SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
(Mark one)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 0-011228
NATURAL HEALTH TRENDS CORP.
(Name of Small Business Issuer in Its Charter)
Florida 59-2705336
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
380 Lashley Street
Longmont, Colorado 80501
(Address of principal executive office)
(303) 682-4236
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
On Which Registered
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001
(Title of Class)
Class A Warrants
(Title of Class)
Class B Warrants
(Title of Class)
Units
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this Form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB or any amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year: $15,269,631
The number of shares of Common Stock held by nonaffiliates of the
registrant (as determined for the purpose of this Form 10-KSB only) as of March
31, 2000 was 8,263,995 with an approximate aggregate market value of
$10,072,157, (based upon the closing price of such shares as of such date). The
number of shares of the Common Stock of the issuer outstanding as of March 31,
2000 was 8,292,270.
Natural Health Trends Corp.
1999 Form 10-KSB Annual Report
Table of Contents
Page
Part I
Item 1 Description of Business 2
Item 2 Description of Property 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a
Vote of Security Holders 18
Part II
Item 5 Market for Common Equity and
Related Stockholder Matters 18
Item 6 Management's Discussion and
Analysis or Plan of Operation 19
Item 7 Financial Statements 25
Item 8 Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 25
Part III
Item 9 Directors, Executive Officers,
Promoters and Control Persons;
Compliance With Section 16(a)
of the Exchange Act 25
Item 10 Executive Compensation 26
Item 11 Security Ownership of Certain
Beneficial Owners and Management 29
Item 12 Certain Relationships and Related
Transactions 30
Item 13 Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 31
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Part I
ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
Natural Health Trends Corp. is a corporation which develops and operates
businesses, in one business segment, to promote human wellness. Through Global
Health Alternatives, Inc., the Company's wholly-owned subsidiary, the Company
markets a line of natural, over-the-counter homeopathic pharmaceutical products.
Through Kaire Nutraceuticals, Inc., the Company's wholly-owned subsidiary, the
Company utilizes a network of independent associates to offer a line of
approximately 50 products.
In February 1999, the Company's newly-formed, wholly-owned subsidiary,
Kaire Nutraceuticals, Inc., acquired substantially all of the assets (the "Kaire
Assets") of Kaire International, Inc. including, but not limited to, the names
"Kaire," "Kaire International, Inc." and all variations and any other product
name and all other registered or unregistered trademarks, tradenames, service
marks, patents, logos, and copyrights of Kaire International, Inc., all accounts
receivable, contractual rights and product formulations to any and all products
of Kaire International, Inc., product inventory, "800" and other "toll-free"
telephone numbers, product supply contracts (including, but not limited to, its
Enzogenol product), independent associate lists, and shares of capital stock
owned by Kaire International, Inc. in each of its wholly-owned and/or partially
owned subsidiaries including, but not limited to, Kaire New Zealand Ltd., Kaire
Australia Pty Ltd., Kaire Trinidad, Ltd. and Kaire Europe Ltd. (but excluding
Kaire Korea Ltd.).
In exchange for the Kaire Assets, the Company issued (i) to Kaire
International, Inc., $2,800,000 aggregate stated value of Series F preferred
stock; (ii) to two creditors of Kaire International, Inc., $350,000 aggregate
stated value of Series G preferred stock; and (iii) to Kaire International,
Inc., five-year warrants to purchase 200,000 shares of the Company's common
stock exercisable at $4.06 per share. In addition, Kaire Nutraceuticals has
agreed to make certain payments to Kaire International, Inc. each year for a
period of five years (the "Kaire Nutraceuticals Net Income Payments") commencing
with the year ending December 31, 1999, to be determined as follows:
(i) 25% of the net income of Kaire Nutraceuticals if the net sales of Kaire
Nutraceuticals in any such year are between $1 and $10,000,000;
(ii) 33% of Kaire Nutraceuticals' net income if its net sales are between
$10,000,000 and $15,000,000;
(iii)40% of Kaire Nutraceuticals' net income if its net sales are between
$15,000,000 and $40,000,000; and
(iv) 50% of Kaire Nutraceuticals' net income if its net sales are in excess of
$40,000,000.
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The Kaire Nutraceuticals Net Income Payments shall be reduced on a
dollar-for-dollar basis to the extent of (a) all indebtedness of Kaire
International, Inc. assumed by Kaire Nutraceuticals; (b) all other direct and/or
indirect costs or expenses assumed and/or otherwise incurred by the Company of,
or resulting from, Kaire International, Inc. including, but not limited to,
litigation costs, payments of sales or other taxes, expenses of officers of
Kaire International, Inc., and other payments or expenses resulting directly
and/or indirectly from the acquisition of the Kaire Assets; and (c) any
reasonable inter-company obligations of the Company resulting from third party
payments made by the Company on behalf of (or allocable proportionately to)
Kaire Nutraceuticals by the Company that resulted from the acquisition of the
Kaire Assets. In addition, all amounts set-off against Kaire Nutraceuticals Net
Income Payments are cumulative and, if not set-off in the year they are paid (or
incurred) because Kaire Nutraceuticals did not have a sufficient amount of Net
Income (or for any reason), such set-off amounts shall accrue and be used as a
set-off in the earliest possible year or years.
In connection with the Kaire Acquisition, Kaire Nutraceuticals assumed
certain specified liabilities of Kaire International, Inc. including: (i)
approximately $475,000 owed to MW International Inc.; (ii) approximately $50,000
owed to Manhattan Drug Company; (iii) approximately $120,000 in the aggregate
owed to Robert L. Richards and Mark Woodburn (both officers and directors of
Kaire International, Inc.); (iv) up to approximately $120,000 in unpaid payroll
taxes of Kaire International, Inc.; and (v) up to $180,000 owed to STAR
Financial Bank.
In addition, Kaire Nutraceuticals has agreed to indemnify certain officers
of Kaire International, Inc. against all amounts paid following the acquisition
of the Kaire Assets by such persons resulting from unpaid sales taxes accrued by
Kaire International, Inc. prior to the closing date of the Kaire Acquisition.
In connection with the Kaire Acquisition, the Company retained BLH, Inc. as
a consultant. In accordance with the terms of the consulting agreement, BLH,
Inc. was to identify companies which the Company could effect a business
combination. BLH, Inc. introduced Kaire International, Inc. to the Company.
Pursuant to the terms of the consulting agreement, BLH, Inc. earned a fee of
approximately $430,000 in connection with the Kaire Acquisition which was paid
in February, 1999 by issuing 516 shares of Series I preferred stock. The Series
I preferred stock was converted into 160,104 shares of common stock during July
1999.
Industry Overview
Natural Health Products
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The Company believes that the market for natural products and supplements
is being driven by information in the mass media which continues to highlight
problems with the American diet; the fact that American consumers are becoming
increasingly disenchanted with and skeptical about many conventional medical
approaches to disease treatment; growing consumer interest in and acceptance of
natural and alternative therapies and products; and, finally, recent
clarifications and changes of food and drug laws that have eased significantly
the regulatory burdens associated with the introduction and sale of dietary
supplements.
The Company believes that public awareness of the positive effects of
nutritional supplements and natural remedies on health has been heightened by
widely publicized reports and medical research findings indicating a correlation
between the consumption and use of a wide variety of nutrients and natural
remedies and the reduced incidence of certain diseases.
The Company believes, although there can be no assurance, that the aging of
the United States population, together with an increased focus on preventative
and alternative health care measures, will continue to fuel increased demand for
certain nutritional supplement products and natural remedies. Management also
believes that the continuing shift to managed healthcare delivery systems will
place greater emphasis on disease prevention and health maintenance, areas with
which natural health products are most identified.
With respect to the distribution of natural health products, while
distribution through small to large sized natural and health food stores remains
significant, the bulk of the growth is found in the mass merchandisers and
health food chains such as General Nutrition Centers which now represent the
majority of sales, and represent the fastest growing channels of distribution.
Direct Selling
According to The Direct Selling Association, network marketing is one of
the fastest growing segments for the distribution of products. The Direct
Selling Association reports that worldwide, over 17.5 million individuals are
now involved in direct selling (of which network marketing is a major segment)
and that those involved in direct selling generate $80 billion in annual sales
around the world. Network marketing sales in the United States are estimated to
be approximately $22 billion annually.
Currently, the Company has associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and Tobago
and the United Kingdom. Management believes that significant market potential
exists for its products in international markets, and it is the company's
intention to explore expansion into Japan, Europe, Hong Kong, Taiwan, India and
the Philippines. Statistics from the World Federation of Direct Selling
Associations as reported in May 1998 indicate that the direct sales market in
the foregoing countries amounted to over $37 billion with 6.4 million
individuals being involved in some form of direct marketing. This compares to
$28.6 billion in sales and 7.2 million individuals involved in the markets
currently serviced by the Company.
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Product Licensing Agreements
We have developed four products under the Natural Relief 1222 brand name.
Our initial mass market-oriented product, Natural Relief 1222 Arthritis Relief
is a topical, natural, homeopathic medicine. The active ingredients are Bryonia
6X and Rhus Toxicodendron 6X, in a patented base of natural ingredients. This
product is intended to be utilized for the temporary relief of minor pains and
stiffness of muscles and joints associated with arthritis; subject to FDA
compliance. Arthritis Relief was introduced in July 1997 through a nationwide
television direct response advertising campaign. In December 1997, we introduced
three extensions to the Natural Relief 1222 product line-Sports Rub, Wart
Remover, and Dermatitis & Eczema Relief. We also introduced Arthritis Relief to
the mass consumer distribution channels through a broker network. We obtained
distribution of Arthritis Relief in several drug chains. However, due to the
capital intensive nature of mass market distribution, we have revised our
business plan of marketing and support for our products, decreasing its emphasis
on mass market advertising. Instead, we plan to use our resources for the
development of other less capital-intensive distribution channels (e.g., network
marketing which will be facilitated through Kaire Nutraceuticals).
In January 2000, we entered into a licensing agreement with GLI, Inc., of
which our former president, Joseph Grace, is a principal. We licensed to GLI
certain rights to manufacture, distribute and sell the four Natural Relief 1222
products through various distribution channels and the exclusive right to the
trademark "Natural Relief 1222". The licensing agreement is for a percentage of
GLI's net sales for five years with a minimum royalty guaranteed. After five
years, the royalty is reduced to a lower percentage of net sales with no minimum
royalty guaranteed. As part of the licensing agreement, GLI agreed to purchase
any unused inventory of the product.
We marketed a line of homeopathic flower remedies under the Ellon trade
name, which consists of 38 individual flower remedies and one combination flower
remedy, sold as Calming Essence?. These products are regulated over-the-counter
pharmaceuticals which are intended to be utilized for the relief of a range of
emotional and psychological stresses. Calming Essence has been sold principally
to natural and health food retailers subject to FDA compliance and distributors,
and to alternative health care practitioners. We compete in this category with
several other established lines of homeopathic flower remedies, including the
Bach and Flower Essence Services product lines.
In February 2000, we entered into a licensing agreement with Ellon
Botanicals, Inc. in which we granted to Ellon Botanicals the exclusive license
to market and use all patents, service marks and trademarks associated with the
Ellon, Calming Essence and ContentMints brand names. The licensing agreement is
for a percentage of Ellon Botanicals net sales for a period of four years with a
minimum royalty guaranteed. As part of the licensing agreement, Ellon Botanicals
agreed to purchase any unused inventory of the product.
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Products
Energize
This line is primarily natural stimulants designed to enhance and increase
energy levels and endurance both mentally and physically. Products in this
category include Ginko Shield, which assists in mental alertness and the
circulatory system, Momentum, and RF5, that helps increase and balance energy
levels and gives one an overall sense of well-being.
Enhance
The Enhance product line is designed to support an individual's overall
health and includes such products as Immunol, Colloidal Silver Kaire, Colon
Complex, Synerzyme, Kavatu, Arthrokaire, Osteo Formula, CPM9, Royal Hawaiian
Noni, Slimkaire, and SinusKaire.
Immunol is a shark liver based capsule which we believe aids in the human
immune system. This product is imported exclusively by Kaire Nutraceuticals.
Colloidal Silverkaire, a solution of silver particles electro-magnetically
suspended in deionized water and provides dietary support for the immune system.
It is used by individuals for a number of purposes including eye drops, a
topical solution, nose drops and a drink.
A colon-cleansing product, Colon Complex, is for periodic use in cleaning
the lower digestive system and Synerzyme, a combination of naturally occurring
enzymes and trace minerals to enhance the efficacy of the enzymes, which may
assist the body with the breakdown and assimilation of various foods and fats.
CPM9 includes cetyl-myristoleate, which has been cited as a critical
nutrient for chronic pain due to connective tissue disorders. It assists the
body in modulating inflammatory response and adding flexibility to affected
tissues.
Noni is derived from a fruit grown only in the Central and South Pacific,
and contains high levels of naturally occurring vitamins, minerals, trace
elements, enzymes, and phytochemicals. The processing method of flash freezing
the fruit and then processing it into capsules retains the high level of
nutrients that may be lost through the pasteurization of liquid presentations of
this product.
Slimkaire is a new time-release, thermogenic weight management program with
five herbal blends; including a thyroid support blend, that is designed to work
as a system to assist weight loss safely while giving the dieter a higher level
of energy and maintaining a healthy body. This system concept is based upon a
complete program including Kaire Nutraceuticals products, walking or other
sensible exercise available to virtually all individuals and sensible permanent
eating habits. We believe that our proprietary formula, which has no synthetic
stimulant, is superior to competitor blends for the health conscious individual.
In addition, Kaire Nutraceuticals offers a second thermogenic weight
management program, SK II, for individuals seeking a product without Ma huang,
(ephedrine).
Developed exclusively for the Canadian market, Sinuskaire, is a similar
formulation to the United States product Slimkaire that also aids in a healthy
sinus function.
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Optimize
This category provides for many of the basic vitamins and nutrients, which
are missing in the typical adult or child's diet such as Vita/Minkaire, Prokids
and MSM Complex.
In addition, Kaire Nutraceuticals acquired the right to distribute Bio10,
an organic live source of all 12 lactobacillus bacteria designed to supplement
and maintain optimum health.
Renew
Renew is a complete line of skin care, hair care and topical analgesic's
designed to assist in maintaning a youthful and healthy appearance. Kaire
Nutraceutical's products include Isomer (TM) Personal Solutions, Aloe Gel, Kobi,
Dermakaire with Pycnogenol (TM), and Dermunol.
Isomer (TM) is our line of skin and hair care products and includes 20
different items to appeal to a wide range of consumers, both male and female.
Kobi combines Australian Aboriginal healing traditions and scientific
research with a patented Emu oil to provide temporary relief of minor aches and
pains associated with simple strains, sprains and arthritis.
DermaKaire with Pycnogenol is a mosturizing, whole-leaf Aloe product
combined with a powerful antioxidant to maintain healthy-looking skin.
Restore
Products in this category serve two primary purposes. The first is to
provide adaptogens in an efficient medium and the second is to provide a natural
relaxant for rest and sleep. Arctic Root is an adaptogen, an herb which works
with the body to allow energy to be used by the body as needed as opposed to
stimulants and depressants which affect the body's energy as a whole, over a
certain period of time. Kavatu combines the extract from the Pacific KavaKava
plant with other nutrients to form a product allowing for a more complete rest
and sleep without the "hangover" effects of many artificial relaxants and sleep
aids. We also market St. John's Wort.
In addition, Aloe has been studied for a number of years as everything from
a topical for skin irritations and sunburn to a supplement for improving the
general health of the body. Fruit-N-Aloe is a more palatable form of the Aloe
juice as it is mixed with fruit juices to get the Aloe benefits without the
strong taste of AloElite, a more concentrated form of the Aloe juice.
Revive
This line is primarily nutritional supplements based on antioxidants
including Maritime Prime and EnzoKaire Complete. Most of the products are based
on exclusive formulations in several combinations containing natural products
including Pycnogenol, Enzogenol(TM) and Arctic Root(TM). Products containing
Pycnogenol have not been approved for direct importation into Australia.
Maritime Plus is not available in Canada due to Canadian regulations on the
ascorbate that is contained in this product.
-7-
Pycnogenol, is believed to be highly bioavailable and retained in the body
for several days. Antioxidants have been shown to be effective in fighting the
effects of oxidation on the body. Oxidation is the same process that causes
metals to rust and apples to turn brown. Free radicals, which are molecules
damaged by oxidation, are being studied as the causes of various infirmities in
humans. A free radical is an unstable oxygen molecule seeking, at the molecular
level, to pair up with an electron. Free radicals can be created in the
atmosphere by the exposure of oxygen to sunlight and pollution. Free radicals
can also be created by natural metabolic processes. Antioxidants are molecules
which can combine with and, as a result, neutralize free radicals.
DHEA is a hormonal product which replaces the same hormone in the body.
Research shows that as a person matures their body generates diminishing amounts
of DHEA. According to a number of research studies, DHEA is the hormone which
allows the body to know its energy level.
In December 1999, we acquired the distribution rights to HIM and HER,
gender-specific, anti-aging formulas designed to compliment the complete Kaire
Nutraceuticals product line.
New Product Development
Additional products being considered in these areas are additional
antioxidants, anti-aging, weight management, and energy products. In addition to
the introduction of single products, Kaire Nutraceuticals is also focusing on
promoting groups of products to be taken in conjunction with each other to
address specific needs (such as weight loss, stress, daily wellness, etc.) that
an individual may have.
Kaire Nutraceuticals intends to seek to identify, develop and introduce
innovative, effective and safe products. Management believes that its ability to
introduce new products increases its associates' visibility and competitiveness
in the marketplace.
Kaire Nutraceuticals maintains its own product review and evaluation staff
but relies upon independent research, vendor research departments, research
consultants and others for product research, development and formulation
services.
Product Warranties and Returns
Kaire Nutraceuticals' product warranties and policy regarding returns of
products are similar to those of other companies in its industry. If a consumer
who enrolled with Kaire subsequent to July 1, 1999, for any of Kaire
Nutraceuticals' products is not satisfied with the product, she/he may return it
to the associate from whom the purchase was made, within 90 days of enrollment.
The associate is required to refund the purchase price to the consumer. The
associate may then return the unused portion of the product to Kaire
Nutraceuticals for an exchange of equal value. If an associate requests a refund
in lieu of an exchange, a check or credit is issued. All associates enrolled
with Kaire prior to July 1, 1999 may return products for exchange or refund
within 30 days from the date of purchase. All products are warranted against
defect by the manufacturer of those products. Most products returned to Kaire
Nutraceuticals, however, are not found to be defective in manufacture.
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Manufacturing
The Company does not intend to develop its own manufacturing capabilities
since management believes that the availability of manufacturing services from
third parties on a contract basis is adequate to meet the Company's needs. The
Company has utilized a number of manufacturers who have sufficient manufacturing
capacity to meet the Company's anticipated production needs.
Kaire Nutraceuticals currently purchases all of its vitamins, nutritional
supplements and all other products and ingredients from parties that manufacture
such products to Kaire Nutraceuticals' specifications and standards. All
nutritional supplements, raw materials and finished products are subject to
sample testing, weight testing and purity testing by independent laboratories.
Except for an agreement with Enzo Nutraceuticals, Inc., the Company has no
existing contractual commitments or other arrangements for the future
manufacture of its products. Rather, it places orders for component or finished
goods manufacturing services as required based upon price quotations and other
terms obtained from selected manufacturers. During the year ended December 31,
1999, Kaire Nutraceuticals purchased amounts of its products from a limited
number of vendors, including 46% from MW International, Inc. The Company
currently buys all of its Pycnogenol, an important component of its products,
from one supplier.
Marketing and Distribution
Kaire Nutraceuticals' products are distributed through its network
marketing system of associates. Associates are independent contractors who
purchase products directly from Kaire Nutraceuticals for resale to retail
consumers. Associates may elect to work on a full-time or a part-time basis.
Management believes that its network marketing system is well suited to
marketing its nutritional supplements and other products because sales of such
products are strengthened by ongoing personal contact between retail consumers
and associates, many of whom use Kaire Nutraceuticals' products.
Our goal is to offer distributors a business opportunity that allows the
part-time and full-time network marketers to achieve income levels relative to
their business practices and sales levels. Distributors have the opportunity to
earn immediate, residual, and retirement incomes. Bonuses are paid to qualified
distributors based on sales for each month. Rank titles for the distributors are
Associate, Broker, Director, Executive, Managing Executive, Senior Executive,
and Master Executive. Each increased rank has additional standards to achieve
and maintain rank, as well as providing the ability to earn additional bonuses.
To become an associate, a person must simply sign an agreement to comply
with the policies and procedures of Kaire Nutraceuticals. No investment is
necessary to become an associate. Kaire Nutraceuticals considers approximately
30,000 of its associates to be "active," that is, an individual associate who
has ordered at least $50 of Kaire's products during the preceding 12 month
period.
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Kaire Nutraceuticals has sponsored opportunity meetings in various key
cities and participates in motivational and training events in its market areas
designed to inform prospective and existing associates about Kaire
Nutraceuticals' product line and selling techniques. Associates give
presentations relating to their experiences with Kaire Nutraceuticals' products
and the methods by which they have developed their own organization of
associates. Specific selling techniques are explained, and emphasis is placed on
the need for consistency in using such techniques. Participants are encouraged
to ask questions regarding selling techniques and product developments, to share
information with other associates and to develop confidence in selling and
goal-setting techniques. Motivation is offered to participants in the form of
recognition, gifts, excursions and tours, which are intended to foster an
atmosphere of excitement throughout the associate organization. Prospective
associates are educated about the structure, dynamics and benefits of Kaire
Nutraceuticals' network marketing system.
Kaire Nutraceuticals continues to develop marketing strategies and programs
to motivate associates. These programs are designed to increase associates'
monthly product sales and the recruiting of new associates. An example of these
programs is the Kaire AutoShip Program.
Under the Kaire AutoShip Program, an associate may enroll in a minimum
ordering program to maintain eligibility for performance bonuses. Minimum orders
ranging from $50 to $550 per month are automatically placed by credit card or
electronic bank draft. The associate also gets preferred pricing, no minimum
purchase requirement (once they have a qualifying select order set up),
exclusive access to some product introductions, and discounts on Kaire
Nutraceuticals' sponsored events.
As part of Kaire Nutraceuticals' maintenance of constant communication with
its associate network, Kaire Nutraceuticals offers the following support
programs to its associates:
Touchtalk and Faxback
An automated telephone system that associates can call 24 hours a day to
place orders, receive reports on the sales activity of their organization and
listen to selected messages on special offers, marketing program updates,
product information, and similar information. Certain information is also
available via facsimile to the associate.
24 Hour Teleconference
A weekly teleconference on various subjects such as technical product
discussions, associate organization building and management techniques. An
associate can listen to any of the last four weekly teleconferences.
Internet
Kaire Nutraceuticals maintains a web-site at http:\www.kaireint.com. There,
the user can read news letters, learn more about products, place an order or
sign up to be an associate. In addition, associates can send messages and orders
to Kaire Nutraceuticals e-mail address of kaireint.com. This allows associates
to potentially be able to sponsor associates and order products 24 hours a day.
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Product Literature
Kaire Nutraceuticals produces for its associates, color catalogs and
brochures displaying and describing Kaire Nutraceuticals' products.
Toll Free Access
A toll free number is available to place orders, sponsor new associates,
and for consumer support.
Broadcast Fax/Broadcast E-mail
Kaire Nutraceuticals' announcements and product specials are automatically
sent via facsimile and/or e-mail to associates who have requested this service.
Markets
Kaire Nutraceuticals has operations in the United States, Canada,
Australia, New Zealand, Trinidad and Tobago and the United Kingdom.
Upon deciding to enter a new market, Kaire Nutraceuticals hires local
counsel to assist ensuring that Kaire Nutraceuticals' network marketing system
and products comply with all applicable regulations and that Kaire
Nutraceuticals' profits may be expatriated. In addition, local counsel assists
in establishing favorable relations in the new market area by acting as liaison
between Kaire Nutraceuticals and local regulatory authorities, public officials
and business people. Local counsel also is responsible for explaining Kaire
Nutraceuticals' products and product ingredients to appropriate regulators and,
when necessary, will arrange for local technicians to conduct any required
ingredient analysis tests of Kaire Nutraceuticals' products.
If regulatory approval is required in a foreign market, Kaire
Nutraceuticals' local counsel interfaces with local regulatory agencies to
confirm that all of the ingredients of Kaire Nutraceuticals' products are
permissible within the new market. During the regulatory compliance process,
Kaire Nutraceuticals may alter the formulation, packaging or labeling of its
products to conform to applicable regulations as well as local variations in
customs and consumer habits, and Kaire Nutraceuticals may modify certain aspects
of its network marketing system as necessary to comply with applicable
regulations.
Following completion of the regulatory compliance phase, Kaire
Nutraceuticals undertakes the steps necessary to meet the operational
requirements of the new market. Kaire Nutraceuticals then initiates plans to
satisfy inventory, distribution, personnel and transportation requirements of
the new market, and modifies its associate training materials as may be
necessary to be suitable for the new market.
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Management Information Systems
Kaire Nutraceuticals maintains a computerized system for processing
associate orders and calculating associate commission and bonus payments
enabling it to promptly remit payments to associates. Kaire Nutraceuticals'
computer system provides each associate a detailed monthly accounting of all
sales and recruiting activity in his or her organization. These convenient
statements eliminate the need for substantial record keeping on behalf of the
associate. As a precaution, duplicate copies of Kaire Nutraceuticals' computer
records are transferred daily to an off-site location for safekeeping. Kaire
Nutraceuticals believes that prompt remittance of commissions and bonuses is
vital to maintaining a motivated network of associates and that associate
loyalty has been enhanced by Kaire Nutraceuticals making commission and bonus
payments as scheduled.
Competition
Kaire Nutraceuticals competes with many companies which market and sell
products similar to our own products. It also competes intensely with other
network marketing companies in the recruitment of associates.
There are many network marketing companies with which Kaire Nutraceuticals
competes for associates. Some of the largest of these are Nutrition for Life
International, Inc., Nature's Sunshine, Inc., Herbalife International, Inc.,
Amway and Rexall Sundown, Inc. Each of these companies is substantially larger
than Kaire Nutraceuticals and has significantly greater financial and personnel
resources than Kaire Nutraceuticals. Kaire Nutraceuticals competes for
associates by means of its marketing program that includes its commission
structure, training and support services, and other benefits.
Not all competitors market all types of products marketed by Kaire
Nutraceuticals, and some competitors market products and services in addition to
those marketed by Kaire Nutraceuticals. For example, some competitors are known
for and are identified with sales of herbal formulations, some are known for and
are identified with sales of household cleaning and personal care products, and
others are known for and are identified with sales of nutritional and dietary
supplements. Kaire Nutraceuticals' principal methods of competition for the sale
of products are its responsiveness to changes in consumer preferences and its
commitment to quality, purity, and safety.
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Seasonality
Sales of topical analgesic products are strongest during the colder winter
months when arthritis sufferers tend to feel pain and stiffness more acutely.
Conversely, sales of skin treatment products (e.g., hydrocortisone creams, etc.)
are slightly stronger during the non-winter months. The Company does not believe
that the sales of wart removal products are seasonal.
Sales of the Company's weight management products are strongest during
January when New Year's resolutions are made and during the spring season. The
Company does not believe that its other nutritional supplements are affected by
seasonality.
Government Regulation
The Company's president and chief executive officer believe that all of its
existing products are homeopathic medicines which do not require governmental
approvals prior to marketing in the United States. The processing, formulation,
packaging, labeling and advertising of such products, however, are subject to
regulation by one or more federal agencies including the FDA, the Federal Trade
Commission, the Consumer Products Safety Commission, the Department of
Agriculture, the Department of Alcohol, Tobacco and Firearms and the
Environmental Protection Agency. The Company's activities are also subject to
regulation by various agencies of the states and localities in which its
products are sold. In addition, the sale of the Company's products by
distributors in foreign markets are subject to regulation and oversight by
various federal, state and local agencies in those markets.
The FDA traditionally has been the main agency regulating the types of
products sold by homeopathic and natural over-the-counter pharmaceutical firms.
Official legal recognition of homeopathic drugs in the United States dates to
the Federal Food, Drug and Cosmetic Act of 1938. The Food Drug and Cosmetic Act
provides that the term "drug" includes articles recognized in the official
Homeopathic Pharmacopoeia of the United States. The Food Drug and Cosmetic Act
further recognizes the separate nature of homeopathic drugs from traditional,
allopathic drugs by providing that whenever a drug is recognized in both the
U.S. Pharmacopoeia and the Homeopathic Pharmacopoeia, it shall be subject to the
requirements of the U.S. Pharmacopoeia unless it is labeled and offered for sale
as a homeopathic drug, in which case it shall be subject to the provisions of
the Homeopathic Pharmacopoeia and not to those of the U.S. Pharmacopoeia.
-13-
In 1988, the FDA issued a Compliance Policy Guide that formally established
the manner in which homeopathic drugs are regulated. The Compliance Policy Guide
provides that homeopathic drugs may only contain ingredients that are generally
recognized as homeopathic. Such recognition is most often obtained via the
publication of a monograph in the Homeopathic Pharmacopoeia. The FDA has also
noted that a product's compliance with a Homeopathic Pharmacopoeia monograph
system does not necessarily mean that it has been shown to be safe and
effective. According to the Compliance Policy Guide, and consistent with
established FDA principles regarding allopathic drugs, a homeopathic drug may
only be marketed without a prescription if it is intended solely for
self-limiting disease conditions amenable to self-diagnosis and treatment. Other
homeopathic drugs must be marketed as prescription products. In addition, if a
Homeopathic Pharmacopoeia monograph states that a drug should only be available
on a prescription basis, this criteria will apply even if the drug is intended
for a self limiting condition. The Compliance Policy Guide provides that the
FDA's general allopathic drug labeling requirements are also applicable to
homeopathic drugs. All firms that manufacture, prepare, compound, or otherwise
process homeopathic drugs must register their drug establishments with the FDA
and must also "list" their drugs with the agency. Homeopathic drugs must also be
manufactured in conformance with "current good manufacturing practices." In
addition, homeopathic drugs are exempt from FDA's requirements for expiration
date labeling.
The Homeopathic Pharmacopoeia is updated regularly. The Homeopathic
Pharmacopoeia was initially published by the Committee on Pharmacy of the
American Institute of Homeopathy and is currently published by the Homeopathic
Pharmacopoeia Convention of the United States, a private, non-profit entity
organized exclusively for charitable, educational, and scientific activities.
The Homeopathic Pharmacopoeia is an official publication that is cited in the
Federal Food and Drug Laws and Compliance Policy Guide. The Homeopathic
Pharmacopoeia contains hundreds of monographs for homeopathic ingredients that
have been found by the Homeopathic Pharmacopoeia Convention to be both safe and
effective. The Homeopathic Pharmacopoeia also contains general standards for the
preparation of homeopathic drugs.
Based on information provided by the Company's president, in November 1991,
the FDA issued proposed regulations designed to, among other things, amend its
food labeling regulations. The proposed regulations met with substantial
opposition. In October 1994, the "Dietary Supplement Health and Education Act of
1994" ("DSHEA") was enacted. Section 11 of the Dietary Supplement Law provided
that the advance notice of proposed rule making by the FDA concerning dietary
supplements was null and void. FDA regulations that became effective on June 1,
1994 require standard format nutrition labeling on dietary supplements. However,
because the new Dietary Supplement Law also addresses labeling of dietary
supplements, the FDA indicated that it would not enforce its labeling
regulations until January 1, 1998.
Based on information provided by the Company's president, in January 2000,
the FDA issued a final ruling, effective February 7, 2000, related to
structure/function statements that may be claimed on dietary supplement product
labels. The rule provides for clarification of when a structure/function claim
may be made without prior FDA approval and when a claim constitutes disease
related claims. The final rule provides for the adoption of previously issued
language by the Nutrition Labeling and Education Act ("NLEA") for `disease or
health related conditions' and among other things allows for express and implied
disease claims to be made through the name of a product, through a statement
about the formulation of a product, or through the use of pictures, vignettes,
or symbols. The finalized rule now interprets DSHEA to permit structure/function
claims for the effects of "natural states" or common
-14-
conditions associated with natural states and may include such phrases as
"maintains a healthy circulatory system". In addition, the FDA acknowledged
permissible statements for minor pain, calming, upset stomach, etc., but not
tied to any particular condition or symptom.
The Company's president believes that the above finalized rule loosens the
restrictions on its labeling of products regarding dietary supplements and
structure/function claims provided that any such statements by the Company does
not suggest that the supplement is intended to augment or replace a specific
prescription drug or therapy for a disease.
Kaire Nutraceuticals is unaware of any legal actions pending or threatened
by the FDA or any other governmental authority against Kaire Nutraceuticals.
Certain ingredients utilized in the Company's weight management products,
primarily ephedrine, are increasingly subject to regulations being promulgated
by various state agencies. These regulations generally limit the amount of the
ingredient or require a conspicuous warning labels be affixed to each product.
In addition, certain states have prohibited the sale of ephedrine based products
to minors or at all. The can be no assurances that the Company will not be
subject to additional regulation on its weight management product line.
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, that
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products.
Based on research conducted in opening its existing markets the nature and
scope of inquiries from government regulatory authorities and the Company's
history of operations in such markets to date, the Company's president believes
that its method of distribution is in compliance in all material respects with
the laws and regulations relating to direct selling activities of the countries
in which Kaire Nutraceuticals currently operates. Even though the Company's
president believes that laws governing direct selling are generally becoming
more permissive, many countries currently have laws in place that would prohibit
Kaire Nutraceuticals from conducting business in such markets. There can be no
assurance that Kaire Nutraceuticals will be allowed to continue to conduct
business in each of its existing markets that it currently services or any new
market it may enter in the future.
The Company's president believes that Kaire Nutraceuticals is in material
compliance with all regulations applicable to it. Despite this belief, the
Company may be found not to be in material compliance with existing regulations
as a result of, among other things, the considerable interpretative and
enforcement discretion given to regulators or misconduct by associates. There
can be no assurances that the Company will not be subject to inquiries and
regulatory investigations or disputes and the effects of any adverse publicity
resulting therefrom. Any assertion or determination that the Company or any of
its associates are not in compliance with existing laws or regulations could
have a material adverse effect on the Company' business and results of
operations. In addition, in any
-15-
country or jurisdiction, the adoption of new laws or regulations or changes in
the interpretation of existing laws or regulations could generate negative
publicity and/or have a material adverse effect on the Company' business and
results of operations. The Company cannot determine the effect, if any, that
future governmental regulations or administrative orders may have on the
Company's business and results of operations. Moreover, governmental regulations
in countries where the Company may commence or expand its operations may
prevent, delay or limit market entry of certain products or require the
reformulation of such products. Regulatory action, whether or not it results in
a final determination adverse to the Company, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of associates and consequently, on the Company's sales and earnings.
Patents and Trademarks
Global Health, through Natural Health Laboratories, Inc., has a United
States Patent covering the use of certain inactive botanical ingredients as a
base for several of its Natural Relief 1222 products. The Company also has
obtained marketing and manufacturing rights to a family of Chinese-origin,
patented, natural topical medical products. Global Health has federal trademark
registrations for Natural Relief 1222, Ellon, Calming Essence, Contentmints and
Mesozoic Minerals. The Company also has trademark registrations for Nature's
Relief and Nature's Relief 1222 in Canada. Most Kaire Nutraceuticals' products
are packaged under Kaire Nutraceuticals' "private label." Kaire Nutraceuticals
has registered trademarks with the United States Patent and Trademark Office for
its name, logo and various products names. It has applied for trademark
registration in several countries outside of those it is currently operating in
for its name, logo and various product names.
Additional trademark registration applications which may be filed by the
Company with the United States Patent and Trademark Office and in other
countries may or may not be granted and the breadth or degree of protection of
the Company's existing or future trademarks may not be adequate. Moreover, the
Company may not be able to defend successfully any of its legal rights with
respect to its present or future trademarks. The failure of the Company to
protect its legal rights to its trademarks from improper appropriation or
otherwise may have a material adverse effect on the Company.
Employees
As of December 31, 1999, the Company had 37 full time employees and 2 part
time employee, of which 15 were involved in sales and marketing, 11 in
administration and finance and 13 in operations. None of the Company's employees
are represented by a union, and the Company believes that its employee relations
are good.
Insurance
The Company carries general liability insurance in the amount of $5,000,000
per occurrence and $6,000,000 in the aggregate including product liability
insurance. There can be no assurance, however, that the Company's insurance will
be sufficient to cover potential claims or that an adequate level of coverage
will be available in the future at a reasonable cost, if at all. A successful
claim could have a material adverse effect on the Company.
-16-
ITEM 2. DESCRIPTION OF PROPERTY.
-----------------------
Kaire Nutraceuticals leases an aggregate of approximately 8,500 square feet
of office and warehouse space in an office complex in Longmont, Colorado. The
lease term is month to month and the current rate is approximately $93,000 per
year. The Australian and New Zealand subsidiaries also lease their office and
warehouse facilities of approximately 8,000 square feet for a period of four
years at an annual rental of $30,000 and $24,000, respectively. The Trinidad and
Tobago office is approximately 1,100 square feet in downtown Port-of-Spain,
Trinidad, which lease is for one year with two one-year renewals. We believe
that such properties are suitable and adequate for our current operating needs.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
On August 4, 1997 Samantha Haimes brought an action in the Fifteenth
Judicial Circuit of Palm Beach County, Florida, against us and National Health
Care Centers of America, Inc., the Company's wholly-owned subsidiary. We have
asserted counterclaims against Samantha Haimes and Leonard Haimes. The complaint
arises out of the defendant's alleged breach of contract in connection with the
Company's natural health care center which was located in Boca Raton, Florida.
The plaintiff is seeking damages in the amount of approximately $535,000. On
September 10, 1997 Rejuvenation Unlimited, Inc. and Sam Lilly, Inc. brought an
action in the Fifteenth Judicial Circuit of Palm Beach County, Florida, arising
out of the Company's alleged breach of contract in connection with the
acquisition of the Company's natural health care center which was located in
Boca Raton, Florida from the plaintiff. The plaintiff is seeking damages in
excess of $15,000. The Company has agreed to settle such actions for shares of
common stock with a fair market value of $325,000, but not less than 125,000
shares of common stock and has agreed to register shares of Common Stock.
In Global Health and Ellon, Inc. v. Leslie Kaslof, Ralph Kaslof, and Ellon
USA, Inc., pending in the United States District Court for the District of Maine
(the "Maine Kaslof Case") claims have been made arising out of the sale of Ellon
USA's ("Old Ellon") assets to Global Health's wholly-owned subsidiary, Ellon,
Inc. ("New Ellon"). In connection with that sale, Leslie Kaslof and Ralph
Kaslof, former shareholders and officers of Old Ellon, entered into employment
and consulting agreements with Global Health. Global Health's potential
obligation to the Kaslofs under the employment and consulting agreements was
approximately $525,000. The complaint in the Maine Kaslof Case seeks a
determination that the Kaslofs materially breached their respective obligations
under the agreements and that Global Health and New Ellon are excused from
further performance thereunder. The complaint includes a breach of fiduciary
claim against Ralph Kaslof, as well as a claim to recover approximately
$142,000. In a related civil action brought by the Kaslofs and Old Ellon in the
United States District Court for the Eastern District of New York (the "New York
Kaslof Action"). The Kaslofs have alleged breaches of the purchase and sale
agreement, the employment and consulting agreements, and other agreements
executed in connection with the sale of Old Ellon's assets. The complaint seeks
to recover damages in an unspecified amount, but not less than $1,300,000, costs
of court, reasonable attorney fees, and interest. Global Health intends to
vigorously defend any and all claims asserted by the Kaslofs and their
corporation.
-17-
Inter/Media Time Buying Corp. ("Inter/Media") v. Global Health, et al.,
which is pending in the United States District Court for the Central District of
California (the "Inter/Media Action"), is based on Inter/Media's provision of
marketing, media purchasing, and related advertising services to Global Health
in connection with Natural Relief 1222. The complaint seeks compensatory damages
of $144,500, unstated special damages, attorney fees and costs of court. Global
Health answered the complaint, denying all material allegations therein, and
asserting a counterclaim arising out of Inter/Media's creation of a defective
national direct response campaign which prevented a successful nationwide retail
launch for a clinically-proven product. By its counterclaim, which includes
claims for breach of contract, negligence, intentional interference with a
prospective economic advantage, fraud and intentional misrepresentation, and
negligent misrepresentation, Global Health seeks to recover general damages of
not less than $6,500,000, special damages, costs of suit, and reasonable
attorney fees. Inter/Media has sought an attachment against Global Health's
assets for the full amount of its claims.
The Company is currently negotiating with Inter/Media for settlement of the
case.
In PIC-TV v. Global Health, et al., PIC-TV seeks to recover compensatory
damages of not less than $319,656, together with interest and costs of suit,
based on the sale of advertising time and sponsorships to Global Health. PIC-TV
has received default judgment in its suit against Global Health. Such amount has
been accrued in the financial statements.
In September 1999 Command Financial Press Corp. commenced an action in the
Supreme Court of the State of New York in New York City against the company for
unpaid invoices for printing services in the amount of approximately $65,000.
The Company is defending the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
During the last quarter of 1999, the Company did not submit any matter to
the vote of its shareholders.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
--------------------------------------------------------
PRICE RANGE OF COMMON STOCK
The common stock is quoted on the Nasdaq SmallCap Market under the symbol
"NHTC." The following table sets forth the range of high and low closing sale
prices as reported by The Nasdaq SmallCap Market for the common stock for the
quarters indicated.
High Low
Common Stock
1997
First Quarter $100.00 $40.00
Second Quarter 90.00 35.00
Third Quarter 40.00 8.75
Fourth Quarter 10.00 1.25
1998
First Quarter 5.00 1.88
Second Quarter 3.75 .56
Third Quarter 2.13 .78
Fourth Quarter 4.00 1.91
-18-
1999
First Quarter 5.63 3.56
Second Quarter 4.34 3.31
Third Quarter 4.25 2.47
Fourth Quarter 2.93 1.75
2000
First Quarter 2.00 1.22
Holders
As of January 22, 1999, the Company had approximately 192 record holders of
its common stock and 1,669 beneficial holders of its common stock.
Dividends
The Company has not paid any cash dividends on its common stock to date and
does not anticipate declaring or paying any cash dividends in the foreseeable
future. In addition, future financing arrangements, if any, may preclude or
otherwise restrict the payment of dividends.
Recent Sales of Unregistered Securities
In October and November 1999, the Company issued convertible notes in the
amount of $100,000 and $70,000, respectively, to Domain Investments, Inc.
pursuant to the exemption from registration under Section 4(2) of the Securities
Act.
In October 1999, the Company issued 125,000 shares of Common Stock to
Samantha Haimes in a litigation settlement pursuant to the exemption from
registration under Section 4(2) of the Securities Act.
In October 1999, the Company issued 3,018 shares of Common Stock to an
employee and 25,000 shares to a director pursuant to the exemption from
registration under Section 4(2) of the Securities Act.
In October 1999, the Company issued 95,000 shares of Common Stock to Domain
Investments, Inc. and 125,000 shares of Common Stock to Meridian Equities Hong
Kong, Ltd. for consulting services pursuant to the exemption from registration
under Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
---------------------------------------------------------
Background
Prior to August 1997, the Company's operations consisted of the operation
of natural health care centers and vocational schools. Upon the acquisition of
Global Health on July 23, 1997, the Company commenced marketing and distributing
a line of natural, over-the-counter homeopathic pharmaceutical products. In
February 1999, the Company acquired substantially all of the assets of Kaire
International, Inc. and commenced marketing and distributing a line of natural,
herbal based dietary supplements and personal care products through an
established network marketing system. The Company discontinued the operations of
the natural health care centers during the third quarter of 1997 and sold the
vocational schools in August 1998. During most of the year ended December 31,
1997, the Company's ongoing lines of business were not in operation, not having
been acquired until July 1997 and February 1999.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues
Revenues for the year ended December 31, 1999 were approximately
$15,270,000 as compared to revenues for the year ended December 31, 1998 of
approximately $1,191,000, an increase of approximately $14,079,000 or 1,282.1%.
Sales for the year ended December 31, 1998 were primarily from Global Health.
The increase in sales is primarily attributable to Kaire Nutraceuticals' sales
of approximately $14,401,000 which commenced on February 19, 1999. Global
Health's revenues declined approximately $132,000 or 13.2% during the year ended
December 31, 1999 as compared to the year ended December 31, 1998 due to a
change in the marketing approach used to a less capital intensive method.
-19-
Cost of Sales
Cost of sales for the year ended December 31, 1999 was approximately
$4,267,000 or 27.9% of revenues. Cost of sales for the year ended December 31,
1998 was $454,000 or 38.1% of revenues. The total cost of sales increased by
approximately $3,813,000 or 839.9% of which approximately $3,938,000 was
attributable to the Kaire Nutraceuticals and its related operations. The
decrease in the cost of sales as a percentage of revenues is also attributable
to the effect of Kaire Nutraceuticals' sales due to the different pricing
structure associated with Kaire Nutraceuticals' sales distribution channel.
Gross Profit
Gross profit increased from approximately $737,000 in the year ended
December 31, 1998 to approximately $11,003,000 in the year ended December 31,
1999. The increase was approximately $10,266,000 or 1,357.3%. The increase was
attributable to Kaire Nutraceuticals' gross profit.
Commissions
Distributor commissions were approximately $7,230,000 or 47.3% of revenues
in the year ended December 31, 1999 attributable to Kaire Nutraceuticals'
marketing system.
Selling, General and Administrative Expenses
Selling, general and administrative costs increased from approximately
$3,277,000 or 275.1% of revenues in the year ended December 31, 1998 to
approximately $7,723,000 or 50.6% of revenues in the year ended December 31,
1999, an increase of approximately $4,446,000 or 135.7% which is attributable to
Kaire Nutraceuticals' operations.
Loss from Operations
Operating losses increased from $2,540,000 in the year ended December 31,
1998 to approximately $7,117,000 in the year ended December 31, 1999
representing a 180.2% increase in the loss or approximately $4,577,000 between
comparable periods. This increase is due primarily to larger losses being
incurred by Global Health due to reduced revenues without a corresponding
reduction in operating expenses.
Gain on dissolution
Kaire Nutraceuticals, Inc. closed its wholly owned subsidiary in the United
Kingdom in February 2000. The $200,000 represents the anticipated gain on the
liquidation of this asset.
Interest Expense
Interest expense was approximately $200,000 or 16.8% of revenues in the
year ended December 31, 1998 increased to approximately $663,000 or 4.3% of
revenues in the year ended December 31, 1999, a change of approximately
$463,000. This increase is primarily due to the beneficial conversion feature of
certain debt instruments.
-20-
Income Taxes
Income tax benefits were not reflected in either period. The anticipated
benefits of utilizing net operating losses against future profits was not
recognized in the years ended December 31, 1999 or 1998 under the provisions of
Financial Standards Board Statement of Financial Accounting Standards No. 109
(Accounting for Income Taxes), utilizing its loss carry forwards as a component
of income tax expense. A valuation allowance equal to the net deferred tax asset
has been recorded, as management of Natural Health Trends has not been able to
determine that it is more likely than not that the deferred tax assets will be
realized.
Net Loss from Continuing Operations
Net loss from continuing operations was approximately $7,558,000 in the
year ended December 31, 1999 or 49.5% of revenues as compared to approximately
$2,740,000 or 230.0% of revenues in the year ended December 31, 1998.
Discontinued Operations
In February, 1998, Natural Health Trends closed the natural health care
center in Pompano Beach, Florida. The anticipated gain on this discontinued
operation was reflected in the year ended December 31, 1999 and 1998,
respectively.
Gain on Forgiveness of Debt
During the year ended December 31, 1998, Natural Health Trends realized a
$816,000 gain on the work-out of various debt and payables of Global Health.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Total revenues for continuing operations for Fiscal 1998 were approximately
$1,191,120, as compared to revenues of approximately $1,133,726 for the fiscal
year ended December 31, 1997 ("Fiscal 1997"), an increase of 5.1%. Although
revenues increased during Fiscal 1998, the revenues for Fiscal 1998 reflect
operations for a full year. However, revenues for Fiscal 1997 reflect operations
for only five months. On an annualized basis, revenues decreased by 57%. The
company believes that the decrease in revenues is primarily attributable to a
decrease in the sale of Natural Relief 1222 to mass market retailers and major
drug chains. The company believes that such decrease was due to a decrease in
spending on marketing and advertising as a result of the company's decision to
pursue less capital intensive channels of distribution.
Cost of Sales
Cost of sales for Fiscal 1998 were approximately $454,370, or 38.1% of
revenues, as compared to approximately $3,375,034, or 33.1% of revenues, for
Fiscal 1997. Gross profit for Fiscal 1998 was approximately $736,750, or 61.9%
as a percentage of revenues, as compared to approximately $758,692, or 66.9% as
a percentage of revenues, for Fiscal 1997. The company believes that the
decrease in gross profit as a percentage of revenues was primarily attributable
to a write-down of $75,000 for obsolete inventory for Fiscal 1998.
-21-
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal 1998 were
approximately $3,277,047, as compared to approximately $4,194,044 for Fiscal
1997, a decrease of 21.9%. The company believes that the decrease in selling,
general and administrative expenses was primarily attributable to reduced
spending on advertising and promotion. Advertising and promotion expenses were
approximately $1,771,095 for Fiscal 1997 as compared to $692,344 for Fiscal
1998.
Interest Expense
Interest expense for Fiscal 1998 was $199,757 as compared to $868,721 for
Fiscal 1997. Excluding the amortization of notes payable discount (related to
the company's convertible debentures) which amounted to $433,333 for Fiscal
1997, interest expense decreased by 54.1%. The company believes that the
decrease in interest expense was primarily attributable to the conversion of
convertible debentures during the fourth quarter of Fiscal 1998 and the first
quarter of Fiscal 1997.
Discontinued Operations
In October 1997, the company closed its natural health care center in Boca
Raton, Florida. In February 1998, the company sold its remaining natural health
care center in Pompano Beach, Florida. The anticipated losses on these
discontinued operations were reflected in our financial statements for Fiscal
1997. In August 1998, the company sold its three vocational schools and certain
related businesses, recognizing a gain of $1,424,379 from the sale. In November
1998, the company sold an office building which previously accommodated its
corporate headquarters and one of its vocational schools, realizing an estimated
loss of $829,000 which was reflected in our financial statements for the quarter
ended September 30, 1998.
Gain on Forgiveness of Debt
During Fiscal 1998, the company realized a gain of $815,636 on the work-out
of various debt and trade payables.
Liquidity and Capital Resources
We have funded our working capital and capital expenditure requirements
primarily from cash provided through borrowings from institutions and
individuals, and from the sale of our securities in private placements. Our
other ongoing source of cash receipts has been from the sale of Global Health's
and Kaire Nutraceuticals' products.
In February 1998, we issued $300,000 face amount of Series B Preferred
Stock, net of expenses of $38,500. The Series B Preferred Stock has been
converted into 541,330 shares of common stock.
In April 1998, we issued $4,000,000 face amount of Series C Preferred
Stock, net of expenses of $492,500 from the proceeds raised, we paid $2,500,000
to retire $1,568,407 face value of Series A Preferred Stock outstanding. The
Series C Preferred Stock has been converted into 3,608,296 shares of common
stock.
-22-
In July 1998, we issued $75,000 face amount of Series D Preferred Stock,
which was redeemed in August 1998 for $91,291.
In August 1998, we issued $1,650,000 face amount of Series E Preferred
Stock, net of expenses of $210,500. The Series E Preferred Stock pays dividends
of 10% per annum and is convertible into shares of common stock at the lower of
the closing bid price on the date of issue or 75% of the market value of the
common stock. In September 1999, $610,000 of face amount of Series E Preferred
Stock was converted into 603,130 shares of common stock.
In August 1998, we sold our three vocational schools and certain related
businesses for $1,778,333 and other consideration. From the proceeds from the
sale of the schools, we paid $1,030,309 to retire the remaining $631,593 face
value of Series A Preferred Stock then outstanding, and $91,291 to redeem all of
the Series D Preferred Stock outstanding. The remaining proceeds were used to
pay down payables.
In March and April 1999, we issued $1,400,000 of Series H Preferred Stock.
The Series H Preferred Stock pays dividends of 10% per annum and is convertible
into shares of common stock at the lower of the closing bid price on the date of
issue or 75% of the market value of the common stock.
In June 1999, we borrowed $100,000 from Domain Investments, Inc. The loan
bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion.
In July 1999, the Company borrowed $50,000 from H. Newcomb Eldredge and
issued a nine month secured promissory note bearing interest at the rate of 14%
per annum, but in no event shall the interest payable be less than $5,000. In
November 1999, the note to H. Newcomb Eldredge was repaid in full.
In July 1999, we borrowed $50,000 from Capital Development S.A. and issued
a nine month secured promissory note bearing interest at the rate of 14% per
annum, but in no event shall the interest payable be less than $5,000. In
November 1999, the note was repaid in full.
In July and August 1999 we borrowed $150,000 from Filin Corporation, and
issued a secured promissory note due on the earlier of 60 days from the date of
issuance or upon the sale of its securities resulting in gross proceeds of at
least $5,000,000 and bearing interest at the rate of 10% per annum, but in no
event less than $12,000. In October 1999 we amended the promissory note to
provide that the note is payable upon demand and is convertible into shares of
common stock at a discount equal to 60% of the average closing bid price of the
common stock on the three days preceding notice of conversion.
In October 1999, we borrowed $100,000 from Domain Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion.
In November 1999, we borrowed $70,000 from Domain Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion. This note was repaid with interest in March 2000.
-23-
During 1999, the Company has not made its payroll tax deposits with the
Internal Revenue Service ("IRS") and the various state taxing authorities on a
timely basis. The Company has filed all required payroll tax returns and is
currently negotiating a payment plan with the IRS. As of December 31, 1999, the
Company owes approximately $668,400 of delinquent payroll tax liabilities
including interest and penalties. The Company's failure to pay its delinquent
payroll tax liabilities could result in tax liens being filed by various taxing
authorities.
During 1999, the Company did not make its sales tax deposits with the
various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of December 31, 1999, the Company owed
approximately $189,900 in current and delinquent sales taxes which is included
in other current liabilities. The Company's failure to pay its delinquent sales
taxes could result in tax liens being filed by various taxing authorities.
In March 2000, we sold 1,000 shares of Series J Preferred Stock with a
stated value of $1,000 per share realizing net proceeds of $1,000,000. The
preferred stock pays a dividend at the rate of 10% per annum. The preferred
stock and the accrued dividends thereon are convertible into shares of the
Company's common stock at a conversion price equal to the lower of the closing
bid price on the date of issuance or 70% of the average closing bid price of the
common stock for the lowest three trading days during the twenty day period
immediately preceding the date on which the Company receives notice of
conversion from a holder. In connection with the offering of the Series J
Preferred Stock, the Company issued warrants to purchase 141,907 shares of
common stock at an exercise price of $1.41 per share.
At December 31, 1999, our ratio of current assets to current liabilities
was .23 to 1.0 and we had a working capital deficit of approximately $6,455,000.
Cash used in operations for the period ended December 31, 1999 was
approximately $715,000. Cash used by investing activities during the period was
approximately $1,677,000, which primarily relates to the Kaire acquisition and
computer upgrades at Kaire. Cash provided by financing activities during the
period was approximately $2,532,000, primarily from the issuance of preferred
stock of approximately $3,724,000 and partially offset by the redemption of
preferred stock of approximately $1,552,000. Total cash increased by
approximately $140,000 during the period.
Our independent auditors' report on our consolidated financial statements
stated as of December 31, 1999 due to net losses and a working capital deficit,
there is substantial doubt about the company's ability to continue as a going
concern. The Company requires additional financing to continue operations of
which there can be no assurance. Management has revised its business plan of
marketing development and support for Global Health's products, licensing rights
to sell its products. We believe that the Company will require approximately
$1,500,000, primarily to finance operations for the next 12 months The Company
intends to raise such additional financing through additional debt and equity
financings, of which there can be no assurance and for which there are no
commitments or definitive agreements. As of December 31, 1999, Global Health
owed approximately $2,090,000 to creditors and had a working capital deficit of
approximately $2,090,000. We have not reached satisfactory settlements with
Global Health's creditors and we have ceased the operations of Global Health and
may file for protection from creditors under the bankruptcy laws. There can be
no assurance that we will be able to achieve satisfactory settlements with our
creditors or secure such additional financing. The failure of Natural Health
Trends to achieve satisfactory settlements with our creditors and secure
additional financing would have a material adverse effect on our business,
prospects, financial conditions and results of operations and we may have to
curtail or cease operations.
-24-
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
Our consolidated financial statements, including the notes thereto,
together with the report of independent certified public accountants thereon,
are presented beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
-----------------------------------------------------------
None.
Our independent auditor's report on our consolidated financial statements
stated as of December 31, 1999 due to net losses and a working capital deficit,
there is substantial doubt about the company's ability to continue as a going
concern.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a).
----------------------------------------------------
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning the directors
and executive officers of the Company.
Name Age Position
Robert L. Richards 53 President, Chief Executive Officer and Director
Mark D. Woodburn 29 Chief Financial Officer, Secretary and Treasurer
Martin C. Licht 57 Director
Dirk D. Goldwasser 38 Director
The following is a brief summary of the background of each executive
officer and director of the Company:
The following is a brief summary of the background of each executive
officer and director of the Company:
-25-
Robert L. Richards is the Chief Executive Officer of Kaire Nutraceuticals
and became a director of the Company in April 1999 and president and chief
executive officer of Natural Health Trends in September 1999. He was a
co-founder and had been an executive officer and director of Kaire
International, Inc. since its inception in 1992.
Mark D. Woodburn became the chief financial officer of the Company in
April, 1999 and secretary in October 1999. He had been a secretary and a
director of Kaire International, Inc. from 1992 to the present.
Martin C. Licht has been a practicing attorney since 1967. Mr. Licht became
a director of the Company in July 1995.
Dirk D. Goldwasser has been a consultant/trader with Filin Corp. from
August 1996 to the present. From June 1994 to July 1996 he was a vice president
with Bankers Trust Securities Company. From December 1993 to June 1994 he was an
associate with Oppenheimer and Co. From 1988 to December 1993, he was director
of sales for Galbreath Asset Advisors/Loews Organization. Mr. Goldwasser became
a director in September 1998.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of (i) Forms 3 and 4 and amendments thereto
furnished to the company pursuant to Rule 16a-3(e), promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), during the Company's
fiscal year ended December 31, 1999, and (ii) Forms 5 and amendments thereto
and/or written representations furnished to the Company by any director, officer
or ten percent security holder of the Company (collectively "Reporting Persons")
stating that he or she was not required to file a Form 5 during the Company's
fiscal year ended December 31, 1999, it has been determined that no Reporting
Person is delinquent with respect to his or her reporting obligations set forth
in Section 16(a) of the Exchange Act, except that the Company did not receive
any Form 5's from its officers and directors or Form 3's from Messrs. Grace or
Goldwasser.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended December 31, 1997,
1998 and 1999 with respect to the following officers of the Company:
-26-
Annual Compensation Long Term Compensation
Name and Year Salary($) Bonus($) Other Restricted Securities LTIP All Other
Principal Position ---- --------- -------- Annual Stock Underlying Payouts Compensa-
- ------------------ Compensation Award(s) Options ($) tion($)
($)(1) $ SARs(#)
------------ --------- ------------ ------- -----------
Awards Payouts
Robert L. Richards,(2) 1999 $196,923 - - - - - -
President
Joseph P. Grace,(3) 1999 $133,333 - - - - - -
Former President 1998 $162,500
Sir Brian Wolfson, 1999 0 - - - - - -
Chairman of the Board (4)1998 50,000 - - - - - -
1997 0 - - - - - -
Neal R. Heller,(5) 1999 0 - - - - - -
President and Chief 1998 155,365 - - - - - -
Executive Officer 1997 201,500 - - - - - -
Elizabeth S. Heller(6) 1999 0 - - - - - -
Secretary 1998 50,885 - - - - - -
1997 141,100 - - - - - -
- --------------------------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Mr. Richards became the Company's President in September 1999.
(3) Mr. Grace resigned in September 1999 and will receive consulting fees of
$8,333 per month for a period of nine months commencing October 1, 1999.
(4) Sir Brian Wolfson waived $50,000 of his 1999 and 1997 salary.
(5) Mr. Woodburn became the Company's Chief Financial Officer in April 1999 and
Secretary in October 1999.
(6) Mr. Heller is no longer an officer or employee of the Company.
(7) Mrs. Heller is no longer an officer or employee of the Company.
Option Grants in Last Fiscal Year
We did not grant any options during the fiscal year ended December 31, 1999
to the named executive officers. During the fiscal year ended December 31, 1999,
none of the named executive officers exercised any options issued by us.
Consulting Agreements
In October 1999, the Company entered into a two year consulting agreement
with Domain Investments, Inc. pursuant to which Domain Investments Inc. will
provide the company with financial advisory services relating to mergers and
acquisitions and strategic alliances in consideration for the issuance of 95,000
shares of common stock.
In October 1999, the Company entered into a consulting agreement with
Meridian Equities Hong Kong, Ltd. pursuant to which Meridian Equities Hong Kong,
Ltd. will negotiate settlements with the Company's creditors in consideration
for the issuance of 185,000 shares of common stock.
-27-
Directors' Compensation
Directors of the Company do not receive any fixed compensation for their
services as directors. Directors are reimbursed for their reasonable
out-of-pocket expenses incurred in connection with performance of their duties
to the Company. We did not pay our directors any cash or other form of
compensation for acting in such capacity, although directors who were also
executive officers of the Company received cash compensation for acting in the
capacity of executive officers. Mr. Goldwasser received options to purchase
50,000 shares of common stock and Mr. Ellison, a former director, received
options to purchase 20,000 shares of common stock during the year ended December
31, 1998 and 20,000 shares of common stock for the year ending December 31, 1999
at an exercise price of $1.00 per share. See "?Executive Compensation." No
director received any other form of compensation for the fiscal year ended
December 31, 1998.
Stock Options
The 1998 Stock Option Plan (the "1998 Plan") provides for the granting of
options to key employees, including officers, non-employee directors and
consultants of the Company and its subsidiaries to purchase up to 200,000 shares
of common stock which are intended to qualify either as Incentive Stock Options
within the meaning of the Code or as options which are Nonstatutory Stock
Options.
The 1997 Stock Option Plan (the "1997 Plan") provides for the granting of
options to key employees, including officers, non-employee directors and
consultants of the Company and its subsidiaries to purchase up to 75,000 shares
of common stock which are intended to qualify either as incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (the "Code"), or as options which are not
intended to meet the requirements of such section ("Nonstatutory Stock
Options").
The Company has adopted the 1994 Stock Option Plan (the "1994 Plan") under
which up to 16,667 options to purchase shares of common stock may be granted to
key employees, officers, consultants and members of the Board of Directors of
the Company. Options granted under the 1994 Plan may be either Incentive Stock
Options or Nonstatutory Options.
The plans are administered by the Board of Directors. Under the plans, the
Board of Directors has the authority to determine the persons to whom options
will be granted, the number of shares to be covered by each option, whether the
options granted are intended to be incentive stock options, the manner of
exercise, and the time, manner and form of payment upon exercise of an option.
Incentive stock options granted under the Plans may not be granted at a
price less than the fair market value of the common stock on the date of grant
(or less than 110% of fair market value in the case of employees holding 10% or
more of the voting stock of the Company). Non-qualified stock options may be
granted at an exercise price established by the Stock Option Committee selected
by the Board of Directors, but may not be less than 85% of fair market value of
the shares on the date of grant. Incentive stock options granted under the plans
must expire not more than ten years from the date of grant, and not more than
five years from the date of grant in the case of incentive stock options granted
to an employee holding 10% or more of the voting stock of the Company.
-28-
In April 1999, the Company granted options to purchase shares of common
stock to the following individuals at an exercise price of $3.50 per share as a
bonus for the year ended December 31, 1998:
Person Number of Options
Joseph P. Grace.................... 150,000
Dirk Goldwasser ................... 50,000
Sir Brian Wolfson.................. 50,000
Martin C. Licht.................... 25,000
Kevin Underwood.................... 20,000
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The following table sets forth certain information as to the common stock
ownership of each of the Company's directors, executive officers, all executive
officers and directors as a group, and all persons known by the Company to be
the beneficial owners of more than five percent of the Company's common stock.
Number of Approximate
Name and Address(1) of Beneficial Owner(2) Shares(3) Percentage of Common Stock
Dirk D. Goldwasser 66,125(4) *
Martin C. Licht 35,300(5) *
Sir Brian Wolfson 9,850(6) *
Robert L. Richards --- *
Mark D. Woodburn --- *
All Executive Officers and Directors as a Group
(5 persons)
111,275 *
* Owns less than one (1%) percent.
(1) Unless otherwise noted, all persons named in the table have sole voting
and dispositive power with respect to all shares of common tock beneficially
owned by them.
(2) The address of each executive officer and director is c/o the Company,
380 Lashley Street, Longmont, CO 80501.
-29-
(3) The table does not include shares of common stock issuable upon the
conversion of the Company's Series E, F, G, H and J preferred stock. Pursuant to
the terms of the Series E, F, G H and J preferred stock, the holders thereof
generally are not entitled to convert such instruments to the extent that such
conversion would increase the holders' beneficial ownership of common stock to
an amount in excess of 4.9%, except in the event of mandatory conversion. On the
date of a mandatory conversion of the Series E, F, G, H and J preferred stock, a
change in control of the Company may occur, based upon the number of shares of
common stock issuable to such holders.
(4) Includes options to purchase 65,000 shares of common stock, but does
not include options to purchase 35,000 shares of common stock which are not
exercisable within 60 days.
(5) Includes options to purchase 9,000 shares of common stock which are
exercisable within 60 days, but does not include options to purchase 16,000
shares of common stock which are not exercisable within 60 days.
(6) Includes options to purchase 9,000 shares of common stock, but does not
include options to purchase 41,000 shares of common stock which are not
exercisable within 60 days.
* Represents less than 1% of applicable shares of common stock outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
In August 1998, we sold our three vocational schools that we operated as a
junior college in Orlando, Pompano Beach and Miami, Florida that offer training
and preparation for licensing in therapeutic massage and skin care to Florida
College of Natural Health, Inc. Neal R. Heller, our former President, Chief
Executive Officer, a principal stockholder and a former director, Elizabeth S.
Heller, his wife, our former secretary, a principal stockholder and a former
director, and Mr. Arthur Kaiser, a former director of ours, were at the time
principal shareholders of Florida College. The purchase price for the schools
was $1,778,333 in cash. In addition, Florida College assumed all of the
liabilities in connection with the operations of the schools together with
additional liabilities in the aggregate amount of approximately $2,559,249. We
were not released from such liabilities despite such assumption by Florida
College.
In connection with the sale of the schools, Mr. and Mrs. Heller's
employment agreements were canceled, and they each resigned as directors and
officers of ours. Mr. and Mrs. Heller also transferred to us 79,175 shares of
common stock which were canceled and options to purchase 20,000 shares of common
stock.
Martin C. Licht, a director of Natural Health Trends, was a member of law
firms which received $263,221 attributable to 1998 and $79,000 attributable to
1999.
-30-
As of December 31, 1999, we owed approximately $37,000 to Robert L.
Richards, the president and a director, in connection with liabilities assumed
in connection with the Kaire acquisition. In addition we owed two current
employees and one former employee approximately $112,000. Mr. Woodburn, our
chief financial officer, and Mr. Richards have guaranteed a loan to the Company
in the amount of $87,000 from STAR Financial Bank.
In January 2000, we entered into a licensing agreement with GLI, Inc., of
which our former president, Joseph Grace, is a principal. We licensed to GLI
certain rights to manufacture, distribute and sell the four Natural Relief 1222
products through various distribution channels and the exclusive right to the
trademark "Natural Relief 1222". The licensing agreement is for a percentage of
GLI's net sales for five years with a minimum royalty guaranteed. After five
years, the royalty is reduced to a lower percentage of net sales with no minimum
royalty guaranteed. As part of the licensing agreement, GLI agreed to purchase
any unused inventory of the product.
We believe that the transactions between us and any of our officers,
directors and/or 5% stockholders have been on terms no less favorable to the
Company than could have been obtained from independent third parties. Future
transactions, if any, between the Company and any of its officers, directors
and/or 5% stockholders will be on terms no less favorable to us than could be
obtained from independent third parties and will be approved by a majority of
the independent, disinterested directors. In addition, any forgiveness of
indebtedness of officers, directors or 5% stockholders will be approved by a
majority of disinterested directors who do not have an interest in the
transactions and who have access, at our expense, to counsel.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits
Index to Exhibits
- --------------
NUMBER DESCRIPTION OF EXHIBIT
2.1 Asset Purchase Agreement dated April 29, 1998 by and among
Natural Health Trends Corp., Neal Heller & Elizabeth S.
Heller and Florida College of Natural Health, Inc. (2)
2.2 Acquisition Agreement among the Company, NHTC Acquisition
Corp. and Kaire International, Inc. (the "Acquisition
Agreement").(3)
3.1 Amended and Restated Certificate of Incorporation of the
Company.(4)
3.2 Amended and Restated By-Laws of the Company.(4)
4.1 Specimen Certificate of the Company's Common Stock.(4)
4.2 Form of Class A Warrant.(4)
4.3 Form of Class B Warrant.(4)
4.4 Form of Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company for Class A and B
Warrants.(4)
-31-
4.5 1994 Stock Option Plan.(4)
4.6 1997 Stock Option Plan.(11)
4.7 1998 Stock Option Plan.(11)
4.8 Articles of Amendment of Articles of Incorporation of the
Company.(6)
4.9 Articles of Amendment of Articles of Incorporation- Series C
Preferred Stock.(7)
4.10 Articles of Amendment of Articles of Incorporation- Series E
Preferred Stock.(3)
4.11 Articles of Amendment of Articles of Incorporation- Series F
Preferred Stock.(3)
4.12 Articles of Amendment of Articles of Incorporation- Series G
Preferred Stock.(3)
4.13 Articles of Amendment of Articles of Incorporation- Series H
Preferred Stock.(3)
4.14 Form of Warrant in connection with the Acquisition
Agreement.(3)
4.15 Articles of Amendment of Articles of Incorporation - Series J Preferred
Stock (13)
10.1 Agreement among Natural Health Trends Corp. Health Wellness
Nationwide Corp., Samantha Haimes and Leonard Haimes.(8)
10.2 Leases (Two) for Registrant's Denver, Colorado
facilities.(11)
10.3 Manufacturing and Distribution Agreement between Kaire
International Inc. and ENZO Nutraceuticals, Ltd.(11)
10.4 Assignment of Patents Agreement dated May 23, 1997 between
MikeCo., Inc. and Troy Laboratories, Inc. and H. Edward
Troy.(11)
10.5 Agreement dated April 8, 1998 among Global Health
Alternatives, Inc. and MikeCo., Inc., Troy Laboratories,
Inc., H. Edward Troy, Kevin Underwood and Patrick
Killorin.(11)
10.6 Assumption Agreement and Amendment of Commercial Security
Agreement dated February 19, 1999 by and between STAR
Financial Bank, Kaire International, Inc. and NHTC
Acquisition Corp.(11)
10.7 Agreement dated September 17, 1999 between the Company and
Joseph P. Grace.(11)
10.8 Promissory Note in the amount of $150,000 from the Company
to Filin Corporation.(11)
10.9 Promissory Note in the amount of $50,000 from the Company to
H. Newcomb Eldredge.(11)
10.10 Promissory Note in the amount of $50,000 from the Company to
Capital Development S.A.(11)
10.11 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
10.12 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
10.13 Consulting Agreement between the Company and Meridian
Equities Hong Kong, Ltd.(10)
10.14 Consulting Agreement between the Company and Domain
Investments, Inc.(10)
10.15 Promissory Note in the amount of $70,000 from the Company to Domain
Investments, Inc. (12)
10.16 Licensing Agreement between GLI, Inc. and the Company(12)
21.1 List of Subsidiaries.(9)
23.1 Consent of Feldman Sherb Horowitz & Co P.C.(1)
27.1 Financial Data Schedule.(12)
-32-
- -------------------------
(1) Filed upon the initial filing of this Registration Statement.
(2) Previously filed with the Company's Proxy Statement on Schedule 14A,
dated May 14, 1998.
(3) Previously filed with the Company's Proxy Statement on Schedule 14A,
dated January 25, 1999.
(4) Previously filed with Registration Statement No. 33-91184.
(5) Previously filed with the Company's Form 8-K dated August 7, 1997.
(6) Previously filed with the Company's Form 10-QSB dated June 30, 1997.
(7) Previously filed with the Company's Form 10-QSB dated September 30,
1998.
(8) Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1996.
(9) Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1998.
(10) To be filed by Amendment.
(11) Previously filed with the Company's Registration Statement, File
No. 333-80465.
(12) Filed herewith.
(13) Previously filed with the Company's Form 8-K dated March 17, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
-33-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the company has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Natural Health Trends Corp.
Signature Title Date
/s/ Robert L. Richards President, Chief Executive
- ------------------------- Officer and Director May 9, 2000
Robert L. Richards
/s/ Mark D. Woodburn Chief Financial Officer, Secretary May 9, 2000
- ----------------------- (Principal Financial and Accounting
Mark D. Woodburn Officer)
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacitites and on the dates indicated.
Signature Title Date
/s/ Robert L. Richards Director May 9, 2000
- ------------------------
Robert L. Richards
/s/ Martin C. Licht Director May 9, 2000
- ---------------------
Martin C. Licht
/s/ Dirk D. Goldwasser Director May 9, 2000
- -----------------------
Dirk D. Goldwasser
-32-
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of Natural Health Trends
Corp. are included in response to Item 7:
PAGE
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Stockholders' Equity .................... F-5
Consolidated Statements of Cash Flows............................. F-6-7
Notes to Consolidated Financial Statements....................... F-8-23
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of Natural
Health Trends Corp. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, the financial position of Natural Health Trends Corp. and Subsidiaries
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years ended December 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred losses in
each of the last three fiscal years and as more fully described in Note 2, the
Company anticipates that additional funding will be necessary to sustain the
Company's operations through the fiscal year ending December 31, 2000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
March 10, 2000
F-2
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
1999 1998
----------- -------------
ASSETS
Current Assets
Cash $ 434,063 $ 294,220
Restricted cash 152,505 -
Account receivables 407,490 19,331
Inventory 847,212 314,367
Due from affiliate - 250,000
Prepaid expenses and other current assets 120,481 3,370
----------- -------------
Total Current Assets 1,961,751 881,288
Property and Equipment, net 567,065 78,436
Long Term Prepaids 54,228 498,125
Patents and Customer Lists 7,912,594 4,415,049
Goodwill 682,654 829,468
Deposits and Other Assets 75,607 150,350
----------- -------------
Total Assets $ 11,253,899 $ 6,852,716
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks written in excess of deposits $ 556,884 $ -
Accounts payable 4,511,772 1,685,313
Accrued expenses 404,458 139,566
Accrued bonus payable 472,503 -
Payroll taxes payable 668,390 -
Accrued expenses for discontinued operations - 314,593
Notes payable 854,684 314,684
Current portion of capital lease obligations 75,995 -
Notes payable related parties 112,363 -
Accrued consulting contract - 405,385
Other current liabilities 231,926 38,481
Deferred revenue 527,831 -
----------- -------------
Total Current Liabilities 8,416,806 2,898,022
Capital Lease Obligations, net
of current portion 53,158 -
----------- -------------
Total Liabilities 8,469,964 2,898,022
Common Stock Subject to Put - 380,000
Stockholders' Equity:
Preferred Stock, $1,000 par value;
1,500,000 shares authorized;
5,164, and 1,650 shares issued
and outstanding 5,163,695 1,650,000
Common Stock, $.001 par value;
50,000,000 shares authorized;
7,989,847 and 6,220,331 shares
issued and outstanding 7,990 6,221
Additional Paid in Capital 21,443,914 16,668,257
Accumulated Deficit (23,165,664) (14,369,784)
Deferred Compensation (666,000) -
Common Stock subject to put - (380,000)
----------- -------------
Total Stockholders' Equity 2,783,935 3,574,694
----------- -------------
Total Liabilities and
Stockholders' Equity $ 11,253,899 $ 6,852,716
=========== =============
See Notes to Consolidated Financial Statements
.
F-3
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues $ 15,269,631 $ 1,191,120 $ 1,133,726
Cost of sales 4,267,045 454,370 375,034
------------ ------------ ------------
Gross profit 11,002,586 736,750 758,692
Distributor commissions 7,229,758 - -
Write-down of patents and
goodwill 3,166,841 - -
Selling, general and
administrative expenses 7,723,157 3,277,047 4,194,044
------------ ------------ ------------
Operating loss (7,117,170) (2,540,297) (3,435,352)
Minority interest in loss
of subsidiaries 89,756 - -
Other (expense) (67,180) - -
Gain on dissolution 200,000 - -
Interest, net (663,289) (199,757) (868,721)
------------ ------------ ------------
Loss from continuing operations (7,557,883) (2,740,054) (4,304,073)
------------ ------------ ------------
Discontinued operations:
Income (loss) from discontinued
operations 304,593 (86,234) (2,919,208)
Gain (loss) on disposal - 722,640 (501,839)
------------ ------------ ------------
Gain (loss) from discontinued
operations 304,593 636,406 (3,421,047)
------------ ------------ -------------
Loss before extraordinary gain (7,253,290) (2,103,648) (7,725,120)
Extraordinary gain -
forgiveness of debt - 815,636 -
------------ ------------ -------------
Net loss (7,253,290) (1,288,012) (7,725,120)
Preferred stock dividends 1,542,590 2,011,905 733,333
------------ ------------ -------------
Net loss to common shareholders $ (8,795,880) $(3,299,917) $(8,458,453)
============ ============ =============
Basic and diluted loss per common share:
Continuing operations $ (1.26) $ (2.15) $ (11.60)
Discontinued operations 0.04 0.29 (7.88)
Extraordinary gain - 0.37 -
------------ ------------ -------------
Net loss to common shareholders $ (1.22) $ (1.49) $ (19.48)
============= ============ =============
Basic and diluted weighted common
shares used 7,233,297 2,210,458 434,265
============= ============ =============
See Notes to Consolidated Financial Statements.
F-4
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common
Additional Stock Deferred
Common Stock Preferred Stock Paid-in Accumulated Subject Stock
--------------------------------------
Shares Amount Shares Amount Capital Deficit to Put Compensation Total
----------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 308,650 $ 309 - $ - $6,242,689 $ (2,595,123) $(380,000) $ 96,250) $3,171,625
Sales of Convertible Series A - - 2,200 1,900,702 - - - - 1,900,702
preferred stock
Preferred stock dividends imputed - - - - 733,333 (733,333) - - -
Conversion of debentures 303,986 303 - - 1,207,172 - - - 1,207,475
Stock issued for acquisition 145,000 145 - - 2,899,855 - - - 2,900,000
Other issuances 500 1 - - 24,999 - - - 25,000
Issuances of stock options - - - - 400,000 - - - 400,000
Amortization of deferred stock - - - - - - - 82,500 82,500
compensation
Discount on debentures - - - - 433,333 - - - 433,333
Net loss - - - - - (7,725,120) - - (7,725,120)
----------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 758,136 758 2,200 1,900,702 11,941,381 (11,053,576) (380,000) (13,750) 2,395,515
Sales of Convertible Series B - - 300 261,500 - - - - 261,500
preferred stock
Sales of Convertible Series C - - 4,000 3,507,500 - - - - 3,507,500
preferred stock
Sales of Convertible Series D - - 75 75,000 - - - - 75,000
preferred stock
Sales of Convertible Series E - - 1,650 1,650,000 (210,500) - - - 1,439,500
preferred stock
Preferred stock dividends imputed - - - - 2,011,905 (2,011,905) - - -
Redemption of Convertible Series A
preferred stock - - (2,200) (1,900,702) (1,629,607) - - - (3,530,309)
Redemption of Convertible Series D
preferred stock - - (75) (75,000) - (16,291) - - (91,291)
Conversion of debentures 206,603 207 - - 188,418 - - - 188,625
Conversion of Convertible Series
B preferred stock 541,330 541 (300) (261,500) 260,959 - - - -
Conversion of Convertible Series
C preferred stock 3,608,296 3,608 (4,000) (3,507,500) 3,503,892 - - - -
Conversion of notes payable 1,195,473 1,196 - - 697,917 - - - 699,113
Redemption of shares re: school
sale (79,175) (79) - - (96,118) - - - (96,197)
Shares cancelled in reverse
stock split (10,332) (10) - - 10 - - - -
Amortization of deferred stock - - - - - - - 13,750 13,750
compensation
Net loss - - - - - (1,288,012) - - (1,288,012)
----------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 6,220,331 6,221 1,650 1,650,000 16,668,257 (14,369,784) (380,000) - 3,574,694
Issuance of Convertible Series
F preferred stock - - 2,800 2,800,000 - - - - 2,800,000
Issuance of Convertible Series
G preferred stock - - 350 350,000 - - - - 350,000
Sale of Convertible Series
H preferred stock - - 1,400 1,400,000 (198,985) - - - 1,201,015
I preferred stock - - 516 516,000 - - - - 516,000
Issuance of common stock warrants - - - - 682,000 - - - 682,000
Preferred stock dividends imputed - - - - 632,455 (632,455) - - -
Accrued preferred stock dividends - - - - 910,135 (910,135) - - -
Conversion of Convertible Series
I preferred stock 160,104 160 (516) 515,840 (516,000) - - - -
Conversion of Convertible Series
E preferred stock 603,130 603 (610) (610,000) 609,397 - - - -
Exercise of Series E warrants 185,769 186 - - (186) - - - -
Conversion of Convertible Series
H preferred stock 255,254 255 (426) (426,305) 426,050 - - - -
Deferred stock compensation - - - - - - - (666,000) (666,000)
Exercise of put - - - - - - 380,000 - 380,000
Shares issued for services 433,018 433 - - 1,122,383 - - - 1,122,816
Shares issued for interest 132,241 132 - - 76,568 - - - 76,700
Net loss - - - - (7,253,290) - - (7,253,290)
----------------------------------------------------------------------------------------------------
BALANCE - December 31, 1999
7,989,847 $7,990 5,164 $5,163,695 $21,443,914 $(23,165,664) $ - $ (666,000) $2,783,935
====================================================================================================
See Notes to Consolidated Financial Statements.
F-5
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
December 31,
-------------------------------------------
1999 1998 1997
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $(7,253,290) $(1,288,012) $(7,725,120)
Adjustments to reconcile net loss to net
cash used in operating activities:
(Gain) on dissolution ..................................... (200,000) -- --
Loss from discontinued operations ......................... (304,593) 86,234 2,919,208
(Gain) loss on disposal of discontinued operations ........ -- (722,640) 501,839
Depreciation and amortization ............................. 374,154 549,668 255,345
Loss on disposal of fixed asset ........................... (3,802) -- --
Interest settled by issuance of stock ..................... 122,868 112,971 116,065
200,000
Write down of patents and goodwill ........................ 3,166,841 --
Amortization of note payable discount ..................... -- -- 433,333
(815,636)
Gain on forgiveness of debt ............................... (81,260) --
Changes in assets and liabilities, net of business combination:
(Increase) decrease in accounts receivable ................. 228,684 141,774 (62,446)
(Increase) decrease in inventories ......................... 253,033 405,359 (219,144)
(Increase) decrease in prepaid expenses .................... (134,364) 7,970 102,353
(Increase) decrease in prepaid royalties ................... 498,125 (491,825) --
Decrease in deposits and other assets ...................... 283,200 42,514 66,775
Increase in accounts payable ............................... 1,113,501 154,963 1,380,509
Increase (decrease) in accrued expenses .................... 179,690 (698,805) 506,021
Increase (decrease) in accrued expenses for
discontinued operations .................................... (10,000) (41,469) 356,062
Increase in accrued interest ............................... 352,906 -- --
Increase in accrued consulting contract .................... -- 45,254 360,131
Increase in deferred revenue ............................... 453,744 -- --
Increase (decrease) in other current liabilities ........... 245,478 (121,339) 33,397
----------- ----------- ------------
Net cash used in continuing operations ........................ (715,085) (2,433,019) (975,672)
Net cash used in discontinued operations ...................... -- (2,057,177) (3,455,155)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ........................... (715,085) (4,490,196) (4,430,827)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................... (127,077) (7,510) (32,658)
Business acquisitions net of assets acquired ................... (1,353,573) -- --
Increase in cash overdraft ..................................... (168,792) -- --
Increase in restricted cash .................................... (27,505) -- --
Proceeds from disposition of discontinued operations ........... -- 4,349,700 --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ............. (1,676,947) 4,342,190 (32,658)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due to affiliate ........................ 250,000 (250,000) --
Loan origination costs - preferred stock ....................... -- -- (299,299)
Proceeds from preferred stock .................................. 3,724,195 5,283,000 2,200,000
Redemption of preferred stock .................................. (1,552,305) (3,621,600) --
Proceeds from sale of debentures ............................... -- -- 1,626,826
Payments of debentures ......................................... -- -- (355,650)
Proceeds from notes payable and long-term debt ................. 581,899 -- 850,000
Payments of notes payable and long-term debt ................... (471,914) (940,000) (8,692)
Redemption of common stock ..................................... -- (96,197) --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....................... 2,531,875 375,203 4,013,185
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ................................. 139,843 227,197 (450,300)
CASH, BEGINNING OF YEAR ......................................... 294,220 67,023 517,323
----------- ----------- -----------
CASH, END OF YEAR ............................................... $ 434,063 $ 294,220 $ 67,023
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-6
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
December 31,
------------------------------------
1999 1998 1997
------------------------------------
DISCLOSURE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
(1) Conversion of preferred stock to common stock $ 1,552,305 $ 3,769,000 $ -
(2) Conversion of debentures, notes payable and
related accrued interest to common stock $ - $ 887,738 $ 1,207,475
(3) Stock and warrants issued for acquisition $ - $ - $ 2,900,000
(4) Preferred stock dividends $ 1,542,590 $ 2,011,905 $ -
See Notes to Consolidated Financial Statements.
F-7
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
1. ORGANIZATION
Natural Health Trends Corp. (formerly known as Florida Institute of Massage
Therapy, Inc.) (the "Company") was incorporated under the laws of the State of
Florida in December 1988.
In 1996, the Company opened two natural health care centers which provided
multi-disciplinary complementary health care in the areas of alternative and
nutritional medicine. These facilities were closed during 1997 and accordingly
are being accounted for as discontinued operations.
In July 1997, the Company acquired Global Health Alternatives, Inc.,
("Global") a company incorporated in Delaware, which is in the business of
marketing and distribution of over-the-counter homeopathic pharmaceutical health
products. Global operates its business through its wholly owned subsidiaries:
Ellon, Inc. ("Ellon"), Maine Naturals, Inc. ("MNI") and Natural Health
Laboratories, Inc.
In 1998, the Company sold its schools and related facilities, that offered
curricula in therapeutic massage training and skin care therapy. These
operations are being accounted for as discontinued operations.
In February 1999, the Company's newly formed, wholly-owned subsidiary,
Kaire Nutraceuticals, Inc., ("Kaire Nutraceuticals") acquired substantially all
the assets of Kaire International Inc., ("Kaire"). Kaire Nutraceuticals is
engaged in the distribution of health and personal care products through network
marketers throughout the United States, Canada, New Zealand, Australia, and
Trinidad and Tobago. Included in the purchase was shares of common stock owned
by Kaire in each of its wholly-owned and /or majority owned subsidiaries
including, but not limited to Kaire New Zealand Ltd., , Kaire Australia Pty.
Ltd., Kaire Trinidad, Ltd., and Kaire Europe Ltd., (subsequently closed in March
2000). Kaire Nutraceuticals acquired 100% of the common stock of Kaire Europe,
Ltd. and Kaire Trinidad, Ltd., and it acquired 51% of the common stock of Kaire
New Zealand Ltd. and Kaire Australia Pty. Ltd.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation-The accompanying consolidated financial
statements include the accounts of Natural Health Trends Corp. and its
subsidiaries. All material inter-company transactions have been eliminated in
consolidation.
B. Accounts Receivable-Accounts receivable are stated net of allowance for
doubtful accounts of approximately $0 for 1999 and $2,000 for 1998.
C. Inventories-Inventories consisting primarily of nutritional supplements
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
D. Property and Equipment-Property and equipment are carried at cost.
Depreciation is computed using the straight-line method over the useful lives of
the various assets.
E. Cash Equivalents-Cash equivalents consist of money market accounts and
commercial paper with an initial term of fewer than three months. For purposes
of the statement of cash flows, the Company considers highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
F-8
F. Earnings (Loss) Per Share-In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS 128") "Earnings Per Share", which became effective for both interim and
annual financial statements for periods ending after December 15, 1997. SFAS 128
requires a presentation of "Basic" and (where applicable) "Diluted" earnings per
share. Generally, Basic earnings per share is computed on only the weighted
average number of common shares actually outstanding during the period, and the
Diluted computation considers potential shares issuable upon exercise or
conversion of other outstanding instruments where dilution would result.
Furthermore, SFAS 128 requires the restatement of prior period reported earnings
per share to conform to the new standard. The per share presentations in the
accompanying financial statements reflect the provisions of SFAS 128. Diluted
earnings per share is not being shown due to the fact that the years ended
December 31, 1999, 1998 and 1997 show a net loss and the conversion of the
preferred stock and common stock outstanding during those years would be
anti-dilutive.
G. Accounting Estimates-The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
H. Income Taxes-Pursuant to Statement of Financial Accounting Standards No.
109 ("SFAS 109") "Accounting for Income Taxes", the Company accounts for income
taxes under the liability method. Under the liability method, a deferred tax
asset or liability is determined based upon the tax effect of the differences
between the financial statement and tax basis of assets and liabilities as
measured by the enacted rates which will be in effect when these differences
reverse.
I. Fair Value of Financial Instruments-The carrying amounts reported in the
balance sheet for cash, receivables, accrued expenses, and long-term debt
approximate fair value based on the short-term maturity of these instruments.
J. Stock Based Compensation-The Company accounts for stock transactions in
accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees."
In accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting For Stock-Based Compensation," the Company adopted the pro
forma disclosure requirements of SFAS 123.
K. Impairment of Long-Lived Assets-The Company reviews long-lived assets,
certain identifiable assets and goodwill related to those assets on a quarterly
basis for impairment whenever circumstances and situations change such that
there is an indication that the carrying amounts may not be recovered. At
December 31, 1999 and 1998, the Company recorded a charge against patents and
goodwill upon such review (Note 4).
L. Basis of Presentation-The Company had a working capital deficiency of
approximately $6,597,000 and $2,017,000 for the years ended December 31, 1999
and 1998, and they recorded net losses of approximately $7,152,000 and
$1,288,000 respectively, that raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continued existence is
dependent on its ability to obtain additional debt or equity financing and to
generate profits from operations.
M. Royalty Expense-Royalties that are incurred on a per unit sold basis are
included in Cost of Sales. Additional royalty amounts incurred to meet
contractual minimum levels are classified as Selling, General and Administrative
Expenses.
N. Reclassifications-The Company has reclassified certain expenses in its
consolidated statements of operations for the year ended December 31, 1997 as a
result of the sale of its schools and related facilities. These changes had no
significant impact on previously reported results of operations or stockholders'
equity.
F-9
O. Foreign Currency Translations-Assets and liabilities of subsidiaries are
translated at the rate of exchange in effect on the balance sheet date; income
and expenses of subsidiaries are translated at the average rates of exchange
prevailing during the year or period then ended. The related transaction
adjustments are reflected as a cumulative translation adjustment in consolidated
stockholders' equity. Foreign currency gains and losses resulting from
transactions are included in results of operations in the period in which the
transaction occurred.
P. Revenue Recognition-Kaire Nutraceuticals sells its product directly to
independent distributors. Sales are recorded when products are shipped. Kaire
Nutraceuticals has a program that provides a 100% refund (less shipping and
handling) to all end users, for any unopened product that is returned within 30
days from the date of purchase in resalable condition. Kaire Nutraceuticals
provides a 100% product exchange for any product that does not meet customer
satisfaction if returned within 30 days under this program. An associate is
allowed 90 days from order date for exchange or refund only if product bottles
(empty, partial or full) are returned. SFAS No. 48 "Revenue Recognition When
Right of Return Exists" requires that Kaire Nutraceuticals accrue losses that
may be expected from sales returns. Kaire Nutraceuticals monitors its historical
sales returns and accrues a liability for sales returns when and if sales
returns become significant.
Q. Comprehensive Income-Subsequent to the acquisition of Kaire, the Company
has adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130")
"Reporting Comprehensive Income". Comprehensive income is comprised of net loss
and all changes to the consolidated statements of stockholders' equity, except
those due to investments by stockholders, changes in paid in capital and
distribution to stockholders. For the year ended December 31, 1999, the Company
has deemed comprehensive income to be negligible, due to the purchase of Kaire
in February, and has reported comprehensive income as such.
R. Concentration of Risk-The Company maintains its cash accounts in several
bank accounts. Accounts in the United States are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. The Company's cash balance in some
of its bank accounts generally exceeds the insured limits.
Kaire Nutraceuticals sells its products through network marketers
throughout the United States, Canada, New Zealand, Australia, and Trinidad and
Tobago. Credit is extended for returned checks and/or until credit card
purchases have cleared the bank.
Credit losses, if any, have been provided for in the financial statements
and are based on management's expectations. The Company's accounts receivable
are subject to potential concentrations of credit risk. The Company does not
believe that it is subject to any unusual or significant risk, in the normal
course of business.
S. Restricted Cash-Kaire Nutraceuticals has three (3) restricted cash
accounts (i) two (2) with credit card processing companies. The primary purpose
of these accounts is to provide a reserve for potential uncollectible amounts
and chargebacks by Kaire Nutraceuticals' credit card customers. The credit card
processing companies may periodically increase the restricted cash account. The
amount on deposit is calculated at 2% of net sales over a rolling six month
average and (ii) a third account is maintained with a bank as security for a
note payable which was refinanced in January 2000 using this restricted cash (of
approximately $27,000), to pay down a portion of the note principal (see Note
5).
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following:
December 31,
----------------
1999 1998
------- ------
Equipment, furniture and fixtures 5 to 7 $641,579 $91,795
Leasehold improvements 3 to 5 - 4,190
------- ------
641,579 95,985
Less: Accumulated depreciation (74,514) (17,549)
------- ------
$567,065 $78,436
======= ======
F-10
4. PATENTS, CUSTOMER LISTS AND GOODWILL
Patents and customer lists consisted of the following:
December 31,
---------------------------------
1999 1998
----------------- ---------------
Patents and trademarks, net of accumulated
amortization of $1,076,984 and $873,540
for 1999 and 1998 respectively $ 1,739,736 $ 4,374,674
Customer lists, net of accumulated
amortization of $29,316 and $16,625 for
1999 and 1998 respectively. 6,172,825 40,375
----------------- ---------------
$ 7,912,594 $ 4,415,049
================= ===============
Goodwill, net of accumulated
amortization of $89,319 and $28,071
for 1999 and 1998 respectively $ 682,654 $ 829,468
================= ===============
The goodwill, the patents and trademarks, and the customer lists arose in
connection with the acquisitions of businesses made by the Company in 1997 and
1999. The goodwill, the patents and trademarks, and the customer lists are being
amortized over their estimated useful lives which are 5 to 10 years for the
customer lists, 15 years for goodwill and 11 and 17 years for patents. In 1999
and 1998, the Company under Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed" evaluated the recoverability of its patent and
trademarks, by comparing its carrying amount to income generated. As a result of
such evaluation the Company recorded a charge of approximately $3,166,841 and
$200,000 against the patent and trademarks in 1999 and 1998, respectively.
In connection with the acquisition of Kaire in February 1999, the Company
has recognized $7,719,459 in goodwill and customer list (Note 18).
Goodwill $771,947
Customer List 6,947,512
---------
$7,719,459
=========
F-10
5. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
----------------
1999 1998
---- ----
(i) $375,000 note payable, non-interest $239,865 $239,865
bearing, due October 1, 2000 (less
unamortized discount based on imputed
interest rate of 12% per annum ($41,385))
Initial payment of $93,750 on October 15,
1996, then monthly payments of $7,813
beginning on November 1, 1997 and ending
October 1, 2000
(i) $75,000 note payable, non-interest 47,819 47,819
bearing, due September 15, 1998
(less unamortized discount based on
imputed interest rate of 12% per
annum ($1,349))
(i) $69,000 note payable, non-interest 27,000 27,000
bearing, due October 15, 1997.
(ii)$120,000 note payable, 10% interest, due 120,000 -
January 15, 2000
(iii)$270,000 notes payable, 10% interest, 270,000 -
due on demand
(iv) $150,000 note payable, 10% interest, 150,000 -
due on demand -------- ---------
$854,684 $314,684
======== =========
(i) The above notes were issued upon the purchase of Ellon, Inc. in 1996.
Scheduled payments have not been made since 1997, due to disputes with the
note holders, and accordingly all unpaid balances are included in notes
payable.
(ii) In accordance with the asset purchase agreement of Kaire (Note 18), the
Company assumed a note payable to a bank that bears interest at 10.5% per
annum and is collateralized by inventories, accounts receivable, certain
assets, and the personal guarantees of certain officers and directors of
Kaire. The term loan is payable in monthly principal installment of $5,000
plus accrued interest and is due in January 2000. In January 2000, this
note was refinanced at the same terms and is now due July 15, 2001.
(iii)In the event the note is not paid on demand, the holder has the option to
convert the note at any time into shares of common stock at 40% of the five
day average closing bid price of the common stock on the five days
preceding notice of conversion. Due to the beneficial conversion feature in
this note, imputed interest of $405,000 has been recorded.
(iv) In October 1999, the Company amended the promissory note to provide that
the note is payable upon demand and is convertible into shares of common
stock at a discount equal to 40% of the average closing bid price of the
common stock on three days preceding notice of conversion. Due to the
beneficial conversion feature in this note, imputed interest of $225,000
has been recorded.
6. NOTES PAYABLE RELATED PARTY
As of December 31, 1999, the Company owed $112,363 to four of its
executive officers and directors. All four notes bear interest at 10% and are
payable upon demand.
7. PAYROLL TAX AND SALES TAX LIABILITIES
During 1999, the Company has not made its payroll tax deposits with the
Internal Revenue Service ("IRS") and the various state taxing authorities on a
timely basis. The Company has filed all required payroll tax returns and is
currently negotiating a payment plan with the IRS. As of December 31, 1999, the
Company owes approximately $668,400 of delinquent payroll tax liabilities
including interest and penalties. The Company's failure to pay its delinquent
payroll tax liabilities could result in tax liens being filed by various taxing
authorities.
F-12
During 1999, the Company did not make its sales tax deposits with the
various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of December 31, 1999, the Company owed
approximately $189,900 in current and delinquent sales taxes which is included
in other current liabilities. The Company's failure to pay its delinquent sales
taxes could result in tax liens being filed by various taxing authorities.
8. STOCKHOLDERS' EQUITY
A Common Stock-The Company is authorized to issue 50,000,000 shares of
common stock, $.001 par value share. In October 1999, the Company entered into a
two year consulting agreement with a consultant pursuant to which the consultant
will provide the Company with advisory services relating to mergers and
acquisitions and strategic alliances in consideration for the issuance of 95,000
shares of common stock.
In October 1999, the Company entered into a consulting agreement with a
consultant pursuant to which the consultant will negotiate settlements with the
Company's creditors in consideration for the issuance of 185,000 shares of
common stock.
In November 1999, the Company issued 125,000 shares of common stock
pursuant to a settlement agreement.
In November 1999, the Company issued 3,018 shares of common stock to a
former employee pursuant to an employment agreement.
In November 1999, the Company issued 25,000 shares of common stock to a
Director in connection with legal services performed on the Company's behalf.
B. Preferred Stock-The Company is authorized to issue a maximum of
1,500,000 shares of $.001 par preferred stock, in one or more series and
containing such rights, privileges and limitations, including voting rights,
dividend rates, conversion privileges, redemption rights and terms, redemption
prices and liquidation preferences, as the Company's board of directors may,
from time to time, determine.
Series A Preferred Stock-In June 1997, the Company sold 2,200 shares of its
convertible Series A Preferred Stock for $1,000 a share realizing net proceeds
of $1,900,702. The preferred stock pays dividends at the rate of 8% per annum
payable in cash or shares of the Company's common stock valued at 75% of the
closing bid price. The preferred stock has a liquidation preference of $1,000
per share. The preferred stock is convertible commencing 60 days after issuance,
provided that a registration statement covering the resale of the shares of
common stock is effective, at the rate of 75% of the average closing bid price
of the common stock over the five days preceding the notice of redemption. The
Company has the right to redeem the preferred stock for 240 days after the date
of issuance at the rate of 125% of the stated value. If a registration statement
is not deemed effective within 60 days of the date of issuance, then the Company
is obligated to pay a penalty at the rate of 2.5% per month.
In 1998 all 2,200 shares of Series A preferred stock were redeemed for
$3,530,309, inclusive of face amount, redemption value, penalties and dividends.
Series B Preferred Stock. In February 1998, the Company issued 300 shares
of Series B Preferred Stock with a stated value of $1,000 per share realizing
net proceeds of $261,500. The preferred stock and the accrued dividends thereon
are convertible into shares of the Company's common stock at a price equal to
the lower of 70% of the average closing bid price of the common stock for the
three trading days immediately preceding the notice of conversion or $0.625 per
share. Due to the beneficial conversion features in the issuance of this series
of preferred stock, an imputed dividend of $128,572 has been recorded.
F-13
In 1998 all 300 shares of Series B Preferred Stock converted to a total of
541,330 shares of the Company's common stock.
Series C Preferred Stock. In April 1998, the Company issued 4,000 shares of
Series C Preferred Stock with a stated value of $1,000 per share realizing net
proceeds of $3,507,500. The preferred stock and the accrued dividends thereon
are convertible into shares of the Company's common stock at a conversion price
equal to 75% of the average closing bid prices of the common stock for the five
day trading period ending on the day before conversion date, or 100% of the
closing bid price on the day of funding. Due to the beneficial conversion
features in the issuance of this series of preferred stock, an imputed dividend
of $1,333,333 has been recorded.
In 1998 all 4,000 shares of Series C Preferred Stock converted to a total
of 3,608,296 shares of the Company's common stock.
Series D Preferred Stock-In July 1998, the Company issued 75 shares of
Series D Preferred Stock with a stated value of $1,000 per share. The stated
value and the accrued dividends thereon are convertible into shares of the
Company's common stock at a conversion price equal to 70% of the average closing
bid prices of the common stock for the five day trading period ending on the day
before conversion date.
In August 1998 all 75 shares of Series D Preferred Stock were redeemed for
a total of $91,291.
Series E Preferred Stock. In August 1998, the Company issued 1,650 shares
of Series E Preferred Stock with a stated value of $1,000 per share realizing
net proceeds of $1,439,500. The preferred stock and the accrued dividends
thereon are convertible into shares of the Company's common stock at a
conversion price equal to the lower of 75% of the average closing bid price of
the common stock for the five trading days immediately preceding the conversion
date or 100% of the closing bid price on the day of funding. This series of
stock is convertible commencing 60 days after issuance. Due to the beneficial
conversion features in the issuance of this series of preferred stock, an
imputed dividend of $550,000 has been recorded.
If the Company does not have an effective common stock registration 120
days subsequent to the issuance of Series E Preferred Stock, a 2% penalty on the
face amount of $1,650,000 accrues for every 30 days without an effective
registration statement. As of the year ended December 31, 1999 the Company has
recorded a charge of $369,800 due to non-compliance with this clause.
In the year ended December 31, 1999, $159,510 in accrued dividends was
recorded for the period such stock was outstanding.
In September 1999, 610 shares of Series E Preferred Stock was converted to
603,130 of the Company's common stock.
Series F Preferred Stock. In February 1999, the Company issued 2,800 shares
of Series F Preferred Stock with a stated value of $1,000 per share realizing a
net value of $2,800,000. This issuance is in accordance with the asset purchase
agreement of Kaire (Note 18). The preferred stock pays a dividend at 6% per
annum and is payable upon conversion into either cash or common stock. The
preferred stock and the accrued dividends thereon are convertible into shares of
the Company's common stock at a conversion price equal to 95% of the average
closing bid price of the Common stock for the three trading days immediately
preceding the date on which the Company receives notice of conversion from a
holder. The Company is permitted at any time, on five days prior to written
notice, to redeem the outstanding preferred stock at a redemption price equal to
the stated value and the accrued dividends thereon.
In the year ended December 31, 1999, the Company recorded an imputed
dividend of $147,368 due to the beneficial conversion features in the Series F
Preferred Stock. An additional $145,135 in accrued dividends was recorded for
the period such stock was outstanding.
F-14
Series G Preferred Stock. In February 1999, the Company issued 350 shares
of Series G Preferred Stock with a stated value of $1,000 per share realizing a
net value of $350,000. The preferred stock pays a dividend at the rate of 6% per
annum. The preferred stock and the accrued dividends thereon are convertible
into shares of the Company's common stock at a conversion price equal to 95% of
the average closing bid price of the common stock for the three trading days
immediately preceding the date on which the Company receives notice of
conversion. The Company is permitted at any time, on five days prior written
notice, to redeem the outstanding preferred stock at a redemption price equal to
the stated value and the accrued dividends thereon.
In the year ended December 31, 1999, the Company recorded an imputed
dividend of $18,421 due to the beneficial conversion features in the Series G
Preferred Stock. An additional $18,142 in accrued dividends was recorded for the
period such stock was outstanding.
Series H Preferred Stock. In March and April 1999, the Company sold 1,400
shares of Series H Preferred Stock with a stated value of $1,000 per share
realizing net proceeds of $1,201,015. The preferred stock pays a dividend at the
rate of 8% per annum. The preferred stock and the accrued dividends thereon are
convertible into shares of the Company's common stock at a conversion price
equal to the lower of the closing bid price on the date of issuance or 75% of
the average closing bid price of the common stock for the three trading days
immediately preceding the date on which the Company receives notice of
conversion from a holder.
If the Company does not have an effective common stock registration 120
days subsequent to the issuance of the Series H Preferred Stock, a 2% penalty on
the face amount of $1,400,000 accrues for every 30 days without an effective
registration statement. As of the year ended December 31, 1999, the Company
recorded a charge of $123,500 due to non-compliance with this clause.
In the year ended December 31, 1999, the Company recorded an imputed
dividend of $466,667 due to the beneficial conversion features in the Series H
Preferred Stock. An additional $79,155 in accrued dividends was recorded for the
period such stock was outstanding.
During the year ended December 31, 1999, the Company had converted 426
shares of the Series H Preferred Stock into 255,254 shares of common stock.
Series I Preferred Stock. In February 1999, the Company authorized the
issuance of 516 shares of Series I Preferred Stock with a stated value of $1,000
per share realizing a net value of $516,000. These shares were issued in
connection to services rendered in connection with the Kaire acquisition. The
preferred stock pays a dividend at the rate of 8% per annum. The preferred stock
and the accrued dividends thereon are convertible into shares of the Company's
common stock at a conversion price equal to the average closing bid price of the
Common stock for the five trading days immediately preceding the date of
conversion.
In the year ended December 31, 1999, $16,048 in accrued dividends was
recorded for the period such stock was outstanding.
In July 1999 all 516 shares, plus the accrued interest payable of $16,048
of Series I Preferred stock was converted to 160,104 shares of the Company's
common stock.
C. Convertible Debentures-In April 1997, the Company issued $1,300,000 of
6% convertible debentures (the "Debentures"). Principal on the Debentures is due
in March 2000. The principal and accrued interest on the Debentures are
convertible into shares of common stock of the Company. The Debentures are
convertible into shares of common stock at a conversion price equal to the
lesser of $1.4375 or 75% of the average closing bid price of the common stock
for the five trading days immediately preceding the notice of conversion. In
June 1997, the Company repaid $300,000 of the Debentures. As of December 1997,
$820,233 of such debentures were converted into 303,986 shares of common stock.
As of December 1998, the remaining $179,767 were converted into 206,603 shares
of common stock.
F-15
In conjunction with the issuance of the Debentures, the Company issued
warrants to purchase an aggregate of 5,000 shares of Common Stock. The warrants
are exercisable until April 3, 2002. Warrants to purchase 2,500 shares of Common
Stock are exercisable at $97.50 per share, and the balance are exercisable at
$130.00 per share.
D. Options-During the quarter ended September 30, 1997, the Company's
president and secretary were issued an aggregate of 20,000, 10 year options,
exercisable at $.001 per share. The Company has recorded a non-cash expense of
$400,000 representing the difference between the exercise price and the fair
value of the common stock.
In connection with the sale of the schools, to the Company's former
president and secretary, the above options were canceled.
In April 1999, the Company issued an aggregate of 295,000, 5 year options,
exercisable at $3.50 per share, to the Company's president, chairman of the
board of directors, two directors, and an employee. The options were granted at
fair market value, accordingly, no expense has been recognized.
In connection with a licensing agreement, in February 2000, to the
Company's former president, 150,000 of the above options were canceled.
E. 1 For 40 Reverse Stock Split-On April 6, 1998, the Company effected a 1
for 40 reverse split of its common stock, amending its certificate of
incorporation to provide for the authority to issue 50,000,000 shares of $.001
par value common stock. All per share data in these financial statements is
retroactively restated to reflect this reverse split.
F. Conversion of Notes Payable-In May 1998 the Company converted $595,000
of its 12.5% promissory notes, plus accrued interest of $104,113 into 1,195,473
shares of common stock.
G. Redemption of Shares-In connection with the sale of the schools, the
Company redeemed 79,175 shares of common stock from its former president and
secretary.
9. DISCONTINUED OPERATIONS
During the third quarter of 1998, the Company sold its three vocational
schools and certain related businesses. Net assets of the schools were
approximately $2,875,285 consisting primarily of furniture and equipment,
accounts receivable and goodwill. Liabilities were approximately $2,559,249.
Accordingly, the results of the vocational school operations are shown
separately as "discontinued operations."
Revenues of the discontinued vocational school business were $3,351,959 in
1998 and $5,858,790 for the full year 1997.
In November 1998, the Company sold an office building located in Pompano
Beach, Florida that previously accommodated the Company's corporate headquarters
and one of its vocational schools. Gross proceeds were approximately $2,900,000,
less net book value of $3,238,000 plus closing and financing costs of $498,000.
During the third quarter of 1997, the Company reached a decision to
discontinue the medical clinic line of business. Net assets of the medical
clinics were approximately $1,509,405 consisting primarily of furniture and
equipment, accounts receivable and goodwill. Liabilities were approximately
$213,987. The Company has accrued an estimated loss on disposal of approximately
$716,193 representing primarily an accrued employment contract and lease
terminations. Accordingly, the results of the clinic operations are shown
separately as "discontinued operations." As of December 31, 1999 accrued
expenses on this discontinued operation totaled $0.
Revenues of the discontinued clinic line of business were $1,754,066 for
1997.
F-16
10. KAIRE EUROPE, LTD.
In March 2000, Kaire Europe, Ltd. (a subsidiary of the Company) which had
been served an Involuntary Winding Up Order was placed in liquidation. At
December 31, 1999, the remaining assets and liabilities were written off,
resulting in a $200,000 gain.
11. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS 109.
SFAS No. 109 requires the recognition of deferred tax assets and liabilities for
both the expected impact of differences between the financial statement and tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. SFAS 109 additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. At December 31, 1999 and 1998, the Company
had net deferred tax assets of approximately $7,000,000 and $4,464,000,
respectively. The Company has established a valuation allowance for the full
amount of such deferred tax assets at December 31, 1999 and 1998, as management
of the Company has not been able to determine that it is more likely than not
that the deferred tax assets will be realized.
The following table reflects the Company's deferred tax assets and
(liabilities) at December 31, 1999 and 1998:
December 31,
----------------------
1999 1998
---- ----
Net operating loss deduction $7,000,000 $4,464,000
Valuation allowance (7,000,000) (4,464,000)
---------- -----------
$ -- $ --
========== ===========
The provision for income taxes (benefits) differs from the amount computed
by applying the statutory federal income tax rate to income loss before income
taxes as follows:
Year Ended December 31,
----------------------------
1999 1998
---- ----
Income tax (benefit) computed at
statutory rate $(2,500,000) $(451,000)
Effect of permanent differences 450,000 -
Tax benefit not recognized (2,150,000) 451,000
------------ ----------
Provision for income taxes (benefit) $ - $ -
============ ==========
The net operating loss carryforward at December 31, 1999 was approximately
$15,145,000 and expires in the years 2012 to 2019.
F-17
12. COMMITMENTS AND CONTINGENCIES
A. Leases-The Company leases its Longmont, Colorado office under a lease
expiring in 2000. Rent expense for the years ended December 31, 1999 and 1998
was $240,000 and $24,000, respectively. In October 1999, the Company
consolidated it's operations from Portland, Maine to Longmont, Colorado. The
Company is liable for lease payments in Maine until November 2001. In January
2000, the Company assigned a portion of it's Maine obligation to a third party
with consent. In 1998 Corporate headquarters rented facilities in New York City.
In December 1999, the Company consolidated it's Corporate headquarters to
Longmont, Colorado. Minimum rental commitments for the Longmont, Portland and
New York City facilities over the next five years are as follows:
2000 $65,461
2001 23,840
2002 19,934
2003 -
2004 -
B. Employment Agreement-During the quarter ended March 31, 1997, the
Company renegotiated with a former stockholder of Sam Lilly, Inc. with whom it
was obligated under an employment agreement, to cancel the employment agreement
and replace it with a consulting agreement. The consulting agreement required
the individual to provide services to the Company for one day per week through
December 1998 at the rate of $5,862 per week. The Company determined that the
future services, if any, that it will require will be of little or no value and
accounted for this obligation as a cost of severing the employment contract.
Accordingly all future payments have been accrued in full at September 1997. The
expense associated with this accrual is recorded as part of the loss from
discontinued operations in 1997.
C. Renegotiation of Patent Agreement-In April 1998, the Company
renegotiated the terms of its acquisition of the Troy Patent, due to the
agreement being in breach because of unpaid minimum royalties. Under the new
agreement, royalties are payable at the rate of 3% of the first $2,000,000 of
related product sales; 2% of the next $2,000,000 in sales and 1% of sales in
excess of $4,000,000.
D. Litigation- On August 4, 1997 Samantha Haimes brought an action in
the Fifteenth Judicial Circuit of Palm Beach County, Florida, against us and
National Health Care Centers of America, Inc., the Company's wholly-owned
subsidiary. We have asserted counterclaims against Samantha Haimes and Leonard
Haimes. The complaint arises out of the defendant's alleged breach of contract
in connection with the Company's natural health care center which was located in
Boca Raton, Florida. The plaintiff is seeking damages in the amount of
approximately $535,000. On September 10, 1997 Rejuvenation Unlimited, Inc. and
Sam Lilly, Inc. brought an action in the Fifteenth Judicial Circuit of Palm
Beach County, Florida, arising out of the Company's alleged breach of contract
in connection with the acquisition of the Company's natural health care center
which was located in Boca Raton, Florida from the plaintiff. The plaintiff is
seeking damages in excess of $15,000. The Company has agreed to settle such
actions for shares of common stock with a fair market value of $325,000, but not
less than 125,000 shares of common stock and has agreed to register shares of
Common Stock.
In Global Health and Ellon, Inc. v. Leslie Kaslof, Ralph Kaslof, and Ellon
USA, Inc., pending in the United States District Court for the District of Maine
(the "Maine Kaslof Case") claims have been made arising out of the sale of Ellon
USA's ("Old Ellon") assets to Global Health's wholly-owned subsidiary, Ellon,
Inc. ("New Ellon"). In connection with that sale, Leslie Kaslof and Ralph
Kaslof, former shareholders and officers of Old Ellon, entered into employment
and consulting agreements with Global Health. Global Health's potential
obligation to the Kaslofs under the employment and consulting agreements was
approximately $525,000. The complaint in the Maine Kaslof Case seeks a
determination that the Kaslofs materially breached their respective obligations
under the agreements and that Global Health and New Ellon are excused from
further performance thereunder. The complaint includes a breach of fiduciary
claim against Ralph Kaslof, as well as a claim to recover approximately
$142,000. In a related civil action brought by the Kaslofs and Old Ellon in the
United States District Court for the Eastern District of New York (the "New York
Kaslof Action"). The Kaslofs have alleged breaches of the purchase and sale
agreement, the employment and consulting agreements, and other agreements
executed in connection with the sale of Old Ellon's assets. The complaint seeks
to recover damages in an unspecified amount, but not less than $1,300,000, costs
of court, reasonable attorney fees, and interest. Global Health intends to
vigorously defend any and all claims asserted by the Kaslofs and their
corporation.
Inter/Media Time Buying Corp. ("Inter/Media") v. Global Health, et al.,
which is pending in the United States District Court for the Central District of
California (the "Inter/Media Action"), is based on Inter/Media's provision of
marketing, media purchasing, and related advertising services to Global Health
in connection with Natural Relief 1222. The complaint seeks compensatory damages
of $144,500, unstated special damages, attorney fees and costs of court. Global
Health answered the complaint, denying all material allegations therein, and
asserting a counterclaim arising out of Inter/Media's creation of a defective
national direct response campaign which prevented a successful nationwide retail
launch for a clinically-proven product. By its counterclaim, which includes
claims for breach of contract, negligence, intentional interference with a
prospective economic advantage, fraud and intentional misrepresentation, and
negligent misrepresentation, Global Health seeks to recover general damages of
not less than $6,500,000, special damages, costs of suit, and reasonable
attorney fees. Inter/Media has sought an attachment against Global Health's
assets for the full amount of its claims.
The Company is currently negotiating with Inter/Media for settlement of the
case.
In PIC-TV v. Global Health, et al., PIC-TV seeks to recover compensatory
damages of not less than $319,656, together with interest and costs of suit,
based on the sale of advertising time and sponsorships to Global Health. PIC-TV
has received default judgment in its suit against Global Health. Such amount has
been accrued in the financial statements.
In September 1999 Command Financial Press Corp. commenced an action in the
Supreme Court of the State of New York in New York City against the company for
unpaid invoices for printing services in the amount of approximately $65,000.
The Company is defending the action.
As of December 31, 1999, Global had a working capital deficit of $2,090,000
and Global is attempting to achieve settlements with its creditors. Also at
December 31, 1999, Global is a defendant in various legal actions brought by
creditors to whom the Global is attempting settlement offers with.
E. Major Supplier
Kaire Nutraceuticals currently buys all of its Pycnogenol, an important
component of its products, from one supplier.
For a period of five years, Kaire Nutraceuticals must purchase no less than
$73,750 per month of a different product from another supplier. Although there
are a limited number of manufacturers of this component, management believes
that other suppliers could provide similar components on comparable terms. Kaire
Nutraceuticals does not maintain any other contractual commitments or similar
arrangements with other suppliers.
Kaire Nutraceuticals purchases its products from manufacturers and
suppliers on an as needed basis. Should these relationships terminate, Kaire
Nutraceuticals' supply and ability to meet consumer demands would be adversely
affected.
13. Capital Lease Obligations
The Company has various capital lease obligations which are collateralized
by equipment. Interest rates under the agreements range from 7.1% to 31.9%, with
monthly principal and interest payments ranging from $2,029 to $33,933.
Future minimum lease payments and the present value of the minimum lease
payments under the noncancelable capital lease obligations as of December 31,
1999 are as follows:
December 31, 1999
2000 $75,995
2001 52,903
2002 26,931
--------
Total future minimum lease payments 155,829
Less amounts representing interest 26,676
---------
Present value of minimum lease payments 129,153
Less current maturities 75,995
----------
Total long-term obligations $53,158
==========
F-19
14. COMMON STOCK SUBJECT TO PUT
In connection with the January 1996 acquisition of the net assets of Sam
Lilly, Inc., the 9,500 shares issued in connection with the acquisition are
subject to the seller's ability to require the Company to repurchase such shares
for a three year period for $380,000, in the event that the aggregate market
value of the shares falls below $380,000. Such shares are excluded from
permanent equity on the accompanying balance sheet. As of March 1998, the seller
had exercised the put and this matter is now subject to litigation.
15. STOCK OPTION PLANS AND WARRANTS
Under the Company's 1994 Stock Option Plan, up to 16,667 shares of common
stock are reserved for issuance. The exercise price of the options will be
determined by the Stock Option Committee selected by the board of directors, but
the exercise price will not be less than 85% of the fair market value on the
date of grant. Towards the end of 1995, 50 options were issued to each of two
directors at an exercise price equal to the market price at the time. During
1996 the Company issued 250 options to a director at a price equal to the fair
market value on the date of grant.
In August 1997, the Company adopted a stock option plan covering officers,
directors, employees and consultants. In August the Company issued 43,750 ten
year options under the 1997 Plan, exercisable at fair market value (which was
$22.40 per share) to certain of its officers who were former principals of
Global. Options to purchase 21,875 shares became exercisable in August 1998, and
the remaining 21,875 will be exercisable in August 1999.
In 1998 the Company issued 100,000 warrants to two directors at an exercise
price of $1.00, which was equal to the fair market value at the date of grant.
The following table summarizes the changes in options and warrants
outstanding, and the related exercise price for shares of the Company's common
stock:
Weighted Weighted
Average Average
Shares Exercise Exercisable Shares Exercise Exercisable
------ ----------- ------ -----------
Price Price
Stock Options Warrants
Outstanding at December 31, 1996 350 50.13 350 2,110,757 8.35 2,110,757
Granted 63,750 5.77 20,000 5,000 113.75 5,000
--------- ------ --------- ---------- --------- -----------
Outstanding at December 31, 1997 64,100 71.00 20,350 2,115,757 8.60 2,115,757
Granted -- -- -- 407,500 1.16 407,500
Canceled (20,000) 0.00 1,875 -- -- --
--------- ------ --------- ---------- --------- -----------
Outstanding at December 31, 1998 44,100 15.68 22,225 2,523,257 7.30 2,523,257
Granted 295,000 3.50 295,000 250,000 3.93 250,000
--------- ------ --------- ---------- --------- -----------
Outstanding at December 31, 1999 339,100 6.01 317,225 2,773,257 7.00 2,773,257
========== ======= ======= ========== ========= ===========
Options Warrants
Weighted Average fair value of options
and warrants granted during 1996 $40.42 None
Weighted Average fair value of options
and warrants granted during 1997 $10.55 $78.03
Weighted Average fair value of options
and warrants granted during 1998 None $0.84
Weighted Average fair value of options
and warrants granted during 1999 1.79 1.90
F-20
The following table summarizes information about exercisable stock options
and warrants at December 31, 1999:
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
Outstanding Exercisable
Options: $3.50 - 101.20 339,100 2-8 years $6.01 317,225 $4.35
Warrants: - 2,523,257 1-5 years $7.00 2,773,257 $7.00
In fiscal 1997, the Company adopted the disclosure provisions of SFAS 123.
For disclosure purposes, the fair value of options is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for stock options granted during the years ended
December 31, 1999, 1998 and 1997 respectively: annual dividends of $0; expected
volatility of 50%; risk free interest rate of 7% and expected life of 10 years.
The weighted average fair value of stock options granted during the years ended
December 31, 1999, 1998 and 1997 was $1.79, $0 and $21.60, respectively. If the
Company had recognized compensation cost of stock options in accordance with
SFAS 123, the Company's proforma loss and net loss per share would have been as
follows:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Net loss to common stockholders
As reported $(8,795,880) $(3,299,917) $(8,458,453)
Pro forma $(8,925,006) $(3,299,917) $(9,214,453)
Net loss from continuing
operations:
As reported $(9,100,473) $(2,740,054) $(4,304,073)
Pro forma $(9,229,599) $(2,740,054) $(5,060,073)
Net loss per share to common
stockholders
Basic
As reported $(1.22) $(1.49) $(19.48)
Pro forma $(1.24) $(1.49) $(21.22)
Net loss per share to common
stockholders continuing operations:
Basic
As reported $(1.26) $(2.15) $(11.60)
Pro forma $(1.28) $(2.15) $(13.34)
16. FORGIVENESS OF DEBT
During the year ended December 31, 1998 the Company realized a gain of
approximately $869,516 due to its ongoing efforts to restructure Global and its
various wholly owned subsidiaries.
The Company for the years ended December 31, 1999 and 1998, reviewed the
fair value of its accounts payable, accrued expenses and other liabilities, and
adjusted their gain on forgiveness of debt to approximately $816,000, resulting
in an approximate decrease of $54,000 in gain that had been realized in the year
ended December 31, 1998.
F-21
17. RELATED PARTY TRANSACTION
The Company sold its three vocational schools (Note 9) in 1998 to a company
controlled by the Company's former President and Chief Executive Officer, the
Company's former Secretary, and a former director.
The Company has paid legal fees to a law firm, whose member is a director
of the Company. Fees of approximately $79,000, $263,000 and $153,000 were paid
in the year's ended December 31, 1999, 1998 and 1997, respectively.
The Company as of December 31, 1999 owed $45,000 to its chief financial
officer and $37,360 to its chief executive officer of the Company, both in
connection with liabilities assumed in connection with the Kaire acquisition.
18. FOREIGN SALES
Since the acquisition of Kaire and its foreign subsidiaries in February
1999, the Company has substantially increased its international presence both in
sales and long-lived assets. The Company's sales and long-lived assets by
country as of December 31, 1999 is as follows:
United Australia and Other Consolidated
States New Zealand Subsidiaries
Sales to unaffiliated customers $13,167,421 $1,334,770 $767,440 $15,269,631
Long-lived assets at December 31,
1999 $9,452,993 $39,320 $43,260 $9,535,573
19. ACQUISITIONS
On July 23, 1997, the Company closed on the acquisition of the capital
stock of Global. The purchase price for the acquisition of Global was settled
with the issuance of 145,000 shares of the Company's common stock. The Company
has agreed to issue to former Global shareholders additional shares of common
stock as follows: i) up to 20,000 shares if Global's pre-tax operating earnings
equal or exceed $1,200,000 for the period from July 1, 1997 through June 30,
1998, which did not occur and ii) shares equal in market value to the lesser of
$45 million or eight times Global pre-tax operating earnings for the period from
July 1, 1999 through June 30, 2000 minus the fair market value on the date of
issuance of the 145,000 share initial consideration.
The acquisition was recorded using the purchase method of accounting by
which the assets are valued at fair market value at the date of acquisition. The
following table summarizes the acquisition.
Purchase price $2,900,000
Liabilities assumed 4,530,741
Fair value of assets acquired (6,511,954)
Goodwill $918,787
The assets acquired included two patents, one (the "Troy Patent") was
valued at $4,819,000, (subsequently written down to $2,500,000 in 1999 - see
note 4), and is being amortized over its remaining life of 11 years, the other
(the "Xu Patent") was valued at $404,000,. In December 1998 management evaluated
the recoverability of the Xu patent, by comparing its carrying amount to income
generated. As a result of such evaluation the Company recorded a charge of
$200,000 against this patent (subsequently written down to $0 in 1999 - see note
4). The Troy Patent is being amortized over its remaining life of 17 years, from
the date of purchase, with adjustments for future amortization in regards to the
charge against it. Additionally, the Company acquired a customer list valued at
$57,000, which is being amortized over 5 years.
F-22
The following schedule combines the unaudited pro-forma results of
operations the Company and Global, as if the acquisition occurred on January 1,
1997 and includes such adjustments which are directly attributable to the
acquisition, including the amortization of goodwill. It should not be considered
indicative of the results that would have been achieved had the acquisition not
occurred or the results that would have been obtained had the acquisition
actually occurred on January 1, 1996.
Year Ended December 31,
1997
Revenues $7,856,071
Loss from continuing operations $(7,709,728)
Net loss $(10,234,169)
Basic and diluted loss per share
from continuing operations $(15.21)
Basic and diluted net loss per share $(20.20)
Shares used in computation 506,765
The Company in February 1999, pursuant to an asset purchase agreement
acquired substantially all the assets of Kaire in exchange for the (i) issuance
to Kaire, of $2,800,000 aggregate stated value of the Company's Series F
Preferred Stock, par value of $.001, (ii) issuance to creditors of Kaire of
$350,000 aggregate stated value of the Company's Series G Preferred Stock, par
value of $.001, (iii) issuance to Kaire of five year warrants to purchase
200,000 shares of the Company's common stock, par value of $.001, and
acquisition costs of $622,587 of which $516,000 will be paid with the issuance
of $516,000 aggregate stated value of the Company's Series I Preferred Stock,
par value $.001 and $106,587 was paid in cash. The Company has computed an
aggregate $682,000 value on the warrants for acquisition purposes. The value was
derived by using the Black-Scholes Option Pricing model, (iv) the assumption of
certain indebtedness of Kaire, as defined in the agreement and as agreed to
outside of the asset purchase agreement. (v) indemnification to certain officers
of Kaire against certain liabilities accrued prior to the closing date of the
asset purchase, and (vi) certain annual payments to Kaire for a period of five
years commencing December 31, 1999 based upon revenues and net income.
The acquisition was recorded using the purchase method of accounting, by
which assets are valued at fair value on the date of acquisition. The following
table summarized the acquisition:
Purchase price including acquisition costs $5,347,513
Liabilities assumed 4,205,012
Fair value of assets acquired (2,546,070)
Goodwill and customer list $7,006,455
The Goodwill acquired is approximately $772,000 and is being amortized over
its remaining useful life of 15 years. The customer list acquired is
approximately $6,948,000 and is being amortized over its remaining useful life
of 10 years.
The following schedule combines the unaudited pro-forma results of
operations of the Company and Kaire, as if the acquisition occurred on January
1, 1996 and includes such adjustments which are directly attributable to the
acquisition, including the amortization of goodwill. It should not be considered
indicative of the results that would have been achieved had the acquisition
actually occurred on January 1, 1996.
F-23
Years Ended December 31,
1999 1998 1997
---- ---- ----
Revenues $17,572,637 $27,366,830 $36,815,238
Net loss to common
stockholder $(10,302,249) $(10,431,144) $(15,362,756)
Basic and diluted loss per
common share from continuing
operations $(1.27) $(3.63) $(25.28)
Basic and diluted net loss $(1.43) $(4.72) $(35.38)
to common stockholder per share
Shares used in computation 7,233,297 2,210,458 434,265
20. FOURTH QUARTER ADJUSTMENTS
Fourth quarter adjustments include the following:
Write-down of patents $ 2,398,841
Write-off of prepaid royalty $ 163,000
Write-off of goodwill $ 768,000
Write-off of inventory $ 167,000
21. SUBSEQUENT EVENTS
In January 2000, the Company entered into a Licensing Agreement with GLI,
Inc., ("GLI") a Delaware corporation with whom Joseph Grace, former C.E.O. and
director of the Company, is a principal. The License agreement allows GLI
certain worldwide rights to manufacture, distribute and sell certain products
under the Natural Relief 1222 trademark. The licensing agreement calls for the
Company to receive a royalty based upon GLI's net sales with a minimum royalty
guaranteed thorough the year 2004.
In February 2000, the Company entered into an Asset Purchase and Licensing
Agreement with Ellon Botanicals, Inc. ("EBI"). The agreement allows EBI the
exclusive license market products under the "Ellon", "Calming Essence" and
"ContentMints" tradenames. The agreement calls for the Company to receive a
royalty based upon EBI's sales with a minimum royalty through the year 2004.
In March 2000, the Company sold 1,000 shares of Series J Preferred Stock
with a stated value of $1,000 per share realizing net proceeds of $936,000. The
preferred stock pays a dividend at the rate of 10% per annum, payable in cash or
stock at the Company's option. The preferred stock and the accrued dividends
thereon are convertible into shares of the Company's common stock at a
conversion price equal to the lower of the closing bid price on the date of
issuance or 70% of the average closing bid price of the common stock for the
lowest three trading days during the twenty day period immediately preceding the
date on which the Company receives notice of conversion from a holder.
In connection with the offering of the Series J Preferred Stock, the
Company issued warrants to purchase 200,000 shares of common stock. The exercise
price shall be equal to 110% of the closing bid price on the day of funding.
F-24