownership of the Companys Common Stock and Preferred Stock held by Health Holdings, except to
the extent of their indirect pecuniary interest in the shares.   38




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##### Table of Contents



(4)
    
    Total includes 13,540,723 shares of Series B Convertible Preferred Stock. Each share of
Series B Convertible Preferred Stock is convertible into 1.041 shares of Common Stock at the
option of the holder (subject to adjustment to prevent dilution). The Series B Convertible
Preferred Stock is held by Westgate Equity Partners, L.P. of which Messrs. Brown and Vitale
are principals, a related company to Westgate Group, LLC. Messrs. Brown and Vitale each
disclaim beneficial ownership of the Companys Common Stock and Preferred Stock held by
Westgate Equity Partners, L.P except to the extent of their indirect pecuniary interest in the
shares.(5)
    
    Total includes 14,154,831 shares of Common Stock issuable on conversion of the 13,540,723
shares of Series B Preferred Stock owned by Westgate, as adjusted for antidilution as of
December 31, 2004. The 13,540,723 shares of Series B Preferred Stock may currently be voted
on an as-converted-to-Common Stock basis.(6)
    
    Total includes 85,000 shares of Common Stock solely owned by Mr. Weil, 238,125 shares of
Common Stock owned by a company of which Mr. Weil is a 50% owner, 50,000 shares of Common
Stock which can be purchased under presently exercisable options and 720,392 shares of Common
Stock issued upon conversion of a $50,000 note.(7)
    
    Total includes 335,000 shares of Common Stock which can be purchased under presently
exercisable options.(8)
    
    Total includes 112,500 shares of Common Stock which can be purchased under presently
exercisable options.(9)
    
    Total includes shares of Common Stock beneficially owned by Health Holdings and Common Stock
beneficially owned by Westgate Equity Partners; see note 3 and note 4 above, respectively. See
also notes 5, 6, 7 and 9 above with respect to additional shares of Common Stock included in
this total.(10)
    
    Total includes 190,000 shares of Common Stock which can be purchased under presently
exercisable options.   39




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions As of December 12, 1997 the Company entered into a Consulting Agreement with Doyle & Boissiere
LLC (D&B), an affiliate of Health Holdings. Under the Consulting Agreement, as long as
affiliates of D & B own at least 25% of the outstanding equity interests of the Company, D&B will
provide consulting services to the Company and receive a total annual fee of $300,000, payable
quarterly. D&B permanently waived the payment of this fee for
all of 2004 and 2003 as services under the contract were not required
or performed for these periods. On January 2, 2002, as part of the Private Equity Transaction, the Company entered into a
Management Services Agreement with Westgate Group, LLC an affiliate of Westgate (Westgate Group).
Under the Management Services Agreement, as long as Westgate owns 10% or more of the outstanding
voting securities of the Company, four principals of Westgate Group provide management and
consulting services to the Company and receive a total annual fee of $100,000, payable quarterly.
The agreement extends until December 31, 2006, and is automatically renewed for one-year terms
unless terminated by either party. The Westgate Group permanently waived the payment of this fee
for 2004 and 2003 as services under the contract were not required
for these periods. On April 14, 2003, the Company entered into a loan agreement (the Loan Agreement) with
Health Holdings and Botanicals, LLC, a principal stockholder of the Company, and David A. Weil, a
director and stockholder of the Company (the Lender Group), pursuant to which the Lender Group
has agreed to lend the Company $450,000 and, subject to the discretion of the Lender Group, up to
an additional $300,000. All advances under the Loan Agreement bear interest at the rate of 15% per
annum, are due on December 31, 2004, are secured by substantially all of the assets of the Company,
and are subordinated to the Companys indebtedness to Wells Fargo. This due date was extended as
discussed below. The advances under the Loan Agreement will be used for the Company for working
capital and general corporate purposes. For a more complete description of this transaction, see
Item 1. Business  Loan Agreement. In consideration of the extension of credit under the Loan
Agreement, Wells Fargo waived all defaults of the Company as of December 31, 2002 under the Credit
and Security Agreement dated as of February 27, 2000 and amended the agreement to, among other
things, reduce the covenants regarding minimum net income and minimum book net worth and increased
the interest rate. On April 14, 2004, the terms of the Loan Agreement were modified by the Joinder of Bill D.
Stewart, the Chief Executive officer of the Company, as a member of the Lender Group, subject to
all of the terms and conditions of the Loan Agreement, and the Lender Group advanced an additional
$200,000, of which Bill D. Stewart advanced $100,000. Further, on May 3, 2004, the Lender Group
advanced the Company an additional $100,000. Further, on August 16, 2004, advances allowed under
the Loan Agreement were increased to a total of $950,000 and the Lender Group advanced an
additional $200,000 to the Company. There are no additional amounts available to advance under the
Loan Agreement. Proceeds of the advances have been used for working capital. On January 26, 2005,
the terms of the Loan Agreement were modified to extend the due date to December 31, 2005. For a description of the amended bank credit facility, see Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources.   40




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##### Table of Contents



Item 14. Principal Accountant Fees and Services The Company paid the following fees to BDO Seidman, LLP during fiscal years 2004 and 2003: Year ended December 31,2004
    
    
    2003Audit Fees
    
    $
    90,122
    
    
    $
    82,000All other FeesAudit-related Fees (Out of pocket expenses)
    
    
    1,390
    
    
    
    1,500Tax-related Fees (Tax return preparation)
    
    
    18,995
    
    
    
    10,960All other fees
    
    $
    20,385
    
    
    $
    12,460
 The Audit Committee administers the Companys engagement of BDO Seidman, LLP and pre-approves
all audit and permissible non-audit services on a case-by-case basis. In approving non-audit
services, the Audit Committee considers whether the engagement could compromise the independence of
BDO Seidman, LLP, and whether for reasons of efficiency or convenience it is in the best interest
of the Company to engage its independent auditor to perform the services. The audit committee has
determined that performance by BDO Seidman, LLP of the non-audit services related to the fees on
the table above did not affect their independence. The Audit Committee has not approved any non-audit services pursuant to Paragraph (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X.   41




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##### Table of Contents



PART IV 
 Item 15. Exhibits and Financial Statement Schedules  (a)
    See the Index to Financial Statements on page F-1 for a list of financial statements filed as
part of this report.Financial statement schedules have been omitted because they either are not applicable or
the required information is shown in the Companys financial statements or the related notes
thereto.(b)
    Exhibits: The following is a list of exhibits filed as a part of this report: Exhibit No.
    
    Document2
    
    Stock Purchase Agreement, dated as of December 15, 1997
(the Stock Purchase Agreement), by and among the
Company, Allan Schulman, L.S. Smith, Dallas Gold & Silver
Exchange, Inc. (DGSE), Barry M. Zwick and Health
Holdings and Botanicals, Inc., incorporated by reference
to Exhibit 2 to the Companys Current Report on Form 8-K
filed on December 23, 1997.3.1
    
    Certificate of Incorporation of Naturade, Inc., together
with Amendments and Certificate of Designations relating
thereto, incorporated by reference to the Companys Annual
Report on Form 10-K filed for fiscal 1997 and the exhibits
and attachments thereto.3.2
    
    Amended and Restated Bylaws of Naturade, Inc., as amended
December 7, 2001, incorporated by reference to Exhibit 3.6
to the Companys Current Report on Form 8-K filed on
January 3, 2002.3.3
    
    Certificate of Amendment to Certificate of Incorporation
of Naturade, Inc. dated December 20, 2001, incorporated by
reference to Exhibit 3.3 to the Companys Current Report
on Form 8-K filed on January 3, 2002.3.4
    
    Certificate of Amendment to Certificate of Incorporation
of Naturade, Inc., dated December 28, 2001, incorporated
by reference to Exhibit 3.4 to the Companys Current
Report on Form 8-K filed on January 3, 2002.3.5
    
    Certificate of Designation of Series B Convertible
Preferred Stock, dated December 20, 2001, incorporated by
reference to Exhibit 3.5 to the Companys Current Report
on Form 8-K filed on January 3, 2002.4.1
    
    Registration Rights Agreement, dated as of December 15,
1997, by and between the Company and Health Holdings &
Botanicals, Inc., incorporated by reference to Exhibit 4
to the Companys Current Report on Form 8-K as filed on
December 23, 1997.10.1*
    
    Consulting Agreement dated as of December 12, 1997, by and
between the Company and Doyle & Boissiere LLC,
incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed December 23, 1997.
   42




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##### Table of Contents



Exhibit No.
    
    Document10.4
    
    Form of Option Agreement for Purchase of Naturade, Inc. Common
Stock for Directors, incorporated by reference to the Companys
Annual Report on Form 10 K filed for fiscal 1995 and the exhibits
and attachments thereto.10.15*
    
    Naturade, Inc. 1998 Incentive Stock Option Plan, as amended,
incorporated by reference to Exhibit 10.17 to the Companys
Quarterly Report on Form 10-Q for the period ended March 31, 1998.10.16*
    
    Incentive Stock Option Plan with Bill D. Stewart dated March 2,
1998, incorporated by reference to Exhibit 10.18 to the Companys
Quarterly Report on Form 10-Q filed for the period ended March 31,
1998.10.19
    
    Finance Agreement by and Between Naturade, Inc. and Health Holdings
and Botanicals, Inc. dated as of March 17, 1999, incorporated by
reference to Exhibit 10. 2 to the Companys Quarterly Report on
Form 10-Q filed for the period ended March 31, 1999.10.20
    
    Amendment No. 1 to Finance Agreement by and between Naturade, Inc.
and Health Holdings and Botanicals, Inc. dated June 1, 1999,
incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q filed for the period ended June 30,
1999.10.21
    
    Credit Agreement by and Between Naturade, Inc. and Health Holdings
and Botanicals, Inc. dated as of August 9, 1999, incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q filed for the period ended June 30, 199910.24
    
    Credit and Security Agreement by and Between Naturade, Inc. and
Wells Fargo Business Credit, Inc. dated as of January 27, 2000,
incorporated by reference to Exhibit 10.24 to the Companys Annual
Report on Form 10-K filed for fiscal 1999.10.25
    
    Amendment No. 2 to Finance Agreement by and between Naturade, Inc.
and Health Holdings and Botanicals, LLC dated as of March 17, 2000,
incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q filed for the period ended March 31,
2000.10.26
    
    Industrial Lease dated as of December 23, 1998 between the Company
and The Irvine Company, incorporated by reference to Exhibit 10.25
to the Companys Quarterly Report on Form 10-Q filed for the period
ended June 30, 2000.10.27
    
    Loan Agreement by and Between Naturade, Inc. and Health Holdings
and Botanicals, LLC. and Wald Holdings, LLC. dated as of August 31,
2000, incorporated by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K filed on September 20, 2000.10.28
    
    Securities Purchase Agreement among Naturade, Inc., Westgate Equity
Partners, L.P., and Health Holdings & Botanicals, LLC, dated as of
December 20, 2001, incorporated by reference to Exhibit 10.28 to
the Companys Current Report on Form 8-K filed January 3, 2002.10.29
    
    Registration Rights Agreement between Naturade and Westgate Equity
Partners, L.P., dated as of January 2, 2002, incorporated by
reference to Exhibit 10.29 to the Companys Current Report on Form
8-K filed January 3, 2002.10.30*
    
    Management Services Agreement between Westgate Group, LLC and
Naturade, Inc. dated as of January 2, 2002, incorporated by
reference to Exhibit 10.30 to the Companys Current Report on Form
8-K filed January 3, 2002.10.31
    
    Voting Agreement between Westgate Equity Partners, L.P. and Health
Holdings & Botanicals, LLC, dated as of January 2, 2002,
incorporated by reference to Exhibit 10.31 to the Companys Current
Report on Form 8-K filed January 3, 2002.
   43




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##### Table of Contents



Exhibit No.
    
    Document10.32*
    
    Amended and Restated Employment Agreement between Naturade, Inc.
and Bill D. Stewart, dated as of January 2, 2002, incorporated by
reference to Exhibit 10.31 to the Companys Current Report on Form
8-K filed January 3, 2002.10.33
    
    Fourth Amendment to Credit and Security Agreement and Waiver of
Defaults between Naturade, Inc. and Wells Fargo Business Credit,
Inc., dated as of December 20, 2001, incorporated by reference to
Exhibit 10.33 to the Companys Current Report on Form 8-K filed
January 3, 2002.10.34
    
    Amendment No. 3 to Finance Agreement between Naturade, Inc. and
Health Holdings & Botanicals, LLC, dated as of January 2, 2002,
incorporated by reference to Exhibit 10.34 to the Companys Current
Report on Form 8-K filed January 3, 2002.10.35
    
    Letter agreement of Wells Fargo Business Credit, Inc. waiving
rights arising from the Companys defaults of covenants under the
Credit and Security Agreement dated as of January 27, 2000,
incorporated by reference to Exhibit 10.35 to the Companys
quarterly Report on Form 10-Q filed for the period ended March 31,
2000.10.36
    
    Sixth Amendment to Credit and Security Agreement between Naturade,
Inc. and Wells Fargo Business Credit Inc., dated as of March 24,
2003, incorporated by reference to Exhibit 10.36 to the Companys
quarterly Report on Form 10-Q filed for the period ended September
30, 2003.10.37
    
    Consent and Mutual Release dated as of April 14, 2003, among the
Company, Westgate Equity Partners, LLP and Health Holdings and
Botanicals, LLC, incorporated by reference to Exhibit 10.37 to the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.10.38
    
    Fifth Amendment to Credit and Security Agreement between Naturade,
Inc. and Wells Fargo Business Credit Inc., dated as of September
19, 2002 incorporated by reference to Exhibit 10.38 to the
Companys quarterly Report on Form 10-Q filed for the period ended
September 30, 2002.10.39
    
    Irrevocable Proxy between Health Holdings and Botanicals, LLC and
Westgate Equity Partners, LLP dated April 14, 2003, incorporated by
reference to Exhibit 10.39 to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2002.10.40
    
    Loan Agreement by and between Naturade, Inc., Health Holdings and
Botanicals, LLC and David A. Weil dated April 14, 2003,
incorporated by reference to Exhibit 10.40 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.10.41
    
    Waiver of Preferential Dividends by Holders of Series B Convertible
Preferred Stock by Westgate Equity Partners, L.P dated April 14,
2003, incorporated by reference to Exhibit 10.41 to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31,
2002.10.42
    
    Seventh Amendment to Credit and Security Agreement between
Naturade, Inc. and Wells Fargo Business Credit Inc., dated as of
April 15, 2003, incorporated by reference to Exhibit 10.42 to the
Companys Current Report on Form 8-K filed on April 25, 2003.10.43
    
    Eighth Amendment to Credit and Security Agreement between Naturade,
Inc. and Wells Fargo Business Credit Inc., dated as of November 6,
2003, incorporated by reference to Exhibit 10.43 to the Companys
Current Report on Form 8-K filed on November 6, 2003.10.44
    
    Ninth Amendment to Credit and Security Agreement between Naturade,
Inc. and Wells Fargo Business Credit Inc., dated as of March 29,
2004 incorporated by reference to Exhibit 10.44 to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31,
2003.10.45*
    
    First Amendment to Amended and Restated Employment Agreement
between Naturade, Inc. and Bill D. Stewart dated March 29, 2004
incorporated by reference to Exhibit 10.45 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.10.46
    
    Joinder to Loan Agreement of Naturade, Inc. dated as of April 13,
2003 by and among Bill D. Stewart and the lenders listed therein,
incorporated by reference to Exhibit 10.46 to the Companys Current
Report on Form 8-K filed on April 22, 2004.10.47
    
    Subordination Agreement as of April 14, 2004 by Bill D. Stewart for
the benefit of Wells Fargo Business Credit, Inc, incorporated by
reference to Exhibit 10.47 to the Companys Current Report on Form
8-K filed on April 22, 2004.10.48
    
    Secured Promissory Note for $100,000 by Naturade, Inc. payable to
Bill D. Stewart, dated April 14, 2004, incorporated by reference to
Exhibit 10.48 to the Companys Current Report on Form 8-K filed on
April 22, 2004.10.49
    
    Secured Promissory Note for $100,000 by Naturade, Inc. payable to
Health Holdings & Botanicals, LLC, dated April 14, 2004,
incorporated by reference to Exhibit 10.49 to the Companys Current
Report on Form 8-K filed on April 22, 2004.10.50
    
    Secured Promissory Note for $25,000 by Naturade, Inc. payable to
David Weil, dated May 3, 2004, incorporated by reference to Exhibit
10.50 to the Companys Current Report on Form 8-K filed on May 5,
2004.
   44




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##### Table of Contents



Exhibit No.
    
    Document10.51
    
    Secured Promissory Note for $75,000 by Naturade, Inc. payable to
Health Holdings & Botanicals, LLC, dated May 3, 2004, incorporated
by reference to Exhibit 10.51 to the Companys Current Report on
Form 8-K filed on May 5, 2004.10.52
    
    Tenth Amendment to Credit and Security Agreement between
Naturade, Inc. and Wells Fargo Business Credit Inc., dated May 10,
2004 , incorporated by reference to Exhibit 10.52 to the
Companys Current Report on Form 10-Q filed on May 13, 2004.10.53*
    
    Revised Employment Agreement between Naturade, Inc. and Stephen M.
Kasprisin, dated as of June 1, 2004, incorporated by reference to
Exhibit 10.53 to the Companys Current Report on Form 8-K filed on
June 11, 2004.10.54*
    
    Revised Employment Agreement between Naturade, Inc. and Marwan
Zreik, dated as of June 1, 2004, incorporated by reference to
Exhibit 10.54 to the Companys Current Report on Form 8-K filed on
June 11, 2004.10.55
    
    Asset Purchase Agreement Dated November 2, 2004, between L.O.D.C.
Group, LTD and Naturade, Inc, incorporated by reference to Exhibit
10.55 to the Companys Current Report on Form 8-K filed on November
81, 2004.**10.56
    
    Eleventh Amendment to Credit and Security Agreement
between Naturade, Inc. and Wells Fargo Business Credit Inc.
dated November 2, 2004.**10.57
    
    First Amendment dated as of January 26, 2005, to Secured
Promissory Note dated April 13,2003, between Health Holdings
& Botanicals, LLC, and Naturade, Inc.**10.58
    
    First Amendment dated as of January 26, 2005, to Secured
Promissory Note dated April 14,2004, between Health Holdings
& Botanicals, LLC, and Naturade, Inc.**10.59
    
    First Amendment dated as of January 26, 2005, to Secured
Promissory Note dated May 13,2004, between Health Holdings &
Botanicals, LLC, and Naturade, Inc.**10.60
    
    First Amendment dated as of January 26, 2005, to Secured
Promissory Note dated August 16, 2004, between Health
Holdings & Botanicals, LLC, and Naturade, Inc.**10.61
    
    First Amendment dated as of January 26, 2005, to Secured
Promissory Note dated April 13, 2003, between David A. Weil,
and Naturade, Inc.**10.62
    
    First Amendment dated as of January 26, 2005, to Secured
Promissory Note dated May 3, 2004, between David A. Weil, and
Naturade, Inc.**10.63
    
    First Amendment dated as of January 26, 2005, to Secured
Promissory Note dated May 3, 2004, between Bill D. Stewart,
and Naturade, Inc.**10.64
    
    Third Amendment to Loan
Agreement dated March 25, 2005, between Howard Shao and Naturade,
Inc.14
    
    Naturade, Inc. Code of Financial Ethics incorporated by
reference to Exhibit 14 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2003**31.1
    
    Certification Pursuant to Rule 15d-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**31.2
    
    Certification Pursuant to Rule 15d-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**32
    
    Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Management contracts or compensatory plan or arrangement.**
    
    Filed herewith.   45




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##### Table of Contents



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: March 31, 2005
    /s/ Bill D. StewartBill 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 and Chief Executive Officer
    
    March 31, 2005Bill D. Stewart
    
    (Principal Executive Officer)/s/ STEPHEN M. KASPRISIN
    
    Chief Financial Officer
    
    March 31, 2005Stephen M. Kasprisin
    
    (Principal Accounting Officer)/s/ LIONEL P. BOISSIERE
    
    Director
    
    March 31, 2005Lionel P. Boissiere/s/ WILLIAM B. DOYLE, JR
    
    Director
    
    March 31, 2005William B. Doyle, Jr./s/ DAVID A. WEIL
    
    Director
    
    March 31, 2005David A. Weil/s/ JAY BROWN
    
    Director
    
    March 31, 2005Jay Brown/s/ ROBERT V. VITALE
    
    Director
    
    March 31, 2005Robert V. Vitale
   46




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##### Table of Contents



NATURADE, INC. INDEX OF FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-2FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002Balance Sheets
    
    
    F-3Statements of Operations
    
    
    F-4Statements of Stockholders Deficit
    
    
    F-5Statements of Cash Flows
    
    
    F-6Notes to Financial Statements
    
    
    F-7
   F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Naturade, Inc.
Irvine, California We have audited the accompanying balance sheets of Naturade, Inc. (the Company) as of
December 31, 2004 and 2003 and the related statements of operations, stockholders deficit, and
cash flows for each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal controls
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2004 and 2003 and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements, the Companys
recurring losses from operations, net working capital deficit and stockholders capital deficiency
raise substantial doubt about its ability to continue as a going concern. Managements plans
concerning these matters are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLPLos Angeles, CaliforniaMarch 25, 2005
   F-2




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##### Table of Contents



NATURADE, INC. 
 Balance Sheets As of December 31, 2004 and December 31, 2003
 December 31,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    210,573
    
    
    $
    144,102Accounts receivable, net
    
    
    2,186,431
    
    
    
    2,333,394Inventories, net
    
    
    1,598,685
    
    
    
    1,246,371Prepaid expenses and other current assets
    
    
    268,810
    
    
    
    148,503Total current assets
    
    
    4,264,499
    
    
    
    3,872,370Property and equipment, net
    
    
    94,890
    
    
    
    161,885Other assets
    
    
    42,002
    
    
    
    42,302Total assets
    
    $
    4,401,391
    
    
    $
    4,076,557LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, WARRANT AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    2,666,425
    
    
    $
    2,310,317Accrued expenses
    
    
    513,544
    
    
    
    475,286Current portion of Notes Payable to Related Parties
    
    
    1,067,954
    
    
    
    644,471Current portion of long-term debt
    
    
    1,875,897
    
    
    
    2,231,778Total current liabilities
    
    
    6,123,820
    
    
    
    5,661,852Long-term debt, less current maturities
    
    
    
    
    
    
    5,609Total Liabilities
    
    
    6,123,820
    
    
    
    5,667,461COMMITMENTS AND CONTINGENCIESREDEEMABLE CONVERTIBLE PREFERRED STOCKRedeemable convertible preferred stock, Series B including accumulated preferred
stock dividends of $686,578 at December 31, 2004 and $433,908 at
December 31, 2003, less discount of $1,142,858 at December 31, 2004,
and $1,428,572 at December 31, 2003, par value $0.0001 per share:
authorized 50,000,000 shares; issued and outstanding, 13,540,723
at December 31, 2004 and 2003 ($2,000,000 redemption value)
    
    
    1,309,119
    
    
    
    770,734WARRANT
    
    
    
    
    
    
    500,000STOCKHOLDERS DEFICIT:Preferred stock, Series A, par value $0.0001 per share; authorized, 2,000,000
shares; issued and outstanding, 0 at December 31, 2004 and 2003
    
    
    0
    
    
    
    0Common stock, par value $0.0001 per share; authorized, 100,000,000
shares; issued and outstanding, 44,533,886 at December 31, 2004 and 2003
    
    
    4,453
    
    
    
    4,453Non-Voting Common stock, par value $0.0001 per share; authorized,
2,000,000 shares; issued and outstanding, 117,284 at December 31, 2004 and
2003
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    18,987,458
    
    
    
    18,987,458Accumulated deficit
    
    
    (22,023,471
    )
    
    
    (21,853,561
    )Total stockholders deficit
    
    
    (3,031,548
    )
    
    
    (2,861,638
    )Total liabilities, redeemable convertible preffered stock, warrant and stockholders deficit
    
    $
    4,401,391
    
    
    $
    4,076,557
 See accompanying notes to financial statements. F-3




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##### Table of Contents



NATURADE, INC 
 Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Net sales
    
    $
    14,141,481
    
    
    $
    16,326,296
    
    
    $
    14,416,351Cost of sales
    
    
    7,802,802
    
    
    
    8,662,299
    
    
    
    8,157,607Gross profit
    
    
    6,338,679
    
    
    
    7,663,997
    
    
    
    6,258,744Costs and expenses:Selling, general and administrative expenses
    
    
    7,216,930
    
    
    
    7,883,398
    
    
    
    8,069,382Total operating costs and expenses
    
    
    7,216,930
    
    
    
    7,883,398
    
    
    
    8,069,382Operating loss
    
    
    (878,251
    )
    
    
    (219,401
    )
    
    
    (1,810,638
    )Other expense:Interest expense
    
    
    305,265
    
    
    
    189,462
    
    
    
    113,480Gain on sale of brand
    
    
    (1,055,647
    )
    
    
    
    
    
    
    Gain on retirement of warrant
    
    
    (500,000
    )
    
    
    
    
    
    
    Other expense (Income)
    
    
    2,857
    
    
    
    (7,948
    )
    
    
    (28,300
    )Income (loss) before provision for income taxes
    
    
    369,274
    
    
    
    (400,915
    )
    
    
    (1,895,818
    )Provision for income taxes
    
    
    800
    
    
    
    800
    
    
    
    800Net income (loss)
    
    $
    368,474
    
    
    $
    (401,715
    )
    
    $
    (1,896,618
    )Less:Preferred Stock Dividends
    
    $
    (252,670
    )
    
    $
    (228,908
    )
    
    $
    (205,000
    )Deemed Dividend
    
    
    (285,714
    )
    
    
    (285,714
    )
    
    
    (285,714
    )Net Loss Attributable to Common Shareholders
    
    $
    (169,910
    )
    
    $
    (916,337
    )
    
    $
    (2,387,332
    )Basic and Diluted Net Loss per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )Weighted Average Number of Shares used in Computation of
Basic and Diluted Net Loss per share
    
    
    44,651,170
    
    
    
    44,651,170
    
    
    
    44,117,284
 See accompanying notes to financial statements F-4




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##### Table of Contents



NATURADE, INC. 
 Statements of Stockholders Deficit for the Years Ended December 31, 2004, 2003 and 2002 AdditionalCommon
    
    
    Common(Non-Voting)
    
    
    Preferred
    
    
    Paid-In
    
    
    (AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    TotalBALANCE, DECEMBER 31, 2001
    
    
    7,823,639
    
    
    $
    783
    
    
    
    
    
    
    
    
    
    
    
    1,250,024
    
    
    $
    125
    
    
    
    11,539,611
    
    
    $
    (18,549,892
    )
    
    $
    (7,009,373
    )Conversion of debt into common stock
and exercise of warrants
    
    
    36,710,247
    
    
    
    3,670
    
    
    
    117,284
    
    

    
    12
    
    
    
    (1,250,024
    )
    
    
    (125
    )
    
    
    5,410,070
    
    
    
    
    
    
    
    5,413,627Issuance of common stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,777
    
    
    
    
    
    
    
    37,777Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205,000
    )
    
    
    (205,000
    )Preferred stock discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    
    
    
    
    2,000,000Accretion of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (285,714
    )
    
    
    (285,714
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,896,618
    )
    
    
    (1,896,618
    )BALANCE, DECEMBER 31, 2002
    
    
    44,533,886
    
    
    
    4,453
    
    
    
    117,284
    
    
    
    12
    
    
    
    0
    
    
    $
    
    
    
    
    18,987,458
    
    
    
    (20,937,224
    )
    
    
    (1,945,301
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (228,908
    )
    
    
    (228,908
    )Accretion of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (285,714
    )
    
    
    (285,714
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (401,715
    )
    
    
    (401,715
    )BALANCE, DECEMBER 31, 2003
    
    
    44,533,886
    
    
    
    4,453
    
    
    
    117,284
    
    
    
    12
    
    
    
    0
    
    
    $
    0
    
    
    
    18,987,458
    
    
    
    (21,853,561
    )
    
    
    (2,861,638
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252,670
    )
    
    
    (252,670
    )Accretion of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (285,714
    )
    
    
    (285,714
    )Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    368,474
    
    
    
    368,474BALANCE, DECEMBER 31, 2004
    
    
    44,533,886
    
    
    $
    4,453
    
    
    
    117,284
    
    
    $
    12
    
    
    
    0
    
    
    $
    0
    
    
    $
    18,987,458
    
    
    
    ($22,023,471
    )
    
    
    ($3,031,548
    )
 See accompanying notes to financial statements F-5




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##### Table of Contents



NATURADE, INC 
 Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003
    

    
    December 31, 2002Cash flows from operating activities:Net income (loss)
    
    $
    368,475
    
    
    $
    (401,715
    )
    
    $
    (1,896,618
    )Adjustments to reconcile net loss to
net cash used in operating activities:Depreciation and amortization
    
    
    66,995
    
    
    
    75,436
    
    
    
    86,218Provision for bad debt expense
    
    
    
    
    
    
    
    
    
    
    60,260Provision for excess and obsolete inventories
    
    
    59,197
    
    
    
    21,168
    
    
    
    17,062Loss from retirement of property & equipment
    
    
    
    
    
    
    1,118
    
    
    
    Expense for stock options, warrants and convertible debt
    
    
    
    
    
    
    
    
    
    
    37,777Gain on expiration of warrant
    
    
    (500,000
    )
    
    
    
    
    
    
    Gain on sale of brand
    
    
    (1,055,647
    )
    
    
    
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    171,963
    
    
    
    (906,336
    )
    
    
    552,298Inventories
    
    
    (614,284
    )
    
    
    421,592
    
    
    
    (527,674
    )Prepaid expenses and other current assets
    
    
    (115,307
    )
    
    
    (43,368
    )
    
    
    252,711Other assets
    
    
    300
    
    
    
    7,292
    
    
    
    5,169Accounts payable and accrued expenses
    
    
    394,365
    
    
    
    (569,068
    )
    
    
    (54,734
    )Net cash used in operating activities:
    
    
    (1,223,943
    )
    
    
    (1,393,881
    )
    
    
    (1,467,531
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    
    
    
    
    (9,716
    )
    
    
    (7,579
    )Proceeds from sale of brand
    
    
    1,228,420
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities:
    
    
    1,228,420
    
    
    
    (9,716
    )
    
    
    (7,579
    )Cash flows from financing activities:Net borrowings (repayment) under line of credit
    
    
    (355,881
    )
    
    
    444,780
    
    
    
    (142,011
    )Proceeds from issuance of debt to related party
    
    
    500,000
    
    
    
    450,000
    
    
    
    Payments of long-term debt
    
    
    (82,125
    )
    
    
    (69,663
    )
    
    
    (28,583
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    1,850,318Proceeds from issuance of warrant
    
    
    
    
    
    
    
    
    
    
    462,580Net cash provided by financing activities:
    
    
    61,994
    
    
    
    825,117
    
    
    
    2,142,304Net increase (decrease) in cash and cash equivalents
    
    
    66,471
    
    
    
    (578,480
    )
    
    
    667,194Cash and cash equivalents, beginning of period
    
    
    144,102
    
    
    
    722,582
    
    
    
    55,388Cash and cash equivalents, end of period
    
    $
    210,573
    
    
    $
    144,102
    
    
    $
    722,582Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest
    
    $
    177,876
    
    
    $
    148,728
    
    
    $
    116,433Income taxes
    
    $
    800
    
    
    $
    800
    
    
    $
    800Non-cash financing transactions:Conversion of notes payable and accrued interest to related
party into common stock
    
    $
    
    
    
    $
    
    
    
    $
    5,413,627Surrender of preferred stock for cancellation without
conversion in exchange for common stock
    
    $
    
    
    
    $
    
    
    
    $
    125Discount related to redeemable convertible preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    2,000,000Preferred stock dividend accrued
    
    $
    252,670
    
    
    $
    228,908
    
    
    $
    205,000Deemed dividend
    
    $
    285,714
    
    
    $
    285,714
    
    
    $
    285,714Issuance of non-voting common stock in connection with
private equity transaction
    
    $
    
    
    
    $
    
    
    
    $
    47,500
 See accompanying notes to financial statements F-6




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##### Table of Contents



NATURADE, INC. 
 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Naturade, Inc., a Delaware corporation (the Company or Naturade), is a branded
nutraceuticals marketing company focused on high growth, innovative natural products that nourish
the health and well being of consumers. The Companys products include low carbohydrate, high
protein powders, nutritional supplements, joint health and arthritis pain relief products, and soy
protein based powders. Its products are sold to the health food and mass market channels through
distributors and directly to retailers in the United States and overseas. Basis of Presentation The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared on a going-concern basis,
which contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. At December 31, 2004, the Company has an accumulated deficit of $22,023,470, a
net working capital deficit of $1,859,320, a stockholders capital deficiency of $3,031,547 and has
incurred recurring net losses. These factors, among others, raise substantial doubt about the
Companys ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern. The Companys
continuation as a going concern depends on its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms and covenants of its financing agreements,
to obtain additional financing or refinancing as may be required and ultimately to attain
successful operations. In response to these conditions, the Company amended its loan agreement with the majority
shareholder and other investors during 2004 to include Bill D. Stewart, CEO of the Company, as a
party to the Loan Agreement and the total borrowing limit was increased to $950,000. During 2004,
the Company made draws totaling $500,000 on this line. This additional financing helped the Company
meet its obligations and sustain operations. In addition management has made certain financial and
organizational changes and updated the detailed analysis of the Companys core competencies, the
nutraceutical market, competitors and specific product categories in light of the softening economy
during the year. Based on this analysis, the management team has focused its sales force on the
growth-oriented mass market retail segment and stabilizing the health food segment, taken action to
reduce overhead costs and expanded the sales of previously-developed product line extensions in the
rapidly growing soy protein category, sports nutrition and safe, ephedra free weight loss segments.
No assurance can be given that managements plans will be successful. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Use of Estimates and Assumptions The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially from those estimates.   F-7




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##### Table of Contents



Concentration of Credit Risk Financial instruments that subject Naturade to concentration of
credit risk consist primarily of cash and accounts receivable. 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 estimated credit losses. The Company
maintains cash balances with financial institutions that are in excess of federally insured limits. Fair Value of Financial Instruments The Companys balance sheets include the following financial
instruments: cash and cash equivalents, trade accounts receivable, trade accounts payable and
long-term debt. The Company considers the carrying amounts in the financial statements to
approximate fair value of these financial instruments due to the relatively short period of time
between the origination of the instruments and their expected realization or the interest rates
which approximate current market rates. Accounts Receivable Accounts receivable are presented net of an allowance for doubtful accounts
of $9,740 and $9,740 at December 31, 2004 and December 31, 2003, respectively, and net of an
allowance for returns and allowances of $ 322,299 and $685,945 at December 31, 2004 and December
31, 2003, respectively. The allowance for doubtful accounts and returns and allowances includes the
following: Balance as of December 31, 2001
    
    $
    948,450Provision for doubtful accounts and returns and allowances
    
    
    342,418Deductions
    
    
    (403,826
    )Balance as of December 31, 2002
    
    
    887,042Provision for doubtful accounts and returns and allowances
    
    
    239,744Deductions
    
    
    (431,101
    )Balance as of December 31, 2003
    
    
    695,685Provision for doubtful accounts and returns and allowances
    
    
    745,660Deductions
    
    
    (1,109,306
    )Balance as of December 31, 2004
    
    $
    332,039
 Inventories Inventories are valued at the lower of cost or market. The weighted average method is
used to determine cost. The reserve for excess and obsolete inventories includes the following: Balance as of December 31, 2001
    
    $
    357,918Provision for excess and obsolete inventory
    
    
    17,062Write-offs
    
    
    (302,879
    )Balance as of December 31, 2002
    
    
    72,101Provision for excess and obsolete inventory
    
    
    21,168Write-offs
    
    
    (16,018
    )Balance as of December 31, 2003
    
    
    77,251Provision for excess and obsolete inventory
    
    
    59,197Write-offs
    
    
    (55,137
    )Balance as of December 31, 2004
    
    $
    81,311
 Property and Equipment Property and equipment are stated at cost, less accumulated depreciation
and amortization computed using the straight-line method over the estimated useful lives of the
related assets ranging from five to ten years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the lease term or estimated useful life. Expenditures for
maintenance and repairs are charged to operations as incurred. Impairment of Long-Lived Assets In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
If long-lived assets become impaired, the Company recognizes an impairment loss measured as the
amount by which the carrying value of the assets exceeds the estimated fair value of the assets.   F-8




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##### Table of Contents



Income Taxes The Company accounts for income taxes under the provisions of SFAS 109, Accounting
for Income Taxes. Under this method, deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Revenue Recognition- Sales are recognized upon shipment and passage of title. This is when the
customer has made the fixed commitment to purchase the goods, the products are shipped per the
customers instructions, the sales price is determinable, and collection is reasonably assured. The
Company accrues for estimated returns at the time of sale. The Company accounts for certain
promotional allowances such as consumer coupons and rebates, $20,800 in 2004, and customer slotting
fees $83,300 in 2004, as a reduction of sales and new store opening costs, $38,700 in 2004, are
recorded as cost of goods sold in the period incurred in accordance with Emerging Issues Task Force
(EITF) issue No. 01-09. Net Income (Loss) Per Share Basic earnings (loss) per share (EPS) excludes dilution and is
computed by dividing net income or loss attributable to common stockholders by the weighted average
of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock (i.e. convertible preferred stock,
warrants to purchase common stock and common stock options using the treasury stock method) were
exercised or converted into common stock. Potentially dilutive securities, representing warrants
and options to purchase 2,231,000, 35,948,548, and 35,073,548 shares of common stock for the years
ended December 31, 2004, 2003 and 2002 are excluded in EPS as their effect would be anti-dilutive. Research and Development Research and development costs are expensed when incurred and amounted
to $274,057, $216,185 and $210,985 for the years ended December 31, 2004, 2003 and 2002. Advertising and Promotion The Company complies with Emerging Issues Task Force (EITF) issue No.
01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendors
Products(EITF 01-9), whereby certain payments to customers are presented as a reduction of sales.
These payments amounted to $1,735,300 in 2004. Advertising The Company expenses the cost of advertising as incurred. Advertising expenses
amounted to $346,372, $491,374, and $559,797 for the years ended December 31, 2004, 2003 and 2002. Deferred Rent Deferred rent totaling $81,727 and $98,471 at December 31, 2004 and 2003,
respectively, is included in accrued expenses. Deferred rent represents rental expense (recorded on
a straight-line basis) in excess of actual rental payments to date. Warrants- On December 31, 2004, the Warrant to purchase Series B Convertible Preferred Stock was
not exercised and accordingly, expired. As the Warrants were initially classified outside of
equity and were recorded at fair value, the subsequent expiration of the warrants should be
classified as charge to earnings in accordance with Statement of Financial Accounting Standards No.
150: Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity.Paragraph 45 of Statement of Financial Accounting Standards No. 150 states that because
the contract gives the counterparty the choice of cash settlement or settlement in shares, public
companies should report the proceeds from the issuance of put warrants as liabilities and
subsequently measure the put warrants at fair value with changes in fair value reported in
earnings. As the value of the Warrants did not fluctuate during their existence and if exercised, would
have generated a fixed cash investment in the company, no charge to earnings was required in
previous periods. Guarantees- In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation Number (FIN) 45 Guarantors Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others  an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FIN 34. The following is a summary of the Companys
agreements that the Company has determined are within the scope of FIN 45.   F-9




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##### Table of Contents



Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events
or occurrences arising as a result of an officers or directors serving in such capacity. The term
of the indemnification period is the officers or directors lifetime. The maximum potential amount
of future payments the Company could be required to make under these indemnification agreements is
unlimited. However, the Company has a directors and officers liability insurance policy that
limits its exposure and enables it to recover a portion of any future amounts paid. As a result of
its insurance policy coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liability recorded for these agreements as of
December 31, 2004. The Company enters into indemnification provisions under (i) its agreements with other companies in
its ordinary course of business, typically business partners, contractors, customers and landlords
and (ii) its agreements with investors. Under these provisions the Company generally agrees to
indemnify and hold harmless the indemnified party for losses suffered or incurred by the
indemnified party as a result of the Companys activities or, in some cases, as a result of the
indemnified partys activities under the agreement. These indemnification provisions often include
indemnifications relating to representations made by the Company with regard to intellectual
property rights. These indemnification provisions generally survive the termination of the
underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for
certain expenses and to provide salary continuation during short-term disability. The maximum
potential amount of future payments the Company could be required to make under these
indemnification provisions is unlimited. The Company has not incurred material costs to defend
lawsuits or settle claims related to these indemnification provisions. As a result, the Company
believes the estimated fair value of these provisions is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of December 31, 2004. Major Customers During the fiscal years ended December 31, 2004, 2003 and 2002, the Company had
sales to four customers in excess of 10% of the Companys total net sales as shown in the following
table. Major Customers Table Customer One
    
    
    Customer Two
    
    
    Customer Three
    
    
    Customer FourAccounts
    
    
    
    
    
    
    Accounts
    
    
    
    
    
    
    Accounts
    
    
    
    
    
    
    AccountsReceivable
    
    
    
    
    
    
    Receivable
    
    
    
    
    
    
    Receivable
    
    
    
    
    
    
    ReceivableBalance
    
    
    
    
    
    
    Balance
    
    
    
    
    
    
    Balance
    
    
    
    
    
    
    BalanceSales
    
    
    Year-end
    
    
    Sales
    
    
    Year-end
    
    
    Sales
    
    
    Year-end
    
    
    Sales
    
    
    Year-endDecember 31, 2004
    
    $
    3,231,200
    
    
    $
    722,295
    
    
    $
    2,603,800
    
    
    $
    174,538
    
    
    $
    1,795,500
    
    
    $
    81,628
    
    
    $
    279,100
    
    
    $
    227,001December 31, 2003
    
    $
    3,722,900
    
    
    $
    229,501
    
    
    $
    2,393,000
    
    
    $
    189,512
    
    
    $
    2,185,900
    
    
    $
    101,260
    
    
    $
    1,749,500
    
    
    $
    1,502,459December 31, 2002
    
    $
    2,547,000
    
    
    $
    438,200
    
    
    $
    2,342,400
    
    
    $
    185,439
    
    
    $
    2,352,500
    
    
    $
    241,539
    
    
    $
    882,100
    
    
    $
    754,799
 The loss of any one of these customers could have a material adverse effect on the Companys
results of operations. The Company does not have long-term contracts with any of its customers and,
accordingly, there can be no assurance that any customer will continue to place orders with the
Company to the same extent it has in the past, or at all. Sale of Brand- During 2004, the Company sold all of the assets related to its aloe vera based
product lines in an all cash transaction. The sale included two product lines sold primarily
through health food stores and natural food supermarkets including aloe vera gel concentrate drinks
and Aloe Vera 80® brand topical products. The transaction was completed on November 2,
2004 for a purchase price of approximately $1,285,787 and included all inventory, tangible and
intangible personal property related to these two brands and resulted in a gain of approximately
$1,055,647. The proceeds on the sale were used to reduce borrowings under the Credit Agreement. Accounting for Stock-Based Compensation SFAS 123, Accounting for Stock-Based Compensation,
requires disclosure of the fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period which is usually the vesting
period. The Company has chosen, under the provisions of SFAS 123, to continue to account for
employee stock-based transactions using the intrinsic value method under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.   F-10




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##### Table of Contents



Pursuant to SFAS 123, the Company has elected to continue using the intrinsic value method of
accounting for stock-based awards granted to employees and directors in accordance with APB Opinion
No. 25 and related interpretations in accounting for its stock option plan. Had the compensation
cost for the Company stock option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the method of SFAS 123, the Companys net loss and loss
per share would have been the pro forma amounts presented below: Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Net income (loss): As reported
    
    $
    368,474
    
    
    $
    (401,715
    )
    
    $
    (1,896,618
    )Add: Stock-based employee compensation expense included in
reported net loss
    
    
    0
    
    
    
    0
    
    
    
    0Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (5,704
    )
    
    
    (8,066
    )
    
    
    (333,710
    )Pro forma
    
    $
    362,770
    
    
    $
    (409,781
    )
    
    $
    (2,230,328
    )Basic and Diluted net income (loss) per share: As reported
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    (0.05
    )Pro forma
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )
 The fair value for each option grant was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Weighted Average Risk-Free Interest Rate
    
    
    4.41 to 5.21
    %
    
    
    4.41 to 5.21
    %
    
    not applicableExpected Life of an Option
    
    
    5 years
    
    
    
    5 years
    
    
    not applicableExpected Stock Volatility
    
    
    76
    %
    
    
    76
    %
    
    not applicable
 New Accounting Pronouncements In December 2004, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 123R
Share Based Payment. This statement is a revision of SFAS Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS 123R addresses all forms of share based
payment (SBP) awards including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that
will be measured at fair value on the awards grant date, based on the estimated number of awards
that are expected to vest. Under this method, compensation expense is recognized for all
share-based payments granted after July 1, 2005 and also for all awards granted prior to July 1,
2005 that remain unvested on the effective date. The adoption of this pronouncement will increase
compensation expense under the modified prospective approach (e.g., the impact of outstanding
grants which continue to vest plus future grants will result in more compensation expense relative
to their previous approach under APB 25). The Company is still evaluating the amount of the
increase to compensation expense. In November 2004, the FASB issued SFAS No. 151 Inventory Costs (SFAS 151). This statement amends
the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges. In addition, this Statement
requires that allocation of fixed production overheads to costs of conversion be based upon the
normal capacity of the production facilities. The provisions of SFAS 151 are effective for
inventory cost incurred in fiscal years beginning after June 15, 2005. As such, the Company is
required to adopt these provisions at the beginning of fiscal 2006. The adoption of this
pronouncement is not expected to have material effect on the Companys financial statements.   F-11




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##### Table of Contents



In December 2004, the FASB issued Statement Accounting Standard (SFAS) No. 153 Exchanges of
Nonmonetary Assets. This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December 16, 2004. The
provisions of this Statement should be applied prospectively. The adoption of this pronouncement is
not expected to have material effect on the Companys financial statements. In October 2004, the American Jobs Creation Act of 2004 (Act) became effective in the U.S. Two
provisions of the Act may impact the Companys provision (benefit) for income taxes in future
periods, namely those related to the Qualified Production Activities Deduction (QPA) and Foreign
Earnings Repatriation (FER). The QPA will be effective for the Companys U.S. federal tax return year beginning after December
31, 2004. In summary, the Act provides for a percentage deduction of earnings from qualified
production activities, as defined, commencing with an initial deduction of three percent for tax
years beginning in 2005 and increasing to nine percent for tax years beginning after 2009, with the
result that the Statutory federal tax rate currently applicable to the Companys qualified
production activities of 35 percent could be reduced initially to 33.95 percent and ultimately to
31.85 percent. However, the Act also provides for the phased elimination of the Extraterritorial
Income Exclusion provisions of the Internal Revenue Code. Due to the interaction of the law
provisions noted above as well as the particulars of the Companys tax position, the ultimate
effect of the QPA on the Companys future provision (benefit) for income taxes has not been
determined at this time. The FASB issued FASB Staff Position FAS 109-1, Application of FASB
Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004, (FSP 109-1) in December 2004. FSP
109-1 requires that tax benefits resulting from the QPA should be recognized no earlier than the
year in which they are reported in the entitys tax return, and that there is to be no revaluation
of recorded deferred tax assets and liabilities as would be the case had there been a change in an
applicable statutory rate. The FER provision of the Act provides generally for a one-time 85 percent dividends received
deduction for qualifying repatriations of foreign earnings to the U.S. Qualified repatriated funds
must be reinvested in the U.S. in certain qualifying activities and expenditures, as defined by the
Act. In December 2004, the FASB issued FASB Staff Position FAS 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FSP 109-2). FSP 109-2 allows additional time for entities potentially impacted by the FER
provision to determine whether any foreign earnings will be repatriated under said provisions. The
Company has no foreign earnings at this time and accordingly, has not undertaken an evaluation of
the application of the FER provision and any potential benefits of effecting repatriations under
said provision. Numerous factors, including previous actual and deemed repatriations under federal
tax law provisions, are factors impacting the availability of the FER provision to the Company and
its potential benefit to the Company, if any. The Company will examine this issue prior to
undertaking any operations resulting in foreign source earnings.   F-12




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##### Table of Contents



2. INVENTORIES Inventories are stated at the lower of weighted average cost or market. Weighted average cost is
determined on a first-in, first-out basis. Inventories at December 31, 2004 and December 31, 2003
consisted of the following: December 31, 2004
    
    
    December 31, 2003Raw Materials
    
    $
    203,610
    
    
    $
    208,615Finished Goods
    
    
    1,476,386
    
    
    
    1,115,007Subtotal
    
    
    1,679,996
    
    
    
    1,323,622Less: Reserve for Excess and Obsolete Inventories
    
    
    (81,311
    )
    
    
    (77,251
    )$
    1,598,685
    
    
    $
    1,246,371
 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 2004 and December 31, 2003 consisted of the following: December 31, 2004
    
    
    December 31, 2003Building and improvements
    
    $
    160,196
    
    
    $
    160,196Machinery and equipment
    
    
    477,185
    
    
    
    477,185Automobiles
    
    
    83,980
    
    
    
    83,980Total
    
    
    721,361
    
    
    
    721,361Less accumulated depreciation and amortization
    
    
    (626,471
    )
    
    
    (559,476
    )Property and equipment, net
    
    $
    94,890
    
    
    $
    161,885
 Depreciation expenses amounted to $66,995, $75,436 and $86,218 for the fiscal years ended December
31, 2004, 2003 and 2002. 4. DEBT Long-term debt consists of the following at December 31, 2004 and 2003. December 31, 2004
    
    
    December 31, 2003Line of Credit
    
    $
    1,875,897
    
    
    $
    2,231,778Investor Notes with majority shareholder and other investors
    
    
    112,345
    
    
    
    162,345Notes Payable due to a former stockholders estate;
borrowings bear interest at 8% and are due in monthly
installments of $2,832
    
    
    5,609
    
    
    
    37,735Loan Agreement with majority shareholder and other investors
    
    
    950,000
    
    
    
    450,000Total
    
    
    2,943,851
    
    
    
    2,881,858Less line of credit and current portion of long-term debt
    
    
    (2,943,851
    )
    
    
    (2,876,249
    )Long-term debt
    
    $
    -0-
    
    
    $
    5,609
   F-13




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##### Table of Contents



Line of Credit On January 27, 2000, the Company entered into a three year Credit and Security
Agreement (the Credit Agreement) with Wells Fargo Business Credit, Inc. (Wells Fargo), which
initially allowed for maximum borrowings of up to $3,000,000, based on certain percentages of
eligible accounts receivable and inventories as defined. In consideration of the extension of
credit under the Loan Agreement on April 14, 2003, Wells Fargo waived all defaults of the Company
as of December 31, 2002 under the Credit Agreement and amended the agreement to, among other
things, reduce the covenants regarding minimum net income and minimum book net worth and increased
the interest rate to the prime rate plus 4.5%. On November 6, 2003, the terms of the Credit
Agreement were modified to extend the maturity date until March 31, 2004 and on March 29, 2004; the
terms of the Credit Agreement were modified to extend the maturity date until December 31, 2005 .
Borrowings under the Credit Agreement, which totaled $1,875,897 at December 31, 2004, are
collateralized by substantially all assets of the Company. At December 31, 2004 the prime rate was
5.25% and the interest charge under the Credit Agreement was 9.75%. The Credit Agreement contains
covenants, which, among other things, require that certain financial ratios be met. As of December
31, 2004, the Company was in compliance with all covenants. Available borrowings under the Credit
Agreement were $278,434 at December 31, 2004. Loan Agreement with Majority Shareholder and Other Investors In August 2000, the Company entered
into a Loan Agreement (the Investor Notes) with Health Holdings and other investors (the Lender
Group). The Investor Notes allowed for advances (the Loan Advances) of up to $1.2 million at an
interest rate of 8% per annum with due dates of September 11, 2002 for $50,000 and August 31, 2003
for the remaining balance outstanding. The Loan Agreement further provided that the Lender Group could elect to convert all or any part of
the Loan Advances into shares of the Companys Common Stock at a conversion price equal to the
lower of (a) the average closing bid of the Companys Common Stock for the ten trading days prior
to the making of a Loan Advance or (b) the average closing bid of the Companys common stock for
the ten trading days prior to the date of receipt of notice of conversion. On June 13, 2001, two
investors converted their total debt of $150,000 plus accrued interest of $2,400 into Common Stock,
receiving a total of 476,250 shares of the Companys Common Stock based on the then fair market
value of $0.32. As part of the Private Equity Transaction on January 2, 2002 as described more
fully in Note 5, Health Holdings converted into Common Stock all of the Companys Investor Notes
due to Health Holdings, plus accrued interest of $11,051 for a total debt conversion of $752,496.
On August 8, 2002, one investor (a member of the Board of Directors) converted debt of $50,000
which was due September 11, 2002 plus accrued interest of $427 into Common Stock, receiving a total
of 720,392 shares of the Companys Common Stock based on the then fair market value of $0.07. On August 21, 2003, the terms of the remaining outstanding Investor Notes totaling $202,345 were
modified to include increasing the interest rate to 15% per annum paid in quarterly increments and
setting a principal repayment schedule of $20,000 each on September 15, 2003 and October 15, 2003,
installments of $10,000 per month from January 15, 2004 through July 15, 2004 and a final payment
of $92,345 on August 15, 2004. On September 23, 2004 payment terms on these Notes were modified to
December 31, 2004. As of December 31, 2004, there is $112,345 outstanding on the Investor Notes and
the Company was in default of the payment provisions of the Notes. On March 25, 2005, the payment
provisions of the Investor Notes was amended to require a principal payment of $20,000 plus accrued
interest on July 15, 2005 with the remaining principal of $92,345 plus accrued interest due
December 31, 2005. In addition, the conversion provision of the Investor Note allowing the holder
to convert outstanding Notes to the Companys Common Stock and a predetermined price was
eliminated. See Note 12, Subsequent Event. On April 14, 2003, the Company entered into a loan agreement (the Loan Agreement) with Health
Holdings and certain other lenders (the Lender Group), pursuant to which the Lender Group agreed
to lend the Company $450,000 and, subject to the discretion of the Lender Group, up to an
additional $300,000. All advances under the Loan Agreement bear interest at the rate of 15% per
annum, are secured by substantially all of the assets of the Company, and are subordinated to the
Companys indebtedness to Wells Fargo Business Credit, Inc. (Wells Fargo). In consideration of
the extension of credit under the Loan Agreement, Wells Fargo waived all defaults of the Company as
of December 31, 2003 under the Credit and Security Agreement dated as of January 27, 2000. On April 14, 2004, the terms of the Loan Agreement were modified by the Joinder of Bill D. Stewart,
the Chief Executive officer of the Company, as a member of the Lender Group, subject to all of the
terms and conditions of the Loan Agreement, and the Lender Group advanced an additional $200,000,
of which Bill D. Stewart advanced $100,000. Further, on May 3, 2004, the Lender Group advanced the
Company an additional $100,000. On August 16, 2004, advances allowed under the Loan Agreement were
increased to a total of $950,000 and the Lender Group advanced an additional $200,000 to the
Company. There are no additional amounts available to advance under the Loan Agreement. Proceeds of
the advances have been used for working capital. On January 26, 2005, the terms of the Loan
Agreement were modified to extend the due date to December 31, 2005. As of December 31, 2004 there
is $950,000 outstanding under the Loan Agreement.   F-14




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##### Table of Contents



5. PRIVATE EQUITY TRANSACTION On January 2, 2002, the Company privately sold 13,540,723 shares of Series B Convertible Preferred
Stock (the Shares) for $2 million, and warrants, which expire on December 31, 2004, to purchase
an additional 33,641,548 shares of Series B Convertible Preferred Stock at an aggregate exercise
price of $3.5 million (the Warrants), for $500,000. The Shares and Warrants were purchased by
Westgate Equity Partners, L.P. (Westgate). The Series B Convertible Preferred Stock bears
dividends at a rate of 10% per annum, which will accumulate and compound semi-annually if not paid
in cash. The Series B Convertible Preferred Stock may be converted into Common Stock at any time at
the option of the holder. On the seventh anniversary of its issuance, any unconverted shares of
Series B Convertible Preferred Stock will be automatically redeemed by the Company at the original
issuance price plus accrued and unpaid dividends, provided the Company is legally able to do so.
Two members of the Board of Directors of the Company are elected exclusively by the holders of the
Series B Convertible Preferred Stock voting as a separate class. The
Company had the right to redeem the Series B Convertible Preferred Stock at any time prior to
December 31, 2004 if the Company received a bona fide offer from a third party to invest equity
capital in the Company and the holders of the Series B Convertible Preferred Stock did not make a
counter offer satisfying certain price requirements. No bona fide offer was made and the Company
did not redeem the Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock
has a beneficial conversion feature of $2,000,000, which was recorded as a discount and is being
amortized over seven years. As part of this transaction (the Private Equity Transaction), the Company entered into a
Management Services Agreement under which certain principals of Westgate or its affiliates will
provide management and consulting services to the Company. On December 31, 2004, the Warrants were not exercised and accordingly expired. As the
Warrants were initially classified outside of equity and were recorded at fair value, the
subsequent expiration of the warrants was classified as charge to earnings in accordance with
Statement of Financial Accounting Standards No. 150: Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity After the completion of the Private Equity Transaction, to accommodate the market rate conversion
ratio of certain outstanding notes, the Company and Westgate agreed to adjust the conversion
formula for the Series B Convertible Preferred Stock. In addition, Westgate and Health Holdings
agreed that (i) the Company may grant additional options to purchase up to 1,250,000 shares of
Common Stock to employees in accordance with the Naturade, Inc. 1998 Incentive Stock Option Plan,
and (ii) Health Holdings would grant to Westgate a proxy to vote 1.041 shares of Common Stock owned
by Health Holdings for each share of Common Stock issued on exercise of the new options. The Company has used the net proceeds of the transactions for working capital and general corporate
purposes. 6. STOCKHOLDERS EQUITY Employee Stock Option Plan In February 1998, the Company adopted an Incentive Stock Option Plan
(the Plan) to enable participating employees to acquire shares of the Companys common stock. The
Plan provided for the granting of incentive stock options up to an aggregate of 850,000 shares, as
amended. In October 2001, the Company amended the Plan by increasing to 2,000,000 the number of
shares of the Companys common stock which may be subject to awards granted pursuant to the Plan.
The actual amount of incentive stock options that may be granted to employees is determined by the
Compensation Committee based on the parameters set forth in the Plan. Under the terms of the Plan,
incentive stock options may be granted at not less than 100% of the fair market value at the date
of the grant (110% in the case of 10% shareholders). Incentive options granted under the Plan vest
over a four-year period from the date of grant. The Company has granted 1,543,500 incentive options
under the Plan at the weighted average exercise price per share of $0.14 as of December 31, 2004.
These options expire seven years from the date of grant. Director Stock Options In October 1999, 87,500 options were issued to each of two then new board
members at an exercise price of $1.03.   F-15




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##### Table of Contents



Warrants On January 2, 2002, the Company sold warrants to purchase 33,641,548 shares of Series B
Convertible Common Stock. The aggregate purchase price of the warrants was $500,000 and the
aggregate exercise price is $3.5 million. These warrants expired on December 31, 2004. This
transaction is described more fully in Note 5, Private Equity Transaction. In 1999, the Company granted 600,000 warrants in conjunction with certain financing agreements.
These warrants expire ten years from the date of grant. As part of the Private Equity Transaction
described in Note 5, the holders of the warrants agreed they would be exercisable for Non-Voting
Common Stock. A summary of the Companys outstanding stock options activity is as follows: WeightedAverage
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    Exercise Price
    
    
    Number
    
    
    ExerciseShares
    
    
    per Share
    
    
    Exercisable
    
    
    PriceJanuary 1, 2002
    
    
    1,515,000
    
    
    $
    0.98
    
    
    
    1,052,750
    
    
    $
    1.08Granted
    
    
    -0-
    
    
    $Exercised
    
    
    -0-Expired
    
    
    (683,000
    )
    
    $
    1.01Outstanding at December 31, 2002
    
    
    832,000
    
    
    $
    0.58
    
    
    
    679,875
    
    
    $
    0.56Granted
    
    
    1,025,000
    
    
    $
    0.03Exercised
    
    
    -0-Expired
    
    
    (150,000
    )
    
    $
    1.25Outstanding at December 31, 2003
    
    
    1,707,000
    
    
    $
    0.19
    
    
    
    771,000
    
    
    $
    0.35Granted
    
    
    100,000
    
    
    $
    0.08Exercised
    
    
    -0-Expired
    
    
    (176,000
    )
    
    $
    0.08Outstanding at December 31, 2004
    
    
    1,631,000
    
    
    $
    0.19
    
    
    
    1,233,875
    
    
    $
    0.24
 The following table summarizes information about stock options outstanding at December 31, 2004 WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    Weighted AverageRemaining
    
    
    Average
    
    
    
    
    
    
    Exercise PriceRange of
    
    Options
    
    
    Contract Life
    
    
    Exercise
    
    
    Options
    
    
    for ExercisableExercise Prices
    
    Outstanding
    
    
    In Years
    
    
    Price
    
    
    Exercisable
    
    
    Options$0.025-0.100
    
    
    975,000
    
    
    
    6
    
    
    $
    0.03
    
    
    
    606,250
    
    
    $
    0.03$0.15-0.875
    
    
    533,500
    
    
    
    3
    
    
    $
    0.29
    
    
    
    505,125
    
    
    $
    0.29$1.03 - 1.13
    
    
    122,500
    
    
    
    2
    
    
    $
    1.04
    
    
    
    122,500
    
    
    $
    1.041,631,000
    
    
    
    
    
    
    $
    0.19
    
    
    $
    1,233,875
    
    
    $
    0.24
   F-16




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##### Table of Contents



A summary of the Companys outstanding warrant activity is as follows: WeightedAverage
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    Exercise Price
    
    
    Number
    
    
    ExerciseShares
    
    
    per Share
    
    
    Exercisable
    
    
    PriceOutstanding at January 1, 2002
    
    
    600,000
    
    
    $
    1.00
    
    
    
    600,000
    
    
    $
    1.00Granted
    
    
    33,641,548
    
    
    $
    0.10Exercised
    
    
    -0-
    
    
    $
    -0-Expired
    
    
    -0-
    
    
    $
    -0-Outstanding at December 31, 2002
    
    
    34,241,548
    
    
    $
    0.12
    
    
    
    34,241,548
    
    
    $
    0.12Granted
    
    
    -0-
    
    
    $
    -0-Exercised
    
    
    -0-
    
    
    $
    -0-Expired
    
    
    -0-
    
    
    $
    -0-Outstanding at December 31, 2003
    
    
    34,241,548
    
    
    $
    0.12
    
    
    
    34,241,548
    
    
    $
    0.12Granted
    
    
    -0-
    
    
    $
    -0-Exercised
    
    
    -0-
    
    
    $
    -0-Expired
    
    
    (33,641,548
    )
    
    $
    0.10Outstanding at December 31, 2004
    
    
    600,000
    
    
    $
    1.00
    
    
    
    600,000
    
    
    $
    1.00
 The following table summarizes information about warrants outstanding at December 31, 2004 WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    Weighted AverageRemaining
    
    
    Average
    
    
    
    
    
    
    Exercise PriceRange of
    
    Warrants
    
    
    Contract Life
    
    
    Exercise
    
    
    Warrants
    
    
    for ExercisableExercise Prices
    
    Outstanding
    
    
    In Years
    
    
    Price
    
    
    Exercisable
    
    
    Warrants$1.00
    
    
    600,000
    
    
    
    5
    
    
    $
    1.00
    
    
    
    600,000
    
    
    $
    1.00
   F-17




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##### Table of Contents



7. INCOME TAXES The provision for income taxes for the years ended December 31, 2004, 2003 and 2002 consists of the
following: Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002CurrentFederal
    
    $
    0
    
    
    $
    0
    
    
    $
    0State
    
    
    800
    
    
    
    800
    
    
    
    800Total current
    
    $
    800
    
    
    $
    800
    
    
    $
    800DeferredFederal
    
    
    0
    
    
    
    0
    
    
    
    0State
    
    
    0
    
    
    
    0
    
    
    
    0Total deferred
    
    
    0
    
    
    
    0
    
    
    
    0Total provision
    
    $
    800
    
    
    $
    800
    
    
    $
    800
 The Company has no foreign operations and all international sales are transacted in the United
States and paid in U.S. Dollars. As a result, the Company has no provision for foreign taxes. The income tax provision differs from the amount of income tax determined by applying the U.S.
federal income tax rate to income before income taxes due to the following: Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Computed tax (benefit) expense
    
    $
    125,281
    
    
    $
    (136,651
    )
    
    $
    (644,578
    )Increase (decrease) in income taxes resulting from:Nondeductible expenses
    
    
    9,209
    
    
    
    6,674
    
    
    
    1,783Effect of gain on retirement of warrants
    
    
    (204,027
    )
    
    
    -0-
    
    
    
    -0-State income taxes, net of federal tax benefit
    
    
    22,108
    
    
    
    528
    
    
    
    528Federal/State true ups
    
    
    44,095
    
    
    
    -0-
    
    
    
    -0-State NOL disallowance and others
    
    
    82,985
    
    
    
    (32,124
    )
    
    
    (285,207
    )Change in valuation allowance
    
    
    (79,651
    )
    
    
    161,573
    
    
    
    927,474State minimum franchise tax
    
    
    800
    
    
    
    800
    
    
    
    800$
    800
    
    
    $
    800
    
    
    $
    800
   F-18




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##### Table of Contents



Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The significant components of the net deferred tax assets and liabilities were as
follows: Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003Current deferred tax assets (liabilities)Uniform capitalization
    
    $
    48,475
    
    
    $
    46,872Accounts Receivable
    
    
    132,816
    
    
    
    278,274Accrued vacation
    
    
    33,686
    
    
    
    29,403Inventory reserve
    
    
    32,524
    
    
    
    30,900State taxes
    
    
    272
    
    
    
    272Other
    
    
    109,698
    
    
    
    48,601Valuation allowance
    
    
    (357,470
    )
    
    
    (434,322
    )Total current
    
    
    
    
    
    
    Non-current deferred tax assets (liabilities):Net operating losses and credit carry forwards
    
    
    6,944,652
    
    
    
    6,954,058Depreciation
    
    
    8,604
    
    
    
    17,790
    )Stock option
    
    
    0
    
    
    
    0Other
    
    
    0
    
    
    
    0
    )Valuation allowance
    
    
    (6,953,256
    )
    
    
    (6,971,848
    )Total non-current
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
 As of December 31, 2004, the Company had federal net operating loss carry forwards of approximately
$19,500,000 that begin expiring in December 2017 and state net operating loss carry forwards of
$5,400,000, which begin expiring in December 2005. A valuation allowance for the full amount of
net deferred taxes has been provided because it is more likely than not that the deferred taxes
will not be realized. Under Federal Tax Law IRC Section 382, certain significant changes in
ownership that the Company may undertake may restrict the future utilization of these tax loss
carry forwards.   F-19




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##### Table of Contents



8. COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS Employment Agreements The Company has an employment agreement with its chief executive officer
(CEO) that began in March 1998 with an original four year term. As amended, the agreement provides
for an annual salary of $225,000. As part of the Private Equity Transaction on January 2, 2002 as
described more fully in Note 5, the employment agreement with the Companys CEO was amended to
allow for the immediate vesting of options to purchase 365,000 shares of Common Stock, 297,500 of
which would have vested by March 2, 2002, at an exercise price reduced to $0.1477 per share, which
equals the terms of the Private Equity Transaction. In addition, the employment agreement was
extended to December 31, 2003 and subsequently, extended to December 31, 2005. In July 2003, Mr. Kasprisin, Chief Financial Officer, entered into an employment agreement with the
Company, which can be terminated without cause by either party upon 30 days notice. Mr. Kasprisin
is entitled to severance equal to six months base pay should he be terminated without cause by the
Company. Pursuant to the employment agreement, Mr. Kasprisin is entitled to a base salary of
$160,000 per year and a bonus based upon his base salary. In addition, Mr. Kasprisin has been
granted options to purchase up to 150,000 shares of Common Stock, which options vest in equal
quarterly amounts on each of the first eight quarters of his employment. In June 2004, Mr.
Kasprisins employment agreement was amended in connection with his promotion to Chief Operating
Officer, increasing the base compensation to $178,000 per year, adding a vehicle allowance of $300
per month and granting options to purchase an additional 50,000 of Common Stock, which options vest
in eight equal quarterly amounts. In June 2004, Mr. Zreik, Chief Operating Officer, was promoted to Executive Vice President of
Sales. In connection therewith, Mr. Zreik entered into an employment agreement with the Company
that can be terminated without cause by either party upon 30 days notice. Mr. Zreik is entitled to
severance equal to six months base pay should he be terminated without cause by the Company.
Pursuant to the employment agreement, Mr. Zreik is entitled to a base salary of $150,000 per year,
a vehicle allowance of $300 per month and a bonus based upon his base salary. In addition, Mr.
Zreik has been granted options to purchase up to 50,000 shares of Common Stock, which options vest
in eight equal quarterly amounts. Consulting Agreements The Company is a party to a consulting agreement with an affiliate of its
majority stockholder, Health Holdings, for $300,000 per year payable quarterly. The agreement is
automatically renewable for successive one-year terms so long as Health Holdings or any of its
affiliates owns 25% or more of the Company. As part of the Private Equity Transaction on January 2,
2002 as described more fully in Note 5, the Company entered into a management and consulting
services agreement with Westgate, a principal stockholder, or its affiliates for $100,000 per year
payable quarterly for an initial period of five years ending December 31, 2006. Both Health
Holdings and Westgate elected to permanently forego payments on these consulting agreements in
fiscal 2004 and 2003 as services under these agreements was not required
during these periods. Operating Leases The Company rents property and equipment under certain noncancellable operating
leases expiring in various years through 2006. Future minimum commitments under operating leases as
of December 31, 2004 are as follows: Year Ending December 31
    
    Amount2005
    
    $
    441,8132006
    
    
    298,428Total
    
    $
    740,241
 Rent expense charged to operations was $421,383, $458,687 and $457,230 for the years ended December
31, 2004, 2003 and 2002, respectively. Legal Proceedings. From time to time, 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.   F-20




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##### Table of Contents



9. 401(k) PLAN The Company has a 401(k) plan that is available to all employees of the Company who meet certain
age and length of service requirements. The plan provides for Company matching contributions equal
to 25% of each employee participants contribution not to exceed 6% of the employee participants
compensation. The Companys contribution to the plan was $17,016, $14,538 and $13,763 for the years
ended December 31, 2004, 2003 and 2002, respectively. 10. SEGMENT REPORTING Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the Companys chief operating
decision-maker, or decision-making group, in deciding how to allocate resources and in assessing
performance. The Companys chief operating decision maker is the CEO. The Companys reportable operating segments include health food specialty stores and mass market
categories. The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information reported includes only
sales, cost of sales and gross profit. Operating segment data for the years ended December 31,
2004, 2003 and 2002 are as follows: Distribution Channels Health Food
    
    
    Mass
    
    
    TotalYear ended December 31, 2004Sales
    
    $
    7,220,283
    
    
    $
    6,921,198
    
    
    $
    14,141,481Cost of Sales
    
    
    3,947,949
    
    
    
    3,854,853
    
    
    
    7,802,802Gross Profit
    
    $
    3,272,334
    
    
    $
    3,066,345
    
    
    $
    6,338,679
 Health Food
    
    
    Mass
    
    
    TotalYear ended December 31, 2003Sales
    
    $
    7,576,727
    
    
    $
    8,749,569
    
    
    $
    16,326,296Cost of Sales
    
    
    4,049,706
    
    
    
    4,612,593
    
    
    
    8,662,299Gross Profit
    
    $
    3,527,021
    
    
    $
    4,136,976
    
    
    $
    7,663,997
 Health Food
    
    
    Mass
    
    
    TotalYear ended December 31, 2002Sales
    
    $
    7,366,133
    
    
    $
    7,050,218
    
    
    $
    14,416,351Cost of Sales
    
    
    4,067,120
    
    
    
    4,090,487
    
    
    
    8,157,607Gross Profit
    
    $
    3,299,013
    
    
    $
    2,959,731
    
    
    $
    6,258,744
 Sales are attributed to geographic areas based on the location of the entity to which the products
were sold. Geographic segment data for the years ended December 31, 2004, 2003 and 2002 are as
follows: United States
    
    
    International
    
    
    TotalYear ended December 31, 2004Sales
    
    $
    13,747,244
    
    
    $
    394,237
    
    
    $
    14,141,481Cost of Sales
    
    
    7,570,658
    
    
    
    232,144
    
    
    
    7,802,802Gross Profit
    
    $
    6,176,586
    
    
    $
    162,093
    
    
    $
    6,338,679Year ended December 31, 2003Sales
    
    $
    16,091,995
    
    
    $
    234,301
    
    
    $
    16,326,296Cost of Sales
    
    
    8,515,755
    
    
    
    146,544
    
    
    
    8,662,299Gross Profit
    
    $
    7,576,240
    
    
    $
    87,757
    
    
    $
    7,663,997Year ended December 31, 2002Sales
    
    $
    14,194,058
    
    
    $
    222,293
    
    
    $
    14,416,351Cost of Sales
    
    
    8,011,004
    
    
    
    146,603
    
    
    
    8,157,607Gross Profit
    
    $
    6,183,054
    
    
    $
    75,690
    
    
    $
    6,258,744
   F-21




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11. QUARTERLY FINANCIAL DATA (UNAUDITED) Summary unaudited quarterly financial data from continuing operations for 2004 and 2003 is as
follows: First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal year ended December 31, 2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet Sales
    
    $
    3,552,624
    
    
    $
    3,343,906
    
    
    $
    3,654,751
    
    
    $
    3,590,200Gross Profit
    
    
    1,609,009
    
    
    
    1,498,853
    
    
    
    1,735,026
    
    
    
    1,495,791Operating Income (Loss)
    
    
    (405,211
    )
    
    
    (309,710
    )
    
    
    59,535
    
    
    
    (222,865
    )Net Income (Loss)
    
    
    (468,467
    )
    
    
    (386,364
    )
    
    
    (17,477
    )
    
    
    1,240,782Net Income (Loss) per share, basic
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    0.03Net Income (Loss) per share, diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    0.02Weighted average shares outstanding, basic
    
    
    44,651,170
    
    
    
    44,651,170
    
    
    
    44,651,170
    
    
    
    44,651,170Weighted average shares outstanding, diluted
    
    
    44,651,170
    
    
    
    44,651,170
    
    
    
    44,651,170
    
    
    
    60,927,793
 First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal year ended December 31, 2003
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet Sales
    
    $
    3,866,055
    
    
    $
    4,082,684
    
    
    $
    3,767,767
    
    
    $
    4,609,790Gross Profit
    
    
    1,787,819
    
    
    
    1,840,616
    
    
    
    1,793,076
    
    
    
    2,242,486Operating Loss
    
    
    (164,508
    )
    
    
    (187,589
    )
    
    
    (183,902
    )
    
    
    316,598Net loss
    
    
    (192,659
    )
    
    
    (234,437
    )
    
    
    (236,375
    )
    
    
    261,756Net loss per share, basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.00Weighted average shares outstanding,
basic and diluted
    
    
    44,651,170
    
    
    
    44,651,170
    
    
    
    44,651,170
    
    
    
    44,651,170
 12. Subsequent Event On March 25, 2005, the Company completed an amendment to the Investor Notes between Naturade,
Inc and Other Investors dated August 2000. This amendment extended the payment terms of the
Investor Notes requiring a principal payment of $20,000 plus accrued interest on July 15, 2005 with
the remaining principal of $92,345 plus accrued interest payable on December 31, 2005. In
addition, the conversion provision of the Investor Note allowing the holder to convert outstanding
Notes to the Companys Common Stock at a predetermined price was eliminated.   F-22




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EXHIBIT INDEX Exhibit No.
    
    Document2
    
    Stock Purchase Agreement, dated as of December 15, 1997 (the Stock Purchase Agreement), by and among the Company, Allan
Schulman, L.S. Smith, Dallas Gold & Silver Exchange, Inc. (DGSE), Barry M. Zwick and Health Holdings and Botanicals, Inc.,
incorporated by reference to Exhibit 2 to the Companys Current Report on Form 8-K filed on December 23, 1997.3.1
    
    Certificate of Incorporation of Naturade, Inc., together with Amendments and Certificate of Designations relating thereto,
incorporated by reference to the Companys Annual Report on Form 10-K filed for fiscal 1997 and the exhibits and attachments
thereto.3.2
    
    Amended and Restated Bylaws of Naturade, Inc., as amended December 7, 2001, incorporated by reference to Exhibit 3.6 to the
Companys Current Report on Form 8-K filed on January 3, 2002.3.3
    
    Certificate of Amendment to Certificate of Incorporation of Naturade, Inc. dated December 20, 2001, incorporated by reference to
Exhibit 3.3 to the Companys Current Report on Form 8-K filed on January 3, 2002.3.4
    
    Certificate of Amendment to Certificate of Incorporation of Naturade, Inc., dated December 28, 2001, incorporated by reference
to Exhibit 3.4 to the Companys Current Report on Form 8-K filed on January 3, 2002.3.5
    
    Certificate of Designation of Series B Convertible Preferred Stock, dated December 20, 2001, incorporated by reference to
Exhibit 3.5 to the Companys Current Report on Form 8-K filed on January 3, 2002.4.1
    
    Registration Rights Agreement, dated as of December 15, 1997, by and between the Company and Health Holdings & Botanicals, Inc.,
incorporated by reference to Exhibit 4 to the Companys Current Report on Form 8-K as filed on December 23, 1997.10.1*
    
    Consulting Agreement dated as of December 12, 1997, by and between the Company and Doyle & Boissiere LLC, incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed December 23, 1997.




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##### Table of Contents



EXHIBIT INDEX
(CONT) Exhibit No.
    
    Document10.4
    
    Form of Option Agreement for Purchase of Naturade, Inc. Common Stock for Directors, incorporated by reference to the Companys
Annual Report on Form 10 K filed for fiscal 1995 and the exhibits and attachments thereto.10.15*
    
    Naturade, Inc. 1998 Incentive Stock Option Plan, as amended, incorporated by reference to Exhibit 10.17 to the Companys
Quarterly Report on Form 10-Q for the period ended March 31, 1998.10.16*
    
    Incentive Stock Option Plan with Bill D. Stewart dated March 2, 1998, incorporated by reference to Exhibit 10.18 to the
Companys Quarterly Report on Form 10-Q filed for the period ended March 31, 1998.10.19
    
    Finance Agreement by and Between Naturade, Inc. and Health Holdings and Botanicals, Inc. dated as of March 17, 1999,
incorporated by reference to Exhibit 10. 2 to the Companys Quarterly Report on Form 10-Q filed for the period ended March 31,
1999.10.20
    
    Amendment No. 1 to Finance Agreement by and between Naturade, Inc. and Health Holdings and Botanicals, Inc. dated June 1, 1999,
incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed for the period ended June 30,
1999.10.21
    
    Credit Agreement by and Between Naturade, Inc. and Health Holdings and Botanicals, Inc. dated as of August 9, 1999, incorporated
by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q filed for the period ended June 30, 199910.24
    
    Credit and Security Agreement by and Between Naturade, Inc. and Wells Fargo Business Credit, Inc. dated as of January 27, 2000,
incorporated by reference to Exhibit 10.24 to the Companys Annual Report on Form 10-K filed for fiscal 1999.10.25
    
    Amendment No. 2 to Finance Agreement by and between Naturade, Inc. and Health Holdings and Botanicals, LLC dated as of March 17,
2000, incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed for the period ended March
31, 2000.10.26
    
    Industrial Lease dated as of December 23, 1998 between the Company and The Irvine Company, incorporated by reference to Exhibit
10.25 to the Companys Quarterly Report on Form 10-Q filed for the period ended June 30, 2000.10.27
    
    Loan Agreement by and Between Naturade, Inc. and Health Holdings and Botanicals, LLC. and Wald Holdings, LLC. dated as of August
31, 2000, incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed on September 20, 2000.10.28
    
    Securities Purchase Agreement among Naturade, Inc., Westgate Equity Partners, L.P., and Health Holdings & Botanicals, LLC, dated
as of December 20, 2001, incorporated by reference to Exhibit 10.28 to the Companys Current Report on Form 8-K filed January 3,
2002.10.29
    
    Registration Rights Agreement between Naturade and Westgate Equity Partners, L.P., dated as of January 2, 2002, incorporated by
reference to Exhibit 10.29 to the Companys Current Report on Form 8-K filed January 3, 2002.10.30*
    
    Management Services Agreement between Westgate Group, LLC and Naturade, Inc. dated as of January 2, 2002, incorporated by
reference to Exhibit 10.30 to the Companys Current Report on Form 8-K filed January 3, 2002.10.31
    
    Voting Agreement between Westgate Equity Partners, L.P. and Health Holdings & Botanicals, LLC, dated as of January 2, 2002,
incorporated by reference to Exhibit 10.31 to the Companys Current Report on Form 8-K filed January 3, 2002.




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##### Table of Contents



EXHIBIT INDEX (CONT)


Exhibit No.
    
    Document10.32*
    
    Amended and Restated Employment Agreement between Naturade, Inc. and Bill D. Stewart, dated as of January 2, 2002, incorporated
by reference to Exhibit 10.31 to the Companys Current Report on Form 8-K filed January 3, 2002.10.33
    
    Fourth Amendment to Credit and Security Agreement and Waiver of Defaults between Naturade, Inc. and Wells Fargo Business Credit,
Inc., dated as of December 20, 2001, incorporated by reference to Exhibit 10.33 to the Companys Current Report on Form 8-K
filed January 3, 2002.10.34
    
    Amendment No. 3 to Finance Agreement between Naturade, Inc. and Health Holdings & Botanicals, LLC, dated as of January 2, 2002,
incorporated by reference to Exhibit 10.34 to the Companys Current Report on Form 8-K filed January 3, 2002.10.35
    
    Letter agreement of Wells Fargo Business Credit, Inc. waiving rights arising from the Companys defaults of covenants under the
Credit and Security Agreement dated as of January 27, 2000, incorporated by reference to Exhibit 10.35 to the Companys
quarterly Report on Form 10-Q filed for the period ended March 31, 2000.10.36
    
    Sixth Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc., dated as of March
24, 2003, incorporated by reference to Exhibit 10.36 to the Companys quarterly Report on Form 10-Q filed for the period ended
September 30, 2003.10.37
    
    Consent and Mutual Release dated as of April 14, 2003, among the Company, Westgate Equity Partners, LLP and Health Holdings and
Botanicals, LLC, incorporated by reference to Exhibit 10.37 to the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.10.38
    
    Fifth Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc., dated as of
September 19, 2002 incorporated by reference to Exhibit 10.38 to the Companys quarterly Report on Form 10-Q filed for the
period ended September 30, 2002.10.39
    
    Irrevocable Proxy between Health Holdings and Botanicals, LLC and Westgate Equity Partners, LLP dated April 14, 2003,
incorporated by reference to Exhibit 10.39 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2002.10.40
    
    Loan Agreement by and between Naturade, Inc., Health Holdings and Botanicals, LLC and David A. Weil dated April 14, 2003,
incorporated by reference to Exhibit 10.40 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2002.10.41
    
    Waiver of Preferential Dividends by Holders of Series B Convertible Preferred Stock by Westgate Equity Partners, L.P dated April
14, 2003, incorporated by reference to Exhibit 10.41 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.10.42
    
    Seventh Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc., dated as of
April 15, 2003, incorporated by reference to Exhibit 10.42 to the Companys Current Report on Form 8-K filed on April 25, 2003.10.43
    
    Eighth Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc., dated as of
November 6, 2003, incorporated by reference to Exhibit 10.43 to the Companys Current Report on Form 8-K filed on November 6,
2003.10.44
    
    Ninth Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc., dated as of March
29, 2004 incorporated by reference to Exhibit 10.44 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.10.45*
    
    First Amendment to Amended and Restated Employment Agreement between Naturade, Inc. and Bill D. Stewart dated March 29, 2004
incorporated by reference to Exhibit 10.45 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003.10.46
    
    Joinder to Loan Agreement of Naturade, Inc. dated as of April 13, 2003 by and among Bill D. Stewart and the lenders listed
therein, incorporated by reference to Exhibit 10.46 to the Companys Current Report on Form 8-K filed on April 22, 2004.10.47
    
    Subordination Agreement as of April 14, 2004 by Bill D. Stewart for the benefit of Wells Fargo Business Credit, Inc,
incorporated by reference to Exhibit 10.47 to the Companys Current Report on Form 8-K filed on April 22, 2004.10.48
    
    Secured Promissory Note for $100,000 by Naturade, Inc. payable to Bill D. Stewart, dated April 14, 2004, incorporated by
reference to Exhibit 10.48 to the Companys Current Report on Form 8-K filed on April 22, 2004.10.49
    
    Secured Promissory Note for $100,000 by Naturade, Inc. payable to Health Holdings & Botanicals, LLC, dated April 14, 2004,
incorporated by reference to Exhibit 10.49 to the Companys Current Report on Form 8-K filed on April 22, 2004.10.50
    
    Secured Promissory Note for $25,000 by Naturade, Inc. payable to David Weil, dated May 3, 2004, incorporated by reference to
Exhibit 10.50 to the Companys Current Report on Form 8-K filed on May 5, 2004.




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##### Table of Contents



EXHIBIT INDEX
(CONT) Exhibit No.
    
    Document10.51
    
    Secured Promissory Note for $75,000 by Naturade, Inc. payable to Health Holdings & Botanicals, LLC, dated May 3, 2004,
incorporated by reference to Exhibit 10.51 to the Companys Current Report on Form 8-K filed on May 5, 2004.10.52
    
    Tenth Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc., dated May 10,
2004, incorporated by reference to Exhibit 10.52 to the Companys Current Report on Form 10-Q filed on May 13, 2004.10.53*
    
    Revised Employment Agreement between Naturade, Inc. and Stephen M. Kasprisin, dated as of June 1, 2004, incorporated by
reference to Exhibit 10.53 to the Companys Current Report on Form 8-K filed on June 11, 2004.10.54*
    
    Revised Employment Agreement between Naturade, Inc. and Marwan Zreik, dated as of June 1, 2004, incorporated by reference to
Exhibit 10.54 to the Companys Current Report on Form 8-K filed on June 11, 2004.10.55
    
    Asset Purchase Agreement Dated November 2, 2004, between L.O.D.C. Group, LTD and Naturade, Inc, incorporated by reference to
Exhibit 10.55 to the Companys Current Report on Form 8-K filed on November 81, 2004.**10.56
    
    Eleventh Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc. dated November
2, 2004.**10.57
    
    First Amendment dated as of January 26, 2005, to Secured Promissory Note dated April 13,2003, between Health Holdings &
Botanicals, LLC, and Naturade, Inc.**10.58
    
    First Amendment dated as of January 26, 2005, to Secured Promissory Note dated April 14,2004, between Health Holdings &
Botanicals, LLC, and Naturade, Inc.**10.59
    
    First Amendment dated as of January 26, 2005, to Secured Promissory Note dated May 13,2004, between Health Holdings &
Botanicals, LLC, and Naturade, Inc.**10.60
    
    First Amendment dated as of January 26, 2005, to Secured Promissory Note dated August 16, 2004, between Health Holdings &
Botanicals, LLC, and Naturade, Inc.**10.61
    
    First Amendment dated as of January 26, 2005, to Secured Promissory Note dated April 13, 2003, between David A. Weil, and
Naturade, Inc.**10.62
    
    First Amendment dated as of January 26, 2005, to Secured Promissory Note dated May 3, 2004, between David A. Weil, and Naturade,
Inc.**10.63
    
    First Amendment dated as of January 26, 2005, to Secured Promissory Note dated May 3, 2004, between Bill D. Stewart, and
Naturade, Inc.**10.64
    
    Third Amendment to Loan
Agreement dated March 25, 2005, between Howard Shao and Naturade,
Inc.14
    
    Naturade, Inc. Code of Financial Ethics incorporated by reference to Exhibit 14 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2003**31.1
    
    Certification Pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**31.2
    
    Certification Pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**32
    
    Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Management contracts or compensatory plan or arrangement.**
    
    Filed herewith.