EXHIBIT 10.5
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO NATURADE, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED REVOLVING NOTE
FOR VALUE RECEIVED, each of NATURADE, INC., a Delaware corporation
(the "PARENT"), and the other companies listed on Exhibit A attached hereto
(such other companies together with the Parent, each a "COMPANY" and
collectively, the "COMPANIES"), jointly and severally, promises to pay to LAURUS
MASTER FUND, LTD., c/o M&C Corporate Services Limited, P.O. Box 309 GT, Xxxxxx
House, South Church Street, Xxxxxx Town, Grand Cayman, Cayman Islands, Fax:
000-000-0000 (the "HOLDER") or its registered assigns or successors in interest,
the sum of Three Million Dollars ($3,000,000), without duplication of any
amounts owing by the Companies to the Holder under the Minimum Borrowing Notes
(as defined in the Security Agreement referred to below), or, if different, the
aggregate principal amount of all Loans (as defined in the Security Agreement
referred to below), together with any accrued and unpaid interest hereon, on
July 26, 2008 (the "MATURITY DATE") if not sooner indefeasibly paid in full.
Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in the Security and Purchase Agreement among the
Companies and the Holder dated as of the date hereof (as amended, modified
and/or supplemented from time to time, the "SECURITY AGREEMENT").
The following terms shall apply to this Secured Revolving Note (this
"NOTE"):
ARTICLE I
CONTRACT RATE AND MINIMUM BORROWING NOTE
1.1 Contract Rate. Subject to Sections 3.2 and 4.10, interest
payable on the outstanding principal amount of this Note (the "PRINCIPAL
AMOUNT") shall accrue at a rate per annum equal to the "prime rate" published in
The Wall Street Journal from time to time (the "PRIME RATE"), plus two percent
(2.0%) (the "CONTRACT RATE"). The Contract Rate shall be increased or decreased
as the case may be for each increase or decrease in the Prime Rate in an amount
equal to such increase or decrease in the Prime Rate; each change to be
effective as of the day of the change in the Prime Rate. Subject to Section 1.2,
the Contract Rate shall not at any time be less than six percent (6.0%).
Interest shall be (i) calculated on the basis of a 360 day year, and (ii)
payable monthly, in arrears, commencing on August 1, 2005 on the first business
day of each consecutive calendar month thereafter through and including the
Maturity Date, and on the Maturity Date, whether by acceleration or otherwise.
1.2 Contract Rate Adjustments and Payments. The Contract Rate shall
be calculated on the last business day of each calendar month hereafter (other
than for increases or decreases in the Prime Rate which shall be calculated and
become effective in accordance with the terms of Section 1.1) until the Maturity
Date (each a "DETERMINATION DATE") and shall be subject to adjustment as set
forth herein. If (i) the Parent shall have registered the shares of the Common
Stock underlying the conversion of each Minimum Borrowing Note, each Warrant and
each Option on a registration statement declared effective by the Securities and
Exchange Commission (the "SEC"), and (ii) the market price (the "MARKET PRICE")
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
the five (5) trading days immediately preceding a Determination Date exceeds the
then applicable Fixed Conversion Price by at least twenty-five percent (25%),
the Contract Rate for the succeeding calendar month shall automatically be
reduced by 200 basis points (200 b.p.) (2.0%) for each incremental twenty-five
percent (25%) increase in the Market Price of the Common Stock above the then
applicable Fixed Conversion Price. Notwithstanding the foregoing (and anything
to the contrary contained herein), in no event shall the Contract Rate at any
time be less than zero percent (0%).
1.3 Allocation of Principal to Minimum Borrowing Note.
Notwithstanding anything herein to the contrary, whenever during the Term the
outstanding balance on the Minimum Borrowing Note shall be less than the Minimum
Borrowing Amount (such amount being referred to herein as the "TRANSFERABLE
AMOUNT") to the extent that the outstanding balance on the Revolving Note should
equal or exceed $500,000, that portion of the balance of the Revolving Note that
exceeds $500,000, but does not exceed the Transferable Amount, shall be
segregated from the outstanding balance under the Revolving Note and allocated
to and aggregated with the then existing balance of the next unissued serialized
Minimum Borrowing Note (the "NEXT UNISSUED SERIALIZED NOTE"); provided that such
segregated balance shall remain subject to the terms and conditions of such
Revolving Note until a new serialized Minimum Borrowing Note is issued as set
forth below. The Next Unissued Serialized Note shall remain in book entry form
until the balance thereunder shall equal the Minimum Borrowing Amount, at which
time a new serialized Minimum Borrowing Note in the face amount equal to the
Minimum Borrowing Amount will be issued and registered as set forth in the
Registration Rights Agreement (and the outstanding balance under the Revolving
Note shall at such time be correspondingly reduced in the amount equal to the
Minimum Borrowing Amount as a result of the issuance of such new serialized
Minimum Borrowing Note).
ARTICLE II
CONVERSION RIGHTS AND FIXED CONVERSION PRICE
2.1 Optional Conversion. Subject to the terms of this Article II,
the Holder shall have the right, but not the obligation, at any time until the
Maturity Date, or during an Event of Default (as defined in Article III), and,
subject to the limitations set forth in Section 2.2 hereof, to convert all or
any portion of the outstanding Principal Amount and/or accrued interest and fees
due and payable into fully paid and nonassessable restricted shares of the
Common Stock at the Fixed Conversion Price (defined below). For purposes hereof,
subject to Section 2.6 hereof, the initial "FIXED CONVERSION PRICE" means $
0.80. The shares of Common Stock to be issued upon such conversion are herein
referred to as the "CONVERSION SHARES."
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2.2 Conversion Limitation. Notwithstanding anything contained herein
to the contrary, the Holder shall not be entitled to convert pursuant to the
terms of this Note an amount that would be convertible into that number of
Conversion Shares which would exceed the difference between (i) 4.99% of the
issued and outstanding shares of Common Stock and (ii) the number of shares of
Common Stock beneficially owned by the Holder, issuable to the Holder upon
exercise of the Warrants and issuable to the Holder upon exercise of the
Options. For purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Regulation 13d-3 thereunder. The Conversion Shares limitation described
in this Section 2.2 shall automatically become null and void following notice to
any Company upon the occurrence and during the continuance of an Event of
Default, or upon 75 days prior notice to the Parent, except that at no time
shall the number of shares of Common Stock beneficially owned by the Holder
exceed 19.99% of the outstanding shares of Common Stock. Notwithstanding
anything contained herein to the contrary, the provisions of this Section 2.2
are irrevocable and may not be waived by the Holder or any Company.
2.3 Mechanics of Xxxxxx's Conversion. In the event that the Holder
elects to convert this Note into Common Stock, the Holder shall give notice of
such election by delivering an executed and completed notice of conversion in
substantially the form of Exhibit B hereto (appropriately completed) ("NOTICE OF
CONVERSION") to the Parent and such Notice of Conversion shall provide a
breakdown in reasonable detail of the Principal Amount, accrued interest and
fees that are being converted. On each Conversion Date (as hereinafter defined)
and in accordance with its Notice of Conversion, the Holder shall make the
appropriate reduction to the Principal Amount, accrued interest and fees as
entered in its records and shall provide written notice thereof to the Parent
within two (2) Business Days after the Conversion Date. Each date on which a
Notice of Conversion is delivered or telecopied to the Parent in accordance with
the provisions hereof shall be deemed a Conversion Date (the "CONVERSION
DATE").. Pursuant to the terms of the Notice of Conversion, the Parent will
issue instructions to the transfer agent accompanied by an opinion of counsel
within one (1) Business Day of the date of the delivery to the Parent of the
Notice of Conversion and shall cause the transfer agent to transmit the
certificates representing the Conversion Shares to the Holder by crediting the
account of the Holder's designated broker with the Depository Trust Corporation
("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within
three (3) Business Days after receipt by the Parent of the Notice of Conversion
(the "DELIVERY DATE"). In the case of the exercise of the conversion rights set
forth herein the conversion privilege shall be deemed to have been exercised and
the Conversion Shares issuable upon such conversion shall be deemed to have been
issued upon the date of receipt by the Parent of the Notice of Conversion. The
Holder shall be treated for all purposes as the record holder of the Conversion
Shares, unless the Holder provides the Parent written instructions to the
contrary.
2.4 Late Payments. Each Company understands that a delay in the
delivery of the Conversion Shares in the form required pursuant to this Article
beyond the Delivery Date could result in economic loss to the Holder. As
compensation to the Holder for such loss, in addition to all other rights and
remedies which the Holder may have under this Note, applicable law or otherwise,
the Companies shall, jointly and severally, pay late payments to the Holder for
any late issuance of Conversion Shares in the form required pursuant to this
Article II upon
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conversion of this Note, in the amount equal to $500 per Business Day after the
Delivery Date. The Companies shall, jointly and severally, make any payments
incurred under this Section in immediately available funds upon demand.
2.5 Conversion Mechanics. The number of shares of Common Stock to be
issued upon each conversion of this Note shall be determined by dividing that
portion of the principal and interest and fees to be converted, if any, by the
then applicable Fixed Conversion Price.
2.6 Adjustment Provisions. The Fixed Conversion Price and number and
kind of shares or other securities to be issued upon conversion determined
pursuant to Section 2.1 shall be subject to adjustment from time to time upon
the occurrence of certain events during the period that this conversion right
remains outstanding, as follows:
(a) Reclassification. If the Parent at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of securities as would have been issuable as the result of such change with
respect to the Common Stock (i) immediately prior to or (ii) immediately after,
such reclassification or other change at the sole election of the Holder.
(b) Stock Splits, Combinations and Dividends. If the shares of
Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock or any
preferred stock issued by the Parent in shares of Common Stock, the Fixed
Conversion Price shall be proportionately reduced in case of subdivision of
shares or stock dividend or proportionately increased in the case of combination
of shares, in each such case by the ratio which the total number of shares of
Common Stock outstanding immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.
(c) Share Issuances. Subject to the provisions of this Section
2.6, if the Parent shall at any time prior to the conversion or repayment in
full of the Principal Amount issue any shares of Common Stock or securities
convertible into Common Stock to a Person other than the Holder (except (i)
pursuant to Sections 2.6(a) or (b) above; (ii) pursuant to options, warrants, or
other obligations to issue shares outstanding on the date hereof as disclosed to
the Holder in writing; (iii) pursuant to options that may be issued under any
employee incentive stock option and/or any qualified stock option plan adopted
by the Parent; or (iv) pursuant to issuances of Common Stock in connection with
transactions otherwise permitted pursuant to Section 13(l)(viii) of the Security
Agreement) for a consideration per share (the "OFFER PRICE") less than the Fixed
Conversion Price in effect at the time of such issuance, then the Fixed
Conversion Price shall be immediately reset to such lower Offer Price. For
purposes hereof, the issuance of any security of the Parent convertible into or
exercisable or exchangeable for Common Stock shall result in an adjustment to
the Fixed Conversion Price upon the issuance of such securities.
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(d) Computation of Consideration. For purposes of any
computation respecting consideration received pursuant to Section 2.6(c) above,
the following shall apply:
(i) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash,
provided that in no case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Parent for any underwriting of
the issue or otherwise in connection therewith;
(ii) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market value
thereof as determined in good faith by the Board of Directors of the
Parent (irrespective of the accounting treatment thereof); and
(iii) upon any such exercise, the aggregate
consideration received for such securities shall be deemed to be the
consideration received by the Parent for the issuance of such securities
plus the additional minimum consideration, if any, to be received by the
Parent upon the conversion or exchange thereof (the consideration in each
case to be determined in the same manner as provided in subsections (i)
and (ii) of this Section 2.6(d)).
2.7 Reservation of Shares. During the period the conversion right
exists, the Parent will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of Conversion Shares
upon the full conversion of this Note, the Warrants and the Options. The Parent
represents that upon issuance, the Conversion Shares will be duly and validly
issued, fully paid and non-assessable. The Parent agrees that its issuance of
this Note shall constitute full authority to its officers, agents, and transfer
agents who are charged with the duty of executing and issuing stock certificates
to execute and issue the necessary certificates for the Conversion Shares upon
the conversion of this Note.
ARTICLE III
EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS
3.1 Events of Default. The occurrence of an Event of Default under
the Security Agreement shall constitute an event of default ("EVENT OF DEFAULT")
hereunder.
3.2 Default Interest. Following the occurrence and during the
continuance of an Event of Default, the Companies shall, jointly and severally,
pay additional interest on the outstanding principal balance of this Note in an
amount equal to two percent (2%) per month, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest at such additional
interest rate from the date of such Event of Default until the date such Event
of Default is cured or waived.
3.3 Default Payment. Following the occurrence and during the
continuance of an Event of Default, the Holder, at its option, may elect, in
addition to all rights and remedies of the Holder under the Security Agreement
and the other Ancillary Agreements and all obligations and liabilities of each
Company under the Security Agreement and the other Ancillary Agreements, to
require the Companies, jointly and severally, to make a Default Payment
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("DEFAULT PAYMENT"). The Default Payment shall be one hundred twenty five
percent 125% of the outstanding principal amount of the Note, plus accrued but
unpaid interest, all other fees then remaining unpaid, and all other amounts
payable hereunder. The Default Payment shall be applied first to any fees due
and payable to the Holder pursuant to the Notes , the Security Agreement and/or
the Ancillary Agreements, then to accrued and unpaid interest due on the Notes
and then to the outstanding principal balance of the Notes. The Default Payment
shall be due and payable immediately on the date that the Holder has exercised
its rights pursuant to this Section 3.3.
ARTICLE IV
MISCELLANEOUS
4.1 Conversion Privileges. The conversion privileges set forth in
Article II shall remain in full force and effect immediately from the date
hereof until the date this Note is indefeasibly paid in full and irrevocably
terminated.
4.2 Cumulative Remedies. The remedies under this Note shall be
cumulative.
4.3 Failure or Indulgence Not Waiver. No failure or delay on the
part of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
4.4 Notices. Any notice herein required or permitted to be given
shall be in writing and shall be deemed effective given (a) upon personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile if
sent during normal business hours of the recipient, if not, then on the next
business day, (c) five days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications shall be sent to the
respective Company at the address provided for such Company in the Security
Agreement executed in connection herewith, and to the Holder at the address
provided in the Security Agreement for the Holder, with a copy to Xxxx X.
Xxxxxx, Esq., 000 Xxxxx Xxxxxx, 00xx Xxxxx, Xxx Xxxx, Xxx Xxxx 00000, xxxxxxxxx
number (000) 000-0000, or at such other address as the respective Company or the
Holder may designate by ten days advance written notice to the other parties
hereto. A Notice of Conversion shall be deemed given when made to the Parent
pursuant to the Purchase Agreement.
4.5 Amendment Provision. The term "Note" and all references thereto,
as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as such successor instrument may be
amended or supplemented.
4.6 Assignability. This Note shall be binding upon each Company and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Security
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Agreement. No Company may not assign any of its obligations under this Note
without the prior written consent of the Holder, any such purported assignment
without such consent being null and void.
4.7 Cost of Collection. In case of any Event of Default under this
Note, the Companies shall, jointly and severally, pay the Holder the Holder's
reasonable costs of collection, including reasonable attorneys' fees.
4.8 Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
(b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE
EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY
COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS
NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS OR TO ANY
MATTER ARISING OUT OF OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF
THE OTHER ANCILLARY AGREEMENTS PROVIDED, THAT EACH COMPANY ACKNOWLEDGES THAT ANY
APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE
COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN
THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
HOLDER. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY
HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH COMPANY HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE COMPANY AT
THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO MADE SHALL
BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY'S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID
(c) EACH COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, EACH COMPANY HERETO
WAIVES ALL RIGHTS TO TRIAL
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BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE HOLDER, AND/OR ANY
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, THE SECURITY
AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
THERETO.
4.9 Severability. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of this
Note.
4.10 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.
4.11 Security Interest and Guarantee. The Holder has been granted a
security interest in certain assets of the Parent as more fully described in the
Security Agreement.
4.12 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
[Balance of page intentionally left blank; signature page follows]
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IN WITNESS WHEREOF, each Company has caused this Secured Revolving
Note to be signed in its name effective as of this 26th day of July 2005.
NATURADE, INC.
By: /s/Xxxxxxx X. Xxxxxxxxx
Name: Xxxxxxx X. Xxxxxxxxx
Title: CFO
WITNESS:
/s/ Xxx Xxxxxxx
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EXHIBIT 10.5
EXHIBIT A
OTHER COMPANIES
None.
EXHIBIT 10.5
EXHIBIT B
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Secured Revolving Note)
The undersigned hereby elects to convert $_________ of the principal
and $_________ of the interest due on the Secured Revolving Note dated as of
July 26, 2005 (the "NOTE") issued by NATURADE, INC. (the "PARENT") and the other
Companies named and as defined therein into shares of Common Stock of the Parent
("Shares) in accordance with the terms and conditions set forth in the Note, as
of the date written below.
Date of Conversion: ______________________________________________________
Conversion Price: ______________________________________________________
Shares To Be Delivered: ______________________________________________________
Signature: ______________________________________________________
Print Name: ______________________________________________________
Address: ______________________________________________________
Holder DWAC instructions ______________________________________________________
