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, 2000
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.)
5605 N. MacArthur Boulevard, 11 Floor
Irving, Texas 75038
(Address of principal executive office)
(972) 819-2035
(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: $8,320,105.
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 April 17, 2001
was 73,080,946 with an approximate aggregate market value of $3,800,209,
(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 April 17, 2001 was
73,080,946.
Natural Health Trends Corp.
2000 Form 10-KSB Annual Report
Table of Contents
Page
Part I
Item 1 Description of Business 2
Item 2 Description of Property 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a
Vote of Security Holders 13
Part II
Item 5 Market for Common Equity and
Related Stockholder Matters 13
Item 6 Management's Discussion and
Analysis or Plan of Operation 14
Item 7 Financial Statements 17
Item 8 Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 17
Part III
Item 9 Directors, Executive Officers,
Promoters and Control Persons;
Compliance With Section 16(a)
of the Exchange Act 18
Item 10 Executive Compensation 19
Item 11 Security Ownership of Certain
Beneficial Owners and Management 22
Item 12 Certain Relationships and Related
Transactions 23
Item 13 Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 24
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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
ekaire.com, Inc., and Lexxus International, Inc., our subsidiaries, we utilize a
network of independent associates to offer a line of approximately 35 products.
In February 1999, we 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, we issued (i) to creditors of 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 our common stock
exercisable at $4.06 per share. In addition, we agreed to make certain payments
to Kaire International, Inc. each year for a period of five years (the "Kaire
Net Income Payments") commencing with the year ending December 31, 1999.
The Kaire 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
us; (b) all other direct and/or indirect costs or expenses assumed and/or
otherwise incurred by us, 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 ours resulting from
third party payments made by us. In addition, all amounts set-off against Kaire
Net Income Payments are cumulative and, if not set-off in the year they are paid
(or incurred) because we 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 addition, we 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 taxes accrued by Kaire International, Inc.
prior to the closing date of the Kaire Acquisition.
In connection with the Kaire Acquisition,we retained BLH, Inc. as a
consultant. In accordance with the terms of the consulting agreement, BLH, Inc.
was to identify companies which we could effect a business combination. BLH,
Inc. introduced Kaire International, Inc. to us. 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.
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In January 2001, we were instrumental in starting Lexxus International,
Inc., our majority owned subsidiary, to market women's products.
In March 2001, Global Health Alternatives, Inc., and Ellon, Inc. two
of our wholly owned subsidiaries filed for Chapter 7 bankruptcy liquidation in
U.S. Federal court, North Dallas. Neither Global Health Alternatives or Ellon
had operations during the year 2000.
Industry Overview
Natural Health Products
We believe 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.
We believe 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.
We believe, 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, we have associates in all fifty states, the District of Columbia
Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and Tobago and
Europe. We believe that significant market potential exists for our products in
international markets.
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Products
ekaire.com, Inc..
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 SilverKaire, 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 us.
Colloidal Silverkaire, a solution of silver particles electro-magnetically
suspended in deionized water 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 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 other 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, we offer 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 and MSM
Complex.
In addition, we acquired the right to distribute Bio10, an organic live
source of all 12 lactobacillus bacteria designed to supplement and maintain
optimum health.
In August 2000, we introduced Celltonic Plus (TM), an organic mineral
solution containing over 72 minerals and trace elements, within an electrolyte
drink.
Renew
Renew is a line of moisturizing and topical analgesic's designed to assist
in maintaning a youthful and healthy appearance. Our products include, Aloe Gel,
Kobi, Dermakaire with Pycnogenol(R), and Dermunol.
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(R) is a mosturizing, whole-leaf Aloe product
combined with a powerful antioxidant to maintain healthy-looking skin.
In 2000,we discontinued our line of skin and hair care products due to
market conditions.
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.
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
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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.
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, we are 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.
We intend 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.
We maintain our own product review and evaluation staff but rely upon
independent research, vendor research departments, research consultants and
others for product research, development and formulation services.
We did not expend any money on research and development in the year 2000.
Product Warranties and Returns
Our product warranties and policy regarding returns of products are similar
to those of other companies in our industry. If a consumer who enrolled with us
subsequent to July 1, 1999, for any of our 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 us 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 us 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 us, however, are
not found to be defective in manufacture.
Manufacturing
We do not intend to develop our own manufacturing capabilities since
management believes that the availability of manufacturing services from third
parties on a contract basis is adequate to meet our needs. We have utilized a
number of manufacturers who have sufficient manufacturing capacity to meet our
anticipated production needs.
We currently purchase all of our vitamins, nutritional supplements and all
other products and ingredients from parties that manufacture such products to
our specifications and standards. All nutritional supplements, raw materials and
finished products are subject to sample testing, weight testing and purity
testing by independent laboratories.
We have no existing contractual commitments or other arrangements for the
future manufacture of our products. Rather, we place orders for component or
finished goods manufacturing services as required based upon price quotations
and other terms obtained from selected manufacturers.
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Marketing and Distribution
Our products are distributed by our subsidiaries through our network of
associates. Associates are independent contractors who purchase products
directly from the respective subsidiary for resale to retail consumers or for
personal consumption. Associates may elect to work on a full-time or a part-time
basis. Management believes that network marketing is well suited to marketing
our 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 our 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 and residual incomes. We pay bonuses to qualified distributors
based on sales for their respective commission period.
To become an associate, a person must simply sign an agreement to comply
with the policies and procedures of the respective subsidiary We consider
approximately 40,000 of our associates to be "active," that is, an individual
associate who has ordered at least $50 of products during the preceding 12 month
period from any one subsidiary.
We sponsor opportunity meetings in various key cities and participate in
motivational and training events in our market areas designed to inform
prospective and existing associates about our product line and selling
techniques. Associates give presentations relating to their experiences with our
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 our
network marketing system.
We continue 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 one of these programs
is our AutoShip Program.
Under the AutoShip Program, an associate may enroll in a minimum ordering
program to maintain eligibility for performance bonuses. Minimum orders ranging
from $50 to $500 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 sponsored events.
As part of our maintenance of constant communication with our associate
network, we offer the following support programs to our associates:
Touchtalk and Faxback
An automated telephone system that associates can call 24 hours a day to
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.
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Internet
We maintain a web-site at www.kaire.com, www.ekaire.com and
www.lexxusinternational.com. There, the user can read news, letters, learn more
about products, place an order or sign up to be an associate. This allows
associates to potentially be able to sponsor associates and order products 24
hours a day.
Product Literature
We produce for our associates, color catalogs and brochures displaying and
describing each subsidiaries products.
Toll Free Access
A toll free number is available to place orders, sponsor new associates,
and for consumer support for ekaire.com.
Broadcast Fax/Broadcast E-mail
Our announcements and product specials are automatically sent via facsimile
and/or e-mail to associates who have requested this service.
Markets
We have operations in the United States, Canada, Australia, New Zealand,
and Trinidad and Tobago.
Management Information Systems
We outsource our computer system for processing associate orders and
calculating associate commission and bonus payments enabling us to promptly
remit payments to associates. Our 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.
Competition
We compete with many companies which market and sell products similar to
our own products. We also compete intensely with other network marketing
companies in the recruitment of associates.
There are many network marketing companies with which we compete 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 we are and
have significantly greater financial and personnel resources than us.
We compete for associates by means of our products, marketing program that
includes our commission structure, training and support services, and other
benefits.
Not all competitors market all types of products marketed by us, and some
competitors market products and services in addition to those marketed by us.
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. Our 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
We do not believe that our other nutritional supplements are affected by
seasonality.
Government Regulation
We believe that all of our 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. Our 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 our 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.
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.
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
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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
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.
We believe 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 us does not suggest that the supplement is
intended to augment or replace a specific prescription drug or therapy for a
disease.
We are unaware of any legal actions pending or threatened by the FDA or any
other governmental authority against any of our subsidiaries.
Certain ingredients utilized in our 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 label 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 we 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 our history of
operations in such markets to date, we believe that our methods of distribution
are in compliance in all material respects with the laws and regulations
relating to direct selling activities of the countries in which we currently
operate. Even though we believe that laws governing direct selling are generally
becoming more permissive, many countries currently have laws in place that would
prohibit us from conducting business in such markets. There can be no assurance
that we 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.
We believe that we are in material compliance with all regulations
applicable to it. Despite this belief, we 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 we 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 we or
any of our associates are not in compliance with existing laws or regulations
could have a material adverse effect on our business and results of operations.
In addition, in any 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 our
business and results of operations. We cannot determine the effect, if any, that
future governmental regulations or administrative orders may have on our
business and results of operations. Moreover, governmental regulations in
countries where we 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 us, has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of associates and consequently, on our
sales and earnings.
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Patents and Trademarks
Most of our products are packaged under our "private label." We have
registered trademarks with the United States Patent and Trademark Office for our
name, logo and various products names. We have applied for trademark
registration in several countries outside of those we are currently operating in
for our name, logo and various product names.
Additional trademark registration applications which may be filed by us
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 our existing or
future trademarks may not be adequate. Moreover, we may not be able to defend
successfully any of its legal rights with respect to our present or future
trademarks. Our failure to protect our legal rights to its trademarks from
improper appropriation or otherwise may have a material adverse effect on us.
Employees
As of December 31, 2000, we had 16 full time employees and no part time
employee, of which 3 were involved in sales and marketing, 6 in administration
and finance and 7 in operations. None of our employees are represented by a
union, and we believe that our employee relations are good.
Insurance
We carry general liability insurance in the amount of $1,000,000 per
occurrence and $1,000,000 in the aggregate. There can be no assurance, however,
that our 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 us.
-11-
ITEM 2. DESCRIPTION OF PROPERTY.
-----------------------
We lease an aggregate of approximately 4,380 square feet of office and
warehouse space in an office complex in Carrollton, Texas. The lease term is
month to month and the current rate is approximately $60,000 per year. Our
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., our wholly-owned subsidiary. We asserted
counterclaims against Samantha Haimes and Leonard Haimes. The complaint arises
out of the defendant's alleged breach of contract in connection with our natural
health care center which was located in Boca Raton, Florida. The plaintiff is
seeking damages in the amount of approximately $535,000. We 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 agreed to register the
shares of our common stock. On October 11, 2000, due to our noncompliance with
the settlement, a judgement was taken against us in the amount of $325,000 plus
interest.
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. We believe that with the
Chapter 7 bankruptcy filing of Global Health this case will be dismissed.
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 us for unpaid
invoices for printing services in the amount of approximately $65,000. We are
defending this action.
On July 10, 2000, The State of Texas obtained judgment against us in the
amount of $109,170 for unpaid sales taxes, penalties, interest, and attorney
fees. We have entered into a voluntary payment arrangement and have recorded a
liability of $114,278 which is included in our financial statements for the year
ended December 31, 2000.
On December 29, 2000, Merrill Corporation obtained judgment against us in
the amount of $145,497, plus interest. We have recorded a liability of $145,497
which is included in our financial statements for the year ended December 31,
2000.
-12-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
During the last quarter of 2000, we did not submit any matter to the vote
of our shareholders.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
--------------------------------------------------------
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the OTC Bulletin Board under the symbol
"NHTC". Our common stock was delisted from the Nasdaq Small Cap Market in July
2000 for failure to meet the Nasdaq requirements for continued listing. The
following table sets forth the range of high and low closing sale prices as
reported by The Nasdaq SmallCap Market through June 2000 and the OTC Bulletin
Board for the third and fourth quarters 2000.
High Low
Common Stock
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
Second Quarter 1.31 0.28
Third Quarter 0.44 0.03
Fourth Quarter 0.08 0.02
Holders
As of January 26, 2001, we had approximately 160 record holders of our
common stock and approximately 1,200 beneficial holders of our common stock.
Dividends
We have not paid any cash dividends on our common stock to date and do 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 March 2000, we issued 1,000 shares of our Series J preferred stock with
a face value of $1,000 per share.
In October 2000, we issued 50 shares of our Series H preferred stock with a
face value of $1,000 per share.
-13-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
----------------------------------------------------------
Background
Prior to August 1997, our operations consisted of the operation of natural
health care centers and vocational schools. Upon the acquisition of Global
Health Alternatives, Inc. ("Global Health") on July 23, 1997, we commenced
marketing and distributing a line of natural, over-the-counter homeopathic
pharmaceutical products. In February 1999, we 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. We discontinued the operations
of Global Health during the fourth quarter of 1999 and filed for Chapter 7
bankruptcy protection in March 2001 on behalf of Global Health Alternatives and
Ellon, Inc.
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Revenues
Revenues for the year ended December 31, 2000 were approximately $8,320,000
as compared to revenues for the year ended December 31, 1999 of approximately
$15,270,000, a decrease of approximately $6,950,000 or 45.5%. Sales for the year
ended December 31, 2000 were primarily from ekaire.com, Inc. as Global was
closed at the end of 1999. The decrease in sales related to Global is
approximately $828,000.
Cost of Sales
Cost of sales for the year ended December 31, 2000 was approximately
$2,410,000 or 29.0% of revenues. Cost of sales for the year ended December 31,
1999 was $4,267,000 or 27.9% of revenues. The total cost of sales decreased by
approximately $1,857,000 or 43.5% most of which was attributable to ekaire and
its related operations. The increase in the cost of sales as a percentage of
revenues is attributable to inventory issues that resulted in excessive shipping
costs.
Gross Profit
Gross profit decreased from approximately $11,003,000 in the year ended
December 31, 1999 to approximately $5,910,000 in the year ended December 31,
2000. The decrease was approximately $5,093,000 or 46.3%. The decrease was
attributable to the decline in gross sales.
Commissions
Distributor commissions were approximately $3,682,000 or 44.3% of revenues
in the year ended December 31, 2000 compared with $7,230,000 or 47.3% of
revenues for the year ended December 31, 1999. The decrease in dollars is
directly related to the decrease in gross sales.
Selling, General and Administrative Expenses
Selling, general and administrative costs decreased from approximately
$7,633,000 or 50.0% of revenues in the year ended December 31, 1999 to
approximately $5,777,000 or 69.4% of revenues in the year ended December 31,
2000, a decrease of approximately $1,856,000 or 24.3% which is attributable to
the downsizing of operations in response to the decrease in gross sales, the
cessation of Global's operations, offset by start up costs associated with the
launch of a new marketing plan.
-14-
Loss from Operations
Operating losses increased from $7,027,000 in the year ended December 31,
1999 to approximately $12,552,000 in the year ended December 31, 2000
representing a 78.6% increase in the loss or approximately $5,525,000 between
comparable periods. This increase is due primarily to a one time charge of
approximately $9,339,000 to write down certain intangible assets related to the
Kaire acquisition offset by reduction in commissions. We believe the value of
the customer list and goodwill to be significantly impaired based upon the
decline in gross revenues.
Interest Expense
Interest expense was approximately $260,000 or 3.1% of revenues in the year
ended December 31, 2000 compared with approximately $663,000 or 4.3% of revenues
in the year ended December 31, 1999, a decrease of approximately $403,000. This
decrease is primarily due to the beneficial conversion feature of certain debt
instruments and a decrease in interest bearing liabilities .
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, 2000 or 1999 under the provisions of
Financial Standards Board Statement of Financial Accounting Standards No. 109
(Accounting for Income Taxes), utilizing 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 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 $12,803,000 in the
year ended December 31, 2000 or 153.9% of revenues as compared to approximately
$7,758,000 or 50.8% of revenues in the year ended December 31, 1999.
Discontinued Operations
We closed our wholly owned subsidiary in the United Kingdom in February
2000. We recognized a gain of $200,000 on the anticipated liquidation of this
asset for the year ended December 31, 1999. For the year ended December 31, 2000
we have reduced this gain by $15,000 in recognition of actual proceeds received.
Gain on Forgiveness of Debt
During the year ended December 31, 2000, we realized a $2,148,000 gain on
the various debt and payables of Global Health due to the filing of a Chapter 7
bankruptcy in early 2001.
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 our products.
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 the year ended December 31, 1999, $610,000 of face amount of
Series E Preferred Stock was converted into 603,130 shares of common stock. In
the year ended December 31, 2000 we had converted an additional $93,232 of face
amount Series E Preferred Stock into 2,984,122 shares of common stock.
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
-15-
issue or 75% of the market value of the common stock. In January and February
2000, $359,000 of face amount Series H Preferred Stock was converted into
434,660 shares of 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, we 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 our 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.
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 our
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 we receive notice of conversion from a holder. In
connection with the offering of the Series J Preferred Stock, we issued warrants
to purchase 141,907 shares of common stock at an exercise price of $1.41 per
share.
In May 2000, we borrowed $20,700 from Tyler Pipeline, 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 June 2000, we acquired certain assets of Life Dynamics International and
issued a non-interest bearing promissory note for $208,433. During 2000 we made
payments on this note of $43,874. The remaining balance is payable in shares of
our common stock on a quarterly basis.
In October 2000, we issued an additional 50 shares 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.
-16-
In October 2000, we borrowed $10,000 from Meridian Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand.
In November 2000, we borrowed $25,000 from Filin Corp. The loan bears
interest at 10% per annum and is payable on demand.
During 2000 and 1999, we have not made our payroll tax deposits with the
Internal Revenue Service ("IRS") and the various state taxing authorities on a
timely basis. We have filed all required payroll tax returns and are currently
negotiating a payment plan with the IRS. As of December 31, 2000, we owe
approximately $890,000 of delinquent payroll tax liabilities including interest
and penalties. Our failure to pay our delinquent payroll tax liabilities could
result in tax liens being filed by various taxing authorities.
During 2000 and 1999, we did not make our sales tax deposits with the
various sales tax authorities on a timely basis. We have filed all required
sales tax returns. As of December 31, 2000, we owed approximately $285,000 in
current and delinquent sales taxes which is included in other current
liabilities. Our failure to pay our delinquent sales taxes could result in tax
liens being filed by various taxing authorities.
At December 31, 2000, our ratio of current assets to current liabilities
was .07 to 1.0 and we had a working capital deficit of approximately $5,865,000.
Cash used in operations for the period ended December 31, 2000 was
approximately $1,731,000. Cash used by investing activities during the period
was approximately $24,500, which primarily relates to the Life Dynamics'
acquisition. Cash provided by financing activities during the period was
approximately $1,430,000 primarily from the issuance of preferred stock of
$1,050,000. Total cash decreased by approximately $326,000 during the period.
Our independent auditors' report on our consolidated financial statements
stated as of December 31, 2000 due to net losses and a working capital deficit,
there is substantial doubt about our ability to continue as a going concern. We
require additional financing to continue operations of which there can be no
assurance. We believe that we will require approximately $500,000, primarily to
finance operations for the next 12 months. We intend 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, 2000, Global Health owed approximately $2,148,000 to creditors.
We have not reached satisfactory settlements with Global Health's creditors and
we have ceased the operations of Global Health. In March 2001, we filed for
protection from creditors under the bankruptcy laws. There can be no assurance
that we will be able to secure such additional financing. Our failure to 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.
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.
-17-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
----------------------------------------------------
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning our directors
and executive officers.
Name Age Position
Robert L. Richards* 55 President, Chief Executive Officer and Director
Mark D. Woodburn 30 Chief Financial Officer, Secretary and Treasurer
Martin C. Licht* 59 Director
Dirk D. Goldwasser* 41 Director
* Messrs. Richards, Licht, and Goldwasser resigned from the Board of
Directors in August 2000.
The following is a brief summary of each of our executive officers and
director:
Robert L. Richards is the Chief Executive Officer of Kaire Nutraceuticals
and became a director of ours 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. Mr. Richards resigned as the President, Chief Executive
Officer and Director in August 2000. Mr. Richards has been designated Chairman
Emertitus and Founder of Kaire.
Mark D. Woodburn became our chief financial officer in April, 1999 and
secretary in October 1999. He had been secretary and a director of Kaire
International, Inc. from 1992 to the present. Mr. Woodburn resigned his
appointment as secretary in January 2001.
Martin C. Licht has been a practicing attorney since 1967. Mr. Licht
became a director of in July 1995. Mr. Licht resigned as a director in August
2000.
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
resigned as a director in August 2000.
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, 2000, and (ii) Forms 5 and amendments thereto
and/or written representations furnished to us by any director, officer or ten
percent security holder of ours (collectively "Reporting Persons") stating that
he or she was not required to file a Form 5 during the our fiscal year ended
December 31, 2000, 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.
-18-
ITEM 10. EXECUTIVE COMPENSATION.
We do not have a bonus, profit sharing, or deferred compensation plan for
the benefit of our employees, officers or directors.
The following table provides a summary of cash and non-cash
compensation for each of the last two fiscal years ended December 31, 1999 and
2000 with respect to the following officers.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Name and Other Principal Position Year Salary Bonus Other Restricted Securities LTIP All Other
($) ($) Annual Stock Underlying Payouts Compensation
Compensation Award(s) Options/SARs ($) ($)
($)(1) ($) (#)
Robert L. Richards, (2) 2000 68,692 - - - - - -
Former President & CEO 1999 96,923 - - - - - -
Joseph P. Grace, (3) 2000 - - - - - - -
Former President & CEO 1999 133,333 - - - - - -
Terry LaCore (4) 2000 100,000 - 16,016 - - - -
President of ekaire.com, Inc. 1999 80,769 - - - - - -
Mark D. Woodburn (5) 2000 34,000 - - - - - -
CFO 1999 55,750 - - - - - -
(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 our President in September 1999 and resigned in August
2000.
(3) Mr. Grace resigned in September 1999.
(4) Mr. LaCore is the President of ekaire.com, Inc., our wholly-owned
subsidiary.
(5) Mr. Woodburn became our Chief Financial Officer in April 1999 and
Secretary in October 1999.
Option Grants in Last Fiscal Year
We did not grant any options during the fiscal year ended December 31, 2000
to the named executive officers. During the fiscal year ended December 31, 2000,
none of the named executive officers exercised any options issued by us.
Consulting Agreements
In October 1999, we entered into a two year consulting agreement with
Domain Investments, Inc. pursuant to which Domain Investments Inc. will provide
us 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, we entered into a consulting agreement with Meridian
Equities Hong Kong, Ltd. pursuant to which Meridian Equities Hong Kong, Ltd.
will negotiate settlements with our creditors in consideration for the issuance
of 185,000 shares of common stock.
-19-
In January 2001, we entered into a consulting contract with Benchmark
Consulting Group to advise us in connection with the acquisition and/or startup
and/or merger with other companies introduced to us by Benchmark and any
divesture of our assets, subsidiaries, or the sale of the Company itself.
Directors' Compensation
Our directors 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. 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 received cash compensation
for acting in the capacity of executive officers.
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 ours and our 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 ofours 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").
We 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. 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.
In April 1999, we 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
-20-
On January 18, 2001, we granted 3,000,000 options to purchase shares of
common stock to Terry LaCore, President of our subsidiary ekaire.com, Inc, at
the closing stock price of $.011 per share.
On January 18, 2001, we granted 3,000,000 options to purchase shares of
common stock to Benchmark Consulting Group pursuant to a consulting contract at
the closing stock price of $.011 per share.
On January 18, 2001, we granted 500,000 options to purchase shares of common
stock to various employees at the closing stock price of $.011 per share.
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 our directors, executive officers, all executive
officers and directors as a group, and all persons known to us to be the
beneficial owners of more than five percent of our common stock.
Name and Address Number of Approximate
of Beneficial Owner Shares Percentage of Common Stock
Mark D. Woodburn --- *
All Executive Officers
and Directors as a Group
(1 persons) --- *
Abraham Weinzimer 6,024,094 8.2%
2545 Hempstead Turnpike
East Meadow, NY 11554
* 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 stock beneficially
owned by them.
(2) The address of each executive officer and director is c/o Natural
Health Trends Corp., 5605 N. MacArthur Boulevard, 11th Floor, Irving, Texas
75038.
(3) The table does not include shares of common stock issuable upon the
conversion of the our 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 may occur, based upon the number of shares of common stock
issuable to such holders.
-21-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Martin C. Licht, a former director of ours, was a member of law firms which
received $263,221 attributable to 1998 and $79,000 attributable to 1999.
As of December 31, 2000, we owed approximately $106,000 to Robert L.
Richards, a former president and a director, in connection with liabilities
assumed in connection with the Kaire acquisition. Mr. Woodburn, our chief
financial officer, and Mr. Richards have guaranteed a loan in the amount of
$35,000 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. In January 2001, we modified this
agreement, by mutual consent, to release each party from certain obligations in
connection with Mr. Grace's tenure with the Company and GLI's royalty payments.
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 us than
could have been obtained from independent third parties. Future transactions, if
any, between us and any of our 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)
-22-
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) 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, 2000.
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, we 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/ Mark D. Woodburn President, Chief Financial Officer May 1, 2001
- -------------------------- and Director
Mark D. Woodburn (Principal Financial and Accounting
Officer)
/s/ Robin T. Phelan-Tuggle Controller, Secretary May 1, 2001
- ------------------------
Robin T. Phelan-Tuggle
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 capacities and on the dates indicated.
Signature Title Date
/s/ Mark D. Woodburn Director May 1, 2001
- -------------------------
Mark D. Woodburn
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 Sheet......................................... F-3
Consolidated Statements of Operations.............................. F-4
Consolidated Statements of Stockholders' Deficit................... F-5
Consolidated Statements of Cash Flows.............................. F-6
Notes to Consolidated Financial Statements......................... F-7-19
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 sheet of Natural
Health Trends Corp. and Subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended December 31, 2000 and 1999. 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, 2000 and the results of its operations and its cash flows for
the years ended December 31, 2000 and 1999, 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 two 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, 2001. 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 & Co., P.C.
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
April 19, 2001
F-2
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
ASSETS
CURRENT ASSETS:
Cash $ 108,419
Restricted cash 72,834
Accounts receivable 51,768
Inventories 197,069
Prepaid expenses and other current assets 17,592
----------
Total Current Assets 447,682
PROPERTY AND EQUIPMENT 56,127
DEPOSITS AND OTHER ASSETS 87,039
----------
TOTAL ASSETS $ 590,848
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Checks written in excess of deposits $ 600,168
Accounts payable 3,046,767
Accrued expenses 556,491
Accrued bonus payable 151,684
Accrued payroll taxes 889,908
Notes payable 420,940
Notes payable - related parties 211,674
Current portion of capital lease obligations 30,811
Deferred revenue 119,413
Sales tax payable 284,655
----------
Total Current Liabilities 6,312,511
CAPITAL LEASE OBLIGATIONS, net of current portion 15,779
----------
TOTAL LIABILITIES 6,328,290
STOCKHOLDERS' DEFICIT:
Preferred stock 5,752,410
Common stock 15,761
Additional paid in capital 23,743,804
Accumulated deficit (35,212,214)
Cummulative currency translation adjustment (37,203)
-----------
Total Stockholders' Deficit (5,737,442)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 590,848
===========
See Notes to Consolidated Financial Statements
F-3
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2000 1999
------------ -------------
Revenues $ 8,320,105 $ 15,269,631
Cost of Sales 2,410,096 4,267,045
------------ --------------
Gross Profit 5,910,009 11,002,586
------------ --------------
Distributor commissions 3,681,646 7,229,758
Write-down of patents and goodwill 9,002,582 3,166,841
Selling, general and administrative expenses 5,777,474 7,633,401
------------ --------------
18,461,702 18,030,000
------------ --------------
OPERATING LOSS (12,551,693) (7,027,414)
Gain on foreign exchange 9,076 -
Other expense - (67,180)
Interest (net) (260,160) (663,289)
------------ --------------
LOSS FROM CONTINUING OPERATIONS (12,802,777) (7,757,883)
DISCONTINUED OPERATIONS:
Income from discontinued operations - 304,593
Gain (loss) on disposal (15,000) 200,000
------------ --------------
Loss before extraordinary gain (12,817,777) (7,253,290)
Extraordinary gain - forgiveness of debt 2,148,478 -
------------ --------------
Net loss (10,669,299) (7,253,290)
Preferred stock dividends 1,277,251 1,542,590
------------ --------------
Net loss to common shareholders $ (11,946,550) $ (8,795,880)
============ ==============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations $ (1.47) $ (1.29)
Discontinued operations - 0.07
Extraordinary gain 0.22 -
------------ --------------
Net loss to common shareholders $ (1.25) $ (1.22)
============ ==============
Basic and diluted weighted common shares used 9,588,718 7,233,297
============ ==============
See Notes to Consolidated Financial Statements.
F-4
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock Preferred Stock Additional Common Stock Total
----------------- ---------------- Paid-in Accumulated Subject to Foreign Deferred Stockholders'
Shares Amount Shares Amount Capital Deficit Put Currency Compensation Deficit
-----------------------------------------------------------------------------------------------------------
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
Sale of Convertible Series
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 - - - - 320
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) (426,464) 425,890 - - - - (319)
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 5,163,696 21,443,914 (23,165,664) - - (666,000) 2,783,936
Issuance of Covertible
Series J preferred stock - - 1,000 1,000,000 (62,530) - - - - 937,470
Issuance of common stock
warrants - - - - 100,000 (100,000) - - - -
Conversion of Convertible
Series H preferred stock 434,660 435 (359) (359,154) 385,068 (26,349) - - - -
Conversion of notes payable
to common 3,935,171 3,934 - - 1,216,053 - - - - 1,219,987
Conversion of Convertible
Series E preferred stock 2,984,122 2,984 (94) (93,232) 90,248 - - - - -
Conversion of Convertible
Series G preferred stock 279,852 280 (6) (5,800) 5,520 - - - - -
Issuance of Convertible
Series H preferred stock - - 50 50,000 - - - - - 50,000
Conversion of Series F
preferred stock 138,318 138 (3) (3,100) 2,962 - - - - -
Write-down of deferred
compensation - - - - (555,000) - - - 555,000 -
Amortization of deferred
compensation - - - - - - - - 111,000 111,000
Foreign currency translation - - - - - - - (37,203) - (37,203)
Preferred stock dividends - - - - 1,250,902 (1,250,902) - - - -
Amount payable for acquisition
in common stock - - - - (133,333) - - - - (133,333)
Net loss - - - - - (10,669,299) - - - (10,669,299)
-----------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 2000 15,761,970$15,761 5,752 $5,752,41 $23,743,804 $(35,212,214)$ - $ (37,203) $ - $(5,737,442)
==========================================================================================================
See Notes to Consolidated Financial Statements
F-5
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2000 1999
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,669,299) $ (7,253,290)
Adjustments to reconcile net loss to
net cash used in operating activities:
(Gain) loss on dissolution 15,000 (200,000)
Income from discontinued operations - (304,593)
Depreciation and amortization 364,400 374,154
Loss on disposal of fixed asset (666,856) (3,802)
Write down of patents and goodwill 9,002,582 3,166,841
Gain on forgiveness of debt (2,148,478) (81,260)
Issuance of common stock in settlement
of interest 6,059 122,868
Changes in assets and liabilities:
Decrease in accounts receivable 355,722 228,684
Increase in inventories 863,065 253,033
(Increase) decrease in prepaid expenses 157,117 (134,364)
Decrease in prepaid royalties - 498,125
(Increase) decrease in deposits and other assets (11,432) 283,200
Increase in accounts payable 683,473 1,113,501
Increase in accrued expenses 52,731 532,596
Increase in accrued consulting contract 666,000 -
Increase (decrease) in deferred revenue (408,418) 453,744
Increase in sales tax payable 7,545 245,478
Decrease in accrued expenses for
discontinued operations - (10,000)
-------------- ----------------
8,938,510 6,538,205
-------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (1,730,789) (715,085)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (7,421) (127,077)
Proceeds form the sale of fixed assets 10,533 -
Business acquititions, net of cash acquired (27,587) (1,353,573)
-------------- ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES (24,475) (1,480,650)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash overdraft (43,284) (168,792)
(Increase) decrease in Restricted cash 79,671 (27,505)
Decrease in due to affiliate - 250,000
Proceeds from preferred stock 1,050,000 3,724,195
Proceeds from notes payable and
long-term debt 512,976 581,899
Payments of notes payable and
long-term debt (169,743) (471,914)
Redemption of preferred stock - (1,552,305)
-------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,429,620 2,335,578
-------------- ----------------
INCREASE (DECREASE) IN CASH (325,644) 139,843
CASH - BEGINNING OF YEAR 434,063 294,220
-------------- ----------------
CASH - END OF YEAR $ 108,419 $ 434,063
============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Conversion of preferred stock to common
stock $ 461,286 $ 1,552,305
============== ================
Conversion of debentures, notes payable
and related accrued interest
to common stock $ 1,219,987 $ -
============== ================
Preferred stock dividends $ 1,277,251 $ 1,542,590
============== ================
See notes to consolidated financial statements.
F-6
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 and 1999.
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 July 1997, the Company acquired Global Health Alternatives, Inc.,
("Global") a company incorporated in Delaware, which was in the business of
marketing and distribution of over-the-counter homeopathic pharmaceutical health
products. Global operated its business through its wholly owned subsidiaries:
Ellon, Inc. ("Ellon"), Maine Naturals, Inc. ("MNI") and Natural Health
Laboratories, Inc. These facilities were closed during 1999.
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.
In September 2000, the Company formed a wholly-owned subsidiary, eKaire.com,
Inc., ("eKaire"). eKaire is engaged in the distribution of health care products
and personalized web pages world-wide, utilizing fulfillment centers in the
United States, Canada, New Zealand, and Australia.
In March 2001, Global Health Alternatives, Inc., and Ellon, Inc. two of the
Company's wholly owned subsidiaries filed for Chapter 7 bankruptcy liquidation
in U.S. Federal court, North Dallas. Neither Global Health Alternatives or
Ellon had operations during the year 2000.
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.
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-7
F. Earnings (Loss) Per Share-Accounting Standards No. 128, "Earnings Per
Share" 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. Diluted earnings per share is not being shown due to the fact that the
years ended December 31, 2000 and 1999 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, 2000 and 1999, the Company recorded a charge against patents,
customer lists and goodwill upon such review.
L. Basis of Presentation-The Company had a working capital deficiency of
approximately $5,864,000 as of December 31, 2000, and had recorded net losses of
approximately $10,669,000 and $7,253,000 for the year ended December 31, 2000
and 1999 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 years ended December 31, 2000 and
1999 as a result of the closure of Kaire Europe and related facilities. These
changes had no significant impact on previously reported results of operations
or stockholders' equity.
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.
F-8
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. 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.
R. Restricted Cash-The Company is required to maintain three (3)restricted
cash accounts (i) two (2) with credit card processing companies, one for each
subsidiary. The primary purpose of these accounts is to provide a reserve for
potential uncollectible amounts and chargebacks by Kaire Nutraceuticals' or
eKaire's 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 Canadian bank as security for a bank
drafting process utilized by Kaire Nutraceuticals in the ordinary course of
business.
S. Recently Issued Accounting Standards-The Financial Accounting Standards
Board issued Statement of Financial Accounting Standads ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities
(an amendment of SFAS 133). "These statements establish accounting and reporting
standards for derivative instruments for fiscal years beginning after June 15,
2000. At December 31, 2000, the Company did not have any significant derivative
instruments or hedging activities, and therefore, management believes that the
initial application of these statements will not have a material impact on the
Company's consolidated financial statements.
In December 1999, the Securities and Exchange commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 clarifies existing accounting principles related to revenue
recognition in financial statements. The Company adopted SAB 101 during the
fourth quarter of 2000 and the adoption did not affect the Company's
consolidated financial statements for the year ended December 31, 2000.
F-9
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following:
Estimated
Useful
Lives
-----------------
Equipment, furniture and
fixtures 5 to 7 $ 78,212
Leasehold improvements 3 to 5 3,772
----------------
81,984
Less: Accumulated
depreciation (25,857)
----------------
$ 56,127
================
The Company recorded a loss on sale and abandonment of fixed assets of
$666,856 for the year ended December 31, 2000 in connection with the
closing of facilities in Portland, Maine, New York, New York and Longmont,
Colorado.
4.NOTES PAYABLE
Notes payable consisted of the following:
$93,100 note payable, 10.5% interest, $32,823
due on demand $ 32,823
$270,000 notes payable, 10% interest, $180,285
due on demand (a) 180,285
$175,000 note payable, 10% interest, $166,707
due on demand (b) 166,707
$10,000 note payable, 10% interest, due on
demand (c) 10,000
Amount due for acquisition 31,125
---------------
$ 420,940
===============
(a) 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
was recorded in 1999.
(b) 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 the three days preceding notice of conversion. Due to
the beneficial conversion feature in this note, imputed interest of
$225,000 has been recorded.
(c) The Payee of this Note is entitled, at its option, in the event that
this Note is not paid within two (2) days of demand, to convert at any
time, the principal amount of this Note at a conversion price equal to 75%
of the closing bid price of the Common Stock, on the day the notice of
conversion is received.
F-10
5. NOTES PAYABLE RELATED PARTIES
As of December 31, 2000, the Company owed $211,674 to two of its
former executive officers and directors and two corporations whose
executive staff is related to the Company's CFO. The notes bear interest at
10% and are payable upon demand. The Payees of these Notes are entitled, at
their option, in the event that these Notes are not paid within two (2)
days of demand, to convert at any time, the principal amount of these Notes
at a conversion price equal to 75% of the closing bid price of the Common
Stock, on the day the notice of conversion is received.
6. PAYROLL TAX AND SALES TAX LIABILITIES
During 2000 and 1999, the Company has not made all of 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, 2000, the Company owes approximately $890,000 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 2000, 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 state sales tax returns. As of December 31, 2000, the Company owed
approximately $285,000 in current and delinquent sales taxes. The Company's
failure to pay its delinquent sales taxes could result in tax liens being
filed by various taxing authorities.
7. STOCKHOLDERS' DEFICIT
A. Common Stock-The Company is authorized to issue 500,000,000 shares
of common stock, $.001 par value per 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 $1,000 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.
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.
F-11
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.
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.
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.
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, 200
the Company had recorded a charge of $635,471 due to non-compliance with
this clause.
In September 1999, 610 shares of Series E Preferred Stock was
converted to 603,130 of the Company's common stock.
In the year ended December 31, 2000, $103,715 in accrued dividends was
recorded for the period such stock was outstanding.
During the year ended December 31, 2000, the Company has converted 94
shares of the Series E Preferred Stock into 2,984,122 shares of 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. 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 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 $167,140 in accrued dividends was
recorded for the period such stock was outstanding.
F-12
In November, 2000, the Company has converted 3 shares of the Series F
Preferred Stock into 138,318 shares of common stock.
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.
During the year ended December 31, 2000, the Company has converted 6
shares of the Series G Preferred Stock into 279,852 shares of common stock
and recorded accrued dividends of $20,942 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. In October 2000, the Company
sold an additional 50 shares of Series H Preferred Stock with a stated
value of $1,000 per share realizing proceeds of $50,000.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.
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.
In the year ended December 31, 2000, the Company recorded an imputed
dividend of $16,667 due to the beneficial conversion features in the Series
H Preferred Stock. An additional $49,686 in accrued dividends was recorded
for the period such stock was outstanding.
During the year ended December 31, 2000, the Company had converted 359
shares of the Series H Preferred Stock into 434,660 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.
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.
Series J Preferred Stock. 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 $937,470. 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.
F-13
In the year ended December 31, 2000, the Company recorded an
imputed dividend of $428,579 due to the beneficial conversion features in
the Series J Preferred Stock. An additional $48,767 in accrued dividends
was recorded for the period such stock was outstanding.
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.
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.
In April 1999, the Company issued an aggregate of 295,000, 5 year
options, exercisable at $3.50 per share, to the Company's former 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.
D. 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.
E. Conversion of Notes Payable-During 2000, the Company converted
$1,219,987 of its promissory notes, plus accrued interest into 3,935,171
shares of common stock.
8. 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. In December 2000, a loss of $15,000 was
recorded due to an adjustment in the prior year's gain.
9. 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, 2000, the Company had net deferred tax assets
of approximately $5,600,000. The Company has established a valuation
allowance for the full amount of such deferred tax assets at December 31,
2000, 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.
F-14
The following table reflects the Company's deferred tax assets and
(liabilities) at December 31, 2000:
December 31, 2000
-------------------
Net operating loss deduction $ 5,600,000
Valuation allowance (5,600,000)
-------------------
$ --
===================
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:
For the year Ended
December 31,
-------------------------------------------------------
2000 1999
------------------------- ----------------------
Income tax (benefit) computed at
statutory rate $ (3,500,000) $ (2,500,000)
Effect of permanent differences 3,500,000 450,000
Tax benefit not recognized - 2,150,000
------------------------- ----------------------
Provision for income taxes (benefit) $ - $ -
========================= ======================
The net operating loss carryforward at December 31, 2000 was approximately
$16,000,000 and expires in the years 2012 to 2020.
10. COMMITMENTS AND CONTINGENCIES
A. Leases-The Company leases its Carrollton, Texas office on a month
to month basis. Rent expense for the years ended December 31, 2000 and 1999
was $56,000 and $240,000, 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 December 1999, the Company consolidated it's
Corporate headquarters to Longmont, Colorado. In May 2000, the Company
consolidated all United States offices to Carrollton, Texas. In March 2001,
Global filed for Chapter 7 bankruptcy and no provision has been made for
outstanding lease obligations. The Company has no minimum rental
commitments for any facility as of December 31, 2000.
B. 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. In January 2001 all patent rights were
transferred to GLI, Inc.
C. 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., our wholly-owned subsidiary.
We asserted counterclaims against Samantha Haimes and Leonard Haimes. The
complaint arises out of the defendant's alleged breach of contract in
connection with our natural health care center which was located in Boca
Raton, Florida. The plaintiff is seeking damages in the amount of
approximately $535,000. We 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 agreed to register the shares of our
common stock. On October 11, 2000, due to our noncompliance with the
settlement, a judgement was taken against us in the amount of $325,000 plus
interest.
F-15
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. We
believe that with the Chapter 7 bankruptcy filing of Global Health this
case will be dismissed.
On July 10, 2000, The State of Texas obtained judgment against the
Company in the amount of $109,170 for unpaid sales taxes, penalties,
interest, and attorney fees. We have entered into a voluntary payment
arrangement and have recorded a liability of $114,278 which is included in
our financial statements for the year ended December 31, 2000.
On December 29, 2000, Merrill Corporation obtained judgment against
the Company in the amount of $145,497, plus interest. We have recorded a
liability of $145,497 which is included in our financial statements for the
year ended December 31, 2000.
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.
D. Major Supplier
The Company currently buys all of its Pycnogenol, an important
component of its products, from one supplier.
Although there are a limited number of manufacturers of this component,
management believes that other suppliers could provide similar components
on comparable terms. The Company does not maintain any contractual
commitments or similar arrangements with other suppliers.
The Company purchases its products from manufacturers and suppliers on
an as needed basis. Should these relationships terminate, the Company's
supply and ability to meet consumer demands would be adversely affected.
11. Capital Lease Obligations
The Company has various capital lease obligations which are
collateralized by equipment. Interest rates under the agreements are 20.6%,
with monthly principal and interest payments ranging from $360 to $2,300.
F-16
12. 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 became 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:
Options Warrants
---------------------------------------------------------- ------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Exercisable Shares Price Exercisable
----------------- ----------------- -------------------- -------------- ------------------ --------------
Outstanding at
December 31,
1998 44,100 15.68 44,100 2,563,257 7.30 2,563,257
Granted 295,000 3.50 295,000 250,000 3.93 250,000
----------------- ----------------- -------------------- -------------- ------------------ --------------
Outstanding
at December 31,
1999 339,100 6.01 339,100 2,813,257 7.00 2,813,257
Granted - - - 138,889 1.44 138,889
Canceled (295,000) 3.50 (295,000) - - -
----------------- ----------------- -------------------- -------------- ------------------ --------------
Outstanding
at December 31,
2000 44,100 15.68 44,100 2,952,146 6.74 2,952,146
================= ================= ==================== ============== ================== ==============
Options Warrants
------------------- ------------------
Weighted Average fair value of
options and warrants granted
during 1999 1.79 1.90
Weighted Average fair value of
options and warrants granted
during 2000 None 1.44
F-17
The following table summarizes information about exercisable
stock options and warrants at December 31, 2000:
Number Remaining Average Average
Range of Outstandin Contractual Exercise Number Exercise
Exercise Price g Life Price Exercisable Price
-----------------------------------------------------------------------------------------------------------------
Options: $1.00 - 101.20 44,100 1- 7 $15.68 44,100 $15.68
Warrants: $1.00 - 113.75 2,952,146 0- 5 $6.74 2,952,146 $6.74
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 year ended 1999: 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 year ended
1999 was $1.79. If the Company had recognized compensation cost of stock
options in accordance with SFAS 123, the Company's pro forma loss and net
loss per share would have been as follows:
Year ended
December 31,
1999
--------------------------
Net loss to common stockholders:
As reported $ (8,795,880)
Pro forma $ (8,925,006)
Loss from continuing operations:
As reported $ (9,300,473)
Pro forma $ (9,429,599)
Net loss per share to common stockholders:
Basic
As reported $ (1.22)
Pro Forma $ (1.24)
Net loss per share to common stockholders continuing operations:
Basic
As reported $ (1.29)
Pro Forma $ (1.30)
13. FORGIVENESS OF DEBT
During the year ended December 31, 2000 the Company realized a gain of
approximately $2,148,000 due to the filing of Chapter 7 bankruptcy by
Global and its various wholly owned subsidiaries.
14. RELATED PARTY TRANSACTIONS
The Company has paid legal fees to a law firm, whose member is a
former director of the Company. Fees of approximately $0 and $79,000 were
paid in the year's ended December 31, 2000 and 1999, 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. In 2000, the $45,000 was assigned to a third party, and
an additional $68,800 was recorded for the chief executive officer for
business expenses.
F-18
15. 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, 2000 is as follows:
United Australia and Other
States New Zealand Subsidiaries Consolidated
---------- ------------- ------------- ------------
Sales to unaffiliated customers $6,860,235 $1,369,794 $90,076 $8,320,105
Long-lived assets at December 31,
2000 $37,413 $18,714 $-0- $56,127
16. ACQUISITIONS
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 the customer list
acquired is approximately $6,948,000. Both intangible assets were written
off in entirety at December 2000. Management having determined that
goodwill and the value of the customer list no longer existed with the
decline in sales of 70% since acquisition.
17. FOURTH QUARTER ADJUSTMENTS
Fourth quarter adjustments include the following:
Write-down of patents $ 1,586,000
Write-off of customer lists $ 6,630,000
Write-off of goodwill $ 786,000
Write-off of inventory $ 103,000
18. SUBSEQUENT EVENTS
In January 2001, the Company entered into a joint venture with Lexxus
International and formed a new majority owned subsidiary, Lexxus
International, Inc., a Delaware Corp. Lexxus International, Inc. holds the
exclusive rights to distribute a patent pending topical feminine viagra
known as Viacreme. The Company distributes it's line of products through
network marketing channels.
In January 2001, the Company granted 6,500,000 stock options to
employees and consultants. The options have an exercise price of $0.011.
The options vest over eighteen months and expire in January 2006 or 90 days
after termination of employment.
In January 2001, the Company increased the number of authorized shares
of common stock to 500,000,000. The increase in authorized shares was
required for the Company to fulfill its obligations with regards to
convertible debt securities.
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