<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998
REGISTRATION NO. 333-46085
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KAIRE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5122 84-1359178
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
380 LASHLEY STREET
LONGMONT, COLORADO 80501
(303) 682-0110
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
ROBERT L. RICHARDS
CHIEF EXECUTIVE OFFICER
KAIRE INTERNATIONAL, INC.
380 LASHLEY STREET
LONGMONT, COLORADO 80501
(303) 682-0110
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Robert Perez, Esq. Jay M. Kaplowitz, Esq.
Gusrae, Kaplan & Bruno Gersten, Savage, Kaplowitz
120 Wall Street & Fredericks, LLP
New York, New York 10005 101 East 52nd Street
Tel No. (212) 269-1400 New York, New York 10022
Fax No. (212) 809-5449 Tel No. (212) 752-9700
Fax No. (212) 752-9713
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 10, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
KAIRE INTERNATIONAL, INC.
1,000,000 SHARES OF COMMON STOCK AND
1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Kaire International, Inc., a Delaware corporation (the "Company") hereby
offers 1,000,000 shares of common stock, $.01 par value (the "Common Stock") of
the Company and 1,000,000 Redeemable Common Stock Purchase Warrants (the "Public
Warrants"). The shares of Common Stock and Warrants are being offered to the
public at the initial offering prices of $6.00 per share and $0.10 per warrant,
respectively. The Common Stock and the Public Warrants offered hereby (sometimes
hereinafter collectively referred to as the "Securities") will be separately
tradeable immediately upon issuance and may be purchased separately. Investors
will not be required to purchase shares of Common Stock and Public Warrants
together or in any particular ratio. Each Public Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $6.60 (the "Exercise
Price"), subject to adjustment, at any time during the period, commencing on the
second anniversary of this Prospectus (the "Effective Date") until the close of
business on the sixth anniversary of the Effective Date (such period, the
"Exercise Period"), provided, however, that prior to the Exercise Period, the
Public Warrants will be exercisable only if May Davis Group, Inc. (the
"Underwriter") has consented in writing to all of the Public Warrants being
exercisable.
The Public Warrants are redeemable, in whole or in part, by the Company at a
price of $.05 per Public Warrant, at any time that they are exercisable, and
prior to their expiration, provided that (i) prior written notice of not less
than thirty days is given to the Warrantholders, (ii) the average closing bid
price of the Company's Common Stock for the twenty consecutive trading days
immediately prior to the date on which the notice of redemption is given, shall
have exceeded $10.00 per share, and (iii) Warrantholders shall have exercise
rights until the close of business on the day preceding the date fixed for
redemption, if the Public Warrants are then exercisable.
Prior to this offering (the "Offering"), there has been no public market for
the Company's Common Stock and Public Warrants, and there can be no assurance
that such a public market will develop or be sustained after the completion of
the Offering. The Offering price of the Common Stock and the exercise price and
other terms of the Public Warrants were established by negotiations between the
Company and the Underwriter and do not bear any direct relationship to the
Company's assets, book value, results of operations or any other criteria of
value. The Company has applied for the listing of the Common Stock and Public
Warrants on the Electronic Bulletin Board ("Bulletin Board") under the symbols
" " and " ", respectively. There can be no assurance that such listing
will be obtained.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS," COMMENCING ON PAGE 9,
AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................ $6.00 $.60 $5.40
Per Warrant.............................................. $.10 $.01 $.09
Total(3)................................................. $6,100,000.00 $610,000.00 $5,490,000.00
</TABLE>
(1) Does not include additional compensation to the Underwriter consisting of
(i) a non-accountable expense allowance equal to 3% of the aggregate
purchase price of the Securities, or $183,000 ($210,450 if the Underwriter's
overallotment option is exercised in full); (ii) warrants to purchase
100,000 shares of Common Stock at $7.50 per share and 100,000 warrants at
$.125 per warrant, exercisable for an additional 100,000 shares of Common
Stock at $6.60 per share; and (iii) a three-year consulting agreement
providing for fees totalling $108,000, which is payable to the Underwriter
in full on the closing of this Offering. For additional information
concerning further agreements between the Company and the Underwriter,
including an agreement to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) After deducting Underwriting discounts and commissions, but before the
payment of the Underwriter's non-accountable expense allowance in the amount
of $183,000 ($210,450 if the Underwriter's overallotment option is exercised
in full) and other expenses of the Offering payable by the Company
(estimated at $540,294).
(3) The Company has granted the Underwriter an option to purchase up to 150,000
additional shares of Common Stock and 150,000 additional Public Warrants,
upon the same terms and conditions set forth above, solely to cover
overallotments, if any (the "Overallotment Option"). If the Overallotment
Option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be increased to
$7,015,000, $701,500 and $6,313,500, respectively. See "Underwriting."
The Common Stock and Public Warrants are being offered on a "firm
commitment" basis, subject to prior sale, when, as and if delivered to and
accepted by the Underwriter, and subject to certain other conditions and legal
matters. The Underwriter reserves the right to withdraw, cancel or modify the
Offering and to reject orders in whole or in part. It is expected that delivery
of the certificates representing the shares of Common Stock and Public Warrants
will be made at the offices of the Underwriter, in New York City, on or about
, 1998.
MAY DAVIS GROUP, INC.
The date of this Prospectus is , 1998
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND THE WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
The Company intends to distribute to its stockholders annual reports
containing consolidated financial statements audited and reported upon by its
independent public accountants after the close of each fiscal year, and will
make such other periodic reports, containing unaudited consolidated financial
information, as the Company may determine to be appropriate or as may be
required by law. The Company's fiscal year ends on December 31st of each year.
A logo consisting of human facial silhouettes within a heart,
Kaire-Registered Trademark-, Pro Vine-Registered Trademark-, Nature's
Shield-Registered Trademark-, Dermunol-TM- and Immunol-TM- used in this
Prospectus are trade marks or tradenames of the Company.
Pycnogenol-Registered Trademark- is a trade name/trademark of Horphag Research
Ltd. ("Horphag").
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including financial statements
and notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors". Each prospective investor is urged to read this Prospectus
in its entirety. Except as otherwise noted, all information contained in this
Prospectus gives no effect to the exercise of (i) the Overallotment Option, (ii)
the Underwriter's warrants, (iii) warrants offered hereby or issued to private
investors, or (iv) options granted under the Company's stock option plan.
THE COMPANY WOULD LIKE TO CAUTION READERS REGARDING CERTAIN FORWARD-LOOKING
STATEMENTS IN THE PROSPECTUS AND THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART. STATEMENTS THAT ARE BASED ON MANAGEMENT'S PROJECTIONS,
ESTIMATES AND ASSUMPTIONS ARE FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVE,"
"EXPECT," "ANTICIPATE," AND SIMILAR EXPRESSIONS GENERALLY IDENTIFY
FORWARD-LOOKING STATEMENTS. WHILE THE COMPANY BELIEVES IN THE VERACITY OF ALL
STATEMENTS MADE HEREIN, FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED UPON A
NUMBER OF ESTIMATES AND ASSUMPTIONS THAT, WHILE CONSIDERED REASONABLE BY THE
COMPANY ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE
UNCERTAINTIES AND CONTINGENCIES. MANY OF THESE UNCERTAINTIES AND CONTINGENCIES
CAN AFFECT THE COMPANY'S ACTUAL RESULTS AND COULD CAUSE ITS ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE
BY, OR ON BEHALF OF, THE COMPANY. PLEASE SEE "RISK FACTORS" FOR A DESCRIPTION OF
SOME, BUT NOT ALL, OF THESE UNCERTAINTIES AND CONTINGENCIES.
THE COMPANY
Kaire International, Inc. (the "Company") develops and distributes, through
a network of independent associates, products that are intended to appeal to
health-conscious consumers. Current Company products include health care
supplements and personal care products. The Company offers a line of
approximately 50 products which it divides into nine categories, including
Antioxidant Protection, (Bodily) Defense, Digestion, Energy and Alertness,
Stress, Vital Nutrients, Weight Management, Anti-Aging and Personal Care.
The Company develops products that it believes will have market appeal to
its associates and their customers, and assists its associates in establishing
their own businesses. The Company believes that its associates can start a home
based business without significant normal start-up costs and other difficulties
usually associated with new ventures. The Company provides product development,
marketing aids, customer service, and essential record-keeping functions to its
associates. The Company also provides other support programs to its associates
including a 24 hour telephone assistance system, teleconferencing, optional
seminars, and business training systems with audio and video tapes.
The Company's marketing strategy revolves around associates actively
recruiting interested people to become new associates for the Company. These
recruits are placed beneath the recruiting associate in his or her "network" and
are referred to by the Company as that associate's "organization." Associates
earn commissions on sales generated by the recruited associates in their
organization as well as retail profits on the sales they generate directly.
The Company believes its marketing program is designed to provide incentives
for associates to build an organization of recruited associates in their
organization to maximize their earning potential. The Company has experienced an
increase in the number of associates sponsored from approximately 1,900 at the
end of its first fiscal period of October 20th to December 31, 1992 ("Fiscal
1992") to over 425,000 as of March 31, 1998. Approximately 60,000 of the
Company's associates have had product purchases in excess of $50 during the past
year and are considered to be "active" associates by the Company.
The Company purchases most of its products directly from manufacturers and
markets them to its independent associates located in all fifty states, the
District of Columbia, Puerto Rico, Guam, and Canada. In 1995 the Company
expanded the number of its associates located in other parts of the world,
3
<PAGE>
particularly Australia and New Zealand. During 1997, the Company expanded its
operations into South Korea, Trinidad and Tobago, and the United Kingdom.
The Company's first three full fiscal years were periods of rapid growth
with net sales of approximately $2,719,000, $36,895,000 and $57,841,000,
respectively, for the Company's fiscal years ended December 31, 1993, 1994 and
1995 (hereinafter "Fiscal 1993", "Fiscal 1994" and "Fiscal 1995"). As a result,
the Company had a net loss of approximately $207,000 for Fiscal 1993, and net
income of approximately $1,091,000 and $1,186,000 for Fiscal 1994 and Fiscal
1995, respectively.
By the end of Fiscal 1995, management noted that growth in the Company's
monthly net sales had begun to level off, and there was a decrease in the number
of new associates that were joining and purchasing from the Company on a monthly
basis indicating that a decline in net sales could be anticipated due to the
Company possibly having reached the maturity level, which the Company believes
is frequently encountered by companies in the network marketing industry, beyond
which growth becomes very difficult. During the latter part of Fiscal 1995 and
continuing into the Company's fiscal year ending December 31, 1996 ("Fiscal
1996"), management formulated a three pronged approach to overcome this
maturation, consisting of: (1) attempting to attract more entrepreneurial minded
and younger persons to the Company's associate program; (2) introducing new
products, including products directed at more youthful end users (which was also
intended to aid in the attraction of younger associates); and (3) expanding
geographically. To attract a more entrepreneurial associate, the Company
modified its associate commission program, introduced new training materials and
took efforts to enhance communications with sales associates. This modified
commission program was not successful and, by the fall of 1996, the Company
essentially restored its pre-March 1996 commission program.
During Fiscal 1996, the Company's net sales of approximately $51,499,000
represented a decline of approximately $6,342,000 from the Fiscal 1995 net sales
level of approximately $57,841,000. This decline in net sales continued during
the Company's fiscal year ended December 31, 1997 ("Fiscal 1997"), with net
sales of approximately $35,682,000, a decrease of $15,817,000. During Fiscal
1996 and Fiscal 1997, the Company incurred net losses of approximately
$1,803,000 and $6,099,000, respectively. During the three month period ended
March 31, 1998 ("Three Months 1998"), the Company sustained a net loss of
approximately $326,000 on net sales of approximately $7,717,000. The net loss
and net sales of Three Months 1998 reveal a slowing of net losses but a
continuing decline in sales when compared to the three month period ended March
31, 1997 ("Three Months 1997") during which the Company sustained a net loss of
approximately $1,419,000 upon net sales of approximately $9,604,000. At March
31, 1998, the Company had a working capital deficit of $6,938,000. The Company's
independent certified public accountants stated in their report of May 1, 1998
on the Company's December 31, 1997 consolidated financial statements that, due
to losses from operations and a working capital deficit, there was "substantial
doubt" about the ability of the Company to continue as a going concern.
The Company attributes this trend, from net income in Fiscal 1994 and Fiscal
1995 to net losses in Fiscal 1996 and Fiscal 1997, to, among other things, the
unsuccessful modification of its associate commission structure and increases in
selling, general and administrative expenses. See "Risk Factors--No Assurance of
Return to Profitability." In order to return to profitability, the Company has
continued to pursue its three pronged approach, pursuant to which it essentially
restored its former commission structure and reduced its general and
administrative staffing levels.
The Company was incorporated under the laws of the state of Nevada on
October 20, 1992. In March 1997, the Company merged with a Delaware corporation
specifically established by the Company for the purpose of reorganizing itself
under the laws of that jurisdiction. Kaire New Zealand Ltd. and Kaire Australia
Pty. Ltd. were incorporated under the laws of their respective jurisdictions in
August 1995. In November 1995, these two companies purchased the operating
assets from predecessor corporations in which the Company had no interest. The
Company acquired a 51% interest in Kaire New Zealand, Ltd. and Kaire Australia
Pty. Ltd. at that time. Kaire Korea, Ltd. ("Kaire Korea") was incorporated in
4
<PAGE>
March 1997 under the laws of South Korea. The Company's ownership in Kaire Korea
is 85% at March 31, 1998. In June 1997, Kaire Korea received its license to do
business as a "door to door selling company". Kaire Trinidad, Ltd. was
incorporated under the laws of Trinidad and Tobago in May 1997 and commenced
operations in June. Kaire Europe Ltd. was incorporated in the United Kingdom in
July 1997 and commenced sales in November 1997. On December 9, 1997, the Company
entered into and completed an Agreement and Plan of Reorganization (the
"Agreement") with Interactive Medical Technologies, Ltd. ("IMT") whereby IMT
agreed to provide an additional $300,000 equity investment in the Company and
convert the $700,000 previously borrowed by the Company to equity in the Company
and for IMT to provide additional equity investments of $2,000,000 by February
15, 1998. The additional equity investment of $2,000,000 from IMT was not
received by the Company. Certain of the Company's stockholders exchanged 81%,
3,573,351 shares, of the issued and outstanding shares of the Company's Common
Stock for approximately forty five percent (45%) 118,209,200 shares of IMT's
common stock as defined in the Agreement. The foregoing transaction qualified as
a tax free reorganization pursuant to Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended. During 1998, IMT exchanged 57% of the common
stock of the Company to Global Marketing, LLC. Unless otherwise specified or
required by the context of the following text, all references in this Prospectus
to the "Company" include the Company and all of the foregoing subsidiaries. The
Company's executive office is located at 380 Lashley Street, Longmont, Colorado
80501 and its telephone number at that address is (303) 682-0110. The Company's
web-site is located at http:\\www.kaireint.com.
RISK FACTORS
Certain risk factors should be considered in evaluating the Company, its
business and its proposed expansion plans. Such factors include, among others,
the Company's recent substantial losses, the going concern explanatory paragraph
in the Company's independent certified public accountant's report, losses
sustainable in entering new and overseas markets, use of a substantial portion
of the net proceeds for debt repayment, the possible need for additional
financing, the risks inherent in establishing new business operations and
expanding marketing efforts, intense competition, dependence upon vendors and
substantial dilution. For a discussion of these and certain other factors, see
"Risk Factors".
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered(1)........................ 1,000,000 shares of Common Stock and
1,000,000 Public Warrants. Each Public
Warrant entitles the holder to purchase one
share of Common Stock at a price of $6.60
during a four year period (the "Exercise
Period") commencing two years after the date
of this Prospectus and lasting until the date
six years after the date hereof, provided,
however, that prior to the Exercise Period,
the Public Warrants may be exercisable only
if the Underwriter has consented in writing
to all of the Public Warrants being
exercisable. The exercise price and the
number of shares issuable upon exercise of
the Public Warrants are subject to adjustment
in certain circumstances. See "Description of
Securities."
Common Stock Outstanding Before Offering..... 4,418,351 Shares.
Common Stock Outstanding After Offering(1)... 5,418,351 Shares.
Warrants and Options Outstanding Before
Offering(2)................................ 1,599,100 Warrants and Options.
Warrants and Options Outstanding After
Offering(2)(3)............................. 2,599,100 Warrants and Options.
Warrant Expiration Date...................... , 2004 (six years after the Effective Date).
Warrant Redemption........................... Redeemable by the Company, in whole or in
part at a price of $.05 per Public Warrant,
at any time that they are exercisable upon
not less than 30 days prior written notice to
the holders of the Public Warrants, provided
that the average closing bid price of the
Company's Common Stock for the twenty
consecutive trading days immediately prior to
the date on which the notice of redemption is
given, shall have exceeded $10.00 per share.
Use of Proceeds.............................. Expenses of expansion efforts in South Korea
and the United Kingdom, repayment of
indebtedness to the private placement
investors and Horphag, inventory and working
capital. See "Use of Proceeds."
Proposed Electronic Bulletin Board Symbols(4)
Common Stock...............................
Warrants...................................
</TABLE>
- ------------------------
(1) Does not include (i) 150,000 shares of Common Stock and 150,000 Public
Warrants, subject to the Underwriter's Overallotment Option; (ii) 1,599,100
shares of Common Stock issuable upon the exercise of outstanding warrants;
(iii) 200,000 shares of Common Stock issuable upon the exercise of
6
<PAGE>
the Underwriter's warrants including the shares of Common Stock underlying
the warrants included within the Underwriter's warrants; or (iv) 1,000,000
shares of Common Stock reserved for issuance pursuant to the Company's stock
option plan. See "Management," "Underwriting" and "Description of
Securities."
(2) Includes 1,425,000 warrants on the same terms as the Public Warrants offered
hereby, and 174,100 warrants and options with an exercise price of $.01.
(3) Does not include (i) 150,000 Public Warrants subject to the Underwriter's
overallotment option; or (ii) the Underwriter's Warrants.
(4) The proposed trading symbols do not imply that a liquid and active market
will be developed or sustained for the securities upon completion of this
Offering.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial information has been derived
from the financial statements of the Company and should be read in conjunction
with the financial statements and the related notes thereto appearing elsewhere
in this Prospectus. For a description of the Financial Statements from which the
following financial data has been derived, see the introduction to "Selected
Financial Information." The summary financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this Prospectus. Information as to the
periods ended March 31, 1998 and March 31, 1997 is unaudited.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
<CAPTION>
OCTOBER 20, 1992
(INCEPTION) TO
DECEMBER 31, 1992 1993 1994 1995 1996 1997
------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales................................ $ 92 $ 2,719 $ 36,895 $ 57,841 $ 51,499 $ 35,682
Income (Loss) from Operations............ $ (162) $ (180) $ 1,462 $ 2,164 $ (2,764) $ (5,684)
Net Income (Loss)........................ $ (162) $ (207) $ 1,091 $ 1,186 $ (1,803) $ (6,099)
Net Income (Loss) Per Share--
Basic and diluted...................... $ (.06) $ (.07) $ .39 $ .40 $ (.61) $ (1.51)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Net Sales................................................................................... $ 9,604 $ 7,717
Loss from Operations........................................................................ $ (1,533) $ (114)
Net Loss.................................................................................... $ (1,419) $ (326)
Net Loss Per Share--Basic and diluted....................................................... $ (.40) $ (.07)
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(1)
--------- ---------
Working Capital Deficiency................................................................... $ (6,938) $ (2,171)
Total Assets................................................................................. 4,627 7,236
Long Term Obligations........................................................................ 14 14
Total Liabilities............................................................................ 9,858 7,700
Minority Interest in Consolidated Subsidiaries............................................... 205 205
Stockholders' Deficit........................................................................ (5,436) (669)
</TABLE>
(1) Gives effect to the sale of shares of common stock to be sold by the
Company in the Offering and the application of the estimated net proceeds
therefrom to repay debt, as if the transactions had occurred as of March 31,
1998. See "Use of Proceeds".
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE MADE BY ANY INVESTOR WHO CANNOT
AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. EACH PROSPECTIVE PURCHASER SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FACTORS ASSOCIATED WITH
THIS OFFERING, AS WELL AS OTHER FACTORS DESCRIBED ELSEWHERE IN THIS PROSPECTUS,
BEFORE MAKING AN INVESTMENT.
NO ASSURANCE OF A RETURN TO PROFITABILITY; RECENT SUBSTANTIAL LOSSES. From
its inception in late 1992 through the end of its Fiscal 1995, the Company had
experienced a rapid expansion in its net sales, growing from net sales of
approximately $2,719,000 during its first full fiscal year, Fiscal 1993, to net
sales of approximately $36,895,000 and $57,841,000, for Fiscal 1994 and Fiscal
1995, respectively. During these three fiscal years the Company's net income
experienced corresponding increases, with the Company sustaining a net loss of
approximately $207,000 during Fiscal 1993 and net income of approximately
$1,091,000 and $1,186,000 during Fiscal 1994 and Fiscal 1995, respectively.
Fiscal 1996 and Fiscal 1997 were periods of declining revenues and net losses.
During Fiscal 1996 and Fiscal 1997, the Company sustained net losses of
approximately $1,803,000 and $6,099,000, respectively, upon net sales of
approximately $51,499,000 and $35,682,000, respectively. During the Three Months
1998, the Company sustained a net loss of approximately $326,000 on net sales of
approximately $7,717,000. This is in comparison to Three Months 1997 during
which the Company sustained a net loss of approximately $1,419,000 upon net
sales of approximately $9,604,000. See "Risk Factors--Going Concern Modification
in Independent Certified Public Accountants' Report." Management believes that
the foregoing net sales decreases and losses resulted from the Company maturing
as a network marketing enterprise, having reached a leveling off of its net
sales during the latter part of 1995, and the Company's own initial efforts to
overcome this maturation. In an effort to overcome this maturation, the Company
formulated several approaches. Those approaches were to: attract a younger and
more entrepreneurial minded associate than it had attracted in the past; attract
persons who had been successful network marketers with other companies; continue
to expand its line of products, including efforts to develop products directed
at a younger market; and further expand geographically outside of the United
States. Attracting new, younger and entrepreneurial minded associates was, by
its nature, the first approach undertaken. In an effort to accomplish this,
among other things, the Company changed its commission program that had been in
place since 1994. The change in commission structure was not well received by
the Company's associates and, in addition, the Company's new commission
structure attracted associates who misused the new commission program which
increased commissions on first time sales without providing for commission
recovery by the Company on product returns and refunds. Exacerbating the
Company's losses were to lesser degrees; the time and cost of personnel devoted
to promoting the new commission program, competition in recently penetrated
markets of Australia and New Zealand of "copycat" products, the introduction of
new products that were not as well received by the market as had been expected,
a new product not as consistent as the product it replaced and a corporate
infrastructure (new personnel and facilities) with related fixed costs that had
grown correspondingly with the growth in sales in prior fiscal years. The
Company, in the latter part of Fiscal 1996, reverted to essentially its former
commission program. There can be no assurance that future unforeseen
developments, such as the failure to successfully penetrate the three new
geographically targeted markets (especially South Korea), generate revenue
growth as market competition increases, create or secure new products that will
be accepted in the market place, contain its general and administrative overhead
costs and other unforeseen circumstances will not have a material adverse effect
on the Company's operations in its current or expanded market areas. See "Risk
Factors--Going Concern Modification in Independent Certified Public Accountants'
Report," "--Losses Sustained in Attempting to Penetrate New Markets; Risks
Involved in Entering New Markets," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and Consolidated
Financial Statements and the notes thereto.
GOING CONCERN MODIFICATION IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
REPORT. The report dated May 1, 1998 from BDO Seidman, LLP, the independent
certified public accountants for the Company,
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expressed "substantial doubt" about the Company's ability to continue as a going
concern due to recurring losses and negative working capital. There can be no
assurance that the Company will again or ever achieve profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and Consolidated Financial Statements.
LOSSES SUSTAINED IN ATTEMPTING TO PENETRATE NEW MARKETS; RISKS INVOLVED IN
ENTERING NEW MARKETS. The Company intends to complete its expansion efforts into
South Korea and the United Kingdom allocating a portion of the net proceeds of
this Offering to this effort. Completing the establishment of its operations in
South Korea will require the recruitment and training of new personnel, paying
salaries of South Korean personnel and their related benefits, continuing
compliance with the laws and regulations of that country, delivering products
into that country which are subject to quarantine periods, purchasing equipment,
continuing leasehold payments and payments of other costs and expenses until
South Korean operations generate sufficient revenues to cover the foregoing and
other costs and expenses related to the Company's South Korean operations. Until
such time as South Korean and United Kingdom operations generate sufficient
revenue to cover the foregoing costs and expenses, of which no assurance can be
given, the Company's South Korean and United Kingdom operations will continue to
sustain losses. In addition to the foregoing, future events, including problems,
delays, expenses and complications frequently encountered by companies seeking
to penetrate new markets, foreign currency exchange fluctuations, as well as
changes in governmental policies, economic or other conditions may occur that
could cause the Company to be unsuccessful in these expansion efforts. The net
proceeds of this Offering allocated to that purpose may be expended without the
Company deriving any economic benefit. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
NEED FOR ADDITIONAL FUTURE FINANCING; POSSIBLE ADDITIONAL DILUTION. The
Company may require additional equity or debt financing in order to complete its
expansion efforts into any additional geographic areas that the Company may
target in the future or for additional working capital if it continues to
sustain losses or its South Korean or other expansion areas continues to suffer
losses. Any additional equity financing that may be obtained may dilute the
voting power and equity interests of the Company's stockholders. Any additional
debt financing that may be obtained may restrict or impair the Company's ability
to declare dividends or may impose financial restrictions on the Company's
ability to expand. There can be no assurance that the Company will be able to
obtain additional financing on terms acceptable to the Company or at all. In the
event additional financing is unavailable to the Company, the Company may be
materially adversely affected. See "Use of Proceeds."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately 29% of the
estimated net proceeds to be received by the Company from this Offering have
been allocated to working capital and the Company will have broad discretion as
to the application of such funds. See "Use of Proceeds."
USE OF PROCEEDS TO REPAY INDEBTEDNESS. Approximately 45% of the estimated
net proceeds to be received by the Company from this offering have been
allocated to repay indebtedness and will, as a result, not be used for the
Company's future operations. See "Use of Proceeds."
NON-PAYMENT OF PAYROLL AND SALES TAXES. During Fiscal 1997 and its current
fiscal year to end December 31, 1998 ("Fiscal 1998"), the Company has not made
its payroll tax deposits with the Internal Revenue Service ("IRS") and various
state taxing authorities on a timely basis and is negotiating a payment plan
with the IRS. At December 31, 1997 and March 31, 1998, the Company owed
approximately $277,000 and $371,000, respectively, in payroll tax liabilities
including interest and penalties. As of March 31, 1998 and December 31, 1997,
the Company has federal income tax refunds related to the carryback of net
operating losses of approximately $264,000. The Company has offset these income
tax refunds against the federal payroll tax liabilities as of March 31, 1998 and
December 31, 1997. Also, during Fiscal 1997 and Fiscal 1998, the Company has not
made its sales tax deposits with the various state taxing authorities on a
timely basis. At December 31, 1997 and March 31, 1998, the Company owed
approximately $268,000 and $142,000, respectively, in current and delinquent
sales tax deposits. There can be no
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assurance that the Company will successfully negotiate a payment plan with the
IRS or bring its sales tax deposits current. The IRS and various state taxing
authorities could commence actions against the Company including property
seizure proceedings. If any such action were to be successful the Company could
be required to pay judgments entered against it which may require the sale of
assets at "distress" sale prices. In addition, the cost of defending any such
litigation could be substantial.
GOVERNMENT REGULATION OF PRODUCTS AND MARKETING. The Company is subject to
or affected by extensive governmental regulations not specifically addressed to
network marketing. Such regulations govern, among other things, (i) product
formulation, labeling, packaging and importation, (ii) product claims and
advertising, whether made by the Company or its associates, (iii) fair trade and
distributor practices, and (iv) taxes, transfer pricing and similar regulations
that affect foreign taxable income and customs duties. Based on the Company's
experience and research, the nature and scope of inquiries from government
regulatory authorities, and the advice it receives from various counsel, the
Company believes that it is in material compliance with all regulations
applicable to the Company. However, there can be no assurances that the Company
will not be subject to inquiries and regulatory investigations or disputes and
the effects of any adverse publicity resulting therefrom. Any assertion or
determination that the Company is not in compliance with existing laws or
regulations could potentially have a material adverse effect on the Company's
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 the Company's business and results of operations. The
Company cannot determine the effect, if any, that future governmental
regulations or administrative orders may have on the Company's business and
results of operations. Moreover, governmental regulations in countries where the
Company plans to commence or expand operations may prevent, delay or limit
market entry of certain products or require the reformulation of such products.
Regulatory action, whether or not it results in a final determination adverse to
the Company has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of associates and, consequently, on
the Company's sales and earnings. See "--Losses Sustained in Attempting to
Penetrate New Markets; Risks Involved in Entering New Markets" and
"Business--Government Regulation."
GOVERNMENT REGULATION OF DIRECT SELLING ACTIVITIES. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes.
Such schemes, often referred to as "pyramid" or "chain sales" schemes, often
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products. The
Company must comply with South Korea's strict Door-to-Door Sales Act, which
requires among other things, the regular reporting of revenue, the registration
of associates together with the issuance of a registration card, and the
maintaining of a current associate registry. This law also limits the amount of
certain bonuses that a registered multi-level marketing company can pay to
associates up to a maximum of 35% of revenue in a given month. See "Business--
Government Regulation."
As is the case with most network marketing companies, the Company has from
time to time received inquiries from various government regulatory authorities
regarding the nature of its business and other issues such as compliance with
local business opportunity and securities laws. To date none of these inquiries
has resulted in a finding materially adverse to the Company. There can be no
assurance that the Company will not face inquiries in the future which, either
as a result of findings adverse to the Company or as a result of adverse
publicity resulting from the initiation of such inquiries, could have a material
adverse effect on the Company's business and results of operations. See
"Business--Government Regulation."
Even though management believes that laws governing direct selling are
generally becoming more permissive in certain Asian countries, certain countries
currently have laws in place that would prohibit the Company from conducting
business in such markets. There can be no assurance that the Company will be
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allowed to continue to conduct business in each of its existing markets. See
"Business--Government Regulation."
TAXATION RISKS AND TRANSFERS PRICING. The Company is subject to taxation in
the United States, where it is incorporated. In addition, each of the Company's
subsidiaries are subject to taxation in the country in which it operates,
currently ranging from a statutory tax rate of 32% in South Korea to 45% in
Trinidad and Tobago. The Company will be eligible for foreign tax credits in the
United States for the amount of foreign taxes actually paid in a given period.
In the event that the Company's operations in high tax jurisdictions such as
Trinidad and Tobago grow disproportionately to the rest of the Company's
operations, the Company will be unable to fully utilize its foreign tax credits
in the United States, which could, accordingly, result in the Company paying a
higher overall effective tax rate on its worldwide operations.
Because the Company's subsidiaries operate outside of the United States, the
Company is subject to the jurisdiction of the relevant foreign tax authorities.
In addition to closely monitoring the subsidiaries locally based income, these
tax authorities regulate and restrict various corporate transactions, including
intercompany transfers. The Company believes that the tax authorities in South
Korea are particularly active in challenging the tax structures of foreign
corporations and their intercompany transfers. Although the Company believes
that its tax and transfer structures are in compliance in all material respects
with the laws of every jurisdiction in which it operates, no assurance can be
given that these structures will not be challenged by foreign tax authorities or
that such challenges will not have a material adverse effect on the Company's
business or results of operations.
INCREASED COMPANY EMPHASIS ON OPERATIONS OUTSIDE OF THE UNITED
STATES. Although less than 18% of the Company's revenues during Fiscal 1997
were derived from operations outside of the United States, the Company has
allocated a portion of the net proceeds of this Offering to expand its
operations into South Korea and the United Kingdom, and the Company's future
operations may be materially and adversely affected by economic, political and
social conditions in the countries in which it then operates, in particular
South Korea. A change in policies by any government in the Company's markets and
proposed markets, particularly South Korea, could adversely affect the Company
and its operations through, among other things, changes in laws, rules or
regulations, or the interpretation thereof, confiscatory taxation, restrictions
on currency conversion, currency repatriation or imports, or the expropriation
of private enterprises. Although the Company believes that the general trend in
Asia has been toward more open markets and trade policies and the fostering of
private business and economic activity, no assurance can be given that this
trend will continue or that such policies will not be significantly altered in
future periods. This could be especially true in the event of a change in
leadership, social or political disruption or upheaval, or unforeseen
circumstances affecting economic, political or social conditions or policies.
There can be no assurance that such activities, or other similar activities in
the Company's markets, will not result in passage of legislation or the
enactment of policies which could materially adversely affect the Company's
operations in the market areas where it operates. In addition, the Company's
ability to expand its operations into new markets will directly depend on its
ability to secure the requisite government approvals and comply with the local
government regulations. See "--Losses Sustained in Attempting to Penetrate New
Markets; Risks Involved in Entering New Markets."
CURRENCY RISKS. The Company's foreign-derived sales and selling, general
and administrative expenses are converted to U.S. dollars for reporting
purposes. Consequently, the Company's reported earnings are significantly
impacted by changes in currency exchange rates, generally increasing with a
weakening dollar and decreasing with a strengthening dollar. Given the
uncertainty of the extent of exchange rate fluctuations, the Company cannot
estimate the effect of these fluctuations on its future business, product
pricing, results of operations or financial condition. However, because the
Company's revenue is realized in local currencies and the majority of its cost
of sales is denominated in U.S. dollars, the Company's gross profits will be
positively affected by a weakening in the U.S. dollar and will be negatively
affected by a strengthening in the U.S. dollar. There can be no assurance that
any of the
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foregoing currency risks will not have a material adverse effect upon the
Company's results from operations or financial condition. Fluctuations in
currency exchange rates, particularly those caused by an increase in the value
of the United States dollar, could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
RELIANCE UPON INDEPENDENT DISTRIBUTOR NETWORK AND HIGH TURNOVER RATE OF
DISTRIBUTORS. The Company distributes its products exclusively through
independent associates. Associate agreements with the Company are voluntarily
terminable by the associates at any time. The Company's revenue is directly
dependent upon the efforts of these independent associates, and any growth in
future sales volume will require an increase in the productivity of these
associates and/or growth in the total number of associates. As is typical in the
direct selling industry, there is turnover in associates from year to year,
which requires the sponsoring and training of new associates by existing
associates to maintain or increase the overall associate force and motivate new
and existing associates. The Company experiences seasonal decreases in associate
sponsoring and product sales in some of the countries in which the Company
operates because of local holidays and customary vacation periods. The size of
the associate force can also be particularly impacted by general economic and
business conditions and a number of intangible factors such as adverse publicity
regarding the Company, or the public's perception of the Company's products,
product ingredients, Company associates or direct selling businesses in general.
Historically, the Company has experienced periodic fluctuations in the level of
associate sponsorship (as measured by associate applications). However, because
of the number of factors that impact the sponsoring of associates, and the fact
that the Company has little control over the level of sponsorship of new
associates, the Company cannot predict the timing or degree of those
fluctuations. There can be no assurance that the number or productivity of the
Company's associates will be sustained at current levels or increased in the
future. In addition, the number of associates as a percent of the population in
a given country or market could theoretically reach levels that become difficult
to exceed due to the finite number of persons inclined to pursue a direct
selling opportunity.
POTENTIAL EFFECTS OF ADVERSE PUBLICITY. The size of the distribution force
and the results of the Company's operations can be particularly impacted by
adverse publicity regarding the Company, or its competitors, including the
legality of network marketing, the quality of the Company's products and product
ingredients or those of its competitors, regulatory investigations of the
Company or the Company's competitors and their products, associate actions and
the public's perception of the Company's associates and direct selling
businesses generally. There can be no assurance that such adverse publicity will
not have a material adverse effect on the Company's ability to attract and
retain customers or associates, or on the Company's results from operations or
financial condition generally.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends on the
continued availability of certain key management personnel, including Robert L.
Richards, Michael Lightfoot, and J.T. Whitworth. The business of the Company
could be adversely affected by the loss of services of any of the foregoing
individuals. The Company does not have employment contracts with any of the
foregoing individuals. See "Management--Executive Compensation." The Company's
growth and ability to return to profitability may depend on its ability to
attract and retain other management personnel, of which no assurance can be
given. The Company does not maintain Key Man Life Insurance on the above named
executives.
NO WRITTEN CONTRACTS WITH SUPPLIERS OR MANUFACTURERS. The Company does not
have any written contracts with any of its suppliers or manufacturers or
commitments from any of its suppliers or manufacturers to continue to sell
products to the Company. Due to the absence of any written contract with any
supplier, there is a risk that any of the Company's suppliers or manufacturers
could discontinue selling their products to the Company for any reason. Although
the Company believes that it could establish alternate sources for most of its
products, any delay in locating and establishing relationships with other
sources could result in product shortages and back orders for the products, with
a resulting loss of
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revenues to the Company. In addition, the lack of a written agreement may impair
the Company's ability to enforce such agreements or enforce its rights
thereunder. There can be no assurance that the lack of written agreements with
suppliers or manufacturers will not have a material adverse effect on the
Company.
COMPETITION. The Company competes with many companies marketing products
similar to those sold and marketed by the Company. It also competes intensely
with other network marketing companies in the recruitment of associates, of
which there are many such companies. Some of the largest of these are Nutrition
for Life International, Inc., Natures Sunshine, Inc., Herbalife International,
Inc., Amway and Rexall Sundown, Inc. Each of these companies is substantially
larger than the Company and has significantly greater financial and personnel
resources than the Company.
DEPENDENCE UPON SUPPLIERS. The Company has one source of Pycnogenol, MW
International Inc. ("MWI"), and approximately two-thirds of the Company's
revenues are derived from Pycnogenol. During Fiscal 1995, Fiscal 1996, Fiscal
1997 and Three Months 1998, the Company purchased approximately 40%, 57%, 48%
and 72% of its products, respectively, from MWI. During the same foregoing
fiscal periods, the Company purchased approximately 40%, 22%, 6% and 10% of its
products from Manhattan Drug, Inc. The Company has no written agreements with
its suppliers and although the Company believes that suitable replacement and
comparable product sources are available, there can be no assurance that the
Company would be able to obtain replacement suppliers on a timely basis, on
commercially reasonable terms or at all, in the event its suppliers discontinue
associating with the Company, go out of business or for some other reason either
of their products become unavailable to the Company. See "Business--
Manufacturing and Supplies."
PRODUCT LIABILITY EXPOSURE. Although the Company does not engage in the
manufacture of any of the products it markets and distributes, the Company could
be exposed to product liability claims for the products which it distributes.
The Company has not had, or is not aware of, any such claims to date. Although
the Company maintains product liability insurance which it believes to be
adequate for its needs, there can be no assurance that the Company will not be
subject to claims in the future or that its insurance coverage will be adequate.
CONTROL BY OUTSIDE COMPANY. After the successful completion of this
Offering, Global Marketing, LLC, ("Global") will beneficially own approximately
46% of the Company's issued and outstanding shares of Common Stock. Global will,
as a practical matter, be able to nominate and cause the election of all the
members of the Company's Board of Directors, control the appointment of its
officers and the day-to-day affairs and management of the Company. See
"Principal Stockholders."
INDEPENDENT DIRECTORS NOT A MAJORITY OF THE BOARD. Four of the seven
members of the Company's Board of Directors are also executive officers of the
Company. All decisions affecting the day-to-day operations of the Company will
be made by the Board of Directors, of which the majority of members are not
independent of the Company. See "Management."
IMMEDIATE AND SUBSTANTIAL DILUTION. As a result of the sale of the
Securities offered in this Offering, there will be immediate and substantial
dilution to public investors in that the pro forma net tangible book value per
share of the Company's Common Stock after this Offering will be approximately
$(0.19) per share, or approximately $6.19 (or 103%) less than the $6.00 offering
price per share. See "Dilution."
NO ASSURANCE OF PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING AND
EXERCISE PRICES. Prior to this Offering, there has been no market for any of
the Company's securities. The initial public offering price of the Securities
and the exercise price and other terms of the Public Warrants have been
arbitrarily determined by negotiations between the Company and the Underwriter
and such prices and terms are not necessarily related to the Company's asset
value, net worth or other established criteria of value. In
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addition, there can be no assurance that a trading market will develop after
this Offering for any of the Company's Securities or that, if developed, it will
be sustained. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE DOWNWARD PRESSURE ON SHARE
PRICE. Existing stockholders in the Company are subject to Rule 144 as
promulgated under the Securities Act ("Rule 144") and the restrictions
thereunder upon the disposition of shares. In general, under Rule 144, a person
who has satisfied a one-year holding period may, under certain circumstances,
sell within any three-month period a number of shares of common stock that does
not exceed the greater of 1% of the then outstanding shares of common stock or
the average weekly trading volume in such shares during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of shares without any quantity or other limitation by a person who is not an
affiliate of the issuer and who has satisfied a two-year holding period.
All of the 4,418,351 issued and outstanding shares of the Company's Common
Stock prior to the offering are "restricted securities," as that term is defined
under Rule 144. The Company also has outstanding warrants and options to
purchase 1,599,100 shares of Common Stock. The ability of stockholders to make
Rule 144 sales may increase the supply of shares of Common Stock in the public
market, and thus may have a substantial depressive effect on the price of the
Company's securities in any market which may develop for such securities. There
can be no assurance that such Rule 144 dispositions will not occur or not
adversely affect the price of the securities offered hereby. See "--Effect of
Options, Warrants and Registration Rights" and "Shares Eligible for Future
Sale."
EFFECT OF OPTIONS, WARRANTS AND REGISTRATION RIGHTS. For the respective
terms of the Underwriter's Warrants, Public Warrants sold as part of this
Offering and warrants previously sold by the Company (the "Private Warrants")
and any options that may be granted by the Company under the Company's stock
option plan, the holders thereof are given an opportunity to profit from a rise
in the market price of the Common Stock, with a resulting dilution in the
interests of the other stockholders. Further, the terms on which the Company may
obtain additional financing during the exercise periods of said warrants and
options may be adversely effected by the existence of such warrants, options and
plans. The holders of options or warrants to purchase Common Stock may exercise
such options or warrants at a time when the Company might be able to obtain
additional capital through offerings of securities on terms more favorable than
those provided by such options or warrants. In addition, the holders of the
Underwriter's Warrants and 44,100 of the Private Warrants have demand and
"piggyback" registration rights, respectively, with respect to their securities
and/or the shares of the Company's Common Stock underlying said securities.
Exercise of such registration rights may involve substantial expense to the
Company. See "Management," "Certain Transactions," "Description of Securities"
and "Underwriting."
NO CASH DIVIDENDS. The Company has not paid any dividends to date. The
Company's Board of Directors does not presently intend to declare any dividends
in the foreseeable future, but instead intends to retain all earnings, if any,
for use in the Company's business operations. See "Description of Securities."
LACK OF EXPERIENCE OF THE UNDERWRITER. The Underwriter was organized in
August 1993, was registered as a broker in June 1995, and became a member firm
of the National Association of Securities Dealers, Inc. (the "NASD") in June
1995. The Underwriter is principally engaged in retail brokerage and market
making activities and various corporate finance projects. The Underwriter has
acted as a placement agent in private offerings, has participated as a member of
the underwriting syndicate or as a selected dealer in one public offering, and
has acted only three times as the lead manager of public offerings of
securities. While certain of the officers of the Underwriter have significant
experience in corporate finance and the underwriting of securities, no assurance
can be given that the Underwriter's lack of experience as a lead managing
underwriter of public offerings will not adversely affect this Offering and the
subsequent development of a liquid public trading market in the Company's
securities. See "Underwriting."
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POTENTIAL ADVERSE EFFECT OF REDEMPTION OF PUBLIC WARRANTS. At any time
during their exercise period, the Public Warrants may be redeemed by the Company
at a redemption price of $.05 per Public Warrant upon 30 days prior written
notice if the average closing bid price of the Common Stock for 20 consecutive
trading days ending within 10 days of the notice exceeds $10.00. Redemption of
the Public Warrants could force the holders to exercise the Public Warrants and
pay the exercise price at a time when it may be disadvantageous for the holders
to do so, to sell the Public Warrants at the current market price for the Public
Warrants when they might otherwise wish to hold the Public Warrants, or to
accept the redemption price, which may be substantially less than the market
value of the Public Warrants at the time of redemption. See "Description of
Securities."
CURRENT PROSPECTUS AND BLUE SKY REGISTRATION REQUIRED TO EXERCISE PUBLIC
WARRANTS. Holders of the Public Warrants will have the right to exercise the
Public Warrants for the purchase of shares of Common Stock only if a current
prospectus relating to such shares is then in effect and only if the shares are
qualified for sale under the securities laws of the states in which the Public
Warrantholders reside. Although the Company intends to maintain such a current
prospectus and to seek to qualify the shares of Common Stock underlying the
Public Warrants for sale in those states where the Common Stock and Public
Warrants are to be offered, there is no assurance that it will be able to do so.
The Public Warrants may be deprived of any value if the current prospectus
encompassing the shares underlying the Public Warrants is not kept effective or
if such underlying shares are not or cannot be registered in the states in which
the Public Warrantholders reside. See "Description of Securities."
ELECTRONIC BULLETIN BOARD LISTING; POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF
SECURITIES. Securities listed on the Electronic Bulletin Board may experience
reduced liquidity as compared to the Nasdaq SmallCap market. If the securities
offered hereby are listed on the Electronic Bulletin Board, investors herein may
experience reduced liquidity in such securities and may have difficulty in
obtaining a satisfactory sale price, relative to the actual market price, as a
consequence. There can be no assurance that the failure to attain listing on the
Nasdaq SmallCap market will not adversely affect the Company's securities
liquidity or investors' ability to dispose of such securities.
RISKS OF LOW-PRICED SECURITIES. If the Company's securities are listed on
the Electronic Bulletin Board, such securities would be subject to rules under
the Exchange Act, which impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
clients and "accredited investors" (for example, individuals with a net worth in
excess of $1,000,000 or an annual income exceeding $200,000, or $300,000
together with their spouses). For transactions covered by such rules, a
broker-dealer must make a special suitability determination of the purchaser and
have received the purchaser's written consent to the transaction prior to the
sale. Consequently, such rules may affect the ability of broker-dealers to sell
the Company's securities and the ability of purchasers in this Offering to sell
any of the Company's securities acquired in this Offering in any secondary
market that may develop for such securities.
The Commission has enacted rules that define a "penny stock" to be any
equity security that has a price (as therein defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions, including securities listed on designated exchanges. For any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to any transaction in a penny stock, of a disclosure statement
prepared by the Commission relating to the penny stock market. Disclosure also
has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading, and about commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements must be sent
disclosing recent price information for the penny stocks held in the account and
information on the limited market in penny stocks. In the event the Company's
securities are not otherwise exempt from the provisions of the Commission's
"penny stock" rules, such rules may also affect the ability of broker-dealers to
sell the
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Company's securities and the ability of purchasers in this Offering to sell any
of the securities acquired hereby in any secondary market that may develop.
"YEAR 2000" PROBLEM. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (Year 2000)
approaches. The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the latter
two digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. Management has assessed the Company's "Year 2000"
compliance expense to be $250,000. There can be no assurance that such problem
can be resolved by the Company in a timely or cost effective fashion, or at all,
or that any difficulty or inability in resolving such problem will not have a
material adverse effect upon the Company.
17
<PAGE>
DILUTION
The initial offering price per share of Common Stock is substantially higher
than the average price per share paid by the Company's existing stockholders.
Based on an initial public offering price of $6.00 per share, purchasers of the
Common Stock in this Offering will experience an immediate and substantial
dilution in net tangible book value of approximately 103% or $6.19 per share.
For the purposes of this discussion, it is assumed that no Warrants will be
exercised, and, accordingly, no value is attributed to the Warrants.
The following table presents certain information concerning the net
consolidated tangible book value per share of the Company's Common Stock as of
March 31, 1998, as adjusted to give effect to the sale of 1,000,000 shares of
Common Stock by the Company in this Offering (at an initial public offering
price of $6.00 per share and after deducting the estimated underwriting
discounts and estimated offering expenses payable by the Company):
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $ 6.00
Consolidated Net negative tangible book value per share
before the Offering(1)................................. $ (1.31)
Increase per share attributable to new investors......... 1.12
---------
Net tangible book value per share after the Offering......... (0.19)
---------
Total dilution per share to new investors(2)................. $ 6.19
---------
---------
</TABLE>
- ------------------------
(1) Net tangible book value per share is determined by dividing the Company's
net tangible book value (total assets less intangible assets and total
liabilities and minority interest) at March 31, 1998 by the number of shares
of Common Stock then outstanding.
(2) Dilution per share is determined by subtracting pro forma net tangible book
value per share after this Offering from the initial public offering price
per share. The foregoing table also assumes no exercise of the Underwriter's
Warrants.
In the event the Underwriter exercises its Overallotment Option in full, the
pro forma net tangible book value per share would be $(0.04) which would result
in dilution to new investors of $6.04 per share.
The following table sets forth, on a pro forma basis as of the date of this
Prospectus, the respective positions of the Company's existing stockholders and
new investors with respect to the number of shares of Common Stock purchased
from the Company, the total cash consideration paid and the average price per
share paid by the existing stockholders and by the new investors with respect to
the 1,000,000 shares of Common Stock to be issued by the Company at an initial
public offering price of $6.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE
APPROXIMATE APPROXIMATE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.......................... 4,418,351 81.5% $ 1,387,409 19% $ 0.31
New Investors.................................. 1,000,000 18.5% $ 6,000,000 81% $ 6.00
---------- ------ ------------ ------
TOTAL.................................... 5,418,351 100% $ 7,387,409 100%
---------- ------ ------------ ------
---------- ------ ------------ ------
</TABLE>
The foregoing table assumes no exercise of any warrants.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,000,000 shares of Common
Stock and 1,000,000 Public Warrants offered hereby are estimated to be
approximately $4,767,000 ($5,563,000 if the Underwriter's Overallotment Option
is exercised in full) after deducting underwriting commissions and discounts and
other expenses of this Offering. The Company expects to use the net proceeds
over the next twelve months approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DOLLAR AMOUNT APPROXIMATE
OF NET PERCENTAGE
APPLICATION OF NET PROCEEDS PROCEEDS OF NET PROCEEDS
- --------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Repayment of Bridge Loans(1) (Including interest to
September 30, 1998)............................................................ $ 1,908,000 40%
Expansion Efforts in South Korea and the United Kingdom(2)....................... 239,000 5%
Partial repayment of Horphag loan(3)............................................. 250,000 5%
Inventory........................................................................ 1,000,000 21%
Working Capital.................................................................. 1,370,000 29%
-------------- -----
Total...................................................................... $ 4,767,000 100%
-------------- -----
-------------- -----
</TABLE>
- ------------------------
(1) Repayment of 10% promissory notes issued to private investors due upon the
earlier of eighteen months from the date of issuance or the proceeds of the
Company's initial public offering contemplated herein. The Company used the
proceeds of the promissory notes in its expansion efforts into Korea for
inventory, office equipment, security deposits and to fund operating losses
and also for debt repayment and working capital. See "Certain Transactions."
(2) To be used to buy inventory and to fund operating losses in the Company's
international expansion efforts in South Korea and the United Kingdom.
(3) Partial repayment of 9.5% promissory note due to Horphag Research Ltd. due
upon the earlier of September 15, 1998 or five days after the closing of the
Company's initial public offering contemplated herein. See "Certain
Transactions".
The Company currently estimates that the net proceeds of this Offering will
be sufficient to fund its planned operations, and continued expansion efforts
into South Korea and the United Kingdom for approximately twelve months from the
date of this Prospectus. The net proceeds may be sufficient for a greater or
lesser period of time depending on the extent of the Company's expansion
efforts. In addition, the Company may require additional financing prior to or
following such period if the Company suffers losses greater than anticipated.
The Company has no commitments or arrangements for any such additional financing
and there can be no assurance that the Company will be able to obtain additional
financing on terms acceptable to the Company or at all. In the event additional
financing is unavailable to the Company, the Company may be materially adversely
affected.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of this Offering. Future events, as well as changes in
economic, regulatory or competitive conditions or the Company's business and the
results of the Company's activities may make shifts in the allocation of funds
within the described categories or to other purposes necessary or desirable. In
the event the Company suffers losses greater than anticipated, the Company may
draw upon the net proceeds of this Offering allocated to expand the Company's
operations into Korea and the United Kingdom and/or working capital.
Prior to expenditure, proceeds will be invested principally in high grade,
short-term, interest-bearing investments. Any proceeds received upon exercise of
the Overallotment Option or any Public Warrants will be used for working
capital. There can be no assurance that the Overallotment Option or any of the
Public Warrants will be exercised.
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of March 31, 1998 and as adjusted to reflect the proceeds of
1,000,000 shares of Common Stock and 1,000,000 Redeemable Common Stock Purchase
Warrants for sale in this Offering. The table should be read in conjunction with
the notes below and the consolidated financial statements of the Company and the
information and the related notes thereto including elsewhere herein. See "Use
of Proceeds".
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
AS
ACTUAL ADJUSTED
----------- -----------
<S> <C> <C>
SHORT TERM DEBT:
Notes Payable........................................................................ $ 3,672,412 $ 1,514,412
Capitalized lease obligation......................................................... 96,160 96,160
----------- -----------
TOTAL SHORT TERM DEBT.................................................................. 3,768,572 1,610,572
----------- -----------
LONG-TERM DEBT:
Capital leases payable less current portion.......................................... 14,307 14,307
----------- -----------
TOTAL LONG-TERM DEBT................................................................... 14,307 14,307
----------- -----------
Minority interest in consolidated subsidiaries....................................... 205,274 205,274
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value 5,000,000 shares authorized: none issued and
outstanding........................................................................ -- --
Common Stock, $.01 par value 25,000,000 shares authorized: 4,418,351 and 5,418,351
shares issued and outstanding, actual and adjusted, respectively(1)................ 44,184 54,184
Additional paid-in capital........................................................... 1,343,225 6,100,225
Loss on foreign currency exchange.................................................... (504,611) (504,611)
Retained earnings (deficit).......................................................... (6,318,937) (6,318,937)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................... (5,436,139) (669,139)
----------- -----------
TOTAL CAPITALIZATION................................................................... $(1,447,986) $ 1,161,014
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Does not include (i) 150,000 shares of Common Stock and 150,000 Public
Warrants, subject to the Underwriter's Overallotment Option; (ii) 1,599,100
shares of Common Stock issuable upon the exercise of outstanding warrants
and options; (iii) 200,000 shares of Common Stock issuable upon the exercise
of the Underwriter's warrants including the shares of Common Stock
underlying the warrants included within the Underwriter's warrants; or (iv)
1,000,000 shares of Common Stock reserved for issuance pursuant to the
Company's stock option plan. See "Management," "Underwriting" and
"Description of Securities."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The selected consolidated
financial data presented below for, and as of the end of each of, the five
fiscal years ended December 31, 1997 and for the period October 20, 1992
(inception) to December 31, 1992 have been derived from the Company's
consolidated financial statements. The financial statements for each of the
years in the three-year period ended December 31, 1997, have been audited by BDO
Seidman, LLP, for the periods indicated in their report, and are included
elsewhere in this Prospectus. The information for the three month periods ended
March 31, 1997 and 1998 is unaudited but gives effect to all adjustments (none
of which was other than normal recurring adjustments) necessary, in the opinion
of management of the Company, to present fairly this information. The results of
operations for the interim periods should not be taken as indicative of results
for a full fiscal year. The financial statements for the period October 20, 1992
(inception) to December 31, 1992 and for the years ended December 31, 1993 and
December 31, 1994 are not included in this Prospectus.
This data should be read in conjunction with the consolidated financial
statements and information and the related notes thereto appearing elsewhere
herein.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------
OCTOBER 20, 1992
(INCEPTION) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, ----------------------------------------------------------
1992 1993 1994 1995 1996 1997
------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............................ $ 92 $ 2,719 $ 36,895 $ 57,841 $ 51,499 $ 35,682
Cost of Goods Sold................... 66 839 9,368 14,476 13,321 8,388
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit..................... 26 1,880 27,527 43,365 38,178 27,294
Operating Expenses:
Associate Commissions.............. 26 1,275 19,507 30,831 27,966 19,968
Selling, General & Administrative
Expenses........................... 162 785 6,558 10,370 12,976 13,009
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) from Operations........ (162) (180) 1,462 2,164 (2,764) (5,683)
Other Income (Expense)Net............ -- (27) 60 (30) (27) (562)
---------- ---------- ---------- ---------- ---------- ----------
Net Income (Loss) Before Taxes
and Minority Interest................ (162) (207) 1,522 2,134 (2,791) (6,245)
Income Tax (Provision) Benefit..... -- -- (431) (862) 1,103 13
Minority Interest in
Subsidiaries....................... -- -- -- (86) (115) 134
---------- ---------- ---------- ---------- ---------- ----------
Net Income (Loss).................... $ (162) $ (207) $ 1,091 $ 1,186 $ (1,803) $ (6,098)
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net Income (Loss) Per Share-- Basic
and diluted........................ $ (.06) $ (.07) $ .39 $ .40 $ (.61) $ (1.51)
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Basic and diluted Weighted Average
Number of Common Shares
Outstanding........................ 2,800,000 2,800,000 2,800,000 2,940,000 2,940,000 4,046,566
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
<S> <C> <C>
1997 1998
---------- ----------
Net Sales............................................................................... $ 9,604 $ 7,717
Cost of Sales........................................................................... 2,368 1,785
---------- ----------
Gross Profit.......................................................................... 7,236 5,931
Operating Expenses...................................................................... 8,769 6,045
---------- ----------
Loss from Operations.................................................................... (1,533) (114)
Other Expense--Net...................................................................... 29 (202)
---------- ----------
Net Loss Before Income Tax Benefit and Minority Interest................................ (1,504) (316)
Benefit from Income Taxes............................................................. -- --
Minority Interest in (Income)Loss of Subsidiaries..................................... 85 (10)
---------- ----------
Net Loss................................................................................ (1,419) (326)
---------- ----------
---------- ----------
Net Loss Per Share--Basic and diluted................................................... (.40) (.07)
---------- ----------
---------- ----------
Weighted Average Number of Common Shares Outstanding.................................... 3,550,718 4,418,351
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (IN 000S):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Working Capital (Deficiency)............................ $ (141) $ (401) $ (176) $ 1,005 $ (1,382) (6,492)
Total Assets............................................ 129 308 5,514 6,787 6,350 4,323
Long-Term Obligations................................... -- -- -- -- 114 15
Total Liabilities....................................... 291 677 4,791 4,786 6,026 9,148
Minority Interest in Consolidated Subsidiaries.......... -- -- -- 85 200 200
Stockholders' Equity (Deficit).......................... (162) (369) 723 1,916 124 (5,025)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
<S> <C> <C>
Working Capital (Deficiency).............................................................. (6,938) (2,171)
Total Assets.............................................................................. 4,627 7,236
Long-Term Obligations..................................................................... 14 14
Total Liabilities......................................................................... 9,858 7,700
Minority Interest in Consolidated Subsidiaries............................................ 205 205
Stockholders' Equity (Deficit)............................................................ (5,436) (669)
</TABLE>
- ------------------------
(1) Gives effect to the sale of shares of common stock to be sold by the
Company in the Offering and the application of the estimated net proceeds
therefrom to repay debt, as if the transactions had occurred as of March 31,
1998. See "Use of Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. SEE "RISK FACTORS."
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
OVERVIEW
The Company develops, purchases and distributes primarily natural source
products intended for nutritional or personal care purposes. The Company's
products are distributed through a network of over 425,000 associates, of which
approximately 15% are "active" (as defined herein) in several countries on four
continents, North America, Australia, Asia and Europe. The Company offers
approximately 50 products in nine categories, including Antioxidant Protection,
(Bodily) Defense, Digestion, Energy and Alertness, Stress, Vital Nutrients,
Weight Management, Anti-Aging and Personal Care.
The Company commenced operations in October 1992 with the introduction of
MARITIME PRIME. MARITIME PRIME features the ingredient Pycnogenol, a derivative
of Southern France's Maritinus Pinus tree. Pycnogenol was combined with a blend
of other natural ingredients developed by Horphag Research Ltd. ("Horphag"), a
European corporation which is Pycnogenol's manufacturer.
During Fiscal 1992 and Fiscal 1993, the Company's focus was on obtaining the
information on Pycnogenol and the properties associated with it from Horphag and
disseminating that information in the United States and, in Fiscal 1993, in
Canada. At inception, the Company elected to market its product by "network" as
the most effective way to disseminate product information. During these two
fiscal years, the Company also sold several complimentary products as well as an
aloe vera line of products. During 1993, the Company developed a "uni-level"
compensation plan designed to be simple and financially attractive to associates
(product distributors). By the end of Fiscal 1993, sales revenues had increased
to a rate of approximately $400,000 per month.
In Fiscal 1994, the Company experienced substantial growth in sales
revenues. By September of 1994, net sales increased to a rate of approximately
$5,000,000 per month and new associates were being sponsored at a rate exceeding
approximately 10,000 per month. New products introduced during 1994 were
nutritional and/or Pycnogenol-based. During the summer of 1994 sales volume
briefly exceeded the Company's product delivery capacity but by the fall of
1994, this was rectified and the Company was delivering product on a timely
basis. A price increase was instituted in October 1994 to offset the weakening
of the United States dollar with respect to the French franc and a price
increase from the manufacturer of Pycnogenol via the importer.
In Fiscal 1995, the Company commenced operations in New Zealand and
Australia through its subsidiaries domiciled there. Although the subsidiaries
had a brief period of rapid growth in sales revenues, the Company believes that
sales leveled off as the apparent success of these subsidiaries became known in
the network marketing industry and competitors began offering competitive
products and/or comparable commission programs. The Company believes that most
significant competition was from competitors selling grape seed and grape skin
products which have some of the same properties as Pycnogenol, but are less
expensive to produce and could be sold for substantially less than the Company's
Pycnogenol based products. In addition, a grape supplier asserted that its
product was a generic version of Pycnogenol and could be marketed as such.
Actions ranging from letters to lawsuits by the Company and
23
<PAGE>
Pycnogenol's importer and manufacturer and accompanying cease-and-desist orders
were required to end these assertions.
Based upon management's network marketing industry experience and a leveling
off of sales in the latter part of 1995, the Company anticipated that it would
reach maturity as a network marketing concern and could face the possibility of
diminishing sales unless the Company acted. In an effort to thwart the
possibility of diminishing sales, in March 1996, the Company revised its
associate commission program to include, among other things, providing the
sponsor of an associate with a substantially higher commission on the first
purchase made by the sponsored associate (in the past, the sponsor had received
no such additional compensation on a first sale). The Company's goals in
altering its associate commission program was to encourage associates to not
only sponsor new associates but have the sponsors assist the new associates in
making sales and forming their own sales organization comprised of additional
levels of associates and, ultimately, attract a more entrepreneurial younger
associate than it had attracted in the past. The nature of the Company's
products was believed by the Company to be a draw to middle aged associates
whose apparent focus was to assist friends, relatives, etc. by introducing them
to the Company's products and not necessarily having an additional focus of
earnings. Additionally, at or about the same time, the Company introduced a
weight loss program, a line of cosmetics, Kaire World Magazine, and new and
improved training materials.
The Company believes that the changes in the Company's associate commission
program were not well received by its existing associates and attracted a number
of new associates whose primary focus was apparently directed at garnering the
larger commissions on initial product sales to associates whom they had
sponsored, as opposed to developing a self-sustaining sales organization. The
Company believes that as a consequence, sales revenues declined while product
returns increased. Also, newly introduced products, such as Immunol, Synerzyme
and the Yes! Weight Management Program, did not have the revenue impact
anticipated. In the fall of 1996, the Company essentially returned to the prior
commission program, with some increase in commissions being added to the
original structure, while greater emphasis was placed on seeking professional
network marketers versed and established in the network industry. The Company
believes that its new and improved training materials have been useful to the
Company and well received by its associates.
In 1996, the Company also decided to open new markets and expand into
additional countries. By January 1997, the Company began to establish operations
in South Korea and Trinidad and Tobago. In June 1997, the Company opened an
office in Port-of-Spain, Trinidad and Tobago. Also in June 1997, the Company
received approval from the South Korean government to begin recruitment and
engage associates in that country. In July 1997, the Company completed South
Korea's product approval and quarantine procedures and the sales of selected
products commenced. Initially, only a high-end line of skin care products
(JoBelle Gold Line) was available in South Korea. Maritime Prime was approved
late in August, 1997, and additional Kaire supplements were approved in November
1997. The Company is anticipating the approval of its AquaKaire product line in
1998. The Company is working towards approval of additional nutritional and skin
care products in Korea. The Company incorporated Kaire Europe, Ltd. in the
United Kingdom in July 1997 and commenced sales in November 1997. Approval
efforts are being undertaken for various product lines in Canada, Trinidad and
Tobago, New Zealand, Australia, the United Kingdom and France. There can be no
assurance, however, that any of such approvals will be forthcoming in a timely
fashion, or at all, or will not be contingent on various conditions or
restrictions which may be imposed by the appropriate governmental authorities.
Also, in 1997, the Company decided to modify its commission program with the
objective of increasing the flow of funds to the Company and stabilize its
financial position. The modification consisted of the elimination of a 5% bonus,
a restructuring of supplemental bonuses for top executives, the institution of a
program to pay the car expenses of certain associates in North America, New
Zealand and Australia and a change in qualification and the number of sponsored
levels paid under the international sponsoring program. It is anticipated that
this change will lower the total bonus payout by approximately 4%.
24
<PAGE>
During 1997, the Company borrowed $700,000 from Interactive Medical
Technologies, Ltd. ("IMT"), a Delaware corporation. On December 9, 1997, the
Company and certain shareholders entered into an Agreement and Plan of
Reorganization (the "Agreement") with IMT whereby IMT agreed to convert its
$700,000 of debt previously borrowed by the Company to equity and invest an
additional $2,300,000 in equity in the Company at closing. Certain of the
Company's stockholders exchanged 81%, 3,573,351 shares, of the issued and
outstanding shares of the Company's Common Stock for approximately forty-five
percent (45%), 118,209,200, shares of IMT's common stock as defined in the
Agreement. IMT, as part of the Agreement, was to invest an additional $2,000,000
in equity in the Company which did not occur. During 1998, IMT exchanged 57%,
2,500,155 shares of the Company's common stock to Global Marketing, LLC.
The Company intends to continue its expansion into new marketplaces in the
world in upcoming years. There can be no assurance, however, that any such
expansion will ever occur on terms and conditions favorable to the Company, or
at all. See "Risk Factors" and "Business."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
consolidated statement of operations data expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS
ENDED MARCH
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales.............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold..................................................... 25.0% 25.9% 23.5% 24.7% 23.1%
Gross Profit........................................................... 75.0% 74.1% 76.5% 75.3% 76.9%
Operating Expenses
Associate Commissions................................................ 53.3% 54.3% 56.0% 58.1% 49.1%
Selling, General and Administrative.................................. 17.9% 25.2% 36.5% 33.2% 29.3%
Income (Loss) from Operations.......................................... 3.8% (5.4)% (16.0)% (16.0)% (1.5)%
Other Income (Expense) Net............................................. (0.1)% (0.0)% (1.6)% 0.3% (2.6)%
Net Income (Loss) Before Taxes and Minority Interest................... 3.7% (5.4)% (17.6)% (15.7)% (4.1)%
Income Tax (Provision) Benefit......................................... (1.5)% 2.1% 0.0% 0.0% 0.0%
Minority Interest in Subsidiaries...................................... (0.1)% (0.2)% 0.4% 0.9% (0.1)%
Net Income (Loss)...................................................... 2.1% (3.5)% (17.2)% (14.8)% (4.2)%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 ("THREE MONTHS 1998") COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1997 ("THREE MONTHS 1997")
NET SALES. Net sales for Three Months 1998 were $7,716,000 as compared to
Three Months 1997 sales of $9,604,000, a decline of 19.7%. Sales in Three Months
1998, although lower as compared to Three Months 1997, remained constant in each
of the months in Three Months 1998. The Company had been experiencing declining
monthly sales since March, 1996. Domestic sales in Three Months 1997 included
significant sales to the Korean community in the United States. Some comparable
sales had been reflected in Korean sales in Three Months 1998, but the Korean
sales have not yet reached their potential due to delays in the introduction of
a "clustered water" product into Korea. The Company is still seeking approval
from the Korean authorities for the import of that product into the country.
COST OF GOODS SOLD. Cost of goods sold for Three Months 1998 was $1,785,000
or 23.1% of net sales. Cost of goods sold for Three Months 1997 was $2,368,000
or 24.7% of net sales. The total cost of goods sold declined by $583,000 or
24.7% from Three Months 1997 to Three Months 1998. The primary factor affecting
this category was the decline in sales resulting in lower total dollars.
Affecting the reduction in the gross profit percentage was a change in freight
carrier which lowered the cost of shipping products to
25
<PAGE>
customers while not affecting shipping revenue and the introduction of several
new products in the latter part of 1997 which maintained a lower cost
percentage.
GROSS PROFIT. Gross profit decreased from approximately $7,236,000 in Three
Months 1997 to approximately $5,931,000 in Three Months 1998. The decline was
approximately $1,305,000 or 18.0%. The reason for the gross decline was the
reduction in sales discussed above. The reason the percentage decline was less
than the sales decline were the factors mentioned in the Cost of Goods Sold
section regarding the change in freight carrier and the introduction of new,
higher margin products.
COMMISSIONS. Associate commissions decreased from approximately $5,577,000
or 58.1% of sales to $3,790,000 or 49.1% of sales, a decline of $1,787,000 or
32.0%. The primary reason for the decline was the decrease in sales that the
commissions are based on. There were several reasons for the reduction in the
percentage of commissions paid to associates. The first was a "purging" of the
associate genealogy which occurred in December, 1996. Under the standard
compensation plan, an associate can go deep into his or her organization to fill
up to seven levels of compensation. His/her position, however, is determined by
sales on his/her first level without this "rollup and compression". The purge
moved active associates onto the first line of associates they were previously
rolling up to. This qualified the new "sponsor" for higher, deeper paying
positions in the Company, increasing their commission without having to do any
new sponsoring or selling. This effect gradually disappears and has been
substantially diluted by Three Months 1998, but the Three Months 1997 bonus may
have been negatively affected by 1 - 3%. Second was a reduction in the bonus
payout at a level available to top associates and a reduction in the "Eagles
Nest" bonus percentage from 1% to 0.5% for all countries except Korea. Finally,
Korean operations and sales became a factor in Three Months 1998. There is a
statutory limitation of 35% of sales for commissions in that country. As Korean
sales rise as a percentage of total sales, this will effectively reduce the
average commission payment percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs decreased from $3,192,000 in Three Months 1997 to
$2,255,000 in Three Months 1998, a decrease of $937,000 or 29.3%. Part of the
expense in Three months 1997 was a program the Company believed would increase
the number of professional network marketers joining the Company as opposed to
grass roots and first time individuals who had made up much of the company's
initial growth. It was hoped that the professionals would bring stability and
leadership to the associate base. The total cost of this program was
approximately $1,188,000 and was incurred from August, 1996 through August, 1997
Significant expenses were therefore incurred in Three Months 1997. No expenses
were incurred for this program in Three Months 1998. The Company in Three Months
1998 embarked on a number of cost saving measures both domestically and abroad.
Consolidated operating expenses averaged approximately $752,000 per month in
Three Months 1998 as compared to $1,064,000 per month in Three Months 1997. The
Company accomplished this by reducing staff, cutting out inefficient programs
and limiting optional spending. Increasing selling, general and administrative
expenses for Three Months 1998 was the inclusion of operations in Korea,
Trinidad and Tobago and the United Kingdom, all of which started subsequent to
March, 1997.
LOSS FROM OPERATIONS. Operating losses decreased from approximately
$1,533,000 in Three Months 1997 to approximately $114,000 in Three Months 1998.
This represented a 92.6% decrease in the loss or approximately $1,419,000
between the periods. This decrease was a result of improved margins in the cost
of sales and commissions areas combined with a reduction in selling, general and
administrative expenses.
OTHER INCOME (EXPENSES). Other income (expenses) reversed from total other
income of approximately $29,000 or 0.3% of sales in Three Months 1997 to total
net expense of approximately $202,000 or 2.6% of sales in Three Months 1998, a
change of approximately $231,000. This increase is almost exclusively
attributable to the interest expense on the increased borrowing in 1997 needed
to fund operations. This borrowing was necessitated by the inability to achieve
profitability while incurring costs associated with the above development
programs.
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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 Three Months 1998 or Three Months 1997 under the
provisions of Financial Standards Board Statement of Financial Accounting
Standards No. 109 (Accounting for Income Taxes), by utilizing its loss
carryforwards as a component of income tax expense. As of March 31, 1998, the
Company has a significant amount of net operating loss available to carryforward
and offset against future earnings. As a result of the IMT Agreement and Plan of
Reorganization and subsequent changes in ownership, certain limitations will be
placed on the unrestricted loss carryforwards. A valuation allowance equal to
the net deferred tax asset has been recorded, 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.
MINORITY INTEREST. The income offset for minority interest was an increase
in the Company's loss in Three Months 1998 of approximately $9,000 reflecting
income earned in the Korean, Australia and New Zealand subsidiaries. A reduction
in the Company's loss for Three Months 1997 in the amount of approximately
$85,000 is a reflection of the decreased revenue and/or losses recognized by the
New Zealand and Australian subsidiaries as well as the reduction in value of the
assets of the foreign entities in comparison to the United States dollar which
is presented in these statements. These factors serve to reduce the interest
attributable to the minority shareholders of the foreign subsidiaries.
NET LOSS. Net loss was approximately $326,000 in Three Months 1998 or 4.2%
of net sales as compared to approximately $1,419,000 or 14.8% of net sales in
Three Months 1997. The reduced loss is a result of significant cost cutting
measures in selling, general and administrative expenses combined with lower
cost percentages in the cost of goods sold and commissions to associates.
YEAR ENDED DECEMBER 31, 1997 ("FISCAL 1997") COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("FISCAL 1996")
NET SALES. Fiscal 1997 and Fiscal 1996 were periods of declining sales for
the Company. Revenues for Fiscal 1997 were approximately $35,682,000 which was a
decline of approximately $15,816,000 or approximately 30.7% from Fiscal 1996 of
$51,498,000. Fiscal 1996 was the year in which the Company hit their high water
mark for domestic sales and then saw a consistent decline from that point. The
Company had observed their sales growth slowing in the latter part of Fiscal
1995 and responded to this leveling with a new marketing and compensation
program beginning in March, 1996 in an effort to stimulate sales. While sales
did experience a temporary increase under the new program, sales soon started to
decline at approximately 4% per month. The Company believes that the new
associates attracted by the new program were focused on the large initial bonus
offered by the new program. In addition, the Company believes that many existing
associates did not accept the program and left the Company. As a result, by
October, 1996, the Company had substantially abandoned this new program and
returned to a commission program more comparable to the program used in prior
years. Despite the return to the old program, sales continued to decline through
both the end of 1996 and throughout Fiscal 1997. During Fiscal 1997, the rate of
decline had slowed substantially and there were several months with sales growth
from the prior month, but generally, the trend was downward. To combat this, the
Company took several steps to turn the situation around including a focused
effort to attract professional network marketers through several recruiting
programs and entering international markets in Korea, Trinidad and the Caribbean
and the United Kingdom and Europe. The programs to recruit the professional
marketers included a bonus program called the Eagles Nest which was a bonus pool
consisting of 1% of world-wide sales to be split among the top qualifying
associates; a support program wherein established network marketers were
subsidized while they were building their organization within the Company; and,
an aggressive recruitment, training and support program run by associates who
had been solicited by the Company specifically for that purpose.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1997 was $8,388,000 or
23.5% of net sales. Cost of goods sold for Fiscal 1996 was $13,321,000 or 25.9%
of net sales. The total cost of goods sold declined by $4,933,000 or 37.0% from
Fiscal 1996 to Fiscal 1997. The primary factor affecting this category was the
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decline in sales resulting in lower total dollars. Affecting the percentage was
a slight price increase that was put in place as a part of the March, 1996
compensation program change and a change in the product sales mix due
predominantly to the introduction of new, higher margin products. In Fiscal
1997, 29.5% of total product sales were of non-Pycnogenol related products (all
but those considered Antioxidant Protection in the table on page 38) as compared
to 22.4% in Fiscal 1996. The average cost of goods sold for products in the
"Antioxidant Protection" category is approximately 23% as opposed to
approximately 13-19% in the other categories. Therefore, as the percentage of
products other than Antioxidant Protection products increases as a percentage of
total sales, the overall cost of goods sold percentage will continue to decline.
Returns for Fiscal 1997 averaged approximately $72,000 per month or 2.36% of
gross sales. Returns for Fiscal 1996 averaged approximately $64,000 per month or
1.47% of gross sales.
GROSS PROFIT. Gross profit decreased from approximately $38,177,000 in
Fiscal 1996 to approximately $27,294,000 in Fiscal 1997. The decline was
$10,883,000 or 28.5%. The reason for the gross profit decline was the reduction
in sales discussed above. The reason the percentage decline was less than the
sales decline were the factors mentioned above in the Cost of Goods Sold section
that resulted in a greater gross profit on each dollar of sales.
COMMISSIONS. Associate commissions decreased from approximately $27,965,000
or 54.3% of sales to $19,968,000 or 56.0% of sales, a decline of $7,997,000 or
28.6%. The primary reason for the decline was the decrease in sales that the
commissions are based on. The commissions as a percentage of sales increased
because of the compensation program that was put in place in March, 1996 and
eliminated in September, 1996 paid an overall lower percentage of the net sales.
The Quick Start bonus which paid on only one level, 45% to the sponsor on the
first qualifying order, was one of the primary reasons that the program paid
less to the associates in 1996. Fiscal 1997 showed a larger percentage payout
also because of two compensation decisions made late in 1996. The first paid an
additional 5% bonus on the seventh level (originally taken from the first level,
but later not removed when the first level bonus was restored). The second was a
"purging" of the associate genealogy. Under the standard compensation plan, an
associate can go deep into his or her organization to fill up to seven levels of
compensation. This position, however, is determined by sales on his first level
without this "rollup and compression". The purge moved active associates onto
the first line of associates they were previously rolling up to. This qualified
the new "sponsor" for higher, deeper paying positions in the Company, increasing
their commission without having to do any new sponsoring or selling. This effect
will gradually wear away, but as the change was made in December, 1996, the
Fiscal 1997 bonus may have been negatively affected by 1-3% for the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs increased from $12,976,000 in Fiscal 1996 to $13,009,000 in
Fiscal, 1997, an increase of $33,000 or 0.3%. This increase is not consistent
with the decline in sales and is one of the predominant reasons for the net loss
for the year. The first reason for the overall increase was an increase in
selling costs as a result of the institution of a program the Company believed
would increase the number of professional network marketers joining the Company
as opposed to grass roots and first time individuals who had made up much of the
company's initial growth. It was hoped that the professionals would bring
stability and leadership to the associate base. The total cost of this program
was approximately $1,188,000 and was incurred from August, 1996 through August,
1997. The majority of the expenses were therefore incurred in Fiscal 1997. In
addition, development costs of $1,040,000 to commence operations in Trinidad and
Tobago, South Korea and the United Kingdom were incurred in Fiscal 1997. In
addition to the development expenses, as with most new ventures, these
subsidiaries showed losses in Fiscal 1997 as they were building their sales
forces to the levels needed to achieve profitability. Offsetting these expense
increases were changes in the management of the marketing department during
Fiscal 1997 which decreased expenses through both reduced personnel salaries and
reduced operating costs.
In addition, the Company instituted cost-cutting measures in its domestic
operations (of which the marketing department is a part), reducing operating
expenses for selling, general and administrative
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expenses from approximately $1,200,000 per month during July through September
1996 to $750,000 by December, 1997. The Company accomplished this by reducing
staff, cutting out inefficient programs and limiting optional spending. This
would represent a savings of $450,000 per month or approximately $5,400,000 on
an annualized basis.
LOSS FROM OPERATIONS. Operating losses increased from approximately
$2,764,000 in Fiscal 1996 to $5,683,000 in Fiscal 1997. This represented a
105.6% increase in the loss or $2,927,000 between the two years. This increase
was a result of the decline in sales accompanied by the increases in selling,
general and administrative expenses associated with new foreign subsidiaries and
a professional recruitment program.
OTHER EXPENSES. Other expenses increased from approximately $27,000 or .05%
of sales in Fiscal 1996 to approximately $562,000 or 1.6% of sales in Fiscal
1997, a change of approximately $535,000. This increase is almost exclusively
attributable to the interest, of $600,000, on the increased borrowings in Fiscal
1997 needed to fund operations. This borrowing was necessitated by the inability
to achieve profitability while incurring costs associated with the above
development programs.
INCOME TAXES. Income tax benefits declined from approximately $1,103,000 in
Fiscal 1996 to approximately $13,000 in Fiscal 1997 as the ability to carry net
operating losses back to prior years to claim refunds was substantially used up
in Fiscal 1996. The anticipated benefits of utilizing net operating losses
against future profits was not recognized in Fiscal 1997 under the provisions of
Financial Standards Board Statement of Financial Accounting Standards No. 109
(Accounting for Income Taxes), utilizing its loss carryforwards as a component
of income tax expense. As of December 31, 1997, the Company had approximately
$4,700,000 in Federal net operating losses available to carryforward and offset
against future earnings. As a result of the IMT Agreement and Plan of
Reorganization and subsequent changes in ownership, certain limitations will be
placed on the unrestricted loss carryforwards. A valuation allowance equal to
the net deferred tax asset has been recorded, 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.
MINORITY INTEREST. The income offset for minority interest was a reduction
in the Company's income (increase in the loss) in Fiscal 1996 of approximately
$115,000 reflecting income earned in the Australia and New Zealand subsidiaries.
A reduction in the Company's loss for Fiscal 1997 in the amount of approximately
$134,000 is a reflection of the decreased revenue and/or losses recognized by
the New Zealand, Australian and Korean subsidiaries as well as the reduction in
value of the assets of the foreign entities in comparison to the United States
dollar which is presented in these statements. These factors serve to reduce the
interest attributable to the minority shareholders of the foreign subsidiaries.
NET LOSS. Net loss was approximately $6,098,000 in Fiscal 1997 or 17.1% of
net sales as compared to approximately $1,803,000 or 3.5% of net sales in Fiscal
1996. The increased losses are primarily a result of declining sales, an
unsuccessful change in the commission program and the cost of opening several
new markets.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 ("FISCAL
1995")
NET SALES. Fiscal 1995 and Fiscal 1996 represent the peak of Company
performance to date with respect to net sales. Revenues for Fiscal 1996 were
approximately $51,499,000 which was a decline of approximately $6,342,000 or
approximately 11.0% from Fiscal 1995 revenues of approximately $57,841,000.
Fiscal 1995 was a year of growth in domestic sales for the Company at a slower
rate than in Fiscal 1994. In addition, Australian and New Zealand operations
were acquired in November 1995 adding to the sales total for Fiscal 1995. The
Company recognized that sales were leveling off near the end of Fiscal 1995. In
response to this leveling off, the Company adopted a new marketing and
compensation program in March 1996 in an effort to stimulate sales. While sales
did respond with a temporary increase, they soon started to fall on a monthly
basis. The Company believes that the new associates attracted by the new program
were focused on the larger initial bonus offered by the new program and not
focused on the
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development of a sales organization and that many then existing associates did
not accept the new program and left the Company. As a result, by October 1996,
the Company abandoned this new program and returned to a program more comparable
to the program used in prior years. The decline in net sales in Fiscal 1996 was
not as pronounced because net sales from Australia and New Zealand were included
for a full twelve months in Fiscal 1996 as opposed to the two post-acquisition
months in Fiscal 1995.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1996 was approximately
$13,321,000 which represented 25.9% of net sales. Cost of goods sold for Fiscal
1995 was approximately $14,476,000 or 25.0% of net sales. This represented a
decrease of approximately $1,155,000 or 8.7% from Fiscal 1995 to Fiscal 1996.
The decline in total cost of goods sold was caused by the decreased sales
revenue for Fiscal 1996. The increase in the cost of goods sold percentage was
related to an increase in sales returns. Also, there was a minor price increase
in Fiscal 1996, but no other adjustments in the cost or sales price of the
products sold. The returns stemmed from the new program which encouraged larger
initial purchases as well as broadcast claims made by an unrelated third party
about the effectiveness of Pycnogenol on certain medical conditions. While these
events did generate additional sales, a higher percentage of those purchasing
under the new program returned the product for refunds under the Company's
satisfaction guaranteed policy than had made returns in the past. Sales returns
averaged approximately $27,000 per month or 0.6% of gross sales in January 1996
through April 1996. This percentage had remained consistent with Fiscal 1994 and
Fiscal 1995. For the last eight months of 1996, the returns increased to
approximately $82,000 per month or 1.9% of sales. The Company's return policy is
satisfaction guaranteed with time restrictions (90 days from the date of sale)
on most purchases. Partially used or empty bottles may be returned if the
customer was not fully satisfied. Depending on whether the purchaser was an end
user or an associate will affect if the refund was given as an inventory trade
or a cash refund. As the net sales are reduced by non-salable returns, the cost
of goods remains the same, therefore the cost of goods percentage of net sales
will increase. The Company is currently in the process of reviewing its refund
policies.
The Company's policy is to account for refunds in the period that the refund
request is received. The policy allows 90 days from the date of purchase to
accept refunds but many are received in the month of sale. Because of the
foregoing, the Company has elected not to establish a reserve for anticipated
refunds as the effect on the statement of operations and the balance sheet would
not be material and there is no long term liability due to the 90 day return
policy.
In addition, the Company released a new, more concentrated version of its'
Maritime Prime (Super Prime) late in 1996. This product was initially not well
accepted by the associates as they indicated that the anticipated results from
its use were not achieved. While a reformulation of the Super Prime product
apparently corrected the perceived problem, the Company also replaced this
product at its cost when so requested.
GROSS PROFIT. Gross profit decreased from approximately $43,365,000 in
Fiscal 1995 to approximately $38,178,000 in Fiscal 1996, approximately 12.0%.
The primary reason for the decline in gross profit was the decline in net sales
described above. In addition, gross profit as a percentage of net sales declined
from approximately 75.0% in Fiscal 1995 to 74.1% in Fiscal 1996 due primarily to
the increase in returns.
COMMISSIONS. Associate commissions decreased from approximately $30,831,000
in Fiscal 1995 to approximately $27,966,000 in Fiscal 1996, a decline of
approximately $2,865,000 or 9.3%. As a percentage of net sales, commissions
increased from 53.3% in Fiscal 1995 to 54.3% in Fiscal 1996. Commissions were
constant in Fiscal 1995 as the program was not changed from prior years. In
March 1996 the new program commenced. The new program was not successful as it
attracted associates interested in short term gain and not long term stability,
the smaller associates (who represent a large portion of Company associate base)
were the most adversely effected in proportion to their income and sales leaders
did not support the new program. As of September 1996, the original program was
substantially restored. The Company also enhanced the original program in an
effort to stop further declines in sales raising the effective commission rate
by 10% of sales. The Company purged inactive associates which the Company
believes made a
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significant number of associates qualify for higher positions in the commission
structure and increased their bonus percentages without a corresponding increase
in sponsoring and sales. This change increased the Company's effective bonus
rate by an additional 3%. The net effect of these changes in the latter part of
Fiscal 1996 was to increase commissions measured as a percentage of net sales
for Fiscal 1996 by approximately 1.9% from Fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were approximately $12,976,000 or 25.2% of net sales in
Fiscal 1996 as compared to approximately $10,370,000 or 17.9% of net sales in
Fiscal 1995, an increase of approximately $2,606,000 or 25.1%. The largest
factor in this increase was the acquisition of the interests in the New Zealand
and Kaire Australia subsidiaries in November 1995. During Fiscal 1995, the
Company incurred approximately $250,000 in selling, general and administrative
expenses through those entities. During Fiscal 1996, the first full year of
ownership of said entities, approximately $1,800,000 of their selling, general
and administrative expenses were included within the Company's overall selling,
general and administrative expenses. Also, an increased marketing effort was
undertaken in Fiscal 1996 to promote the new (commission) program and introduce
an internet marketing opportunity for associates. An additional approximate
$478,000, in comparison to approximately $410,000 in Fiscal 1995, was spent on
these marketing efforts in Fiscal 1996. Finally, personnel costs increased
approximately $746,000 from approximately $3,621,000 in Fiscal 1995 to
approximately $4,267,000 in Fiscal 1996. This was due to the addition of several
managerial positions, the installation of a Company 401(k) plan with matching
contributions and an increase in medical insurance costs in Fiscal 1996.
INCOME (LOSS) FROM OPERATIONS. Loss from operations in Fiscal 1996 was
approximately $2,764,000, a decrease of approximately $4,928,000 from Fiscal
1995's income from operations of approximately $2,164,000. The primary reasons
for this decline was the drop in net sales and corresponding decline in gross
profit. Most of the Company's selling, general and administrative expenses are
fixed and do not fluctuate with changes in net sales. These expenses did not
correspondingly decline when net sales declined resulting in a loss instead of a
profit.
OTHER INCOME (EXPENSES). There was no significant variance in other
expenses from Fiscal 1996 to Fiscal 1995. In neither year did other income or
other expense have a material effect on the overall profitability of the
Company.
INCOME TAXES. The Company's income tax provision for Fiscal 1995 was
$862,000 based on income earned during that year. In Fiscal 1996, the Company
recorded an income tax benefit of approximately $1,103,000 from utilizing net
operating losses against prior income taxes paid. No benefit, from utilizing net
operating losses against future profits, was reflected in Fiscal 1996
operations. This treatment was consistent with the provisions of the Financial
Standards Board Statement of Financial Accounting Standards No. 109 (Accounting
for Income Taxes) ("FASB 109"), utilizing its loss carryforwards as a component
of income tax expense, since 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. As a result of the IMT Agreement and Plan of Reorganization and
subsequent changes in ownership, certain limitations will be placed on the
unrestricted loss carryforwards.
MINORITY INTEREST. The provision for Minority Interest was approximately
$86,000 in Fiscal 1995 and $115,000 in Fiscal 1996. This slight increase for
Fiscal 1996 was indicative of the increase in profitability of the foreign
subsidiaries in Fiscal 1996.
NET INCOME (LOSS). The Company's net loss was approximately $1,803,000 for
Fiscal 1996 compared to net income of approximately $1,186,000 for Fiscal 1995.
This change from profitability to a loss was primarily due to the decrease in
net sales and gross profit without a corresponding decrease in selling, general
and administrative expenses.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements in connection with its operations,
foreign development and marketing activities have been and will continue to be
significant. As of March 31, 1998 and December 31, 1997, the Company had a
working capital deficit of approximately $6,938,000 and $6,492,000. The
Company's independent certified public accountants stated in their report on the
December 31, 1997 consolidated financial statements that due to losses from
operations and a working capital deficit, there is substantial doubt about the
Company's ability to continue as a going concern. Despite the fact that the
Company has not made its payroll and sales tax deposits on a timely basis, the
Company has continued to pay its associates timely and has negotiated out of any
default situations with its creditors and debtholders. The Company believes it
is addressing the going concern issue in virtually every aspect of its
operation. The Company has cut its operating expenses and is continuing to
search for, and introduce, new products the Company believes will provide
improved profit margins and anticipated high profile end user appeal. The
Company has also suspended expansion efforts into additional foreign markets
until the existing markets penetrated in 1997 achieve a positive cash flow from
operations. The Company is dependent upon the proceeds of this Offering to
continue its foreign development activities and its domestic operations and fund
its marketing and expansion plans, as well as other working capital
requirements. The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations (including assumptions regarding the
progress and timing of its foreign development efforts), that the net proceeds
of this Offering, together with anticipated revenues from operations and its
current cash equivalent balances, will be sufficient to fund the Company's
operations and capital requirements for at least 12 months following the
consummation of this Offering. In the event the Company's plans change or its
assumptions change or prove to be inaccurate, however, the Company could be
required to seek additional financing sooner than currently anticipated. The
Company has no current arrangements with respect to, or potential sources of,
any additional financing, and it is not anticipated that existing officers,
directors and stockholders will provide any portion of the Company's future
financing requirements. Consequently, there can be no assurance that any
additional financing will be available to the Company when needed on
commercially reasonable terms, or at all.
Through 1995, the Company had generated cash flow from operations due to
revenue growth and minimal capital requirements. Additionally, the Company does
not extend credit to associates, but requires payment prior to shipping products
and therefore, the Company does not maintain high accounts receivable balances.
A typical sales transaction consists of the placement of an order by an
associate. At the time the order is placed, the associate must provide a valid
credit card, be pre-approved for using autodraft (direct withdrawal from their
bank account), a check or cash. No payment terms are offered to purchasers. The
order is shipped after the payment is processed. The only receivables created
are therefore those sales accepted at month end for which the funds are not
received until the following month, those accounts where a "hard" form of
payment (check or cashier's check) was submitted by mail and the actual order
was calculated to be a different amount than the funds sent or a failure to pay
due to an insufficient funds check or account or credit card dispute. As a
result, the receivable is small in relation to sales and turns over rapidly.
Non-collectable accounts are written off to Selling, General and Administrative
expenses on a regular basis. The Company's principal need for funds has been for
distributor incentives, working capital (principally inventory purchases), and
the expansion into new markets. Prior to 1997, the Company had generally relied
entirely on cash flow from operations to meet its business objectives without
incurring long term debt to unrelated third parties.
In Three Months 1998, the cash flow provided by operating activities was
$245,000. This was generated primarily by decreases in inventories of
approximately $374,000 and increases in accrued liabilities of approximately
$307,000. The decrease in inventories and increase in accrued liabilities were
the result of better cash flow management by the Company. Investing activities
used approximately $64,000 for increased deposits of approximately $44,000 and
$20,000 for the purchase of property and equipment. Cash generated from
financing activities totaled $297,000. Net proceeds from additional borrowing
totaled $617,000 which was then reduced by approximately $192,000 paid down on
current liabilities and $128,000
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paid towards offering costs. The final factor in the Three Months 1998 cash flow
was the reduction created by the effect of foreign exchange rates on changes in
cash totaling $435,000. In summary, cash increased during Three Months 1998 by
approximately $44,000.
In Fiscal 1997, the cash applied to operating activities was approximately
$3,433,000. Operating cash was provided by increases in accounts payable of
approximately $1,245,000 and collections of income tax refunds of $1,025,000.
Cash of approximately $107,000 was used for investing, primarily in the
purchases of property and equipment of approximately $275,000 and increasing
deposits by approximately $289,000. Both of these investments relate primarily
to the investment required to open the Korean subsidiary. Financing activities
generated approximately $3,341,000. Net borrowings from related and non-related
parties generated approximately $3,795,000. The sale of common stock generated
an additional approximately $171,000. Some of these proceeds were used to pay
for deferred offering costs and debt issue costs of approximately $331,000. The
effect of foreign exchange rate changes on cash was a reduction in cash in the
amount of approximately $79,000. For Fiscal 1997, cash decreased by
approximately $279,000.
In Fiscal 1996, cash used in operating activities was approximately
$1,622,000. Additional operating cash expenditures were approximately $725,000
for refundable income taxes and a reduction in accrued liabilities of
approximately $322,000. These were offset by collections on accounts receivable
of approximately $623,000 and increases in accounts payable of approximately
$157,000. Cash used in investing totaled approximately $891,000. The invested
cash was used for property and equipment of approximately $243,000, the purchase
of stock in an unrelated company of $250,000, advances to distributors of
approximately $225,000 and investments in intangibles such as trademarks of
approximately $172,000. Financing activities generated approximately $1,448,000.
Most of this was generated by the issuance of checks in excess of deposits of
approximately $1,376,000. Additional borrowings generated $525,000 less payments
on notes and other long term debt of approximately $453,000. Foreign currency
fluctuations generated additional cash of approximately $34,000. For Fiscal
1996, the net decrease in cash was approximately $1,031,000.
In Fiscal 1995, cash generated by operating activities was approximately
$1,060,000. Operating cash in the amount of approximately $300,000 was applied
to an increase in refundable income taxes while approximately $169,000 was
applied to increases in receivables. Investing activities used approximately
$217,000 of which approximately $194,000 was used for the purchase of property
and equipment. Financing activities used approximately $264,000 for payments of
principal on capital lease obligations. For Fiscal 1995, approximately $578,000
of cash and cash equivalents were generated.
"Checks written in excess of deposits" represents checks either written and
held or issued in anticipation of deposits from sales. The Company has a stable
pattern of sales and issues checks in anticipation of collections based on their
analysis of this pattern. The Company has avoided an insufficient check charges
in all but an extremely limited number of situations based on the amount of
checks written on a monthly basis. It is the Company's intent to discontinue
this method of financing as a tool in generating cash once sufficient cash
balances have been attained through either operations or financing activities to
warrant this discontinuance of this practice.
The downturn in the South Korean economy has not had a significant impact on
the overall liquidity of the Company due in part to the fact that revenues from
South Korea represented less than three percent (3%) of the Company's
consolidated revenues during 1997. It is not anticipated that sales will
negatively be effected as individuals out of work will be looking for
alternative income sources of which the Company is a viable alternative. The
ability of the Company's Korean subsidiary to generate a profit and pay the
parent Company for its product purchases has not been adversely affected by the
currency devaluation, thus not impacting the liquidity of the Company.
Because of the significant losses incurred by the Company over the past two
fiscal years, it has become substantially dependent on loans from its officers,
directors, third parties and from private placements of its securities to fund
its operations. These financings are described below.
33
<PAGE>
On or about January 1, 1997, the Company sold $300,000 in Agreement Notes to
three private investors. As partial consideration for their purchase of the
Agreement Notes, the Company issued warrants to the three investors to purchase
an aggregate of 44,100 shares of Common Stock of the Company at an exercise
price of approximately $.01 per share of Common Stock. The Agreement Notes and
related interest were paid in full in July 1997.
During January 1997, the Company borrowed $200,000 for working capital
purposes from a corporation, not otherwise affiliated with the Company, pursuant
to demand promissory notes, bearing interest at the rate of 10% per month, and
guaranteed by certain officers and directors of the Company. An August 25, 1997
agreement modified the repayment provisions of principal and interest, and
required that the Company repay all interest and principal by December 31, 1997
and reduced the interest rate from 10% per month to 2% per month payable
monthly, retroactive to March 5, 1997. Furthermore, in the event that the
Company was unable to repay the principal and accrued interest on such notes in
full by December 31, 1997, the Company would then be required to make twelve
monthly payments, beginning January 1, 1998, in the amount of $18,911 each. In
connection with this transaction, the lending corporation was issued warrants to
purchase 25,000 shares of the Company's Common Stock at $6.60 per share. As of
March 31, 1998, such warrants had not been exercised. On January 15, 1998 the
Company entered into an agreement with the lender to make monthly payments of
interest only and to amend the term of the promissory note to a demand note.
On or about March 20, 1997, the Company completed a private placement of an
aggregate of 500,000 shares of its Common Stock and 500,000 warrants for gross
proceeds of $250,000 from five private investors (the "March 1997 Private
Placement"). Following the payment of commissions and non-accountable expenses,
an initial payment towards its non-accountable expenses for this Offering and
counsel fees and expenses for that private placement, the Company received net
proceeds of approximately $171,500.
In May 1997, Kaire Korea, Ltd., pursuant to a demand promissory note bearing
interest at the rate of 9.5% per year and guaranteed by the Company, borrowed
$500,000 from Horphag, the manufacturer of Pycnogenol. An option expiring in May
2000 to acquire 15% of the capital stock of Kaire Korea Ltd. at the par value of
Kaire Korea Ltd.'s capital stock was granted to Horphag as partial consideration
for the note. The note provides for additional options to be issued in the event
of late payments and/or the failure to pay the entire principal balance plus
accrued interest within six months of the origination date of the note. As of
March 31, 1998, a principal balance of $475,000 remained outstanding. The
options to acquire capital stock of Kaire Korea Ltd. were exercised on November
15, 1997 by Horphag. In an agreement executed on June 2, 1998 but effective as
of January 1, 1998, Horphag agreed to waive any options it may have had in Kaire
Korea Ltd due to late payments or the failure to repay the promissory note in
consideration for the Company pledging its 85% interest in Kaire Korea Ltd as
security on the promissory note to Horphag. The Company and Horphag also agreed
to amend the repayment terms on the promissory note to a demand note due on
September 15, 1998 or five days after the completion of the Company's public
offering. The Company intends to use a portion of the proceeds of the offering
to repay a portion of the promissory note. The remaining balance will be repaid
from cash flows provided by operations.
Between June 3, 1997 and December 8, 1997, the Company completed a private
placement of an aggregate of 345,000 shares of its Common Stock and $1,725,000
in principal amount of its promissory notes (10% Notes") to nine investors (the
"Summer 1997 Private Placement"). Following the payment of commission and
non-accountable expenses, additional payments towards its non-accountable
expenses for this Offering and counsel fees and expenses, the Company received
approximately $1,400,000 in net proceeds. The 10% Notes bear interest at a rate
of ten percent per year and mature and are payable in full (principal plus
accrued but unpaid interest) upon the earlier of (a) eighteen months after
issuance, or (b) the completion date of an equity financing of the Company
pursuant to which it receives gross proceeds of not less than $3,000,000. The
10% Notes are secured by the accounts and accounts receivable of the Company (as
defined in the 10% Notes) but are subordinated to the Company's banking
obligations. The Company intends to use a portion of the net proceeds of this
Offering to repay the 10% Notes in full.
34
<PAGE>
During August 1997, the Company borrowed $200,000 from two lenders, not
otherwise affiliated with the Company, pursuant to unsecured promissory notes
bearing interest at the rate of 12% per year and due in September and October
1997. These notes were paid in full in December 1997. In connection with this
borrowing, the lenders were each issued options to purchase 15,000 shares of the
Company's Common Stock at $.01 per share. As of March 31, 1998, the options had
not been exercised by either of the lenders.
During August and September 1997, the Company borrowed approximately
$492,000 from a lender, not otherwise affiliated with the Company, pursuant to
two promissory notes bearing interest at a rate of .33% per day and guaranteed
by certain officers and directors of the Company. Both notes were repaid by the
Company in December 1997.
During 1997, J.T. Whitworth, Chief Operating Officer, Chief Financial
Officer and Director and Robert L. Richards, Chief Executive Officer and
Director of the Company advanced $140,071 and $118,266, respectively, for
working capital requirements. On November 28, 1997, the Company issued demand
promissory notes bearing interest at the rate of 10% per year in the amount of
$258,337 to the two officers for funds provided by those individuals to that
date.
During 1997, the Company borrowed $663,000 from William F. Woodburn and
Loren E. Bagley, two directors of the Company, pursuant to demand promissory
notes bearing interest at the rate of 10% per year and secured by the Company's
shares of Aloe Commodities, Inc. In September 1997, the Company sold its shares
of Aloe Commodities, Inc., at cost, and made a partial payment on the notes. The
remaining outstanding balance of approximately $241,000 was renegotiated to two
unsecured demand promissory notes bearing interest at the rate of 10% per year.
During November 1997, the Company borrowed $700,000 from IMT. On December 9,
1997, the Company and certain of its stockholders entered into an Agreement and
Plan of Reorganization (the "Agreement") with IMT whereby IMT agreed to provide
an additional $300,000 equity investment in the Company and convert the $700,000
previously borrowed by the Company to equity in the Company and for IMT to
provide $2,000,000 additional equity investments to the Company by February 15,
1998. The additional equity investment of $2,000,000 was not made by IMT. The
Agreement restricted the payment of dividends and the purchase of treasury
shares among other things. Also, as discussed in Note 14 of the Consolidated
Financial Statements, IMT acquired approximately 81% of the Common Stock of the
Company from certain holders of common stock for approximately 45% of the common
shares of IMT, as defined in the Agreement. During late March 1998, it became
apparant that IMT was unable to provide the additional capital that was provided
for under the Agreement. IMT reached an agreement with Global Marketing, LLC to
sell 2,500,155 shares, 57%, of the Company's stock to Global in return for
Global immediately loaning $1,000,000 to the Company. These funds were needed by
the Company as the Company had issued checks in anticipation of a receipt of
funds by IMT.
The long term liquidity of the Company is based on its ability to generate a
profit. The nature of the Company is that it will generate positive cash flows
during periods of growth and/or profitability. The inventory turnover is
normally approximately six times per year which does not create a significant
drain on cash. As the sales are made on a cash and credit card basis, there is
also no investment in receivables as sales grow. The primary expense/liability
of the Company are the bonuses paid to associates on sales. As these are paid
between the 20th and the last day of the succeeding month, this combined with
the cash basis collections will generate a significant positive cash flow from
operations. The reduction in net loss for the Three Months 1998 as opposed to
the Three Months 1997 is indicative of the movement from operating at a loss and
losing cash to generating a profit and the related cash thereon.
During January, 1998 the Company borrowed $103,000, for working capital,
from William F. Woodburn and Loren E. Bagley, two directors of the Company,
pursuant to demand promissory notes bearing interest at the rate 10% per year.
At the present time, the Company has no plans or commitments for capital
expenditures.
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"YEAR 2000" PROBLEM. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (Year 2000)
approaches. The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the computer system for the Year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
by December 31, 1998, allowing adequate time for testing. Management has
assessed the Company's Year 2000 compliance expense to be $250,000.
RECENT ACCOUNTING PRONOUNCEMENTS. The Company is required to implement FAS
No. 128, "Earnings per Share" and FAS No. 129, "Disclosure of Information About
an Entity's Capital Structure" in fiscal year 1998. FAS No. 128 provides a
different method of calculating earnings per share than that currently used in
accordance with Accounting Principles Board Opinion 15 "Earnings per Share." FAS
No. 128 provides for the calculation of "basic" and "diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to fully diluted earnings per share. FAS No. 129 establishes standards
for disclosing information about an entity's capital structure. The
implementation of FAS No. 128 and FAS No. 129 has not had a material effect on
the consolidated financial statements of the Company.
In June 1997, FASB issued Statement of Financial Accounting Standard No.
130, entitled "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standard No. 131, entitled "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. SFAS 131 supersedes Statement of
Financial Accounting Standard No. 14, entitled "Financial Reporting for Segments
of a Business Enterprise." SFAS 131 establishes standards of the way the public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact of SFAS 131, if any, on
future financial statement disclosures. The Company adopted SFAS 130 and
restated all prior periods. Results of operations and financial position,
however, will be unaffected by the implementation of these standards.
In February 1998, the FASB issued FAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. FAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information in not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
36
<PAGE>
BUSINESS
The Company develops and distributes, through a network of independent
associates, products that are intended to appeal to health-conscious consumers.
Current Company products include health care supplements and personal care
products. The Company offers a line of approximately 50 products which it
divides into nine categories, including Antioxidant Protection, (Bodily)
Defense, Digestion, Energy and Alertness, Stress, Vital Nutrients, Weight
Management, Anti-Aging and Personal Care.
The Company develops products that it believes will have market appeal to
its associates and their customers, and assists its associates in establishing
their own businesses. The Company associates can start a home based business
without significant start-up costs and other difficulties usually associated
with new ventures. The Company provides product development, marketing aids,
customer service, and essential record-keeping functions to its associates
without charge. The Company also provides other support programs to its
associates including 24 hour TouchTalk system (as explained below),
international teleconferencing calls, seminars and business training systems
with audio and video tapes.
It is the Company's strategy and expectation that associates actively
recruit interested people to become new associates for the Company. These
recruits are placed beneath the recruiting associate in that associate's
"network" and are referred to by the Company as that associate's "organization."
Associates earn commissions on sales generated by the associates in their
organization as well as retail profits on the sales they make themselves. The
Company's marketing program is designed to provide incentives for associates to
build an organization of recruited associates to maximize their earning
potential. Approximately 60,000 of the Company's associates have had product
purchases in excess of $50 during 1997 and are considered by the Company to be
"active", as compared to approximately 108,000 and 156,000 in 1996 and 1995
respectively.
The Company purchases most of its products directly from manufacturers and
markets them to its independent associates located in all fifty states, the
District of Columbia, Puerto Rico, Guam, and Canada. In 1995, the Company
expanded the number of its associates located in other parts of the world,
particularly Australia and New Zealand. The Company expanded its operations into
South Korea, Trinidad and Tobago and the United Kingdom during 1997.
INDUSTRY OVERVIEW
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 30.5 million individuals are now
involved in directly selling (of which network marketing is a major segment) and
that those involved in direct selling generate $80 billion in annual retail
sales around the world. Direct marketing sales in the United States are
estimated to be approximately $22 billion annually.
BUSINESS STRATEGY
The Company intends to pursue a business strategy of increasing sales and
profitability by attracting and retaining associates to its network marketing
system; increasing product sales to existing associates; expanding its marketing
activities in new international markets and developing new products.
The Company's ability to increase sales is significantly dependent on its
ability to attract, motivate and retain associates. The Company utilizes an
innovative marketing program which it believes is superior to programs offered
by many other network marketing companies. This program provides financial
incentives, including several forms of commission (bonus), a vehicle expense
reimbursement program for associates with a very significant dollar amount of
product sales, optional associate training and support, no sign-up costs, no
inventory requirements, and low monthly purchase requirements. Management
intends to reach potential new associates through increased advertising,
teleconferencing and regional
37
<PAGE>
sales meetings. The Company has experienced an increase in the number of
associates each year since inception.
A key factor in the Company's strategy is to increase product sales to its
associates by, among other things, the timely introduction of new products. In
recent years, the Company has introduced several products that achieved consumer
acceptance and contributed to increased sales. The Company's flagship product is
Maritime Prime that was introduced in November 1992. Maritime Plus was
introduced shortly thereafter, followed by Ultra Prime in 1995 and Super Prime
(each tablet containing three times the essential product ingredient of a
Maritime Prime tablet) in 1996. The Company's Aloe Vera product was introduced
in 1993, while Colloidal Silver was introduced in 1994. In June 1996, the
Company introduced the Yes! Weight Management Program, JoBelle Face Kaire Line,
Synerzyme and Immunol. During 1997, the Company introduced a Fruit and Aloe
Drink, AloElite, ArthriKaire, MSM Complex, Kavatu, and Inner Chi. The Company's
newer products (e.g., those introduced in 1997) have higher margins of profit
and one of the Company's strategies is to increase overall profitability as the
newer products' share of overall sales increases.
The following table indicates how many of the Company's products were
available as of March 31, 1998 in each of the Company's current markets.
<TABLE>
<CAPTION>
PRODUCTS OFFERED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL
PRODUCT PRODUCTS SOUTH
CATEGORIES/LINES OFFERED U.S. CANADA NEW ZEALAND AUSTRALIA KOREA
- -------------------------------------- ------------- --- ------------- ----------------- ------------- -----------
Antioxidant Protection................ 7 7 5 4 0 4
Defense............................... 3 3 3 2 0 0
Digestion............................. 5 5 5 5 2 2
Energy and Alertness.................. 3 3 3 1 1 0
Stress................................ 2 2 1 2 0 1
Vital Nutrients....................... 4 4 2 2 0 0
Weight Management..................... 3 3 0 0 0 0
Anti-Aging............................ 3 3 1 0 0 0
Personal Care......................... 18 18 14 12 12 14
-- -- -- -- -- --
48 48 34 28 15 21
-- -- -- -- -- --
-- -- -- -- -- --
<CAPTION>
<S> <C> <C>
TRINIDAD
PRODUCT AND
CATEGORIES/LINES TOBAGO UNITED KINGDOM
- -------------------------------------- ------------- ---------------------
Antioxidant Protection................ 8 2
Defense............................... 2 1
Digestion............................. 3 2
Energy and Alertness.................. 2 2
Stress................................ 1 1
Vital Nutrients....................... 3 2
Weight Management..................... 3 0
Anti-Aging............................ 1 0
Personal Care......................... 12 0
-- --
35 10
-- --
-- --
</TABLE>
38
<PAGE>
REVENUE BY PRODUCT CATEGORY
Presented below are the revenue amounts of each of the Company's product
categories for the years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
PRODUCT CATEGORY DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
- -------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Antioxidant Protection.................................. $ 37,387 $ 33,947 $ 23,560
Defense................................................. 3,463 3,000 2,740
Digestion............................................... 3,141 2,534 1,779
Energy and Alertness.................................... -- 31 1,079
Stress.................................................. 508 681 508
Vital Nutrients......................................... 957 750 975
Weight Management....................................... -- 611 328
Anti-Aging.............................................. -- 43 608
Personal Care........................................... 1,792 1,261 1,861
Other................................................... 10,593 8,641 2,244
------- ------- -------
$ 57,841 $ 51,499 $ 35,682
------- ------- -------
------- ------- -------
</TABLE>
Currently, the Company has associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and
Tobago, South Korea and the United Kingdom. Management believes that significant
market potential exists for the Company's products in international markets, and
it is the Company's intention to explore expansion into Japan, Europe, Hong
Kong, Taiwan, India and the Philippines. Statistics from the World Federation of
Direct Selling Associations as reported in May 1998 indicate that the direct
sales market in the foregoing countries amounted to over $37 billion with 6.4
million individuals being involved in some form of direct marketing. This
compares to $28.6 billion in sales and 12.7 million individuals involved in the
markets currently serviced by the Company.
DISTRIBUTION AND MARKETING
The Company's products are distributed through its network marketing system
of associates. Associates are independent contractors who purchase products
directly from the Company for resale to retail consumers. Associates may elect
to work on a full-time or a part-time basis. Management believes that its
network marketing system is well suited to marketing its nutritional supplements
and other products because sales of such products are strengthened by ongoing
personal contract between retail consumers and associates, many of whom use the
Company's products.
Associates' revenues are derived from several sources. First, associates may
receive revenues by purchasing the Company's products at wholesale prices and
selling the Company's products to customers at retail prices. Second, associates
earn the right to receive bonuses (commissions) based upon purchases by members
of their organization. There are basically three types of bonuses that an
associate can earn on product purchases by their organization. The standard
bonus is available to any individual who has attained "Broker" status in the
Company. Attaining "Broker" status is done by purchasing a minimum quantity for
a month. The percentages used to determine the bonus and the number of levels in
the organization the associate receives bonuses upon is based on the
individual's status in the Company. The first status level being that of a
"Broker" and the highest being an "Executive". There are two intermediary levels
between "Broker" and "Executive." An associate achieves higher levels in the
bonus structure primarily through increased purchases by associates sponsored
directly by them (their first level) although the minimum monthly purchase as an
individual does increase between certain levels. The requirements for an
associate to reach an "Executive" level are generally monthly personal purchases
exceeding $300 and monthly volume of $900 on their first level. The program is
such that each month an associate must qualify at that
39
<PAGE>
level to be paid at that level. The advantage, for the Company, to this is that
the associate must remain active in purchasing and sponsoring to retain their
bonus, but if they miss a month, their income is only reduced that one month. A
second form of bonus is available to those having multiple "Executives" in their
first level. Based on the number of "Executives" they have at this first level,
associates will receive either 10%, 20%, or 30% of their standard bonus as an
additional bonus. Finally, for those "Executives" attaining the highest levels
in the Company, they are allowed to participate in a percentage of the
Company-wide Gross Bonusable Sales to be divided among qualifying "Executives."
Management believes that the right of associates to earn bonuses contributes
significantly to the Company's ability to retain its productive associates.
Management believes the Company's associate compensation plan is superior to
that of other network marketing organizations because the program offers an
earning opportunity without the need to finance a large inventory of products
and requires only a modest amount of sales to meet the bonus requirements.
To become an associate, a person must simply sign an agreement to comply
with the policies and procedures of the Company. No investment is necessary to
become an associate. The Company considers approximately 60,000 of its
associates to be "active", that is, an individual associate who has ordered at
least $50 of the Company's products during the preceding 12 month period.
The Company regularly sponsors opportunity meetings in various key cities
and participates in motivational and training events in its market areas
designed to inform prospective and existing associates about the Company's
product line and selling techniques. Associates give presentations relating to
their experiences with the Company's 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 the Company's network marketing system.
The Company continues to develop marketing strategies and programs to
motivate associates. These programs are designed to increase associates' monthly
product sales and the recruiting of new associates. An example of these programs
is the Company's KAIRE SELECT PROGRAM.
Under the Kaire Select Program, an associate may enroll in a minimum
ordering program to maintain eligibility for performance bonuses. Minimum orders
ranging from $50 to $550 per month are automatically placed by credit card or
autodraft. 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 Company sponsored events.
As part of the Company's maintenance of constant communication with its
associate network, the Company offers the following support programs to its
associates:
TOUCHTALK AND FAXBACK. An automated telephone system that associates can
call 24 hours a day to place orders, receive reports on the sales activity of
their organization and listen to selected messages on special offers, marketing
program updates, product information, and similar information. Certain
information is also available via facsimile to the associate.
24 HOUR TELECONFERENCE. A weekly teleconference on various subjects such as
technical product discussions, associate organization building and management
techniques. An associate can listen to any of the last four weekly
teleconferences.
INTERNET. The Company maintains a web-site at http:\\www.kaireint.com on
the Planet City mall. There, the user can read news letters, learn more about
products, place an order or sign up to be an
40
<PAGE>
associate. This web-site became fully functional in early 1997. In addition,
associates can send messages and orders to the Company e-mail address of
kaireint.com. This allows associates to potentially be able to sponsor
associates and order products 24 hours a day.
PRODUCT LITERATURE. The Company produces for its associates color
catalogues and brochures displaying and describing the Company's products.
TOLL FREE ACCESS. A toll free number is available to place orders and
sponsor new associates. The Company believes that it was one of the initial
members in the network marketing industry to permit associates to sponsor new
associates over the telephone.
BROADCAST FAX. Company announcements and product specials are automatically
sent via facsimile to associates who have requested this service.
MARKETS
The Company has operations in the United States, Canada, Australia, New
Zealand, Trinidad and Tobago, Korea and the United Kingdom. See Note 12 of the
Consolidated Financial Statements for Net Sales, Income from Operations and
Identifiable assets for the related geographical areas.
Upon deciding to enter a new market, the Company hires local counsel to
assist ensuring that the Company's network marketing system and products comply
with all applicable regulations and that the Company's profits may be
expatriated. In addition, local counsel assists in establishing favorable
relations in the new market area by acting as liaison between the Company and
local regulatory authorities, public officials and business people. Local
counsel also is responsible for explaining the Company's products and product
ingredients to appropriate regulators and, when necessary, will arrange for
local technicians to conduct any required ingredient analysis tests of the
Company's products.
If regulatory approval is required in a foreign market, the Company's local
counsel interfaces with local regulatory agencies to confirm that all of the
ingredients of the Company's products are permissible within the new market.
During the regulatory compliance process, the Company may alter the formulation,
packaging or labeling of its products to conform to applicable regulations as
well as local variations in customs and consumer habits, and the Company may
modify certain aspects of its network marketing system as necessary to comply
with applicable regulations.
Following completion of the regulatory compliance phase, the Company
undertakes the steps necessary to meet the operational requirements of the new
market. The Company then initiates plans to satisfy inventory, distribution,
personnel and transportation requirements of the new market, and modifies its
associate training materials as may be necessary to be suitable for the new
market. The Company has prepared manuals in Korean, French and Spanish.
The downturn in the South Korean economy and the Asian-Pacific currencies
will have a mixed effect on the Company. To the extent that it is more expensive
to purchase the products from the United States, the cost of sales will increase
in the Korean entity which has an adverse effect on profitability. The
potentially positive impact of the downturn in the economy is that more people
are either out of work or concerned about their future. Affiliation with the
Company as an associate is an alternative for an individual to either supplement
or replace their wage income therefore making it an attractive time for
companies in our industry to be operating in a country with a depressed economy.
PRODUCTS
The Company's product line consists of primarily consumable products that
are targeted to growing consumer interest in natural health alternatives for
nutrition and personal care. In developing its product line, the Company has
emphasized quality, purity, potency, and safety.
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<PAGE>
ANTIOXIDANT PROTECTION. This line is primarily nutritional supplements
based in antioxidants including Maritime Prime and other antioxidant blends.
Most of the products are based on exclusive formulations in several combinations
containing natural products including Pycnogenol and Arctic Root. Products
containing Pycnogenol have not been approved for direct importation into
Australia. The Company is currently seeking approval to import its products
containing Pycnogenol into Australia in conjunction with the Therapeutic Goods
Association of Australia. Maritime Plus is not available in Canada due to
Canadian regulations on the ascorbate that is contained in this product. The
Company is also working with French authorities for approval to import the
Maritime Prime line into France.
Pycnogenol has been recognized by sources not associated with the Company as
a potent antioxidant. Pycnogenol, in the Company's formulation, is believed to
be highly bioavailable and retained in the body for several days. Antioxidants
have been shown to be effective in fighting the effects of oxidation on the
body. Oxidation is the same process that causes metals to rust and apples to
turn brown. Free radicals, which are molecules damaged by oxidation, are being
studied as the causes of various infirmities in humans. A free radical is an
unstable oxygen molecule seeking, at the molecular level, to pair up with an
electron. Free radicals can be created in the atmosphere by the exposure of
oxygen to sunlight and pollution. Free radicals can also be created by natural
metabolic processes. Antioxidants are molecules which can combine with and, as a
result, neutralize free radicals. Pycnogenol also provides dietary support to
assist the body in properly responding to inflammations.
DEFENSE. The products in this category are primarily oriented towards
working with the body's natural defense systems to make them more efficient. It
consists of three of the more recent additions to the Kaire line, Colloidal
Silver Kaire, Immunol and Noni.
Colloidal Silver Kaire is a solution of silver particles
electro-magnetically suspended in deionized water and provides dietary support
for the immune system. It is used by individuals for a number of purposes
including eye drops, a topical solution, nose drops and a drink.
Immunol is a shark liver based capsule which the Company believes aids the
human immune system. This product is imported exclusively by the Company, which
obtained the worldwide marketing rights to this product in March 1996 from
Marine Biologics, Inc.
Noni is the most recent addition to the product line. Derived from a fruit
grown only in the Central and South Pacific, it 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.
DIGESTION. The main constituent of this group has long been the Aloe
products. 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. The Company has recently introduced Fruit-N-Aloe
which 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 and AloElite, a more
concentrated form of the Aloe juice.
Two other products currently round out this line, a colon-cleansing product
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.
ENERGY AND ALERTNESS. AquaKaire Daytime and Night-time are two recently
introduced Company products. They are concentrated, "clustered" water products
whose purpose is to increase the metabolic efficiency of the body. Inner Chi is
another recent addition, combining raw honey with Chinese herbs and botanicals
for a balanced, energy enhancing tonic.
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STRESS. 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.
VITAL NUTRIENTS. This category provides for many of the basic vitamins and
nutrients which are missing in the typical adult or child's diet.
WEIGHT MANAGEMENT. One of the newest members of the Company's product
"family" is a weight management program that includes a number of products
designed to work as a system to assist weight loss safely while giving the
dieter a higher level of energy while maintaining a healthy body. This system
concept is based upon a complete program including Company products, walking or
other sensible exercise available to virtually all individuals and sensible
permanent eating habits. Weight management products of the Company include LipeX
(a product designed to inhibit the absorption of fat by the body), fiber wafers
to reduce appetite, lubricate the system and inhibit fat absorption and
nutritional bars to provide both a healthy meal snack alternative and to provide
nutrients which interact with the LipeX to increase metabolism and fat burning
in the system.
The Company believes that the Weight Management Program is well designed to
promote long-term, sustained weight loss. However, the Company's experience has
been that many dieters are highly motivated to lose significant pounds quickly
and the Yes! Weight Management Program does not work quickly enough for such
persons. As a result, the Company is exploring several products which will allow
it to penetrate the rapid weight loss market.
ANTI-AGING. These products are intended to combat the effects of aging on
the human body.
DHEA. This 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.
ARTHRIKAIRE AND OSTEO FORMULA. ArthriKaire and Osteo Formula are Company
products introduced in June 1997. Osteo Formula is a comprehensive bone
supplement that provides 18 nutrients including four different types of calcium
for maximum absorption and assimilation. ArthriKaire is designed to provide
dietary support for joints, tendons and ligaments. This proprietary formula
combines proteoglycans, vitamins and herbs that support the integrity of
connective tissue.
PERSONAL KAIRE. This includes JoBelle Gold (a skin softener containing gold
flakes), Dermakaire (the Company's original moisturizing lotion with
Pycnogenol), and the JoBelle Skin Care System consisting of shampoo, conditioner
and body lotion as well as a "top of the line" six part face care system. An
extension of the Company's Body Kaire System product line featuring tiny gold
particles is one of the principal products the Company is distributing in South
Korea. The Company is attempting to develop an upscale image for this product
line with an appeal to a younger market than the Company's current United States
associate base.
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, the Company is also focusing on promoting
groups of products to be taken in conjunction with each other to address
specific needs (such as weight loss, stress, daily wellness, etc.) that an
individual may have.
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The Company continually seeks to identify, develop and introduce innovative,
effective and safe products. In Fiscal 1996 and Fiscal 1997, the Company
introduced over 20 new products or services. Management believes that its
ability to introduce new products increases its associates' visibility and
competitiveness in the marketplace.
New product ideas are derived from a number of sources, including trade
publications, scientific and health journals, the Company's management and
consultants, and outside parties. Prior to introducing products into the
Company's markets, the Company's scientific consultants, legal counsel and other
representatives retained by the Company investigate product formulation matters
as they relate to regulatory compliance and other issues. The Company's products
are formulated to suit both the regulatory and marketing requirements of
particular markets.
The Company maintains its own product review and evaluation staff but relies
upon independent research, vendor research departments, research consultants and
others for product research, development and formulation services. When the
Company, one of its consultants or another party identifies a new product
concept or when an existing product must be reformulated for introduction into a
new or existing market, the new product concept or reformulation is generally
submitted to the Company's suppliers for technological development and
implementation. The Company owns the proprietary rights to a majority of its
product formulations.
The Company expended no funds on new product research and development during
Fiscal 1996 and 1997, respectively.
PRODUCT WARRANTIES AND RETURNS
The Company's product warranties and policy regarding returns of products
are similar to those of other companies in its industry. If a consumer of any of
the Company's 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 purchase.
The associate is required to refund the purchase price to the consumer. The
associate may then return the unused portion of the product to the Company for
an exchange of equal value. If an associate requests a refund in lieu of an
exchange, a check or credit card credit is issued. All products are warranted
against defect by the manufacturer of those products. Most products returned to
the Company, however, are not found to be defective in manufacture.
MANAGEMENT INFORMATION SYSTEM
The Company maintains a computerized system for processing associate orders
and calculating associate commission and bonus payments enabling it to promptly
remit payments to associates. The Company believes that prompt remittance of
commissions and bonuses is vital to maintaining a motivated network of
associates and that associate loyalty has been enhanced by the Company making
commission and bonus payments as scheduled.
The Company's computer system provides each associate a detailed monthly
accounting of all sales and recruiting activity in his or her organization.
These convenient statements eliminate the need for substantial record keeping on
behalf of the associate. As a precaution, duplicate copies of the Company's
computer records are transferred daily to an off-site location for safekeeping.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the computer system for the Year 2000 compliance.
It is anticipated that all reprogramming efforts will be completed by December
31, 1998, allowing adequate time for testing. Management has assessed the
Company's Year 2000 compliance expense to be $250,000.
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MANUFACTURING AND SUPPLIES
The Company currently purchases all of its vitamins, nutritional supplements
and all other products and ingredients from parties that manufacture such
products to the Company's specifications and standards. During Fiscal 1997,
approximately one-half of the products purchased by the Company were supplied by
MWI a distribution company which purchases and imports Pycnogenol from Horphag
along with other raw materials. MWI is the Company's source of Pycnogenol. The
Company places significant emphasis on quality control. All nutritional
supplements, raw materials and finished products are subject to sample testing,
weight testing and purity testing by independent laboratories.
The Company has no written agreements with any of its suppliers including
MWI. In the event of loss of any of its sources of supply, the Company believes
that suitable replacement sources of similar products and product ingredients
exist and are available to the Company. However, there can be no assurance that
the Company would be able to obtain replacement suppliers on a timely basis, and
on commercially reasonable terms.
TRADEMARKS AND SERVICE MARKS
Most products are packaged under the Company's "private label." The Company
has registered trademarks with the United States Patent and Trademark Office for
its name, logo and various products names. It has applied for trademark
registration in several countries outside of those it is currently operating in
for its name, logo and various product names.
COMPETITION
The Company competes with many companies marketing products similar to those
sold and marketed by the Company. It also competes intensely with other network
marketing companies in the recruitment of associates.
There are many network marketing companies with which the Company competes
for associates. Some of the largest of these are Nutrition for Life
International, Inc., Nature's Sunshine, Inc., Herbalife International, Inc.,
Amway and Rexall Sundown, Inc. Each of these companies is substantially larger
than the Company and has significantly greater financial and personnel resources
than the Company. The Company competes for associates by means of its marketing
program that includes its commission structure, training and support services,
and other benefits.
Not all competitors market all types of products marketed by the Company,
and some competitors market products and services in addition to those marketed
by the Company. 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. The
Company's 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.
GOVERNMENT REGULATION
Although the Company confines its activities to marketing and distribution,
the manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by federal agencies,
including the Food and Drug Administration ("FDA"), the Federal Trade Commission
("FTC"), the Consumer Product Safety Commission, the United States Department of
Agriculture, the United States Postal Service and the United States
Environmental Protection Agency. These activities are also subject to regulation
by various agencies of the jurisdictions, states and localities in which the
Company's products are sold.
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In November 1991, the FDA issued proposed regulations designed to, among
other things, amend its food labeling regulations. The proposed regulations met
with substantial opposition. In October 1994, the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law") was enacted. Section 11 of
the Dietary Supplement Law provided that the advance notice of proposed rule
making by the FDA concerning dietary supplements was null and void. FDA
regulations that became effective on June 1, 1994 would require standard format
nutrition labeling on dietary supplements. However, because the new Dietary
Supplement Law also addresses labeling of dietary supplements, the FDA has
indicated that it would not enforce its labeling regulations until January 1,
1998. To the date of this Prospectus, no new regulations which affect the
Company's labeling practies have been promulgated. In the interim, new
regulations are expected to be proposed by the FDA. Because the FDA has not yet
reconciled its existing regulations with the new Dietary Supplement Law, the
Company cannot determine to what extent any changed or amended regulations will
affect its business.
The Dietary Supplement Law did not affect the July 1, 1994 effectiveness of
the FDA's health claims regulations. Those regulations prohibit any express or
implied health claims for dietary supplements unless such claims are approved in
advance by the FDA through the promulgation of specific authorizing regulations.
Such approvals are rarely provided by the FDA. Therefore, no claim may be made
on a dietary supplement label or in printed sales literature, "that expressly or
by implication characterizes the relationship of any substance to a disease or
health-related condition." The Company cannot determine what effect currently
proposed FDA regulations, when and if promulgated, will have on its business in
the future. Such regulations could, among other things, require expanded or
different labeling, recalling or discontinuing of certain products, additional
record keeping and expanded documentation of the properties and certain products
and scientific substantiation. In addition, the Company cannot predict whether
new legislation regulating its activities will be enacted, which new legislation
could have a material adverse effect on the Company.
The Company has an ongoing compliance program with assistance from FDA
counsel regarding the nature and scope of food and drug legal matters affecting
the Company's business and products. The Company is unaware of any legal actions
pending or threatened by the FDA or any other governmental authority against the
Company.
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.
The Company complies with South Korea's strict Door-to-Door Sales Act, which
requires, among other things, the regular reporting of revenue, the registration
of distributors together with the issuance of a registration card, and the
maintaining of a current distributor registry. This law also limits the amount
of sponsoring bonuses that a registered multi-level marketing company can pay to
its distributors up to a maximum of 35% of revenue in a given month. As is the
case with most network marketing companies, the Company has from time to time
received inquiries from various government regulatory authorities regarding the
nature of their business and other issues such as compliance with local business
opportunity and securities laws. Although to date none of these inquiries has
resulted in a finding materially adverse to the Company, there can be no
assurance that the Company will not face inquiries in the future which, either
as a result of findings adverse to the Company or as a result of adverse
publicity resulting from the initiation of such inquiries, could have a material
adverse effect on the Company's business and results of operations.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and the Company's history of operations in
such markets to date, the Company believes that its method of distribution is in
compliance in all material respects with the laws and regulations relating to
direct selling activities of the countries in
46
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which the Company currently operates. Even though management believes that laws
governing direct selling are generally becoming more permissive, many countries
currently have laws in place that would prohibit the Company from conducting
business in such markets. There can be no assurance that the Company will be
allowed to continue to conduct business in each of its existing markets that it
currently services or any new market it may enter in the future.
The Company is subject to or affected by extensive governmental regulations
not specifically addressed to network marketing. Such regulations govern, among
other things, (i) product formulation, labeling, packaging and importation, (ii)
product claims and advertising, whether made by the Company, or its associates,
(iii) fair trade and distributor practices, and (iv) taxes, transfer pricing and
similar regulations that affect foreign taxable income and customers duties.
In South Korea, the Company has obtained the mandatory certificate of
confirmation as a qualified importer of health assistance foods under the Food
Sanitation Law ("FSL") of that country, as well as additional product approvals
for each of the special nutritional food categories of products which it imports
into that country. Each new product undergoes a 60 day post-customs
quarantine/inspection on cosmetics and 18 day post-customs quarantine/inspection
on food supplements where, in addition to compliance with ingredient
requirements, each product is inspected for compliance with South Korean
labeling requirements.
Based on the Company's experience and research (including assistance from
local counsel) and the nature and scope of inquiries from government regulatory
authorities, the Company believes that it is in material compliance with all
regulations applicable to it. Despite this belief, the Company could be found
not to be in material compliance with existing regulations as a result of, among
other things, the considerable interpretative and enforcement discretion given
to regulators or misconduct by associates. There can be no assurances that the
Company will not be subject to inquiries and regulatory investigations or
disputes and the effects of any adverse publicity resulting therefrom. Any
assertion or determination that the Company or any Company associate are not in
compliance with existing laws or regulations could have a material adverse
effect on the Company's 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 the Company's business and
results of operations. The Company cannot determine the effect, if any, that
future governmental regulations or administrative orders may have on the
Company's business and results of operations. Moreover, governmental regulations
in countries where the Company may commence or expand its operations may
prevent, delay or limit market entry of certain products or require the
reformulation of such products. Regulatory action, whether or not it results in
a final determination adverse to the Company, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of associates and consequently, on the Company's sales and earnings.
PROPERTIES
The Company leases an aggregate of approximately 45,000 square feet of
office and warehouse space in four buildings in Longmont, Colorado. The lease
terms expire over a span of one month to eight months, and the aggregate current
monthly rate is approximately $20,000 per month. The Australian and New Zealand
subsidiaries also lease their office and warehouse facilities of approximately
8,000 square feet for a period of approximately five years. The Company has
entered into leases at June 1, 1997 through its South Korean and Trinidad and
Tobago subsidiaries. The former is a two year lease on the second floor in one
of the office/commercial buildings in downtown Seoul. The Trinidad and Tobago
office is approximately 1,100 square feet in downtown Port-of-Spain. That lease
is for one year with two one-year renewals. In January 1998, the Company entered
into, through its United Kingdom subsidiary, a lease of approximately 4,800
square feet for 11 years in Solihull, England, with an option to review the
leases after five years, and terminate with notice. In February 1998 the
Company, through its South Korean subsidiary, entered into a 14 month lease
consisting of approximately 4,800 square feet on the tenth floor in an office
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building in Pusan, South Korea. Management of the Company believes that such
properties are suitable and adequate for current operating needs.
EMPLOYEES
At March 31, 1998, the Company had employed approximately 75 full time
persons of whom three were executive, 15 were engaged in finance and
administrative activities, 13 in order entry, two in travel services, six in
management information systems ("MIS"), three in purchasing, two in compliance,
five in data support services, one in international development, two in human
resources, one in associate services, eight in customer relations, six in
marketing and eight in shipping. None of the Company's employees is represented
by a collective bargaining unit. The Company believes that its relationship with
its employees is good.
LEGAL PROCEEDINGS
To the knowledge of the management of the Company, there is no material
litigation pending or threatened against the Company nor are there any such
proceedings to which the Company is a party.
However, the Company is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. The Company was initially contacted in January, 1997 and was advised,
in writing, that it is not a "target" of the Department's investigation, but
that it is a "subject" (meaning that its conduct is deemed to be within the
scope of the investigation) thereof. The Company has completed all obligations
and requests pertaining to this matter.
The Company has also received a voluntary request for information from the
FTC regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. The Company is currently responding with clarifications
to previous inquiries.
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MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE COMPANY POSITIONS
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert L. Richards................................... 53 Chief Executive Officer and Director
Michael Lightfoot.................................... 45 President
Loren E. Bagley...................................... 56 Chairman of the Board
J.T. Whitworth....................................... 62 Chief Operating Officer, Chief Financial Officer and
Director
William F. Woodburn.................................. 56 Treasurer and Director
L. Charles Laursen................................... 44 Vice President of Finance
Mark D. Woodburn..................................... 27 Secretary and Director
Steven Westlund...................................... 51 Director
Peter Benz........................................... 38 Director
</TABLE>
Set forth below is a brief background of the Executive Officers and
Directors of the Company, based upon information supplied by them.
ROBERT L. RICHARDS, co-founder of the Company, has been Senior Executive
Vice President (from November 1994 until August 1996), Chief Executive Officer
(since August 1996) and a Director of the Company since its inception in October
1992. Mr. Richards also served as the Company's Executive Vice President and
Chief Financial Officer from 1992 to 1994. From 1989 until joining the Company,
Mr. Richards was the vice president of Continental Tax Corporation, a property
tax consulting firm. From 1982 to 1989, Mr. Richards was the president of
RARADAN Oil Company, a company engaged in the development of oil and gas joint
ventures. Mr. Richards was a Captain in the United States Air Force and an
instructor-pilot from 1970 to 1975. He is an athlete, having been National
Champion and All American in 1966 in the 3,000 meter steeplechase. He was also
on the United States Olympic Training Team (steeplechase) in 1968 and 1972. Mr.
Richards graduated from Brigham Young University with a Bachelor of Science
degree in Geology.
MICHAEL LIGHTFOOT has been President of Kaire International, Inc. since
August 1997. Mr. Lightfoot has been involved with the Company since 1993, when
he joined the Company as an associate and formed Kaire International (Canada)
Ltd. in September 1993. Prior to 1993, Mr. Lightfoot was regional general
manager for Forever Living Products, Inc. of British Columbia, Canada, a network
marketing company selling aloe vera based products. Mr. Lightfoot has over 20
years experience in network marketing.
LOREN E. BAGLEY has been Chairman of the Company's Board of Directors since
its inception. Mr. Bagley is also president and chief executive officer of Trans
Energy, Inc. ("TEI"), a company which is involved in oil and gas exploration and
whose securities are listed on NASDAQ, having been TEI's executive vice
president from August 1991 until assuming his current responsibilities at TEI in
September 1993. From 1979 to the present, Mr. Bagley has also been self employed
in the oil and gas industry as president, chief executive officer or vice
president of various corporations which he has either started or purchased,
including Ritchie County Gathering Systems, Inc. Prior to becoming involved in
the oil and gas industry, Mr. Bagley was employed by the United States
Government with the Agriculture Department. Mr. Bagley attended Ohio University
and Salem College and received a Bachelor of Arts degree.
J.T. WHITWORTH joined the Company in 1994 as Vice President of Operations.
In 1995 he was promoted to Executive Vice President of Operations and Chief
Financial Officer. He was promoted to Chief Operating Officer and Chief
Financial Officer in 1997. He was elected a Director of the Company in 1996.
From 1983 until joining the Company, Mr. Whitworth was manager of worldwide
commerce, import, export, and corporate distribution of AGCO Corporation
("AGCO"), a major farm equipment manufacturer. During his tenure with AGCO,
which was from 1961 until 1994, he held several managerial positions.
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WILLIAM F. WOODBURN has been Treasurer and a Director of the Company since
its inception. Mr. Woodburn is also vice president in charge of TEI's operations
and has been a director of TEI since August 1991. Mr. Woodburn has been actively
engaged in the oil and gas business in various capacities for the past fourteen
years. Prior to his involvement in the oil and gas industry, Mr. Woodburn was
employed by the United States Army Corps of Engineers for twenty-four years. Mr.
Woodburn graduated from West Virginia University with a Bachelor of Science
degree in Civil Engineering.
L. CHARLES LAURSEN, a Certified Public Accountant, joined the Company in
July 1994 as its Controller. Mr. Laursen was promoted to the position of Vice
President of Finance in May 1996. From 1990 until joining the Company, Mr.
Laursen was the controller of Solid Systems Engineering, a heavy equipment
distributor. From 1985 until 1990, Mr. Laursen was the controller of Pratt
Partnership, an industrial park complex encompassing construction, maintenance,
property management, and hotel operations. Mr. Laursen graduated from Colorado
State University with a Bachelor of Science degree in Accounting.
MARK D. WOODBURN has been Secretary and a Director of the Company since its
inception. He also serves as assistant secretary of TEI, a position which he has
held for the past four years. Mark D. Woodburn is the son of William F.
Woodburn.
STEVEN WESTLUND has been a Director of the Company since December 1997. Mr.
Westlund is presently the Chief Executive Officer and Chairman of the Board of
Kaire Holdings, Inc. formerly Interactive Medical Technologies, Ltd., ("IMT") a
nutritional development company, and has served in those capacities since May
1995. Mr. Westlund is also presently the Chief Executive Officer of
Lorenz/Germaine Inc., a personal care product distributor. From May 1993 to
February 1995, Mr. Westlund was Chief Executive Officer and Chairman of the
Board of Vitafort International Corporation, a nutritional development company.
Prior to May 1993, Mr. Westlund was a consultant to several corporations in the
distribution industry specializing in restructuring and recapitalization.
PETER BENZ has been a Director of Kaire International, Inc. since December
1997. Mr. Benz is presently the President of Kaire Holdings, Inc. formerly IMT
and has served in that capacity since May 1995. Since 1990, Mr. Benz has been
President of BiCoastal Consulting Corporation, an independent financial
consulting firm. Mr. Benz has also been the Chairman of the Board of North
American Health & Fitness Corporation. Mr. Benz graduated from the University of
Notre Dame with a Bachelor of Science degree in Business Administration.
Directors of the Company serve until the next annual meeting of stockholders
of the Company and until their successors are elected and duly qualified.
Officers of the Company will be elected annually by the Board of Directors and
serve at the discretion of the Board of Directors.
The Board of Directors of the Company has established the following
committees: an Executive Committee, the members of which are Robert L. Richards,
J.T. Whitworth, Loren E. Bagley, Peter Benz and Steve Westlund with Loren E.
Bagley as Chairman; and an Audit Committee, the members of which are J.T.
Whitworth, Loren E. Bagley, Peter Benz and Steve Westlund with Loren E. Bagley
as Chairman.
EXECUTIVE COMPENSATION
The following table summarizes compensation with respect to Fiscal 1995,
Fiscal 1996 and Fiscal 1997 earned by the Company's President, Chief Executive
Officer and the other executive officers of the Company who earned more than
$100,000 during Fiscal 1995, Fiscal 1996 or Fiscal 1997 (the "Named Executive
Officers"). The Named Executive Officers set forth below were officers of the
Company during the years indicated and were compensated for service in such
position in the manner set forth below.
50
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
<S> <C> <C> <C> <C>
FISCAL ALL OTHER
NAME AND POSITION YEAR SALARY ($) BONUS COMPENSATION
- ---------------------------------------------------------------------- ----------- ---------- ----------- -------------
Nick A. Mangeris, former President.................................... 1997 $ 6,923 $ 0 $ 7,502(1)
1996 156,984 0 19,651(2)
1995 124,602 0 714(3)
Robert L. Richards, currently Chief Executive Officer................. 1997 167,835 0 8,733(4)
1996 178,667 0 18,876(5)
1995 118,760 0 1,064(6)
J.T. Whitworth, currently Chief Operating Officer and Chief Financial
Officer............................................................. 1997 141,266 0 6,376(7)
1996 133,700 0 11,866(8)
1995 97,069 0 1,118(9)
David Crockett, former Vice President of Sales........................ 1997 4,615 0 415(10)
1996 115,264 0 6,356(11)
1995 103,904 0 802(12)
</TABLE>
- ------------------------
(1) Includes the value to Mr. Mangeris of medical benefits provided by the
Company ($7,173), and miscellaneous benefits provided to him.
(2) Includes the value to Mr. Mangeris of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($4,361), medical benefits
provided by the Company ($6,883), and miscellaneous benefits provided to
him.
(3) Includes the value to Mr. Mangeris of medical benefits provided by the
Company ($653), and miscellaneous benefits provided to him.
(4) Includes the value to Mr. Richards of the Company's matching contributions
in Fiscal 1997 to the Company's 401(k) plan ($4,943), medical benefits
provided by the Company ($2,773), and miscellaneous benefits provided to
him.
(5) Includes the value to Mr. Richards of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($5,317), medical benefits
provided by the Company ($3,806), and miscellaneous benefits provided to
him.
(6) Includes the value to Mr. Richards of medical benefits provided by the
Company ($1,003), and miscellaneous benefits provided to him.
(7) Includes the value to Mr. Whitworth of the Company's matching contributions
in Fiscal 1997 to the Company's 401(k) plan ($4,121), and miscellaneous
benefits provided to him.
(8) Includes the value to Mr. Whitworth of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($3,774), and miscellaneous
benefits provided to him.
(9) Includes the value to Mr. Whitworth of medical benefits provided by the
Company ($1,057), and miscellaneous benefits provided to him.
(10) Includes the value to Mr. Crockett of miscellaneous benefits provided to
him by the Company.
(11) Includes the value to Mr. Crockett of the Company's matching contributions
in Fiscal 1996 to the Company's 401(k) plan ($3,413), medical benefits
provided by the Company ($1,847), and miscellaneous benefits provided to
him.
(12) Includes the value to Mr. Crockett of medical benefits provided by the
Company ($740), and miscellaneous benefits provided to him.
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EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
The Company does not have employment contracts with any of its executive
officers.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive compensation for their services as
directors; however, the Board of Directors may authorize the payment of
compensation to directors for their attendance at regular and special meetings
of the Board and for attendance at meetings of committees of the Board as is
customary for similar companies. Directors will be reimbursed for their
reasonable out-of-pocket expenses incurred in connection with their duties to
the Company.
LIMITATION ON LIABILITY OF DIRECTORS
The Delaware General Corporation Law permits a corporation, through its
Certificate of Incorporation, to exonerate its directors from personal liability
to the corporation or to its stockholders for monetary damages for breach of
fiduciary duty of care as a director, with certain exceptions. The exceptions
include a breach of the director's duty of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of law,
improper declarations of dividends, and transactions from which the directors
derived an improper personal benefit. The Company's Certificate of Incorporation
exonerates its directors from monetary liability to the extent permitted by this
statutory provision. The Company has been advised that it is the position of the
Commission that, insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, that provision is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
STOCK OPTION PLAN
In July 1997, the Board of Directors adopted and the stockholders approved
the Company's 1997 Stock Option Plan (the "1997 Stock Option Plan"). The 1997
Stock Option Plan provides for the grant of (i) options that are intended to
qualify as incentive stock options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code, as amended (the "Code"),
to certain employees, directors and consultants (which directors and consultants
are also employees of the Company) and (ii) options not intended to so qualify
("Non-Qualified Stock Options"), to employees, directors and consultants,
including without limitation, employees of companies that do business with the
Company. Each director of the Company is to be automatically granted one
Non-Qualified Stock Option to purchase 5,000 shares of Common Stock, upon their
election to the Board and each anniversary thereafter. The total number of
shares of Common Stock for which options may be granted under the 1997 Stock
Option Plan is 1,000,000 shares. As of March 31, 1998, no options have been
granted under the plan.
The 1997 Stock Option Plan is to be administered by a committee appointed by
the Board of Directors. The Committee is to determine the terms of options
granted, including the exercise price, the number of shares subject to the
option and the terms and conditions of exercise. No option granted under the
1997 Stock Option Plan is transferable by the optionee other than by will or the
laws of descent and distribution and each option is exercisable during the
lifetime of the optionee only by such optionee.
The exercise price of all Incentive Stock Options granted under the 1997
Stock Option Plan must be at
least equal to the fair market value of the underlying Shares on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting rights of all classes of the Company's outstanding capital stock,
the exercise price of any Incentive Stock Option must be not less than 110% of
the fair market value on the date of grant. The exercise price of all
Non-Qualified Stock Options shall be not less than 85% of the fair market value
of the underlying shares on the date of the grant.
The term of each option granted pursuant to the 1997 Stock Option Plan may
be established by the Board of Directors or a committee of the Board of
Directors, in its sole discretion; provided, however, that
52
<PAGE>
the maximum term of each Incentive Stock Option granted pursuant to the 1997
Stock Option Plan is ten years. With respect to any Incentive Stock Option
granted to a participant who owns stock possessing more than 10% of the voting
rights of all classes of the Company's outstanding capital stock, the maximum
term is five years. Options shall become exercisable at such times and in such
installments as the Board of Directors or a committee of the Board of Directors
shall provide in the terms of each individual option.
The Company has agreed with the Underwriter that for a period of two years
from the date of this Prospectus, without the Underwriter's written consent, not
more than 375,000 of the options shall be granted to persons who are officers
and/or directors of the Company on the date of the Prospectus, except that the
Underwriter will not unreasonably withhold consent to the grant or vesting of
such options based on the achievement of goals established in advance and
reasonably approved by the Company's Board of Directors and the Underwriter.
OTHER COMPENSATION
The Company provides basic health and, major medical insurance for its
employees, including its executive officers. The Company has also adopted a
401(K) Profit Sharing Retirement Plan for eligible employees, as described
below. No other retirement, pension or similar program has been adopted by the
Company. These and other benefits may be adopted by the Company for its
employees in the future.
On January 1, 1996, the Company adopted a 401(K) Profit Sharing Retirement
Plan for its employees ("401(K) Plan"). Eligible employees include all employees
of the Company who have completed one year of employment and have attained the
age of 21. The 401(K) Plan permits employees to make voluntary contributions to
the 401(K) Plan up to a dollar limit set by law. The Company may contribute in
discretionary matching contributions equal to the Company's determined
percentage of the employee's contributions. Benefits under the 401(K) Plan are
distributable upon retirement, disability, termination of employment or certain
financial hardship, subject to regulatory requirements. Each participant's share
of the Company's contributions vests at the rate of 20% per year until after 5
years of service, at which time the participant becomes fully vested.
For its fiscal year ended December 31, 1997, the Company made a contribution
to the 401(K) Plan of approximately $53,000, of which $4,900, $0, $4,100,
$1,800, $2,500, $1,100 and $14,400, were for the benefit of Robert L. Richards,
Loren E. Bagley, J.T. Whitworth, William F. Woodburn, L. Charles Laursen, Mark
D. Woodburn and all of the Company's executive officers as a group,
respectively. Amounts to be contributed in the future are at the discretion of
the Company's Board of Directors. Accordingly, it is not possible to estimate
the amount of benefits that will be payable to participants in the 401(K) Plan
upon their retirement. The trustees under the 401(K) Plan are J.T. Whitworth and
L. Charles Laursen.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information concerning beneficial ownership of shares of Common Stock with
respect to (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each executive officer and director of
the Company, and (iii) all executive officers and directors of the Company as a
group based upon information supplied to the Company by such persons:
<TABLE>
<CAPTION>
AMOUNT AND APPROXIMATE
NATURE OF APPROXIMATE PERCENTAGE OF
BENEFICIAL PERCENTAGE OF COMMON COMMON STOCK OWNED
OWNERSHIP STOCK BEFORE OFFERING AFTER OFFERING
----------- ----------------------- -----------------------
<S> <C> <C> <C>
Robert L. Richards(1)(2)................................ 0 0% 0%
Michael A. Lightfoot(1)(2).............................. 0 0% 0%
Loren E. Bagley(1)(2)................................... 0 0% 0%
J.T. Whitworth(1)(2).................................... 0 0% 0%
William F. Woodburn(1)(2)............................... 0 0% 0%
L. Charles Laursen(1)(2)................................ 0 0% 0%
Mark D. Woodburn(1)(2).................................. 0 0% 0%
Steven Westlund(1)(2)................................... 0 0% 0%
Peter Benz(1)(2)(6)..................................... 1,073,196 24% 20%
L. Scott McKnight(3).................................... 2,500,155 57% 46%
12901 Nicholson Road, #370
Farmers Branch, Texas 75234
Barbara Bennett(4)...................................... 400,000 9% 7%
5 West Main Street
Elmsford, NY 10523
Interactive Medical Technologies, Ltd.(5)(6)............ 1,073,196 24% 20%
2139 Pontius Avenue
Los Angeles, CA 90025
All executive officers and directors
as a group (9 persons)(6)............................. 1,073,196 24% 20%
</TABLE>
- ------------------------
(1) The address for each of the above referenced persons or entities is c/o
Kaire International Inc., 380 Lashley Street, Longmont, Colorado 80501.
(2) Does not include options that may be granted under the Company's 1997 Stock
Option Plan. See "Management."
(3) Owned of record by Global Marketing, LLC.
(4) Owned of record in the name of Magic Consulting Group, Inc. Includes 100,000
shares of the Company's Common Stock and gives effect to the exercise of
warrants to purchase 300,000 shares of the Company's Common Stock owned by
such entity. See "Certain Transactions."
(5) In September 1997, IMT, without admitting or denying the allegations set
forth in a civil action commenced by the Securities and Exchange Commission
("Commission"), consented to a final judgement of permanent injunction which
in summary, provided that it was permanently enjoined from violating the
registration provisions of the federal securities laws. The Commission's
complaint alleged that IMT sold shares of its common stock in violation of
said registration provisions. In August 1992, IMT consented to be
permanently enjoined from violating the registration, the antifraud and
other provisions of the federal securities laws, in an action commenced by
the Commission. In July 1997, IMT, without admitting or denying the
allegations set forth in a civil administration proceeding commenced by the
Federal Trade Commission ("FTC"), consented to the entry of an FTC order
prohibiting IMT and others, in connection with any weight loss, fat
reduction or cholesterol reduction product or program; from representing,
advertising, etc. that such product reduces the human body's absorption of
fat, is safe to use and making similar representations, unless such
representation is based upon competent and reliable scientific evidence.
(6) The Company has been advised by IMT that Peter Benz is authorized to vote
said 1,073,196 shares of the Company's Common Stock and, as a consequence of
said authority, Mr. Benz is deemed a beneficial owner of said shares.
54
<PAGE>
CERTAIN TRANSACTIONS
In January 1997, the Company borrowed $102,500 from each of its Chairman,
Loren E. Bagley, and Treasurer and Director, William F. Woodburn, and delivered
one 10% unsecured promissory note each to Mr. Bagley and Mr. Woodburn. In July
1997, the Company borrowed an additional $229,000 from each of Messrs. Bagley
and Woodburn, executed and delivered 10% secured promissory notes to each said
officer, and pledged 1,400,000 shares of Aloe Commodities, Inc., valued at an
aggregate of $250,000, as collateral for the notes. All of the foregoing notes
were due on demand. In September 1997, each of Messrs. Bagley and Woodburn
demanded payment on all of the foregoing notes. The Company sold its shares of
Aloe Commodities, Inc. and repaid $125,000 of the principal amount and accrued
interest to each of Messrs. Bagley and Woodburn, and negotiated the cancellation
of each of the foregoing notes in exchange for its execution and delivery of new
principal amount $120,412, 10% unsecured promissory notes, one each in the favor
of Mr. Bagley and Mr. Woodburn, also payable upon demand. In addition, during
1997, the two directors advanced an additional $113,000 to the Company which was
repaid by the Company during 1997. In December 1997, both Mr. Bagley and Mr.
Woodburn signed agreements with the Company not to demand repayment until and
unless the Company had achieved certain financial benchmarks.
On February 4, 1997, the Company entered into a Consulting Contract with
Magic Consulting Group, Inc. ("Consultant"). Consultant provides general
advisory and consulting to management on matters pertaining to the Company's
business. Consultant received the following compensation for its services: (i)
an option to purchase 100,000 shares of Common Stock of the Company for $.01 per
share, (ii) 100,000 warrants to purchase an aggregate of 100,000 shares of
Common Stock of the Company at $6.60 per share, such warrants to be identical to
the warrants issued by the Company in this Offering, (iii) $2,500 per month for
a period of 60 months from the date of the Consulting Contract. As of March 31,
1998, Consultant had not exercised its option or warrants to purchase shares of
the Common Stock of the Company. In March 1997, the Consultant purchased 100,000
shares of the Company's Common Stock and 100,000 warrants, exercisable at $6.60
per warrant, for $50,000 as part of a private offering of the Company's
securities.
On August 25, 1997, the Company renegotiated the terms of a loan to Magco,
Inc. in the principal amount of $200,000 and as part of such renegotiated terms
issued to the corporation 25,000 warrants to purchase 25,000 shares of Common
Stock of the Company at $6.60 per share, such warrants to be identical to the
warrants issued by the Company in this Offering.
On August 29, 1997, the Company borrowed $100,000 from The Bridge Fund N.V.
for a note bearing interest at the rate of 12% per year, due October 13, 1997.
The balance was paid in full by December 31, 1997. In connection with the
borrowing, the corporation was issued one year options to purchase 15,000 shares
of the Common Stock of the Company at $.01 per share, and 25,000 warrants to
purchase 25,000 shares of common stock of the Company at $6.60 per share, such
warrants to be identical to the warrants issued by the Company in this Offering.
As of March 31, 1998, the options had vested but had not been exercised.
On August 29, 1997, the Company borrowed $100,000 from Corso, Ltd. for a
note bearing interest at the rate of 12% per year, due September 27, 1997. The
balance was paid in full by December 31, 1997. In connection with this
borrowing, the corporation was issued one year options to purchase 15,000 shares
of the Common Stock of the Company at $.01 per share, and 25,000 warrants to
purchase 25,000 shares of common stock of the Company at $6.60 per share, such
warrants to be identical to the warrants issued by the Company in this Offering.
As of March 31, 1998, the options had vested but had not been exercised.
Except as noted above, Magco, Inc., The Bridge Fund N.V. and Corso, Ltd. are
not otherwise affiliated with the Company.
During 1997, the Company borrowed $140,071 from its Chief Operating Officer,
Chief Financial Officer and Director, J.T. Whitworth, and delivered a $140,071
unsecured promissory note to Mr. Whitworth bearing interest at the rate of 10%
per year. The promissory note is due upon demand.
55
<PAGE>
During December 1997, Mr. Whitworth entered into an agreement with the Company
that he would not seek repayment of the note until the Company had reached
certain financial goals.
During 1997, the Company borrowed $118,266 from its Chief Executive Officer
and Director, Robert L. Richards and delivered a $118,266 unsecured promissory
note bearing interest at the rate of 10% per year in the favor of Mr. Richards
at 10% interest. The promissory note is due upon demand. During December 1997,
Mr. Richards entered into an agreement with the Company that he would not seek
repayment of the note until the Company had reached certain financial goals.
In December 1997, Messrs. Bagley, Woodburn, Whitworth, and Richards entered
into an agreement with the Company pursuant to which they agreed that the
Company not make repayments on the notes issued to them until after the end of
the first calendar quarter in which the Company has achieved positive cash flow.
The agreement with Messrs. Bagley, Woodburn, Whitworth and Richards requires
payments only after calendar quarters during which the Company has received
positive cash flow and that the Company is only required to pay the foregoing
named executive officers and directors on a pro rata basis as to their
indebtedness in an aggregate amount equal to 50% of the positive net cash flow
for each such quarter.
On December 9, 1997, the Company and certain holders of common stock of the
Company holding approximately 81%, 3,573,351 shares, of the issued and
outstanding stock of the Company entered into an "Agreement and Plan of
Reorganization" with Interactive Medical Technologies, Inc. ("IMT"), a Delaware
corporation (the "Agreement"). IMT, as part of the Plan of Reorganization, has
committed to invest $3,000,000 in equity in the Company, of which $1,000,000 has
been invested in the Company as of March 31, 1998. Certain holders of common
stock of the Company exchanged their shares for approximately 45%, as defined in
the Agreement, of the common shares of IMT in a transaction which qualified as a
tax free reorganization pursuant to Section 368(a)(1)(B) of the Internal Revenue
Code of 1986, as amended. The Agreement requires the establishment of an
executive committee of the Company's Board of Directors comprised of five
persons, three of whom are to be designated by the Company and two by IMT. The
executive committee is to have the same authority as the Company's Board of
Directors with respect to financing transactions (debt or equity) and anything
materially affecting the operation of the business of the Company with the
proviso that any action taken by the executive committee is to be authorized by
four of its five members. Additionally, if IMT did not provide the additional
capital called for by the Agreement, it was to return the shares of the
Company's common stock it had received in exchange for its own shares,
substantially in the proportion that its actual investment bore to its
investment required by the Agreement. However, this provision was waived by the
Company's stockholders who had exchanged their shares or by their designee,
Robert L. Richards. As part of the transaction, the Company's Board of Directors
was expanded by two new directors Messrs. Westlund and Benz. IMT did not invest
the additional $2,000,000 in equity capital in the Company. During late March
1998 it became apparent that IMT was unable to provide the additional capital
that was provided for under the Agreement. IMT reached an agreement with Global
Marketing, LLC to sell 2,500,155 shares, 57%, of the Company's stock to Global
in return for Global immediately loaning $1,000,000 to the Company. These funds
were needed by the Company as the Company had issued checks in anticipation of a
receipt of funds by IMT.
56
<PAGE>
As part of the Plan of Reorganization, the following identified current and
former executive officers and directors (or entities in which they hold a
beneficial interest) exchanged the stated number of shares of the Company's
Common Stock for the indicated number of IMT's shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
THE COMPANY'S NUMBER OF IMT'S
NAME AND TITLE SHARES EXCHANGED SHARES RECEIVED
- ----------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Robert L. Richards, Chief Executive Officer and Director..................... 627,200 20,748,079
William F. Woodburn, Treasurer and Director.................................. 308,823 10,215,639
Loren E. Bagley, Chairman of the Board....................................... 308,823 10,215,639
Mark D. Woodburn, Secretary and Director..................................... 308,823 10,215,639
J.T. Whitworth, Chief Operating Officer, Chief Financial Officer and
Director................................................................... 294,000 9,726,253
Michael Lightfoot, President................................................. 61,600 2,036,745
Nick A. Mangeris, former President........................................... 767,200 25,379,516
</TABLE>
During January 1998 the Company borrowed $103,000 from William F. Woodburn
and Loren E. Bagley, two directors of the Company, pursuant to demand promissory
notes bearing interest at the rate of 10% per year.
PRIVATE PLACEMENTS OF THE COMPANY'S SECURITIES
Pursuant to a Loan and Security Agreement (the "Loan Agreement"), by and
among the Company and three private investors, in or about January 1997, the
Company sold to such investors $300,000 of Agreement Notes. These notes were
repaid in full by July 31, 1997. In consideration for the purchase of the
Agreement Notes, the Company granted to the holders of the Agreement Notes, the
Agreement Warrants to purchase an aggregate of 44,100 shares of Common Stock of
the Company at an exercise price of approximately $.01 per share of Common Stock
(as adjusted to reflect the anti-dilution provisions in the Agreement Warrants).
The Agreement Warrants expire in January 2000 and include "piggyback"
registration rights relating to the shares of Common Stock issuable upon
exercise of the Agreement Warrants subject to the rights of any Underwriter of
such an offering to exclude a reasonable amount of such shares if market factors
require a limitation on the number of shares to be underwritten. The Underwriter
has advised the Company and the holders of the Agreement Warrants that market
conditions prevent the inclusion of any of the shares of the Company's Common
Stock underlying the Agreement Warrants from being included in the registration
statement of which this Prospectus forms a part.
On or about March 20, 1997, the Company completed a private placement of an
aggregate of 500,000 shares and 500,000 warrants by which it received gross
proceeds of $250,000 from five private investors (the "March 1997 Private
Placement"). Following the payment of commission and non-accountable expenses,
an initial payment towards its non-accountable expenses for this Offering and
counsel fees and expenses for that private placement, the Company received net
proceeds of approximately $171,500. The Underwriter for this Offering served as
the Company's Placement Agent for the March 1997 Private Placement.
As part of the March 1997 Private Placement, the Company entered into a
registration rights agreement with five private investors therein granting them
certain piggyback registration rights with respect to the securities purchased
by them. With respect to any underwritten public offering of the Company's
securities, the foregoing Registration Rights are subject to the Underwriter's
Agreement to include said securities in the registration statement for such an
offering. The Underwriter for this Offering has advised the Company that it will
not agree to include the Company's securities, sold in the March 1997 Private
Placement, in the registration statement of which this Prospectus forms a part.
The holders of a majority of the Company's securities sold in the March 1997
Private Placement have a right to demand that their securities be included, one
time, in a subsequent registration statement to be filed by the Company
57
<PAGE>
and become effective as soon as practicable after the date of this Prospectus
but not later than 180 days thereafter (subject to a 90 day extension in certain
limited circumstances).
Between June 3, 1997 and December 8, 1997, the Company completed a private
placement of an aggregate of 345,000 shares and $1,725,000 in principal amount
of its ten percent promissory notes ("10% Notes") to nine private investors (the
"Summer 1997 Private Placement"). Following the payment of commission and
non-accountable expenses, additional payments towards its non-accountable
expenses for this Offering and counsel fees and expenses, the Company received
approximately $1,400,000 in net proceeds. The 10% Notes bear interest at a rate
of ten percent per annum commencing upon issuance and mature and are payable in
full (principal plus accrued but unpaid interest) upon the earlier of (a)
eighteen months after issuance, or (b) the completion date of an equity
financing of the Company pursuant to which it receives gross proceeds of not
less than $3,000,000. The 10% Notes are secured by the accounts and accounts
receivable of the Company (as defined in the 10% Notes). The security interest
for the 10% Notes, however, are subordinated to the Company's banking
obligations. The Company has the right to prepay all or any of the 10% Notes at
any time without penalty but with accrued interest. The Company intends to use a
portion of the net proceeds of this Offering to repay the 10% Notes in full. See
"Use of Proceeds."
58
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$.01 par value per share, 4,418,351 of which are issued and outstanding as of
the date of this Prospectus. The holders of Common Stock are entitled to receive
dividends equally when, as and if declared by the Board of Directors, out of
funds legally available therefor.
Subject to the rights that may be designated by the Board of Directors to
the holders of any shares of Preferred Stock, the holders of the Common Stock
have voting rights, one vote for each share held of record, and are entitled
upon liquidation of the Company to share ratably in the net assets of the
Company available for distribution. Shares of the Company's Common Stock do not
have cumulative voting rights. Therefore, the holders of a majority of the
shares of Common Stock may elect all of the directors of the Company and control
its affairs and day to day operations. The shares of Common Stock are not
redeemable and have no preemptive or similar rights. All 4,418,351 outstanding
shares of the Company's Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock, par
value $.01 per share ("Preferred Stock"). The Board of Directors of the Company,
without further stockholder action, may issue shares of Preferred Stock in any
number of series and may establish as to each such series the designation and
number of shares to be issued and the relative rights and preferences of the
shares of each series, including provisions regarding voting powers, redemption,
dividend rights, rights upon liquidation and conversion rights. The issuance of
shares of Preferred Stock by the Board of Directors could adversely affect the
rights of holders of Common Stock by, among other matters, establishing
preferential dividends, liquidation rights and voting power. The Company has not
issued any shares of Preferred Stock and has no present intention to issue
shares of Preferred Stock. The issuance thereof could discourage or defeat
efforts to acquire control of the Company through acquisition of shares of
Common Stock.
WARRANTS
The Company has authorized the issuance of up to 1,150,000 Redeemable Common
Stock Purchase Warrants (the "Public Warrants") to be sold in this Offering. As
of the date of this Prospectus, the Company had 1,469,100 warrants issued and
outstanding, 500,000, exercisable at $6.60 per share, having been sold as a part
of a private placement of the Company's securities in March 1997. The Company as
part of its issued and outstanding warrants has warrants to purchase 44,100
shares of its Common Stock issued in connection with a January, 1997 private
placement of the Company's securities, which are exercisable at $.01 per share
of Common Stock and expire in January 2000 (the "Agreement Warrants").
Furthermore, the Company has as part of its issued and outstanding warrants has
warrants to purchase 50,000 shares at $6.60 per share issued in connection with
two private placements of promissory notes in August 1997 and warrants,
exercisable at $6.60 per share, to purchase 25,000 shares of its Common Stock at
$6.60 per share issued in connection with the renegotiation of an earlier loan
to the Company, also in August 1997. The Company issued to its Consultant,
warrants to purchase 100,000 shares of its Common Stock at $6.60 per share in
February 1997. The Company also issued warrants to purchase 750,000 shares of
its common stock to three entities for services provided by them in organizing
the subsidiaries Korea, Trinidad and Tobago, and the United Kingdom. All of said
750,000 warrants are exercisable at $6.60 per share and have the same terms and
conditions as the Public Warrants. See "Certain Transactions."
The following statements and summaries of the material provisions of the
Public Warrants are subject to the more detailed provisions of the Public
Warrants, a copy of which has been included as an Exhibit to the Registration
Statement of which this Prospectus forms a part.
59
<PAGE>
RIGHTS TO PURCHASE SHARES OF COMMON STOCK
Each Public Warrant entitles the holder to purchase for one share of Common
Stock at a price of $6.60, for a period of four years commencing two years after
the date of this Prospectus, provided, however, that if the Underwriter has
consented in writing to all of the Public Warrants being exercisable, they may
be exercisable at any time after their issuance.
Each holder of a Public Warrant may exercise such Public Warrant, in whole
or in part, by surrendering the certificate evidencing such Public Warrant, with
the form of election to purchase attached to such certificate properly completed
and executed, together with payment of the exercise price and any required
transfer taxes, to the Company. No Public Warrants may be exercised unless at
the time of exercise there is a current prospectus covering the shares of Common
Stock issuable upon the exercise of such Public Warrants under an effective
registration statement. The Company will endeavor to obtain and maintain an
effective registration statement, including such current prospectus, so long as
any of the exercisable Public Warrants remain outstanding. While it is the
Company's intention to comply with this intention, there can be no assurance
that it will be able to do so.
The exercise price and any required transfer taxes will be payable in cash
or by certified or official bank check payable to the Company. If fewer than all
of the Public Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Public Warrants.
Certificates evidencing the Public Warrants may be exchanged for new
certificates of different denominations by presenting the warrant certificate at
the offices of the Company.
ADJUSTMENTS
The exercise price and the number of shares of Common Stock purchasable upon
exercise of the Public Warrants are subject to adjustment upon the occurrence of
certain events including stock dividends, stock splits, reverse stock splits,
reclassification, reorganizations, consolidations, mergers, and certain
issuances and redemptions of Common Stock and securities convertible into or
exchangeable for Common Stock (below the lesser of the then exercise price of
the Public Warrants or the fair market value of the Company's Common Stock)
excluding issuances of shares of the Company's Common Stock prior to the
commencement of this Offering, any issuances of the Company's securities in
connection with this Offering and Company stock option plans. No adjustments in
the exercise price will be required to be made with respect to the Public
Warrants until cumulative adjustments amount to $.05. In the event of any
capital reorganization, certain reclassifications of the Common Stock, any
consolidation or merger involving the Company (other than a consolidation or
merger which does not result in any reclassification or change in the
outstanding shares of Common Stock), or sale of the properties and assets of the
Company, as, or substantially as, an entirety to any other corporation, Public
Warrants will thereupon become exercisable only for the number of shares of
stock or other securities, assets, or cash to which a holder of the number of
shares of Common Stock of the Company purchasable (at the time of such
reorganization, reclassification, consolidation, merger or sale) upon exercise
of such Public Warrants would have been entitled upon such reorganization,
reclassification, consolidation, merger or sale.
OTHER RIGHTS
In the event of an adjustment in the number of shares of Common Stock
issuable upon exercise of the Public Warrants, the Company will not be required
to issue fractional shares of Common Stock upon exercise of the Public Warrants.
In lieu of fractional shares of Common Stock, there will be paid to the holders
of the Public Warrants, at the time of such exercise, an amount in cash equal to
the same fraction of the current market price of a share of Common Stock of the
Company.
Public Warrantholders do not have voting or any other rights of stockholders
of the Company and are not entitled to dividends, if any.
60
<PAGE>
REDEMPTION OF PUBLIC WARRANTS
During any time the Public Warrants are exercisable, if the closing bid
price of the Common Stock for twenty consecutive trading days shall exceed
$10.00 the Company may redeem the Public Warrants by paying holders $.05 per
Public Warrant, provided that notice of such redemption is mailed not later than
10 days after the end of such period and prescribes a redemption date at least
30 days thereafter. Public Warrantholders will be entitled to exercise Public
Warrants at any time up to the business day next preceding the redemption date.
Additionally, the Public Warrants may not be redeemed unless at the time of
redemption there is a current prospectus covering the shares of Common Stock
issuable upon exercise of such Public Warrants under an effective registration
statement. During the two year period commencing on the Effective Date, the
Public Warrants shall only be redeemable with the Underwriter's express written
consent.
WARRANT AGREEMENT AND EXCHANGE OF WARRANTS
Upon the closing of this Offering, the Company will enter into a warrant
agreement ("Warrant Agreement") with American Securities Transfer & Trust, Inc.
("Warrant Agent"). It is anticipated that the Warrant Agreement will contain
provisions permitting the Company and the Warrant Agent, without the consent of
the Warrantholders, to supplement or amend the Warrant Agreement in order to
cure any ambiguity or defect, or to make any other provisions in regard to
matters or questions arising thereunder that the Company and the Warrant Agent
may deem necessary or desirable and that does not adversely affect the interests
of the Warrantholders. At that same time, the Company will exchange with the
Warrantholders, who purchased their warrants in the March 1997 private placement
of the Company's securities, printed warrant certificates for the typewritten
format certificates delivered to said investors in this Offering, containing
terms and conditions substantially similar to the Public Warrants.
DIVIDEND POLICY
The Company has not paid dividends to date. The payment of dividends, if
any, in the future is within the discretion of the Board of Directors. The
payment of dividends, if any, in the future will depend upon the Company's
earnings, capital requirements and financial conditions and other relevant
factors. The Company's Board of Directors does not presently intend to declare
any dividends in the foreseeable future, but instead intends to retain all
earnings, if any, for use in the Company's business operations.
TRANSFER AND WARRANT AGENT
The Transfer Agent for the Company's Common Stock and the Warrant Agent for
the Company's warrants is American Securities Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,418,351 shares of
Common Stock outstanding (5,568,351 shares if the Underwriter's Overallotment
Option is exercised in full). All of the shares of Common Stock sold in this
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company which will be subject to certain limitations of Rule 144 adopted
under the Securities Act.
The 4,418,351 presently outstanding shares of Common Stock are restricted
securities and are subject to the resale limitations provided for in Rule 144.
Under Rule 144, as currently in effect, subject to the satisfaction of certain
other conditions, a person, including an affiliate of the Company, which has
owned restricted shares of Common Stock beneficially for at least one year, is
entitled to sell, within any three month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the Common Stock is quoted on an exchange, the average weekly
trading volume during the four calendar weeks preceding the sale. A
non-affiliate which has not
61
<PAGE>
been an affiliate of the Company for at least the three months immediately
preceding the sale and which has beneficially owned such shares for at least two
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above. In meeting the one and two year holding periods
described above, a holder which has purchased shares can include the holding
periods of a prior owner which was not an affiliate of the Company. None of the
shares of the Company's Common stock have been owned by the holders thereof for
greater than two years.
IMT and Global has agreed not to sell, for a period of two years from the
date of this Prospectus, any shares of the Company's Common Stock owned by them
on the date hereof without the prior written consent of the Underwriter.
Furthermore, in connection with this Offering, the Underwriter has been
granted warrants to purchase up to 100,000 shares of Common Stock and up to
100,000 warrants. The holders thereof have the right to require the Company to
register said warrants, and/or the underlying securities under certain
circumstances. In addition, the holders of said warrants have the right to
"piggy-back" said warrants and/or underlying securities on registration
statements of the Company. Any exercise of such registration rights may result
in dilution in the interest of the Company's stockholders, may hinder efforts by
the Company to arrange future financing and may have an adverse effect on the
market price for the Company's securities.
Prior to this Offering, there has been no market for any securities of the
Company. The effect, if any, of public sales of any of the Company's securities
by present securityholders or the availability of such securities for future
sale at prevailing market prices cannot be predicted. Nevertheless, the
possibility that substantial amounts of the Company's securities may be resold
in the public market may adversely affect prevailing market prices for the
Company's securities, if any such market should develop.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
between the Company and the Underwriter (a copy of which agreement is filed as
an exhibit to the registration statement of which this Prospectus forms a part),
the Company has agreed to sell to the Underwriter 1,000,000 shares of Common
Stock and 1,000,000 Public Warrants. All 1,000,000 shares and 1,000,000 Public
Warrants offered must be purchased by the Underwriter if any are purchased. The
shares and Public Warrants are being offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the shares
of Common Stock and the Public Warrants to the public at the offering prices set
forth on the cover page of this Prospectus and that the Underwriter may allow to
certain dealers who are members in good standing with the NASD concessions, not
in excess of $ per share of Common Stock and $ per Public
Warrant. After the initial public offering, the public offering prices and
concessions may be changed by the Underwriter.
In connection with this Offering, the Underwriter and certain selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the shares of Common
Stock and the Public Warrants. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant to
which such persons may bid for or purchase shares for the purpose of stabilizing
their market price. The Underwriter also may create a short position for its own
accounts by selling more shares or Public Warrants in connection with this
Offering than it is committed to purchase from the Company, and in such case may
purchase shares or Public Warrants in the open market following completion of
this Offering to cover all or a portion of such short position. The Underwriter
may also cover all or a portion of such short position by exercising the
Overallotment Option referred to above. In addition, the Underwriter may impose
"penalty bids" under contractual arrangements with dealers participating in this
Offering whereby it may reclaim from such dealer for the account of the
Underwriter, the selling concession with respect to shares and Public Warrants
that are distributed in this Offering, but subsequently purchased for the
account of the Underwriter in the open market. Any of the transactions described
in this paragraph may result in the maintenance of the price of the shares or
Public Warrants at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph are required, and,
if they are undertaken, they may be discontinued at any time.
While certain of the officers of the Underwriter have significant experience
in corporate finance and the underwriting of securities, the Underwriter has
previously underwritten only three public offerings. No assurance can be given
that the Underwriter's limited public offering experience will not affect the
Company's Offering of the Common Stock and Public Warrants and subsequent
development of a trading market, if any.
The Company has granted the Underwriter the Overallotment Option,
exercisable for 45 days from the date of this Prospectus, to purchase up to
150,000 shares of Common Stock and 150,000 Public Warrants from it, at the
public offering price less the underwriting discounts set forth on the cover
page of this Prospectus. The Underwriters may exercise this option solely to
cover overallotments in the sale of the shares of Common Stock and Public
Warrants offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds of the shares of Common Stock and Public
Warrants sold in this Offering of which $40,000 has been paid to date.
The underwriting agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain civil liabilities, including
liabilities under the Securities Act.
63
<PAGE>
The Company has agreed to sell to the Underwriter or its designees, at a
price of $10, the Underwriter's warrants, which entitle the Underwriter to
purchase up to 100,000 shares of Common Stock of the Company and 100,000
warrants to purchase up to an additional 100,000 shares of Common Stock of the
Company, respectively. The Underwriter's warrants will be exercisable at a price
of $7.50 per share, $.125 per warrant and $6.60 per share for the shares of
Common Stock underlying the foregoing warrants, respectively, for a period of
four years commencing one year from the date of this Prospectus, and they will
not be transferable except to the Underwriter and selected dealers and officers
and partners thereof. Any profit realized upon any resale of the Underwriter's
warrants or upon any sale of the shares of Common Stock or warrants underlying
same may be deemed to be additional underwriter's compensation. The Company has
agreed to register (or file a post-effective amendment with respect to any
registration statement registering), for a period of five years from the
Effective Date, the Underwriter's warrants and the underlying securities under
the Securities Act at its expense on one occasion, and at the expense of the
holders thereof on another occasion, upon the request of a majority of the
holders thereof. The Company has also agreed to certain "piggy-back"
registration rights for the holders of the Underwriter's warrants and the
underlying securities. Such piggy-back registration rights will expire five
years from the Effective Date.
The Company has agreed that for a period of not less than three years, the
Underwriter will have the right to designate a person to be a non-voting advisor
to the Company's Board of Directors who will receive the same compensation as a
member of the Board of Directors and who will be indemnified by the Company
against any claims arising out of his participation at meetings of the Board of
Directors. Alternatively, the Underwriter has the right, during such three year
period, to designate one person to be elected to the Company's Board of
Directors. The Company has agreed to use its best effort to obtain the election
of the Underwriter's designee and, if so elected, such person shall be entitled
to receive the same compensation, expense reimbursement and other benefits as
any other non-employee Directors of the Company, if any. The identity of such
person has not been determined as of the date hereof, and it is not expected
that such right will be exercised in the immediate future.
The Underwriter has informed the Company that it does not expect sales to be
made to discretionary accounts to exceed 1% of the shares of Common Stock and
Public Warrants offered hereby.
The Offering is subject to the agreement by IMT and Global that it will not
sell any shares of Common Stock to the public for a period of two years from the
date of this Prospectus.
The Company has agreed to enter into an agreement with the Underwriter
retaining it as a financial consultant for a period of three years from the date
hereof, pursuant to which it will receive fees aggregating $108,000, which fees
will be payable in full at closing.
The Underwriting Agreement also provides that the Company, its current or
future subsidiaries, if any, will for a period of three years from the Effective
Date provide the Underwriter with a right of first refusal with respect to any
public or private offering of securities to raise capital. The Underwriter must
agree to undertake any such financing on the same or better terms as any other
financing proposal.
The Company will pay the Underwriter a commission equal to five percent of
the exercise price of the Public Warrants exercised, of which a portion may be
reallowed to any dealer who solicited the exercise, provided that (i) at the
time of exercise the market price of the Common Stock is greater than the
exercise price of the Public Warrants, (ii) the exercise of the Public Warrants
was solicited by the Underwriter, (iii) the Public Warrants exercised are not
held in discretionary accounts, (iv) disclosure of the compensation arrangements
have been made both at the time of this Offering and at the time of exercise,
and (v) the solicitation of the exercise of the Public Warrants is not in
violation of Regulation M under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has agreed not to solicit the exercise of the
Public Warrants other than through the Underwriter.
64
<PAGE>
LEGAL MATTERS
The validity of the issuances of the securities offered in this Offering
will be passed upon for the Company by Gusrae, Kaplan & Bruno, New York, New
York. Certain legal matters in connection with this Offering will be passed upon
for the Underwriter by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York,
New York.
EXPERTS
The consolidated financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting. The report of BDO Seidman, LLP for the
year ended December 31, 1997 contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
ADDITIONAL INFORMATION
The Company has filed with the Washington, D.C. office of the Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act with respect to the Securities offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and this Offering, reference is made to the Registration Statement,
including the exhibits filed therewith, which may be inspected without charge or
copies made at prescribed rates from the Commission at its principal office at
450 Fifth Street, N.W., Washington, D.C. 20549 or at the Regional Offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material may be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission maintains a web-site that contains
reports, proxies and information statements and other information regarding
issuers that file electronically with the Commission. The Commission's web-site
is located at http://www.sec.gov.
Statements contained in the Prospectus as to the contents of any contract or
other document are not necessarily complete and reference is made to each such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
Upon effectiveness of the Registration Statement, of which this Prospectus
forms a part, the Company will be subject to the reporting requirements of the
Exchange Act and in accordance therewith will file reports, proxies and other
information with the Commission.
65
<PAGE>
KAIRE INTERNATIONAL, INC.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants............................. F-2
Financial Statements:
Consolidated Balance Sheets.................................................. F-3--F-4
Consolidated Statements of Operations and Comprehensive Income............... F-5
Consolidated Statements of Stockholders' Equity (Deficit).................... F-6
Consolidated Statements of Cash Flows........................................ F-7--F-8
Summary of Accounting Policies............................................... F-9--F-13
Notes to Consolidated Financial Statements................................... F-14--F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Kaire International, Inc.
Longmont, Colorado
We have audited the accompanying consolidated balance sheets of Kaire
International, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of operations and comprehensive
income, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1997, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kaire International,
Inc. and subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and has a
working capital deficit of $6,492,288 at December 31, 1997. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
Denver, Colorado
May 1, 1998
F-2
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ---------------------------
(UNAUDITED) 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Assets (Notes 1, 5 and 6)
Current:
Cash and cash equivalents........................................... $ 504,689 $ 460,663 $ 739,267
Accounts receivable, less allowance of $163,297, $168,805 and
$30,000 for possible losses (Notes 5 and 6)....................... 495,160 301,135 148,406
Inventories (Note 5)................................................ 1,514,297 1,612,960 2,194,315
Refundable income taxes (Notes 7 and 9)............................. -- -- 1,025,000
Note receivable--related party (Note 2)............................. -- -- 94,670
Advances--other..................................................... -- -- 226,855
Prepaid expenses and other.......................................... 390,674 267,123 101,225
------------- ------------- ------------
Total current assets.................................................. 2,904,820 2,641,881 4,529,738
------------- ------------- ------------
Property and equipment (Note 4):
Computer equipment.................................................. 914,451 914,451 895,577
Computer software................................................... 579,955 579,955 596,178
Office equipment.................................................... 433,901 424,714 421,915
Furniture and fixtures.............................................. 332,565 322,171 153,678
Leasehold improvements and other.................................... 174,985 174,985 90,762
------------- ------------- ------------
2,435,857 2,416,276 2,158,110
Accumulated depreciation and amortization........................... (1,446,916) (1,344,463) (901,212)
------------- ------------- ------------
Net property and equipment............................................ 988,941 1,071,813 1,256,898
------------- ------------- ------------
Other assets:
Investment (Note 3)................................................. -- -- 250,000
Deposits and other.................................................. 469,299 405,638 313,483
Debt issuance costs, net of accumulated amortization of $212,001 and
$143,886 (Note 6)................................................. 136,229 204,344 --
Deferred offering costs............................................. 127,534 -- --
------------- ------------- ------------
Total other assets.................................................... 733,062 609,982 563,483
------------- ------------- ------------
$ 4,626,823 $ 4,323,676 $ 6,350,119
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-3
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ---------------------------
(UNAUDITED) 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable (Note 6).............................................. $ 2,440,916 $ 2,262,166 $ 200,000
Note payable to bank (Note 5)....................................... 225,000 240,000 250,000
Notes payable--related parties (Notes 2 and 3)...................... 991,496 509,667 75,000
Current portion of capital lease obligations (Note 4)............... 96,160 116,079 258,392
Checks written in excess of deposits................................ 1,151,106 1,322,910 1,376,065
Accounts payable.................................................... 2,674,417 2,495,829 1,341,637
Accounts payable, related party..................................... 12,100 26,255 --
Accrued commissions payable (Note 3)................................ 1,173,429 1,369,305 1,991,476
Accrued payroll taxes payable and other (Note 7).................... 264,737 281,841 137,079
Sales taxes payable (Note 7)........................................ 142,440 268,299 --
Other accrued liabilities........................................... 671,580 241,818 282,062
------------- ------------- ------------
Total current liabilities............................................. 9,843,381 9,134,169 5,911,711
Capital lease obligation, less current maturities (Note 4)............ 14,307 14,713 114,010
------------- ------------- ------------
Total liabilities..................................................... 9,857,688 9,148,882 6,025,721
------------- ------------- ------------
Minority interest in consolidated subsidiaries........................ 205,274 199,636 199,907
Commitments and contingencies (Notes 4, 6 and 10)
Stockholders' equity (deficit) (Note 8):
Preferred stock: $.01 par value; 5,000,000 shares authorized; -0-
shares issued and outstanding..................................... -- -- --
Common stock: $.01 par value; 25,000,000 shares authorized;
4,418,351, 4,418,351 and 2,940,000 shares issued and out-
standing.......................................................... 44,184 44,184 29,400
Additional paid-in capital.......................................... 1,343,225 1,343,225 (21,304)
Cumulative translation adjustment................................... (504,611) (418,980) 11,137
Retained earnings (deficit)......................................... (6,318,937) (5,993,271) 105,258
------------- ------------- ------------
Total stockholders' equity (deficit).................................. (5,436,139) (5,024,842) 124,491
------------- ------------- ------------
$ 4,626,823 $ 4,323,676 $ 6,350,119
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-4
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------- YEARS ENDED DECEMBER 31,
1998 1997 -------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales (Note 12).................... $ 7,716,757 $ 9,604,140 $ 35,681,512 $ 51,498,562 $ 57,841,350
Cost of sales (Notes 3 and 11)......... 1,785,384 2,367,906 8,387,963 13,321,062 14,476,630
------------ ------------- ------------- ------------- -------------
Gross profit........................... 5,931,373 7,236,234 27,293,549 38,177,500 43,364,720
------------ ------------- ------------- ------------- -------------
Operating expenses:
Distributor commissions.............. 3,790,103 5,576,975 19,968,230 27,965,416 30,830,521
Selling general and administrative
expenses........................... 2,255,283 3,192,263 13,008,859 12,975,915 10,370,482
------------ ------------- ------------- ------------- -------------
Total operating expenses............... 6,045,386 8,769,238 32,977,089 40,941,331 41,201,003
------------ ------------- ------------- ------------- -------------
Income (loss) from operations.......... (114,013) (1,533,004) (5,683,540) (2,763,831) 2,163,717
------------ ------------- ------------- ------------- -------------
Other income (expenses):
Other income......................... 1,921 87,281 195,899 40,432 14,556
Interest income...................... 3,880 24,142 54,573 79,029 75,618
Interest expense..................... (194,782) (76,226) (726,392) (126,663) (85,936)
Gain (loss) on foreign exchange...... (1,225) 2,693 (29,202) (17,335) (435)
Other expense........................ (12,105) (8,784) (56,430) (2,775) (33,905)
------------ ------------- ------------- ------------- -------------
Total other income (expenses).......... (202,311) 29,106 (561,552) (27,312) (30,102)
------------ ------------- ------------- ------------- -------------
Income (loss) before income taxes and
minority interest.................... (316,324) (1,503,898) (6,245,092) (2,791,143) 2,133,615
Benefit from (provision for) income
taxes (Note 9)....................... -- -- 12,973 1,103,000 (862,000)
Minority interest in (income) loss of
subsidiaries......................... (9,342) 84,833 133,590 (114,643) (85,264)
------------ ------------- ------------- ------------- -------------
[Net income (loss)..................... (325,666) (1,419,065) (6,098,529) (1,802,786) 1,186,351]
Other comprehensive income (loss):
Foreign currency translation
adjustment......................... (85,631) 11,999 (430,117) 11,137 --
------------ ------------- ------------- ------------- -------------
[Comprehensive income (loss)........... $ (411,297) $ (1,407,066) $ (6,528,646) $ (1,791,649) $ 1,186,351]
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Net income (loss) per share (Note 8)
Basic and diluted.................... $ (0.07) $ (0.40) $ (1.51) $ (0.61) $ .40
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Basic and diluted weighted average
number of common shares
outstanding.......................... 4,418,351 3,550,718 4,046,566 2,940,000 2,940,000
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-5
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED RETAINED STOCKHOLDERS'
---------------------- PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE EQUITY
SHARES AMOUNT CAPITAL INCOME/(LOSS) (DEFICIT) INCOME/(LOSS) (DEFICIT)
--------- ----------- ----------- -------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995...... 2,800,000 $ 28,000 $ (27,000) $ -- $ 721,693 [$ 721,693] $ 722,693
Contribution to capital by
subsidiaries................ -- -- 1,396 -- -- -- 1,396
Issuance of common stock for
services.................... 140,000 1,400 4,300 -- -- -- 5,700
Comprehensive income:
Net income.................. -- -- -- -- 1,186,351 [1,186,351] 1,186,351
--------- ----------- ----------- -------------- ---------- -------------- --------------
Balance, December 31, 1995.... 2,940,000 29,400 (21,304) -- 1,908,044 [1,186,351] 1,916,140
--------------
--------------
Comprehensive income/(loss):
Net loss.................... -- -- -- -- (1,802,786) [(1,802,786)] (1,802,786)
Foreign currency translation
adjustments............... -- -- -- 11,137 -- [11,137] 11,137
--------- ----------- ----------- -------------- ---------- -------------- --------------
Balance, December 31, 1996.... 2,940,000 $ 29,400 $ (21,304) $ 11,137 $ 105,258 [$(1,791,649)] $ 124,491
--------- ----------- ----------- -------------- ---------- -------------- --------------
--------------
Issuance of common stock for
services.................... 633,351 $ 6,334 $ 58,602 $ -- $ -- $ -- $ 64,936
Issuance of common stock for
cash net of offering costs
of $78,543 (Note 8)......... 500,000 5,000 166,457 -- -- -- 171,457
Issuance of common stock in
connection with debt net of
offering costs of $29,580
(Note 6).................... 345,000 3,450 139,470 -- -- -- 142,920
Conversion of debt to
additional paid-in capital
(Note 8).................... -- -- 1,000,000 -- -- -- 1,000,000
Comprehensive income/(loss):
Net loss.................... -- -- -- -- (6,098,529) [(6,098,529)] (6,098,529)
Foreign currency translation
adjustment................ -- -- -- (430,117) -- [(430,117)] (430,117)
--------- ----------- ----------- -------------- ---------- -------------- --------------
Balance, December 31, 1997.... 4,418,351 44,184 1,343,225 (418,980) (5,993,271) [(6,528,646)] (5,024,842)
--------------
--------------
Comprehensive income/(loss):
Net loss (unaudited)........ -- -- -- -- (325,666) [(325,666)] (325,666)
Foreign currency translation
adjustment (unaudited).... -- -- -- (85,631) -- [(85,631)] (85,631)
--------- ----------- ----------- -------------- ---------- -------------- --------------
Balance, March 31, 1998
(unaudited)................. 4,418,351 $ 44,184 $1,343,225 $ (504,611) $(6,318,937) [$ (411,297)] $ (5,436,139)
--------- ----------- ----------- -------------- ---------- -------------- --------------
--------- ----------- ----------- -------------- ---------- -------------- --------------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-6
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
MARCH 31,
--------------------- YEARS ENDED DECEMBER 31,
1998 1997 ---------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
--------- ---------- ---------- ---------- ---------
Operating activities:
Net income (loss)................ $(325,666) $(1,419,065) $(6,098,529) $(1,802,786) $1,186,351
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and
amortization............... 221,332 124,843 876,836 440,873 340,254
Minority interest............ 9,342 (84,833) (133,590) 114,643 85,264
Loss on disposal of fixed
assets..................... -- 16,223 17,217 -- 34,240
Common stock issued for
services................... -- 17,500 17,500 -- 5,700
Deferred income taxes........ -- -- (84,000) 26,366
Provision for doubtful
accounts................... -- 3,385 259,369 41,210 118,855
Changes in operating assets and
liabilities:
Accounts receivable.......... (170,999) (31,921) (435,517) 317,451 (86,178)
Related party receivable..... -- -- -- 238,638 (202,141)
Inventories.................. 374,109 11,076 293,087 123,341 (90,349)
Prepaid expenses and other... (63,315) (3,050) (315,748) (55,909) 102,781
Refundable income taxes...... -- 774,105 1,025,000 (725,000) (300,000)
Accounts payable............. (107,055) 421,617 1,218,959 157,490 (79,217)
Accounts payable, related
party...................... (14,154) -- 26,254 -- --
Accrued liabilities and
other...................... 321,780 (69,145) (184,223) (322,349) (96,959)
Income taxes payable......... -- -- -- (65,755) 14,761
--------- ---------- ---------- ---------- ---------
Net cash provided by (used in)
operating activities........... 245,374 (239,265) (3,433,385) (1,622,153) 1,059,728
--------- ---------- ---------- ---------- ---------
Investing activities:
Deposits and other........... (44,300) (62,346) (289,238) -- --
Purchases of intangibles..... -- -- (20,106) (172,488) (21,223)
Purchases of property and
equipment.................. (19,581) (533) (274,679) (243,415) (193,662)
Advances--other.............. -- -- 226,855 (224,804) (2,051)
Investment................... -- -- 250,000 (250,000) --
--------- ---------- ---------- ---------- ---------
Net cash used in investing
activities..................... (63,881) (62,879) (107,168) (890,707) (216,936)
--------- ---------- ---------- ---------- ---------
</TABLE>
F-7
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED
MARCH 31,
--------------------- YEARS ENDED DECEMBER 31,
1998 1997 ---------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
--------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Financing activities:
Checks written in excess of
deposits..................... (171,804) (408,906) (53,155) 1,376,065 --
Proceeds from note payable to
bank......................... -- -- -- 250,000 --
Payments on note payable to
bank......................... (15,000) -- (10,000) -- --
Proceeds from notes payable.... 150,000 300,000 4,217,463 200,000 --
Payments on notes payable...... -- -- (1,017,463) -- --
Proceeds from notes payable--
related party................ 503,000 407,451 1,165,531 75,000 --
Payments on notes payable--
related party................ (21,171) (312,779) (561,192) (228,738) --
Payments on capital lease
obligations.................. (20,326) (63,209) (241,610) (223,902) (265,734)
Issuance of common stock....... -- 171,457 171,457 -- 1,396
Offering costs paid............ -- -- (29,580) -- --
Payments for deferred offering
costs........................ (127,534) -- -- -- --
Payments for debt issue
costs........................ -- -- (300,794) -- --
--------- ---------- ---------- ---------- ---------
Net cash provided by (used in)
financing activities........... 297,165 94,014 3,340,657 1,448,425 (264,338)
--------- ---------- ---------- ---------- ---------
Effect of foreign exchange rates
changes on cash................ (434,632) (6,807) (78,708) 33,570 --
--------- ---------- ---------- ---------- ---------
Net increase (decrease) in cash
and cash equivalents........... 44,026 (214,937) (278,604) (1,030,865) 578,454
Cash and cash equivalents,
beginning of period............ 460,663 739,267 739,267 1,770,132 1,191,678
--------- ---------- ---------- ---------- ---------
Cash and cash equivalents, end of
period......................... $ 504,689 $ 524,330 $ 460,663 $ 739,267 $1,770,132
--------- ---------- ---------- ---------- ---------
--------- ---------- ---------- ---------- ---------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-8
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
ORGANIZATION AND BUSINESS
Kaire International, Inc. ("the Company"), was incorporated in Nevada in
October 1992. The Company is engaged in the distribution of health and personal
care products through network marketers throughout the United States, Canada,
New Zealand, Australia, South Korea, Trinidad and Tobago, and the United
Kingdom.
As of March 18, 1997, the Company was merged into a newly formed Delaware
corporation of the same name with the Nevada corporation ceasing to exist. The
transaction was accounted for on a basis similar to a pooling of interest with
no change in the historical financial statements of the Company. The newly
formed corporation had no operations prior to the merger.
The Company expanded its markets in 1995 by entering New Zealand and
Australia with its health and personal care products. Kaire New Zealand Ltd.
("Kaire New Zealand") and Kaire Australia Pty. Ltd. ("Kaire Australia") were
incorporated in August 1995 and began operations on November 1, 1995. The
Company acquired a 51% interest in these two subsidiaries on the date of
incorporation.
During 1997, the Company expanded its markets into South Korea, Trinidad and
Tobago, and the United Kingdom. Kaire Korea, Ltd. ("Kaire Korea") was
incorporated on March 19, 1997 in South Korea as a wholly owned subsidiary of
the Company through November 15, 1997. On November 15, 1997, the Company sold
15% of Kaire Korea, in consideration of $143,375 of interest expense due on a
note payable. Operations and sales began during July 1997 (see Note 6). Kaire
Europe Limited ("Kaire Europe") was incorporated as a wholly owned subsidiary of
the Company on July 24, 1997 in the United Kingdom, commencing sales during
November 1997. Kaire Trinidad Limited ("Kaire Trinidad"), a wholly owned
subsidiary of the Company, was incorporated on May 21, 1997 in the Republic of
Trinidad and Tobago and began operations during June 1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries Kaire New Zealand, Kaire Australia
and Kaire Korea, and its wholly owned subsidiaries Kaire Europe, and Kaire
Trinidad. All significant intercompany accounts and transactions have been
eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
statements for the three months ended March 31, 1998 and 1997 are presented on a
basis consistent with the audited consolidated financial statements and reflect
all adjustments, consisting only of normal recurring accruals, necessary for
fair presentation of the results of such periods. The results of operations for
the interim period ended March 31, 1998 are not necessarily indicative of the
results to be expected for the year ending December 31, 1998.
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.
F-9
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
The Company sells its products through network marketers throughout the
United States, Canada, New Zealand, Australia, South Korea, Trinidad and Tobago,
and the United Kingdom. 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 risks, in the normal
course of business.
INVENTORIES
Inventories consist mainly of health and personal care products and are
stated at lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization are
computed, using primarily the straight-line method, over the estimated useful
lives of the assets which range from three to seven years. Maintenance and
repair costs are expensed as incurred.
LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the expected undiscounted future cash flow from the
use of the assets and its eventual disposition is less than the carrying amount
of the assets, an impairment loss is recognized and measured using the asset's
fair value.
DEFERRED OFFERING COSTS
Deferred offering costs include professional fees directly related to the
Company's proposed public offering. If the offering is successful, costs
incurred will be offset against the proceeds of the offering. If the offering is
unsuccessful, such costs will be expensed.
DEBT ISSUE COSTS
Debt issue costs are being amortized using the straight-line method over the
term of the notes payable.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors. Sales
are recorded when products are shipped.
Under the Kaire Direct program the Company 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. The
Company provides a 100% product exchange for any product that does not meet
customer satisfaction if returned within 30 days under the "Kaire Direct"
program. An Associate is allowed 90 days from order date for exchange or refund
only if product bottles (empty, partial or full) are returned.
F-10
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the "liability method". Accordingly, deferred tax
liabilities and assets are determined based on the temporary differences between
the financial statement and tax basis of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Fair values of accounts receivables, accounts payable, and accrued
liabilities are assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair value or they are receivable or payable on demand.
NOTE RECEIVABLE AND NOTES PAYABLE TO RELATED PARTIES
Due to its related party nature and terms of the receivable and payables to
related parties, the Company cannot estimate the fair market value of such
financial instrument.
NOTES PAYABLE
Substantially all of these notes bear interest at fixed rates of interest
based upon the terms of the Agreements. The fair value of these notes are not
materially different than their reported carrying amounts at March 31, 1998 and
December 31, 1997 and 1996.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.
INVESTMENT IN COMMON STOCK
The Company acquired 1,400,000 shares of common stock of Aloe Commodities
International, Inc. ("Aloe") representing a 14% interest in Aloe for $250,000 in
1996. During 1997, the Company sold its investment in Aloe for $250,000 and used
the proceeds as partial payment on certain notes payable (see Note 3).
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. The related translation 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 transactions occurred.
F-11
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items included in the 1996 and 1995 financial statements have been
reclassified to conform to the current year presentation. Such reclassifications
have no impact on the Company's financial position or results of operations.
NET INCOME (LOSS) PER COMMON SHARE
At December 31, 1995, the Company implemented Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No.
128 provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to fully diluted earnings per share. All prior period earnings per share
data has been restated to reflect the requirements of SFAS No. 128. The adoption
of SFAS No. 128 did not effect the EPS calculations at March 31, 1998 and 1997,
and December 31, 1997, 1996 and 1995. See Note 8 for computation of earnings per
share.
STOCK OPTIONS
The Company applies Accounting Pronouncements Bulletin Opinion 25,
"Accounting for Stock Issued to Employee", ("APB 25") and related
interpretations in accounting for all stock option plans. Under APB Opinion 25,
no compensation cost has been recognized for stock options granted as the option
price equals or exceeds the market price of the underlying common stock on the
date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro
forma information regarding net income (loss) as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black Scholes option-pricing model.
COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The implementation
of SFAS No. 130 required comparative information for earlier years to be
restated. The Company has elected to report comprehensive income on consolidated
statements of operations and the consolidated statements of stockholders' equity
(deficit). Comprehensive income is comprised of net income (loss) and all
changes to the consolidated statements of stockholders' equity (deficit), except
those due to investments by stockholders, changes in paid in capital and
distributions to stockholders.
F-12
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 supersedes
Statement of Financial Accounting Standard No. 14 "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 establishes standards of the
way the public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by the implementation of this standard.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132") which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
F-13
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
1. GOING CONCERN
The Company incurred significant losses during the years ended December 31,
1997 and 1996 and, at December 31, 1997, has a negative working capital of
$6,492,288. Additionally, the Company has not made its payroll tax and sales tax
deposits on a timely basis. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The Company has continued to pay its associates on a timely basis and has
negotiated out of any default situations with it's creditors and debtholders.
There are a number of factors which contributed to the losses for 1997 and 1996
including several marketing promotions which did not generate the anticipated
results, a decline in sales from the normal business cycle of a mature business
in the network marketing industry, the creation of a number of marketing videos,
changes in the bonus plan effecting the total payout, the start up of operations
in Korea, Europe and Trinidad and Tobago, and the implementation of an
aggressive recruitment plan. In response to those challenges, the Company has
taken significant steps including the discontinuance of the unsuccessful
marketing promotions, the elimination of videos from the marketing plan, a full
restructuring of the marketing department with significant emphasis on budgeting
and performance, changes to the compensation structure for the associates to
predominantly return to the former compensation structure, a curtailment of any
future expansion plans into foreign countries until adequate capital is
available, an overall reduction in the Company's operating expenses and the
implementation of significant controls over expenses to maintain a very
conservative operational approach.
In addition, the Company is continuing to search for, and introduce, new
products that management believes will provide improved profit margins and
anticipated high profile and user appeal. Management believes that many of the
products introduced over the past two years are excellent products but were
either not fully promoted or lacked the spotlight appeal demanded by many of the
consumers in the network marketing industry. Management's long term goal is to
improve on identifying products which have greater market appeal and then
properly introduce and promote them. The Company has also introduced new
marketing tools to promote sales to end users without the need for the associate
who introduced the product to them to stay with the Company. The Company is also
exploring several avenues of improving gross profit margin.
During 1997, the Company actively pursued a rapid international growth
strategy. The Company obtained a "door to door" selling license in Korea through
a newly formed subsidiary, Kaire Korea, leased office space in Seoul, received
approval for a portion of their product line and started selling products in
Korea in the second half of the year. In May 1997, the Company formed Kaire
Trinidad, leased office space in Port of Spain and began sales operations in
Trinidad and Tobago. During the second half of 1997, the Company formed Kaire
Europe in the United Kingdom, leased office space north of London and began
operations.
These locations were strategically chosen. The Asian market, including
Japan, is the largest in network marketing. Korea was targeted for the entry
into that market as it could be done at a lower cost than Japan. The Company had
contacts with a potentially large associate base of Koreans and Korean-
Americans, and it was believed that the Company would be better accepted by the
Koreans for using it as the starting point into the Asian market as opposed to
the more traditional bases of Hong Kong, Singapore, Taiwan and Japan. Trinidad
was selected for the low cost of operations as the Trinidad economy has a larger
"middle class" than most of the Caribbean islands, and as a entry into both the
Caribbean and South America markets with which it maintains strong trading ties.
The United Kingdom was selected for
F-14
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
1. GOING CONCERN (CONTINUED)
the entry point into the strong European direct sales market. The United Kingdom
presented an English speaking country, a member of the European Union and
regulatory and tax situations similar to several of the countries the Company
was already doing business in.
As with many new entities, the costs of operations in the first months of
operations are high while the sales force and corresponding sales are building.
Therefore, all these entities showed a loss during 1997. Management anticipates
that as these companies become more established and mature, they will be able to
both cut down on their operating expense as a percentage of sales and increase
sales to contribute to the profitability of the Company in 1998 and future
years.
In summary, Management believes that the Company is addressing the going
concern issue in virtually every aspect of its operations. It has cut its
domestic operating expenses. As a part of this reduction, marketing expenses
have been reduced sharply with no perceived impact on the effectiveness of the
Company's marketing strategy. The Company is continuing to pursue outside
financing options including an initial public offering of stock. There are no
assurances that any of these financing events will occur, or that the Company's
plan to achieve profitability and a positive cash flow will be successful. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
2. NOTE RECEIVABLE-RELATED PARTY
On October 18, 1994, the Company accepted a 10% promissory note receivable
from a related party in the amount of $115,549. The note was uncollateralized
and due on demand. During 1997, the Company offset the promissory note and
accrued interest against certain loans made to the Company by the related party
(See Note 3).
3. RELATED PARTY TRANSACTIONS
During 1997 and 1996, three officers of the Company advanced funds to the
Company for working capital requirements. The Company recorded these advances as
current liabilities. On November 28, 1997, the Company issued 10% promissory
notes payable to the officers. The notes are uncollateralized and due on demand.
As of March 31, 1998 and December 31, 1997 and 1996, the Company owed $240,866,
$262,037 and $75,000 to the officers.
During January 1997, the Company borrowed $205,000 from two individual
directors. The Company and the two individual directors agreed to offset the
$115,549 note receivable balance as stated in Note 2 with the advance of
$205,000. The Company then entered into a demand note payable for the balance
with the two directors for $89,451 paying 10% interest per annum. In July 1997,
the Company borrowed an additional $458,000 from the same two directors for
notes payable at 10%, due and payable upon demand. The Company pledged as
collateral on the July 1997 notes payable its investment in the shares of Aloe
Commodities, Inc. The Company sold its investment in the shares of Aloe
Commodities, Inc. to an unrelated third party, valued at $250,000, which was the
Company's cost of those shares. No public market existed for those shares. The
proceeds were used to pay down the note. The Company repaid an additional
$71,500 to the directors and issued 10% promissory notes for the remaining
balances. The remaining principal balance plus accrued but unpaid interest was
refinanced under separate note agreements. The notes are uncollateralized and
due upon demand. As of March 31, 1998 and December 31, 1997, the Company owed
$247,630 and $247,630, respectively, under these notes to the directors. In
addition, during
F-15
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
3. RELATED PARTY TRANSACTIONS (CONTINUED)
1997, the two directors advanced an additional $113,000 to the Company which was
repaid by the Company during 1997.
In December 1997, the directors and officers entered into an agreement with
the Company to which they agreed that the Company not make repayments on the
notes issued to them until after the end of the first calendar quarter in which
the Company has achieved positive cash flow. The agreement requires payments
only after calendar quarters during which the Company has received positive cash
flow and that the Company is only required to pay the officers and directors on
a pro rata basis as to their indebtedness in an aggregate amount equal to 50% of
the positive net cash flow for each such quarter.
On January 5, 1998, the Company borrowed $103,000 from two directors of the
Company for notes payable. The notes payable bear interest at 10%, are
uncollateralized and due on demand.
During March and April 1998, a stockholder of the Company advanced a total
of $1,000,000 (of which $400,000 was outstanding as of March 31, 1998) to the
Company for working capital requirements. On April 16, 1998, the Company entered
into a $1,000,000 note payable with the stockholder. The note bears interest at
10% per annum, is uncollateralized and is payable upon demand.
4. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations which are collateralized
by equipment. Interest rates under the agreements range from 7.1% to 31.9%, with
monthly principal and interest payments ranging from $51 to $11,349.
Future minimum lease payments and the present value of the minimum lease
payments under the noncancelable capital lease obligations as of March 31, 1998
and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
1998.................................................................................. $ 116,028 $ 131,879
1999.................................................................................. 15,347 15,347
----------- ------------
Total future minimum lease payments................................................... 131,375 147,226
Less amounts representing interest.................................................... 20,908 16,434
----------- ------------
Present value of minimum lease payments............................................... 110,467 130,792
Less current maturities............................................................... 96,160 116,079
----------- ------------
Total long-term obligations........................................................... $ 14,307 $ 14,713
----------- ------------
----------- ------------
</TABLE>
At March 31, 1998, December 31, 1997 and 1996, property and equipment
includes equipment under capital lease obligations with a total cost of $757,689
and accumulated amortization of $451,500, $413,900 and $263,588.
5. NOTE PAYABLE TO BANK
The Company had a $250,000 line of credit agreement with a bank. The credit
line bore interest at 10% per annum and was collateralized by inventories,
accounts receivable, certain other assets, and the personal guarantees of
certain officers and directors of the Company. On December 26, 1997, the line of
F-16
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
5. NOTE PAYABLE TO BANK (CONTINUED)
credit was converted to a term loan. The term loan bears interest at 10.5% per
annum and is collateralized by inventories, accounts receivable, certain other
assets, and the personal guarantees of certain officers and directors of the
Company. The term loan is payable in monthly principal payments of $5,000 plus
accrued interest. As of March 31, 1998, December 31, 1997 and 1996, the balance
was $225,000, $240,000 and $250,000. As of March 31, 1998 and December 31, 1997,
the term loan is classified as a current liability.
6. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ------------------------
(UNAUDITED) 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Notes payable to individuals (1).......................................... $ -- $ -- $ 200,000
Note payable to a corporation (2)......................................... 200,000 200,000 --
Note payable owed to stockholder of subsidiary (3)........................ 475,000 475,000 --
Notes payable to individuals (4).......................................... 1,615,916 1,587,166 --
Note payable to a corporation (5)......................................... 150,000 -- --
------------ ------------ ----------
Total notes payable....................................................... $ 2,440,916 $ 2,262,166 $ 200,000
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
- ------------------------
(1) At December 31, 1996, the Company had two $100,000 notes with two
individuals. The notes bore interest at 14% and matured on June 30, 1997.
The notes were collateralized by all accounts and notes receivable and
certain other assets. In connection with this borrowing, the lenders were
each issued warrants to purchase 14,700 shares of the Company's common stock
at $.01 per share. The warrants expire on December 30, 1999. As of December
31, 1997, the notes were paid in full, and the warrants had not been
exercised.
(2) During January 1997, the Company borrowed $200,000 from a corporation for a
note payable at an interest rate of 10% per month, with interest payments
due monthly. The note is guaranteed by certain officers and directors and is
due upon demand. The Company renegotiated the terms of the original
agreement on August 25, 1997, as the Company had not met the interest
payment requirements of the agreement. The August 25, 1997 agreement
modifies the repayment provisions of principal and interest, stipulating
that the Company repay all interest and principal due under the original
agreement by December 31, 1997. Also, the interest rate was reduced from 10%
per month to 2% per month payable monthly, retroactive to March 5, 1997. On
January 15, 1998, the note was amended and changed to a demand note as the
Company was unable to repay the note by December 31, 1997 as stated in the
August 25, 1997 amendment. The Company is required to make monthly interest
only payments of $4,000 per month. In connection with the original terms of
this borrowing, the lender was issued warrants to purchase 25,000 shares of
the Company's common stock at $6.60 per share. The warrants expire six years
after the effective date of the initial public offering. As of March 31,
1998, the warrants had not been exercised.
(3) Kaire Korea, pursuant to a demand promissory note guaranteed by the Company
and personally guaranteed by certain officers of the Company, borrowed
$500,000 from a corporation during May 1997 pursuant to the terms of a note
payable at an annual interest rate of 9.5%. The note was due in principal
installments of: $25,000 due August 31, 1997, $125,000 due September 30,
1997,
F-17
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
6. NOTES PAYABLE (CONTINUED)
$175,000 due October 31, 1997 and $175,000 due November 30, 1997. An option
to acquire 15% of the capital stock of Kaire Korea Ltd. at the par value of
Kaire Korea's capital stock expiring May 2000 was granted to the lender.
During 1997, Kaire Korea defaulted under the note agreement. On November 15,
1997, the Corporation exercised its option to acquire 15% of Kaire Korea
from the Company in consideration of $143,375 in interest expense due by
Kaire Korea under the note agreement. The Company renegotiated the terms of
the original note agreement on January 1, 1998. The January 1, 1998
Agreement modifies the repayment provisions of principal and interest,
stipulating that the Company make monthly interest only payments until the
note is paid in full. The note is payable on September 15, 1998 or five days
after the Company's completion of its proposed public offering (see Note
15). The Company also pledged its stock in Kaire Korea as collateral on this
note.
(4) During 1997, the Company borrowed $1,725,000 pursuant to a private placement
offering consisting of the issuance of promissory notes and common stock of
the Company. In connection with this private placement offering, the Company
incurred $348,230 in debt issue costs. The debt issue costs are being
amortized using the straight line method over the term of the promissory
notes. The promissory notes are due the earlier of eighteen months from the
date of issue, the completion date of an equity financing of the Company
pursuant to which it receives gross proceeds of not less than $3,000,000, or
the Company's receipt of at least $1,000,000 in proceeds from the "Key Man"
life insurance policies on any of its executive officers and/or directors.
The promissory notes bear interest at 10% per annum. In connection with the
private placement offering, debt holders were issued 345,000 shares of the
Company's common stock. Original issue discount of $172,500 was recorded as
part of the private offering financing and is being charged to interest over
the life of the promissory notes under the effective interest method. The
shares issued were valued based upon their estimated fair market value at
date of issuance. As of March 31, 1998 and December 31, 1997, the notes
payable are disclosed net of unamortized original issue discount of $109,084
and $137,834.
(5) During January 1998, the Company borrowed $150,000 from a corporation for a
note payable at an interest rate of 2% per month. Interest and principal are
due on demand. The note is uncollateralized and is personally guaranteed by
certain officers and directors of the Company.
All warrants issued in connection with the above financing transactions have
been valued using the Black Scholes Model and are considered to be nominal in
value.
7. PAYROLL TAX AND SALES TAX LIABILITIES
During 1998 and 1997, the Company has not made its payroll tax deposits with
the Internal Revenue Service ("IRS") and the various state taxing authorities on
a timely basis. The Company has filed all required payroll tax returns. The
Company has been negotiating with the IRS to work out a payment plan. As of
March 31, 1998 and December 31, 1997, the Company has federal income tax refunds
related to the carryback of net operating losses of approximately $264,000 (see
Note 9). The Company has offset these income tax refunds against the federal
payroll tax liabilities as of March 31, 1998 and December 31, 1997 and the net
amount is included. As of March 31, 1998 and December 31, 1997, the Company owes
approximately $370,900 and $277,200 in payroll tax liabilities including
interest and penalties prior to the income tax refund.
During 1998 and 1997, the Company did not make its sales tax deposits with
the various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of March 31, 1998
F-18
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
7. PAYROLL TAX AND SALES TAX LIABILITIES (CONTINUED)
and December 31, 1997, the Company owed approximately $142,400 and $268,300 in
current and delinquent sales taxes.
8. STOCKHOLDERS' EQUITY
STOCK SPLIT AND AUTHORIZATION OF SHARES
On February 1, 1997, the Board of Directors authorized a stock split,
effected in the form of a dividend of 2,800 shares of common stock for each
common share held by shareholders of record on February 1, 1997. All references
to common share and per share amounts in the accompanying financial statements
have been restated to reflect the effect of this stock dividend.
During March 1997, the Board of Directors adopted certain resolutions which
were approved by the Company's stockholders to increase the number of authorized
shares of common stock from 1,000,000 to 25,000,000 shares. The stockholders
also approved the authorization of the issuance of a new class of 5,000,000
shares of preferred stock. The preferred stock of the Company can be issued in
series. With respect to each series issued, the Board of Directors of the
Company will determine, among other things, the number of shares in the series,
voting rights and terms, dividend rates and terms, liquidation preferences and
redemption and conversion privileges. No preferred stock has been issued as of
March 31, 1998.
ISSUANCE OF COMMON STOCK
On March 20, 1997, the Company sold 500,000 shares of common stock pursuant
to a private placement offering for $171,457, net of $78,543 in offering costs,
and warrants to purchase an additional 500,000 shares of common stock at a
purchase price of $6.60 per share. The warrants are exercisable for a period of
four years commencing two years from the date the Securities and Exchange
Commission declares the Company's registration statement effective. The
effective date is the first date the Company may offer the sale of its common
stock in an initial public offering. The Company may redeem the warrants
commencing one year from the effective date at a redemption price $.05 per
warrant if: (1) the closing bid price of the common stock for twenty (20)
consecutive trading days exceeds $10.00, (2) the redemption occurs during the
first two years following the effective date and the Company receives the prior
written consent of the underwriter for such redemption, and (3) the warrants are
exercisable. The warrants issued in connection with this transaction are
considered nominal in value.
During 1997, the Company borrowed $700,000 from Interactive Medical
Technologies, Ltd. ("IMT"), a Delaware corporation. On December 9, 1997, the
Company entered into an Agreement and Plan of Reorganization (the "Agreement")
with IMT whereby IMT agreed to convert its $700,000 of debt previously borrowed
by the Company to equity in the Company, and invest an additional $300,000 in
equity in the Company at closing. The Agreement for reorganization of the
Company contemplated an exchange between the shareholders of Kaire
International, Inc. for IMT shares whereby IMT issued, in total, shares equal to
forty-five percent (45%) of its common stock outstanding (as defined in the
agreement) immediately prior to the closing date of the Agreement in exchange
for not less than 80% of the issued and outstanding common stock of the Company.
During 1998, IMT exchanged 57% of the common stock of the Company to Global
Marketing, LLC. IMT's controlling interest in the Company was deemed temporary
and as such did not result in any adjustment to the Company's consolidated
financial statements as of date of the Agreement.
F-19
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND WARRANTS
During 1997, the Company adopted a stock option plan. No options have been
granted under this Plan as of March 31, 1998. The Company has reserved 1,000,000
shares of its common stock for future grants under this Plan.
SFAS No. 123 requires the Company to provide pro forma information regarding
net loss and net loss per share as if compensation costs for the Company's stock
option plans and other stock awards had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. No stock awards were issued
to employees during the periods ended 1998, 1997, 1996 and 1995. For stock
awards issued to non-employees, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1996, respectively. The options and warrants granted during 1997 and 1996 to
non-employees were considered nominal in value. No stock awards were issued to
non-employees during the periods ended 1998 and 1995.
<TABLE>
<CAPTION>
1997 1996
----------------- ---------
<S> <C> <C>
Dividend yield....................................................................... 0% 0%
Expected volatility.................................................................. 0% 0%
Risk-free interest rates............................................................. 5.85% to 6.6% 6%
Expected lives in years.............................................................. 3 to 6 years 3 years
</TABLE>
F-20
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
8. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock option and warrant plan as of
March 31, 1998 and December 31, 1997 and 1996 is presented below.
<TABLE>
<CAPTION>
OPTIONS WARRANTS
---------------------- -----------------------
<S> <C> <C> <C> <C>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding,
January 1, 1996................................................... -- $ -- -- $ --
Granted......................................................... -- -- 29,400 0.01
--------- ----------- ---------- -----------
Outstanding,
December 31, 1996................................................. -- -- 29,400 0.01
Granted......................................................... 130,000 0.01 1,439,700 6.53
--------- ----------- ---------- -----------
Outstanding,
December 31, 1997................................................. 130,000 0.01 1,469,100 6.40
Granted......................................................... -- -- -- --
--------- ----------- ---------- -----------
Outstanding,
March 31, 1998 (unaudited)........................................ 130,000 $ 0.01 1,469,100 $ 6.40
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
Exercisable,
December 31, 1996................................................. -- $ -- 29,400 $ 0.01
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
Exercisable,
December 31, 1997................................................. 130,000 $ 0.01 44,100 $ 0.01
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
Exercisable,
March 31, 1998 (unaudited)........................................ 130,000 $ 0.01 44,100 $ 0.01
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
Weighted average fair value of options and warrants granted during
1996.............................................................. $ None $ 0.09
Weighted average fair value of options and warrants granted during
1997.............................................................. $ 0.49 $ None
----------- -----------
----------- -----------
</TABLE>
The following table summarizes information about exercisable stock options
and warrants at March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- --------------- ----------- ----------- -----------
Options.......................................... $ 0.01 130,000 4.23 $ 0.01 130,000 $ 0.01
----------- ----------- --- ----- ----------- -----
----------- ----------- --- ----- ----------- -----
Warrants......................................... $ 0.01 44,100 2.00 $ 0.01 44,100 $ 0.01
6.60 1,425,000 6.00 6.60 -- --
----------- ----------- --- ----- ----------- -----
$ 0.01-6.60 1,469,100 5.88 $ 6.40 44,100 $ 0.01
----------- ----------- --- ----- ----------- -----
----------- ----------- --- ----- ----------- -----
</TABLE>
F-21
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
8. STOCKHOLDERS' EQUITY (CONTINUED)
NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
1998 1997 ------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ------------- ------------- ------------- ------------
Numerator:
Net income (loss)...................... $ (325,666) $ (1,419,065) $ (6,098,529) $ (1,802,786) $ 1,186,351
Denominator:
Denominator for basic and diluted
earnings per share--weighted average
shares outstanding................... 4,418,351 3,550,718 4,046,566 2,940,000 2,940,000
Basic and diluted net income (loss) per
share.................................. $ (0.07) $ (0.40) $ (1.51) $ (0.61) $ .40
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
</TABLE>
For the periods ended March 31, 1998 and 1997 and for the years ended
December 31, 1997 and 1996, total stock options and stock warrants of 1,599,100,
894,100, 1,599,100, and 29,400 were not included in the computation of diluted
earnings per share because their effect was anti-dilutive. For the year ended
December 31, 1995, the Company did not have any stock options and stock warrants
outstanding.
F-22
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
9. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------ YEARS ENDED DECEMBER 31,
1998 1997 ----------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current (expense) benefit:
Federal.................................... $ -- $ -- $ 12,973 $ 1,017,000 $ (763,000)
Foreign.................................... -- -- -- -- --
State...................................... -- -- -- 2,000 (130,000)
----------- ----------- ------------- ------------ -----------
-- -- 12,973 1,019,000 (893,000)
----------- ----------- ------------- ------------ -----------
Deferred benefit:
Federal.................................... 168,000 474,000 1,440,000 68,000 29,000
Foreign.................................... 13,000 59,000 205,000 -- --
State...................................... 17,000 16,000 123,000 100,000 2,000
----------- ----------- ------------- ------------ -----------
198,000 549,000 1,768,000 168,000 31,000
----------- ----------- ------------- ------------ -----------
198,000 549,000 1,780,973 1,187,000 (862,000)
Change in valuation allowance................ (198,000) (549,000) (1,768,000) (84,000) --
----------- ----------- ------------- ------------ -----------
Income tax (expense) benefit................. $ -- $ -- $ 12,973 $ 1,103,000 $ (862,000)
----------- ----------- ------------- ------------ -----------
----------- ----------- ------------- ------------ -----------
</TABLE>
At December 31, 1997, the Company had available net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRE
------------ --------------
<S> <C> <C>
Federal net operating loss carryforwards........................................... $ 3,700,000 2012
State net operating loss carryforwards............................................. 6,700,000 2010 to 2012
Foreign net operating loss carryforwards........................................... 924,000 2003 to 2005
Foreign net operating loss carryforwards........................................... 155,000 Indefinite
</TABLE>
The utilization of certain of the loss carryforwards are limited under
Section 382 of the Internal Revenue Code.
The types of temporary differences between the tax basis of assets and
liabilities that give rise to a significant portion of the net deferred tax
liability and their approximate tax effects are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 ------------------------
(UNAUDITED) 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Operating loss carryforwards.............................................. $ 1,690,000 $ 1,497,000 $ 148,000
Foreign operating loss carryforwards...................................... 218,000 205,000 --
Property and equipment.................................................... (81,000) (90,000) (125,000)
Inventories............................................................... 150,000 216,000 47,000
Accounts receivable allowance............................................. 60,000 11,000 14,000
Contribution carryforwards................................................ 13,000 13,000 --
------------ ------------ ----------
Net deferred tax assets................................................... 2,050,000 1,852,000 84,000
Less valuation allowance.................................................. 2,050,000 1,852,000 84,000
------------ ------------ ----------
Net deferred taxes........................................................ $ -- $ -- $ --
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
F-23
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
9. INCOME TAXES (CONTINUED)
A valuation allowance equal to the net deferred tax assets has been
recorded, as management of the Company has not been able to determine that is
more likely than not that the net deferred tax assets will be realized.
A reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------ YEARS ENDED DECEMBER 31,
1998 1997 ----------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Federal income tax (benefit) computed at the
federal statutory rate..................... $ (168,000) $ (474,000) $ (1,452,973) $ (1,085,000) $ 734,000
State income tax (benefit), net of federal
benefit.................................... (17,000) (16,000) (123,000) (102,000) 64,000
Foreign tax (benefit) at statutory rates..... (13,000) (59,000) (205,000) -- --
Increase in valuation allowance.............. 198,000 549,000 1,768,000 84,000 --
Other........................................ -- -- -- -- 64,000
----------- ----------- ------------- ------------- ----------
Income tax expense (benefit)................. $ -- $ -- $ (12,973) $ (1,103,000) $ 862,000
----------- ----------- ------------- ------------- ----------
----------- ----------- ------------- ------------- ----------
</TABLE>
Refundable income taxes in 1996 relate to the carryback of net operating
losses. As of March 31, 1998 and December 31, 1997, the Company has recorded an
income tax receivable which is offset against the Company's payroll tax
liabilities (see Note 7).
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under operating leases for office space, office
equipment and vehicles. Three leases are on a month to month basis and sixteen
require future minimum lease payments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
<S> <C>
1998................................................................................................ $ 424,000
1999................................................................................................ 187,000
2000................................................................................................ 72,000
2001................................................................................................ 70,000
2002................................................................................................ 69,000
Thereafter.......................................................................................... 342,000
------------
Total............................................................................................... $ 1,164,000
------------
------------
</TABLE>
Lease expense for all operating leases was $233,000, $119,000, $605,000,
$290,600 and $175,800 for the three months ended March 31, 1998 and 1997 and the
years ended December 31, 1997, 1996, and 1995.
SELF-INSURANCE
The Company is partially self insured for employee medical liabilities which
covers risk up to $10,000 per incident, per individual covered under the plan.
The Company has purchased excess medical liability coverage for individual
claims in excess of $10,000 and aggregate claims in excess of approximately
$312,000 annually with a national medical insurance carrier. Premiums and claim
expenses associated with the medical self insurance program are included in the
accompanying statements of operations.
F-24
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENT
On February 4, 1997, the Company entered into a consulting agreement with
Magic Consulting Group, Inc. ("Consultant"). Consultant is to receive the
following compensation for services: (i) an option to purchase 100,000 shares of
common stock of the Company for $.01 per share (ii) 100,000 warrants to purchase
an aggregate of 100,000 shares of common stock of the Company at $6.60 per share
and (iii) $2,500 per month for a period of 60 months. As of March 31, 1998, no
warrants were exercised.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends on the continued availability of
certain key management personnel. The Company does not have employment contracts
with any of its employees. The business of the Company could be adversely
affected by the loss of services of any of its key employees.
401(K) PROFIT SHARING PLAN
On January 1, 1996 the Company established a 401(k) profit sharing
retirement plan. The plan requires one year of service and attainment of age 21
to become eligible. Employer contributions vest over a five year period. The
Company's contributions to the plan for the three months ended March 31, 1998
and 1997 were approximately $0 and $12,000 and for the years ended December 31,
1997 and 1996 were approximately $53,000 and $67,000.
LEGAL PROCEEDINGS
The company is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. The Company was initially contacted in January, 1997 and was advised,
in writing, that it is not a "target" of the Department's investigation, but
that it is a "subject" (meaning that its conduct is deemed to be within the
scope of the investigation) thereof. The Company has completed all obligations
and requests pertaining to this matter.
The company has also received a voluntary request for information from the
FTC regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. The Company is currently responding with clarifications
to previous inquiries.
11. MAJOR SUPPLIERS
During the three months ended March 31, 1998 and 1997 and the years ended
December 31, 1997, 1996, and 1995, the Company purchased amounts of its products
from a limited number of vendors, including significant amounts from MW
International of 72%, 87%, 48%, 57% and 40% and from Manhattan Drug of 10%, 6%,
6%, 22% and 40%. 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. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
F-25
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
12. FOREIGN SALES
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31, 1998 UNITED AUSTRALIA OTHER
(UNAUDITED) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------- ------------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers........................ $ 5,509,155 $1,112,424 $ 773,777 $ 321,401 $ -- $ 7,716,757
Transfers between geographic
areas............................ 565,413 -- -- -- (565,413) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 6,074,568 $1,112,424 $ 773,777 $ 321,401 $ (565,413) $ 7,716,757
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from operations...... $ (279,776) $ (17,728) $ 52,775 $ 28,865 $ 101,851 $ (114,013)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at
March 31, 1998................... $ 2,213,369 $ 628,254 $ 1,423,091 $ 281,586 $ 80,523 $ 4,626,823
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
<CAPTION>
PERIOD ENDED MARCH 31, 1997 UNITED AUSTRALIA OTHER
(UNAUDITED) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------- ------------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers........................ $ 8,206,744 $1,397,396 $ -- $ -- $ -- $ 9,604,140
Transfers between geographic
areas............................ 248,129 -- -- -- (248,129) --
Net sales.......................... $ 8,454,873 $1,397,396 $ -- $ -- $ (248,129) $ 9,604,140
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from operations...... $ (1,340,873) $ (297,829) $ -- $ -- $ 105,559 $ (1,533,004)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at
March 31, 1997................... $ 3,990,916 $1,050,957 $ -- $ -- $ -- $ 5,041,873
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
<CAPTION>
UNITED AUSTRALIA OTHER
YEAR ENDED DECEMBER 31, 1997 STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------- ------------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers........................ $ 29,278,545 $5,302,119 $ 808,117 $ 292,731 $ -- $ 35,681,512
Transfers between geographic
areas............................ 2,211,101 -- -- -- (2,211,101) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 31,489,646 $5,302,119 $ 808,117 $ 292,731 $ (2,211,101) $ 35,681,512
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from operations...... $ (4,639,664) $ (693,875) $ (786,714) $(155,037) $ 591,750 $ (5,683,540)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at December 31,
1997............................. $ 2,526,853 $ 702,695 $ 859,954 $ 288,282 $ (54,108) $ 4,323,676
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
</TABLE>
F-26
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
12. FOREIGN SALES (CONTINUED)
<TABLE>
<CAPTION>
UNITED AUSTRALIA OTHER
YEAR ENDED DECEMBER 31, 1996 STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------- ------------- ------------ ------------ ----------- ------------- -------------
Sales to unaffiliated
customers........................ $ 44,122,950 $7,375,612 $ -- $ -- $ -- $ 51,498,562
<S> <C> <C> <C> <C> <C> <C>
Transfers between geographic
areas............................ 1,784,815 -- -- -- (1,784,815) --
Net sales.......................... $ 45,907,765 $7,375,612 $ -- $ -- $ (1,784,815) $ 51,498,562
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from operations...... $ (3,034,684) $ (299,886) $ -- $ -- $ 570,739 $ (2,763,831)
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at December 31,
1996............................. $ 5,153,240 $1,196,879 $ -- $ -- $ -- $ 6,350,119
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
<CAPTION>
UNITED AUSTRALIA OTHER
YEAR ENDED DECEMBER 31, 1995 STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------- ------------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers........................ $ 56,718,455 $1,122,895 $ -- $ -- $ -- $ 57,841,350
Transfers between geographic
areas............................ 171,742 -- -- -- (171,742) --
------------- ------------ ------------ ----------- ------------- -------------
Net sales.......................... $ 56,890,197 $1,122,895 $ -- $ -- $ (171,742) $ 57,841,350
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Income (loss) from operations...... $ 2,168,623 $ (4,564) $ -- $ -- $ (342) $ 2,163,717
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
Identifiable assets at December 31,
1995............................. $ 5,752,254 $1,034,890 $ -- $ -- $ -- $ 6,787,144
------------- ------------ ------------ ----------- ------------- -------------
------------- ------------ ------------ ----------- ------------- -------------
</TABLE>
F-27
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
13. SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------ YEARS ENDED DECEMBER 31,
1998 1997 ------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Interest....................................... $ 20,769 $ 74,812 $ 278,139 $ 120,839 $ 104,502
Income taxes................................... $ -- $ -- $ -- $ -- $ 853,582
Non-cash investing and financing transactions:
Note payable converted to capital................ $ -- $ -- $ 1,000,000 $ -- $ --
Note receivable-related party offset to notes
payable-related parties........................ $ -- $ 94,670 $ 94,670 $ -- $ --
Issuance of common stock in connection with
long-term debt................................. $ -- $ -- $ 172,500 $ -- $ --
Increase in minority interest from sale of 15%
interest in subsidiary......................... $ -- $ -- $ 143,375 $ -- $ --
Equipment acquired under capital lease
obligations.................................... $ -- $ -- $ -- $ 79,374 $ 174,931
Equipment purchased from related party under
notes payable.................................. $ -- $ -- $ -- $ -- $ 66,865
Inventory purchased from related party under
notes payable.................................. $ -- $ -- $ -- $ -- $ 153,764
Common stock issued for debt issue costs......... $ -- $ 47,436 $ 47,436 $ -- $ --
Common stock issued for services................. $ -- $ 17,500 $ 17,500 $ -- $ 57,002
</TABLE>
14. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Period ended March 31, 1998 (unaudited)......................... $ 168,805 $ -- $ 5,508 $ 163,297
Year ended December 31, 1997.................................... $ 30,000 $ 259,369 $ 120,564 $ 168,805
Year ended December 31, 1996.................................... $ 56,000 $ 41,210 $ 67,210 $ 30,000
Year ended December 31, 1995.................................... $ 56,000 $ 118,855 $ 118,855 $ 56,000
</TABLE>
15. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING
The Company has entered into a letter of intent with an underwriter for a
proposed public offering of 1,000,000 shares of common stock and warrants to
purchase 1,000,000 shares of common stock at a price to be determined.
NOTE PAYABLE--RELATED PARTY
On April 29, 1998, the Company borrowed $100,000 from a director of the
Company for a note payable. The notes payable bear interest at 10%. The note is
collateralized by all the assets of the Company and is due on demand.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized in connection with
this Offering to give any information or to make any representations other than
those contained in this Prospectus. This Prospectus does not constitute an offer
or a solicitation in any jurisdiction to any person to whom it is unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has been no change in the circumstances of the Company or the facts
herein set forth since the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 9
Dilution........................................ 18
Use of Proceeds................................. 19
Capitalization.................................. 20
Selected Financial Information.................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business........................................ 37
Legal Proceedings............................... 48
Management...................................... 49
Principal Stockholders.......................... 54
Certain Transactions............................ 55
Description of Securities....................... 59
Shares Eligible for Future Sale................. 61
Underwriting.................................... 63
Legal Matters................................... 65
Experts......................................... 65
Additional Information.......................... 65
Index to Financial Statements................... F-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of the Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
KAIRE INTERNATIONAL, INC.
1,000,000 SHARES
OF COMMON STOCK AND
1,000,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
MAY DAVIS GROUP, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this Offering, all of which are to be paid by the
Registrant, in connection with the issuance and distribution of the Securities
being registered, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 4,728.12
NASD Filing Fee................................................ 1,602.75
NASDAQ Listing and Filing Fees................................. 15,000.00*
Printing and Engraving Expenses................................ 100,000.00*
Accounting Fees and Expenses................................... 100,000.00*
Legal Fees and Expenses........................................ 125,000.00
Blue Sky Fees and Expenses..................................... 50,000.00*
Transfer and Warrant Agent Fees and Expenses................... 10,000.00*
Consulting Agreement with Underwriter.......................... 108,000.00*
Miscellaneous Expenses......................................... 25,963.13*
----------
TOTAL.......................................................... $540,294.00*
----------
----------
</TABLE>
- ------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In general, Section 145 of the Delaware General Corporation Law provides
that persons who are officers or directors of a corporation may be indemnified
by the corporation for acts performed in their capacities as such. The
Registrant's By-Laws authorize indemnification in accordance with and to the
extent permitted by said statute.
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification to the fullest extent permitted by law.
Reference is also made to Section of the Underwriting Agreement filed
as Exhibit 1.1 to this Registration Statement.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold the following securities within the past three
years:
A
<TABLE>
<CAPTION>
APPROXIMATE
DATE PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- --------------- ------------------------------------- ------------------------------------- -----------------
<C> <S> <C> <C>
01/05/97 Mystic Enterprises, Inc. 177,882 shares of Securing
Common Stock financing
01/15/97 Robert J. Young 50,000 shares of Employment
Common Stock Agreement
01/15/97 CCB Investments, L.L.C. 98,823 shares of Securing
Common Stock financing and
personal
guarantees.
01/15/97 Rain Bird Enterprises, L.L.C. 98,823 shares of Securing
Common Stock financing and
personal
guarantees.
01/15/97 Zero Investments, L.L.C. 98,823 shares of Securing
Common Stock financing and
personal
guarantees.
02/04/97 Magic Consulting Group, Inc. Options to purchase 100,000 shares of Partial
Common Stock and Warrants to purchase Consideration for
100,000 shares of Common Stock Consulting
Agreement
03/20/97 Gusrae, Kaplan & Bruno 25,000 shares of Legal Services
Common Stock
08/25/97 Magco, Inc. $200,000 24% Note and Warrants to $200,000
purchase 25,000 shares of Common
Stock
08/29/97 The Bridge Fund N.V. $100,000 18% Note and options to $100,000
purchase 15,000 shares of Common
Stock and Warrants to purchase 25,000
shares of Common Stock
08/29/97 Corso, Ltd. $100,000 12% Note and options to $100,000
purchase 15,000 shares of Common
Stock and Warrants to purchase 25,000
shares of Common Stock
</TABLE>
II-2
<PAGE>
B
<TABLE>
<CAPTION>
DATE PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- --------- ---------------------------------------- ---------------------------------------- -----------------
<C> <S> <C> <C>
12/30/96 Art Granito $100,000 14% Note (Agreement Note) and $ 100,000
Warrants to Purchase approximately
14,700 shares of Common Stock
12/30/96 Roland Day $100,000 Agreement Note and Warrants to $ 100,000
Purchase approximately 14,700 shares of
Common Stock
01/03/97 Long Distance Direct $100,000 Agreement Note and Warrants to $ 100,000
Holdings, Inc. Purchase approximately 14,700 shares of
Common Stock
</TABLE>
C
In March 1997, the Company sold, to the persons and entities identified
below, the securities of the Company for the consideration indicated opposite
their names:
<TABLE>
<CAPTION>
PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- ---------------------------------------------- ---------------------------------------------- -----------------
<S> <C> <C>
Flatford Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
Magic Consulting Group, Inc. One Unit of the Company's Securities* $ 50,000.00
Green Ocean Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
Moonbridge Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
Flint Rock Corporation, N.V. One Unit of the Company's Securities* $ 50,000.00
-----------------
TOTAL $ 250,000.00
-----------------
-----------------
</TABLE>
- ------------------------
* Each Unit consisting of 100,000 shares of Common Stock and 100,000
Redeemable Common Stock Purchase Warrants.
From June 1997 through December 1997, the Company sold, to the persons and
entities identified below, the securities of the Company for the consideration
indicated opposite their names:
II-3
<PAGE>
D
<TABLE>
<CAPTION>
PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- ------------------------------------- ------------------------------------------------------- -----------------
<S> <C> <C>
Farid K. Farida Two Units of the Company's Securities** $ 500,000.00
Sol Arker One Half of a Unit of the Company's Securities** $ 125,000.00
Charles A. Sutton One Half of a Unit of the Company's Securities** $ 125,000.00
Jay Levy One Half of a Unit of the Company's Securities** $ 125,000.00
John J. McCarthy Two Fifths of a Unit of the Company's Securities** $ 100,000.00
Abe Weinzimer One Half of a Unit of the Company's Securities** $ 125,000.00
DG Companies, Inc. One Unit of the Company's Securities** $ 250,000.00
Annette Reed One Half of a Unit of the Company's Securities** $ 125,000.00
Michael E. Jessen One Unit of the Company's Securities** $ 250,000.00
-----------------
TOTAL $ 1,725,000.00
-----------------
-----------------
</TABLE>
- ------------------------
** Each Unit consisting of 50,000 shares of Common Stock and a $250,000 10%
Promissory Note.
These transactions were exempt from registration under the Securities Act of
1933, as amended (the "Act"), under Section 4(2) of that Act as not involving a
public offering, and as to those sales set forth under subsections C and D
above, reliance is placed upon Rule 506 of Regulation D and Section 4(6) of the
Act. No underwriter was engaged by the Company in connection with the issuances
described in subsections A & B. The underwriter herein acted as placement agent
for the issuances set forth in C and D above and received commission and
non-accountable expenses equal in the aggregate to 13% of the gross proceeds
derived therefrom. The recipients of all of the foregoing securities represented
that such securities were being acquired for investment and not with a view to
the distribution thereof. In addition, the certificates evidencing such
securities bear restrictive legends.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement (3)
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's By-Laws (1)
3.3 Registrant's Articles of Merger dated March 11, 1997 (1)
4.1 Form of Underwriter's Warrant Certificate (3)
4.2 Form of Financial Consulting Agreement to be entered into by and between the
Registrant and the Underwriter (3)
4.3 Form of Common Stock Certificate (3)
4.4 Form of Warrants delivered to Private Investors (1)
4.5 Form of Redeemable Common Stock Purchase (Public) Warrants (3)
4.7 Form of Warrant Agency Agreement (3)
5.1 Opinion of Gusrae, Kaplan & Bruno (3)
10.1 Agreement and Plan of Reorganization with Interactive Medical Technologies, Ltd.
("IMT") (1)
10.2 Registrant's Loan Agreement dated May 19, 1997 with Star Financial Bank (1)
10.3 (Deleted)
10.4 (Deleted)
10.5 (Deleted)
10.6 Registrant's Promissory Note with Loren E. Bagley (1)
10.7 Registrant's Promissory Note with William F. Woodburn (1)
10.8 Registrant's Promissory Note with Robert L. Richards (1)
10.9 Registrant's Promissory Note with Horphag Research Ltd. (1)
10.9(A) Registrant's Agreements with Horphag Research, Ltd. including Pledge, Stock Option
and Guaranty (2)
10.10 Registrant's Promissory Notes with Marden Rehabilitation Associates, Inc. (1)
10.11 Registrant's Promissory Note with Magco, Inc. (1)
10.12 Registrant's Promissory Note with IMT dated October 27, 1997 (1)
10.13 Registrant's Promissory Note with IMT dated October 30, 1997 (1)
10.14 Forms of Promissory Notes issued to Private Investors (1)
10.15 Leases (Two) for Registrant's Denver, Colorado facilities (1)
10.16 Registrant's Stock Option Plan (1)
10.17 Registrant's Promissory Note with J.T. Whitworth (1)
10.18 Agreement with Messrs. Bagley, Woodburn, Whitworth, and Richards with the Registrant
regarding Exhibits 10.6, 10.7, 10.8 and 10.17 (2)
21.1 List of Registrant's Subsidiaries (1)
23.1 Consent of Gusrae, Kaplan & Bruno (to be included in Exhibit 5.1) (3)
23.2 Consent of BDO Seidman (2)
23.3 Consent of Jones, Jensen & Company (1)
24.1 Powers of Attorney (included on Page II-8 of initial filing)
27 Financial Data Schedule (2)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed herewith.
(3) To be Filed by Amendment.
II-5
<PAGE>
(b) Financial Statement Schedule
All other schedules are omitted, as the required information is either
inapplicable or presented in the financial statements or related notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication
of such issue.
(5) The undersigned registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Longmont,
State of Colorado, on the 10th day of July, 1998.
KAIRE INTERNATIONAL, INC.
BY: /S/ ROBERT L. RICHARDS
-----------------------------------------
Robert L. Richards,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ROBERT L. RICHARDS Chief Executive Officer and
- ------------------------------ Director (Principal July 10, 1998
Robert L. Richards Executive Officer)
Chief Operating Officer and
Chief Financial Office
/s/ J.T. WHITWORTH and a Director (Principal
- ------------------------------ Financial Officer and July 10, 1998
J.T. Whitworth Principal Accounting
Officer)
/s/ LOREN E. BAGLEY Chairman of the Board of
- ------------------------------ Directors and a Director July 10, 1998
Loren E. Bagley
/s/ WILLIAM F. WOODBURN Treasurer and Director
- ------------------------------ July 10, 1998
William F. Woodburn
/s/ MARK D. WOODBURN Secretary and Director
- ------------------------------ July 10, 1998
Mark D. Woodburn
Director
- ------------------------------ July --, 1998
Steven Westlund
Director
- ------------------------------ July --, 1998
Peter Benz
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LIST
-------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (3)
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's By-Laws (1)
3.3 Registrant's Articles of Merger dated March 11, 1997 (1)
4.1 Form of Underwriter's Warrant Certificate (3)
4.2 Form of Financial Consulting Agreement to be entered into by and between the
Registrant and the Underwriter (3)
4.3 Form of Common Stock Certificate (3)
4.4 Form of Warrants delivered to Private Investors (1)
4.5 Form of Redeemable Common Stock Purchase (Public) Warrants (3)
4.7 Form of Warrant Agency Agreement (3)
5.1 Opinion of Gusrae, Kaplan & Bruno (3)
10.1 Agreement and Plan of Reorganization with Interactive Medical Technologies, Ltd.
("IMT") (1)
10.2 Registrant's Loan Agreement dated May 19, 1997 with Star Financial Bank (1)
10.3 (Deleted)
10.4 (Deleted)
10.5 (Deleted)
10.6 Registrant's Promissory Note with Loren E. Bagley (1)
10.7 Registrant's Promissory Note with William F. Woodburn (1)
10.8 Registrant's Promissory Note with Robert L. Richards (1)
10.9 Registrant's Promissory Note with Horphag Research Ltd. (1)
10.9(A) Registrant's Agreements with Horphag Research, Ltd. including Pledge, Stock Option
and Guaranty (2)
10.10 Registrant's Promissory Notes with Marden Rehabilitation Associates, Inc. (1)
10.11 Registrant's Promissory Note with Magco, Inc. (1)
10.12 Registrant's Promissory Note with IMT dated October 27, 1997 (1)
10.13 Registrant's Promissory Note with IMT dated October 30, 1997 (1)
10.14 Forms of Promissory Notes issued to Private Investors (1)
10.15 Leases (Two) for Registrant's Denver, Colorado facilities (1)
10.16 Registrant's Stock Option Plan (1)
10.17 Registrant's Promissory Note with J.T. Whitworth (1)
10.18 Agreement with Messrs. Bagley, Woodburn, Whitworth, and Richards with the Registrant
regarding Exhibits 10.6, 10.7, 10.8 and 10.17 (2)
21.1 List of Registrant's Subsidiaries (1)
23.1 Consent of Gusrae, Kaplan & Bruno (to be included in Exhibit 5.1) (3)
23.2 Consent of BDO Seidman (2)
23.3 Consent of Jones, Jensen & Company (1)
24.1 Powers of Attorney (included on Page II-8 of initial filing)
27 Financial Data Schedule (2)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed herewith.
(3) To be Filed by Amendment.
<PAGE>
Exhibit 10.9(a)
AGREEMENT made this 30th day of May, 1997 by and between Horphag
Research Limited, having a registered office at 1 Le Marchant Street,
St-Peter Port, Guernsey, Channel Islands ("Horphag") and Kaire International,
Inc. having its principal office at 380 Lashley Street, Longmont, Colorado
("Kaire").
WHEREAS Kaire has caused to be organized Kaire Korea Ltd., a
corporation dedicated to distributing food supplement products in the
Republic of Korea according to Kaire's multi-level system; and
WHEREAS Kaire wishing to set up an office for Kaire Korea Ltd. ("Kaire
Korea") in Seoul and to begin distribution operations as rapidly as possible,
has requested a loan from Horphag; and
WHEREAS Horphag is willing to make such loan on the following terms and
conditions:.
NOW THEREFORE the parties hereto agree as follows:
1. Kaire hereby warrants and represents to Horphag:
a) Kaire is the legal and beneficial owner of all the
capital stock of Kaire Korea and any outstanding shares
of Kaire Korea are or will be upon issuance free and
clear of all liens and encumbrances.
b) The principal sales effort of Kaire Korea will be
devoted to Maritime Pine, a Kaire product containing
Pycnogenol-Registered Trademark-.
c) Kaire will use its best efforts to see that the
trademark Pycnogenol is registered in Korea as a food
supplement as promptly as possible and expects
this to be achieved by July 31, 1997. The bulk
Pycnogenol-Registered Trademark- necessary for
meeting the Korean quarantine requirements
<PAGE>
will have been imported in time to permit sales of
products containing Pycnogenol-Registered Trademark-
by July 31, 1997.
d) Any of the thirty nutritional supplements to be
distributed by Kaire in Korea, including that containing
Pycnogenol-Registered Trademark-, will be sold to associates
who will pay Kaire Korea by bank wire in advance of receiving
any products.
2. In reliance of the forgoing representations and warranties
by Kaire, Horphag agrees to lend to Kaire International $500,000 on
the following terms and conditions:
a) Kaire will issue a demand promissory note in the form
attached hereto.
b) Kaire will issue a guarantee of the note in the form
attached hereto and its officers, Messrs. Mangeris and Robert
Richards, will issue personal guarantees in the form attached
hereto.
c) Promptly upon receipt of the funds from Horphag, Kaire will
transfer them to the Korea Exchange Bank to hold the funds
temporarily in a floating account with the following
instructions:
1) Upon instructions from Jac Hong Ahn or Chae
Woo Song, attorneys-in-fact for Kaire International, Inc.,
(Company), please credit an amount equivalent to 444 million
Won to the share subscription account of Kaire Korea, Ltd.
opened at the Korea Exchange Bank, Naeja Branch, as a share
subscription payment against issuance to the Company of 88,000
shares of Kaire Korea, Ltd. at a price of 5,000 Won per share.
2
<PAGE>
2) Any excess funds are to be credited to our account.
d) Kaire International will issue to Horphag or its assignees
an option to acquire 15% of the capital stock of Kaire Korea
at the par value thereof, which option can be exercised any
time up to 36 months from the date of issuance. Kaire Korea
will be given notice fifteen days in advance of any proposed
assignment by Horphag during which Kaire will have a right,
which it will not exercise unreasonably, to object to the
proposed transferee.
e) To secure the obligations of the Guarantor under such
Option Agreement, Guarantor shall deliver, or cause to be
delivered, to lender a Pledge Agreement constituting a pledge
on 15% of the outstanding shares of Kaire Korea and shall
execute and deliver to Lender such other documents as Lender
may reasonably require from Guarantor in order for Lender to
perfect a first priority security interest in such shares.
f) Kaire Korea will pay the principal of the note plus accrued
interest in installments of $25,000 payable on August 31,
1997, $125,000 payable on September 30, 1997, $175,000 payable
on October 31, 1997, and $175,000 payable on November 30,
1997. If any of these installments is not paid to Horphag
within three days of each of the above dates, Horphag or its
assignees will accrue an option to purchase an additional 2%
of the capital stock of Kaire Korea on the same terms. If the
entire promissory note is not repaid within six (6) months of
3
<PAGE>
the date thereof Kaire will issue to Horphag or its assignees
an option to acquire the cumulative number of shares accrued
through the foregoing specified defaults and a further 5% of
capital stock of Kaire Korea on the same terms and conditions.
If the entire loan is not repaid within a period of seven (7)
months, then for each 30 day period in additional thereto that
it is outstanding, Kaire Korea will issue a further such
option on the same terms and conditions to Horphag or its
assignees for an additional 5% of Kaire Korea capital stock,
until such time as Horphag has an option on 3/4 of the capital
stock of Kaire Korea. If the loan continues to be outstanding
after such options granted to Horphag shall accumulate to 75%
of Kaire Korea's capital stock, then Kaire itself will issue
to Horphag or its assignees an option to acquire within a 36
month period 10% of the capital stock of Kaire International,
Inc. at the par value thereof; if such option cannot for any
reason be issued by Kaire, it will be issued by the personal
guarantors, Messrs. Mangeris and Richards, jointly and
severally with respect to shares of Kaire held by them.
3. On the closing date, which shall be June 1, 1997 or such
other date which is agreed upon by the parties, the parties will
perform the following actions:
a) Horphag will transfer to Kaire Korea the amount of $500,000
which Kaire Korea will transfer to the Korea Exchange Bank,
Naeja-Dong Branch in Seoul, Korea to be converted to Won and
placed in the Won Bank Account of Kaire Korea Ltd.
4
<PAGE>
b) Kaire Korea Ltd., Kaire International, Inc. and Messrs. Mangeris
and Richards will deliver to Messrs. Fox & Horan at 1 Broadway,
New York, New York the documents specified in paragraph 2 above.
4. Messrs. Kim & Chang a law firm located in the Seyang Building at
223 Naeja-Dong Chongro-Ku, Seoul, Korea will execute and deliver to Messrs.
Fox & Horan an opinion stating as follows:
(i) Kaire Korea is duly organized and existing under the laws of
Korea and has no shareholder other than Kaire.
(ii) Neither the shares nor the assets of Kaire Korea are subject
to liens or encumbrances.
(iii) the options granted by Kaire relating to its shares in Kaire
Korea in accordance with this agreement, when duly executed
and delivered will be enforceable by Horphag in Korea in
accordance with their terms.
5. All invoices issued by Kaire Korea to its associates and all monies
paid for products sold by Kaire Korea to its associates or other persons will
be paid into a bank account duly identified and disclosed to Horphag subject
to the following restrictions:
a) Kaire Korea shall submit to Horphag by the tenth day of each
month hereunder a list of fixed and estimated variable expenses,
together with a list of revenues estimated for the following
month, which lists shall be verified by Kaire.
b) Funds received in the escrow account will be retained by Kaire
Korea up to the amount of its verified expenses;
5
<PAGE>
the balance of funds in the account will be kept in escrow until
it can be remitted to Kaire International. Kaire International
will segregate the funds received from Kaire Korea until the
amounts due to Horphag have been paid in full.
c) Kaire will use its best efforts to repay the funds lent by
Horphag, together with interest thereon at the rate of 9.5%
annually, as soon as possible. In any event, Kaire obligates
itself to meet the payment schedule provided in the promissory
note.
6. This agreement is governed by the laws of the State of New York. Any
disagreement arising thereunder which cannot be settled amicably between the
parties will be submitted to arbitration in New York under the Commercial
Arbitration rules of the American Arbitration Association, whose decision
shall be binding on the parties, their successors and assignees and which may
be enforced by any court having jurisdiction over any party whom compliance
is sought thereby.
6
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused their duly authorized
officers to execute this agreement as of the 30th of May 1997.
KAIRE KOREA LTD. KAIRE INTERNATIONAL, INC.
By: By:
------------------------ ----------------------------
Robert L. Richards Robert L. Richards
HORPHAG RESEARCH LIMITED
By:
------------------------
Eric de Kerret
APPROVED AND AGREED TO
By:
------------------------
Nick A. Mangeris
By:
------------------------
Robert L. Richards
7
<PAGE>
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of May 30, 1997 between HORPHAG RESEARCH
LIMITED, having a registered office at 1 Le Marchant Street, St. Peter Port,
Guernsey, Channel Islands ("Horphag"), KAIRE INTERNATIONAL, INC., having
its principal office at 380 Lashley Street, Longmont, Colorado (the
"Shareholder"), and KAIRE KOREA LTD., having its principal office in Seoul,
Korea LTD., having its principal office in Seoul, Korea (the "Company").
W I T N E S S E T H
WHEREAS, the Shareholder is the owner of all the issued and outstanding
shares of the Company;
WHEREAS, Horphag has agreed to make a loan to the Company in the amount
of US$500,000 pursuant to the terms and conditions of that certain Agreement
between the Shareholder and Horphag dated May 30, 1997 and the promissory
note of the Company delivered in connection therewith (the "Agreement");
WHEREAS, to secure the payment and performance of the Company under the
Agreement, the Shareholder has agreed pursuant to the terms of the Agreement
to grant an option to Horphag to purchase up to a certain percentage of
shares of the Company;
WHEREAS, Shareholder has agreed to pledge fifteen percent (15%) of the
Capital Stock of the Company (the "Shares") for the benefit of Horphag until
all amounts owing the Company under the Agreement (the "Payment Obligations")
are paid in full;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. PLEDGE AND SECURITY INTERESTS. In order to secure the full and
punctual payment by the Company of the Payment Obligations in accordance with
the terms of the Agreement, and to secure the performance of obligations of
the Shareholder and the Company:
(A) Shareholder hereby assigns, transfers and pledges to Horphag, and
hereby grants to Horphag a security interest in the Shares, and the
certificates representing the Shares, and all of its rights and privileges
with respect to such Shares, except that the parties hereto acknowledge that
Shareholder's grant of such security interest in the Shares shall not be
interpreted to affect its right to vote such Shares or to receive dividends
or distributions.
(B) Shareholder hereby expressly and irrevocably instructs the Company
to register on this same date in the
<PAGE>
Company's corporate stock ledger book, the existence of this pledge of the
Shares through the insertion in such book of the legend: "These shares have
been pledged in favor of Horphag Research Limited, pursuant to a Pledge
Agreement dated as of May 30, 1997, a copy of which is available at the
offices of the Company."
(C) Upon execution of this Agreement, Shareholder shall deliver to
Horphag all stock certificates representing the Shares. Such certificates
shall be in suitable form for transfer by delivery and shall be accompanied
by duly executed instruments of transfer or assignments in blank, all in a
form and substance satisfactory to Horphag.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER.
Shareholder represents and warrants as follows:
(A) It is the sole record and beneficial owner of the Shares. All of the
Shares are fully paid and non-assessable and subject to no options to sell or
purchase or any similar rights relating to the transfer thereof, other than
Horphag's rights under this Agreement. It shall not become a party to any
agreement which restricts in any manner any of the rights of any current or
future holder of the Shares, without the express prior written agreement of
Horphag.
(B) Upon the recording of the security interest in the Shares in
accordance with Section 1(B) of this Agreement, Horphag will have a valid and
perfected security interest in the Shares. No registration, recordation or
filing with any governmental body, agency or official is required in
connection with the execution or delivery of this Agreement, or necessary for
its validity or enforceability, or for the perfection or enforcement of
Horphag's security interest in its shares pledged hereunder.
SECTION 3. FINANCING STATEMENT. The Shareholder expressly authorizes
Horphag to file one or more financing statements in the United States or in
any applicable jurisdiction naming the Company as debtor and Horphag as
secured party and indicating or describing thereon the Shares and the
Shareholder hereby agrees to execute at the request of Horphag any such
statement or statements and all other documents as Horphag may from time to
time reasonably request for the continued perfection of its respective
security interest in the Shares. To the extent permitted by applicable law,
Shareholder hereby authorizes and empowers Horphag to execute on its behalf
any financing statement and other documents evidencing this Agreement.
2
<PAGE>
SECTION 4. REMEDIES. If the Shareholder or the Company fails to comply with
the terms of the Agreement, and such non-compliance continues for thirty
(30) days, Horphag shall have all the rights and remedies with respect to the
Shares of a secured party under the Uniform Commercial Code (whether or not
said Code is in effect where such rights and remedies are asserted) in
addition to all other rights and remedies provided by law.
SECTION 5. TERMINATION. This Pledge Agreement shall terminate and the
security interest created hereby shall be released upon payment in full of
the Payment Obligations.
SECTION 6. NOTICES. Any notice, request, instruction or other documents to
be given hereunder by any party to any other party shall be in writing and
addressed to each party at the address provided herein and shall be valid
upon receipt.
SECTION 7. GOVERNING LAW. This Pledge Agreement shall be governed by and
construed in accordance with the law of New York.
SECTION 8. ENTIRE AGREEMENT. This Pledge Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof
and supersedes all previous understandings and agreements whether oral or
written, among any of the parties hereto with respect to the subject matter.
SECTION 9. AMENDMENT AND WAIVER. This Pledge Agreement may be amended,
modified and supplemented only by written agreement of the parties signed by
their authorized representatives. The failure or refusal by any of the
parties to enforce any of the terms or conditions of this Pledge Agreement or
to exercise any right hereunder shall not be construed as a waiver or
relinquishment of such provision or right presently or in the future.
SECTION 10. THIRD PARTY RIGHTS. The provisions of this Pledge Agreement are
inserted for the sole benefit of the parties hereto and shall not inure to
the benefit of any other person (other than permitted assigns of the parties)
either as a third party beneficiary or otherwise.
SECTION 11. COUNTERPARTS AND HEADINGS. This Pledge Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the same
instrument. All headings in this Pledge Agreement are inserted for
convenience of reference only and shall not affect its meaning or
interpretation.
SECTION 12. SEVERABILITY. If and to the extent that any court of competent
jurisdiction holds any provision (or any part thereof) of this Pledge
Agreement to be invalid or unenforceable, such holding shall not in any way
affect the validity of this Pledge Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Pledge Agreement to be executed by their respective duly
authorized officers as of the date first above written.
HORPHAG RESEARCH LIMITED KAIRE INTERNATIONAL, INC.
By: By:
---------------------- ------------------------
Name: Eric de Kerret Name: Robert L. Richards
Title: Attorney-in-fact Title: CEO
KAIRE KOREA LTD.
By:
-----------------------
Name: Robert L. Richards
Title: President
4
<PAGE>
EXHIBIT A
Stock Certificate number __, issued to Shareholder representing 15% of
the shares of the common stock of the company.
5
<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made as of this 30th day of May, 1997, by
and between HORPHAG RESEARCH LIMITED, having a registered office at 1 Le
Marchant Street, St-Peter Port, Guernsey, Channel Islands ("Horphag"), KAIRE
INTERNATIONAL, INC., having its principal office at 360 Lashley Street,
Longmont, Colorado (the "Shareholder"), KAIRE KOREA, LTD., having its
principal office in Seoul, Korea (the "Company"), and NICK A. MANGERIS and
ROBERT L. RICHARDS, both with a business address at 380 Lashley Street,
Longmont, Colorado (the "Guarantors").
WITNESSETH:
WHEREAS, the Shareholder is the owner of all the issued and outstanding
shares of the Company;
WHEREAS, Horphag has agreed to make a loan to the Company in the amount
of US$500,000 pursuant to the terms and conditions of that certain Agreement
between the Shareholder and Horphag dated May 30, 1997 and the promissory
note of the Company delivered in connection therewith (the "Agreement");
WHEREAS, the Agreement provides that the loan be repaid by the Company to
Horphag in certain installment payments (the "Installments") according to a
schedule provided therein (the "Payment Schedule");
WHEREAS, to secure the payment and performance of the Company under the
Agreement, the Shareholder has agreed pursuant to the terms of the Agreement
to grant an option to Horphag to purchase up to a certain percentage of
shares of the Company and the Shareholder;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Grant of Option. The Shareholder hereby grants to Horphag the option
to purchase fifteen percent (15%) of the capital stock of the Company (the
"Company Shares") at a price of 5,000 Won per share, subject to the terms and
conditions of this Agreement (the "Initial Option").
2. Additional Options. (a) If the Company fails to pay any Installment
within three days of its respective due date according to the Payment
Schedule, Horphag will automatically accrue an option to purchase an
additional two percent of the Company Shares on the same terms as the Initial
Option.
<PAGE>
(b) In addition to the options issued pursuant to Section 2(a), in the
event that the entire amount due under the Agreement is not repaid within six
(6) months from the date hereof, Horphag will automatically accrue an option
to purchase an additional five percent (5%) of the Company Shares on the same
terms and conditions as the Initial Option.
(c) In addition to the options issued pursuant to Section 2(a) and (b), in
the event the entire amount due under the Agreement is not repaid within
seven (7) months from the date hereof, then for each additional thirty (30)
day period for which any amount under the Agreement remains outstanding, the
Shareholder will issue an option to Horphag to purchase an additional five
(5%) of the Company Shares on the same terms and conditions as the Initial
Option, until such time as Horphag holds options to purchase a total of
seventy-five percent (75%) of all the issued and outstanding Company Shares.
(d) Any and all options issued by the Company to Horphag to purchase
Company Shares, including the Initial Option shall hereinafter be referred to
as the ("Company Option").
(e) In the event Horphag holds options to purchase seventy-five percent
(75%) of the Company Shares and the loan continues to be outstanding and
unpaid, then after thirty (30) days Shareholder shall issue to Horphag or to
its designated assignee, an option to subscribe to the number of shares of
its common stock which would constitute ten percent (10%) of the issued
outstanding shares of its capital stock (the "Kaire Shares" and together with
the Company Shares, the "Shares") for a purchase price per share equal to the
par value of such shares (the "Kaire Option" and together with the Company
Option, the "Options"). If the Shareholder is unable to issue the Kaire
Option for any reason whatsoever, an option with the same terms and
conditions as are described in this Section 2(d) shall be issued to Horphag
by the Guarantors.
3. Term. The term of the Options shall be for a period of three (3) years,
beginning on the date hereof and ending midnight on May 30, 2000, unless
terminated pursuant to the provisions of this Agreement (the "Term").
Notwithstanding any other provision of this Agreement, the Options may not be
exercised by any person or entity after the expiration of said term.
4. Exercise of Options. Subject to the provisions of this Agreement,
Horphag may exercise the Options at any time and from time to time during
the Term. Horphag may, in its sole discretion exercise the Options for all of
the relevant Shares or a portion thereof.
Horphag shall in no event be under any obligation whatsoever or at any
time to exercise either or both of the Options provided
2
<PAGE>
for hereunder, in whole or in part, and Horphag specifically
disclaims any expression regarding its intention to exercise, or
not to exercise, the Options.
5. Method of Exercise. (a) The Options may be exercised
only by delivery to Shareholder or the Guarantor, as the case may
be, of a completed Option Exercise Form, to be substantially in
the form attached hereto as Exhibit A (the ""Option Exercise
Form"). Such delivery shall be accompanied by payment in cash or
cash equivalent of the full price of the Shares being purchased.
(b) Each certificate representing the Shares for which
either of the Options is exercised shall from the date hereof
contain a legend referring to any restrictions on full rights of
ownership or disposition imposed by law and any restrictions
imposed by this Agreement.
6. Rights Prior to Exercise. Horphag shall have no rights
or privileges as a shareholder of either the Company or the
Shareholder or have any voting, dividend or liquidation or
dissolution rights with request to the Shares, unless and until
the Options have been exercised, in whole or in part, by delivery
of the completed Option Exercise Form and payment of the full
Option Price for the Shares being purchased.
7. Deposit in Escrow. Concurrently with the execution of
this Agreement, Shareholder and the Company shall execute and
deliver a Pledge Agreement with regards to the Company Shares
subject to the Initial Option.
8. Severability. If and to the extent that any court of
competent jurisdiction holds any provision (or any part thereof)
of this Stock Option to be invalid or unenforceable, such holding
shall not in any way affect the validity of this Stock Option.
9. Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and assigns provided however, that Horphag may not
assign this Agreement without the prior written consent of
Shareholder. Horphag shall provide the Company with fifteen (15)
days notice of its intention to assign its rights under this
Agreement. The Shareholder shall have the right to reasonably
object to any such assignment. If Shareholder fails to object it
shall be deemed to have consented to such assignment. Any
purported assignment of this Agreement without compliance with
this section shall be void.
3
<PAGE>
10. Notices. Any notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given or
delivered when delivered personally or when mailed by registered or certified
mail, return receipt requested, with the first class postage prepaid to the
parties at the addresses provided herein.
11. Waiver of Breach. The failure of any party to insist, in any one or
more instances, upon the performance of any of the terms or conditions of
this Agreement shall not be construed as a waiver or a relinquishment of any
right granted hereunder, including but not limited to the right to insist
upon future performance of any such term, covenant or condition.
12. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York.
13. Entire Agreement and Amendment. This Agreement represents the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior understandings, written or oral, with respect thereto.
This Agreement may only be modified or amended by a writing signed by the
party against whom enforcement is sought and no oral waiver, modification or
amendment shall be effective.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto if individuals, have duly
executed, and if otherwise, have caused their respective duly authorized
officer to execute, this Stock Option Agreement as of the day and year first
above written.
---------------------------- -----------------------------
Nick A. Mangeris Robert L. Richards
HORPHAG RESEARCH LIMITED KAIRE INTERNATIONAL INC.
By:------------------------ By:--------------------------
Name: Eric de Kerret Name: Robert L. Richards
Title: Attorney-in-fact Title: CEO
KAIRE KOREA LTD.
By:-------------------------
Name: Robert L. Richards
Title: President
5
<PAGE>
EXHIBIT A to
STOCK OPTION AGREEMENT
OPTION EXERCISE FORM
(To be executed upon exercise of Options)
The undersigned hereby irrevocably elects to exercise the right,
as granted by the Stock Option Agreement by and betweeen Kaire International,
Inc. (the "Shareholder"), Kaire Korea Ltd. (the "Company"), Nick A. Mangeris,
Robert L. Richards, and the undersigned, dated as of May 30, 1997 (the "Stock
Option Agreement"), to purchase _____ Shares of the common stock, par value
[$_____] per share (the "Shares") of [the Shareholder/the Company] and
herewith tenders payment for such Shares to the order of the Shareholders in
the amount of specified in the Stock Option Agreement and in accordance with
the terms thereof. The undersigned requests that a certificate be issued in
the name of the undersigned, whose address is ____________________ and that
such certificate be delivered to ___________________ whose address is
____________________________________________________. If said number of
Shares is less than all of the Shares purchasable hereunder, the undersigned
hereby reserves the right to purchase the remaining balance of the Shares in
accordance with the Stock Option Agreement.
IN WITNESS WHEREOF, the undersigned has signed this Option
Exercise Form as of the ___ day of __________, _____.
HORPHAG RESEARCH LIMITED
By:
------------------------------------
6
<PAGE>
GUARANTY
1. FOR VALUE RECEIVED, and in consideration of any loan, credit, draft, or
other financial accommodation now or hereafter at any time made or given to
KAIRE INTERNATIONAL, INC. ("Borrower") by HORPHAG RESEARCH LIMITED
("Lender"), the undersigned (hereinafter "Guarantors") hereby jointly and
severally, absolutely and unconditionally guarantee on demand, in lawful
money of the United States the prompt and complete payment, whether at
maturity, by acceleration, demand, or otherwise, and at any and all times
thereafter, of all indebtedness and other obligations of every kind and
nature from Borrower to Lender, direct or indirect, absolute or contingent,
due or to become due, now or hereafter existing, including, but not limited
to, any amounts now or hereafter owing under that certain Agreement dated
May 30, 1997 between Lender and Borrower and the promissory note delivered
in connection therewith; and in addition, Guarantors agree to pay all
reasonable costs and expenses (including, but not limited to, court costs and
reasonable attorneys' fees) paid or incurred by the Lender in endeavoring to
collect or enforce performance of any of such obligations, or in enforcing
this Guaranty.
2. Guarantors' obligations hereunder shall be unconditional and absolute,
as principal debtors and co-obligors, and without limiting the generality of
the foregoing, shall not be released, discharged or otherwise affected by any
extension, renewal, settlement, compromise or waiver in respect of any
obligation or liability of Borrower; any modification or amendment of or
supplement to any agreement of Borrower with regard to any obligation or
liability of Borrower; any release, exchange, non-perfection or invalidity of
any direct or indirect security for any obligation or liability of Borrower;
any change in the corporate structure or ownership of Borrower, or any
insolvency, bankruptcy, reorganization or other similar proceeding affecting
Borrower or Borrower's assets; the exsitence of any claim, set-off or other
rights which the Guarnators may have at any time against Borrower, Lender or
any other corporation or person; any invalidity or unenforceability for any
reason of any agreement by Borrower relating to any obligation or liability
of Borrower or any provision of applicable law or regulation purporting to
prohibit payment by Borrower of any principal, interest or other amount
payable in regard to any obligation or liability of Borrower; or any other
act or omission to act or delay of any kind by Borrower, Lender or any other
corporation or person or any other circumstance whatsoever which might but
for the provisions of this paragraph, constitute a legal or equitable
discharge of Guarantor's obligations hereunder.
<PAGE>
3. The obligations of Guarantors hereunder are independent of any security
for or other guaranty of the indebtedness hereby guaranteed, whether executed
by the Guarantors or by any other party, and the liability of the Guarantors
is not affected by (a) any other continuing or other guaranty, undertaking or
liability of the undersigned or of any other party as to the indebtedness of
the Borrower, or (b) any payment on, or in reduction of, any such other
guaranty or undertaking; and a separate action or actions may be brought and
prosecuted against any of the Guarantors whether any action is brought
against the Borrower or whether the Borrower be joined in any such action or
actions. The Guarantors waive the benefit of any statute of limitations
affecting their liability hereunder.
4. The Guarantors hereby waive all requirements as to due diligence,
presentment, demand of payment, protest and notice of any kind with respect
to this Guaranty. If acceleration of the time for payment of any amount
payable by Borrower to Lender is stayed upon the insolvency, bankruptcy or
reorganization of Borrower, such amount otherwise subject to acceleration
shall nonetheless be payable by Guarantors hereunder on Lender's demand.
5. This Guaranty shall be binding upon the Guarantors and their heirs,
successors and personal representatives and shall inure to the benefit of the
Lender and its successors and assigns.
6. No modification or waiver of any of the provisions of this Guaranty shall
be effective unless in writing and signed by the Guarantors and an officer of
the Lender.
8. This Guaranty shall be governed by and construed in accordance with the
laws of the State of New York without regard to its conflict of laws.
Wherever possible, each provision of this Guaranty shall be interpreted in a
manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
9. THE PARTIES ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS GUARANTY OR THE RELATIONSHIP ESTABLISHED HEREBY WOULD BE BASED
UPON DIFFICULT AND COMPLEX ISSUES. ACCORDINGLY, IN AN EFFORT TO EXPEDITE THE
RESOLUTION OF ANY SUCH CONTROVERSY AND AVOID ADDITIONAL EXPENSE AND DELAY,
THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY IN ANY
JURISDICTION SHALL BE RESOLVED BY A JUDGE SITTING WITHOUT A JURY.
<PAGE>
IN WITNESS WHEREOF, the Guarantors have executed this Guaranty on the 30th
day of May, 1997.
- ----------------------------- ------------------------------
Nick A. Mangeris Robert L. Richards
STATE OF COLORADO )
)ss.:
COUNTY OF )
The foregoing instrument was acknowledged before me this ____ day of
May, 1997, by Nick A. Mangeris. Wintess my hand and official seal.
-----------------------------
Title of Officer
My commission expires:
-------------------------
STATE OF COLORADO )
) ss.:
COUNTY OF )
The foregoing instrument was acknowledged before me this ____ day of
May, 1997, by Robert L. Richards. Witness my hand and official seal.
-----------------------------
Title of Officer
My commission expires:
-------------------------
<PAGE>
Exhibit 10.18
AGREEMENT
This AGREEMENT made and entered into this 3rd day of December, 1997 by
Kaire International, Inc., a Delaware Corporation, party of the first part
and hereinafter "Kaire", and Loren E. Bagley, William F. Woodburn, J.T.
Whitworth, Mark D. Woodburn, and Robert L. Richards, parties of the second
part.
RECITALS
WHEREAS, Loren E. Bagley has loaned the sum of $120,411.85 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, William F. Woodburn has loaned the sum of $120,411.85 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, J.T. Whitworth has loaned the sum of $140,070.72 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, Mark D. Woodburn has loaned the sum of $3,700.26 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
WHEREAS, Robert L. Richards has loaned the sum of $118,265.84 to Kaire
evidenced by that certain note attached hereto and incorporated herein;
NOW, THEREFORE, for and in consideration of the sum of $10.00, cash in
hand paid, the receipt and sufficiency of which is hereby acknowledged by the
parties hereto, the parties of the second part agree to the following
repayment terms:
Kaire shall not be obligated to make any payment on the cumulative
indebtedness of the parties of the second part until after the end of the
first calendar quarter in which Kaire has achieved positive net cash flow
(the "Initial Payment Quarter"), and that within 30 days after the end of the
Initial Payment Quarter and each succeeding calendar quarter in which Kaire
has achieved positive net cash flow, Kaire shall only be obligated to make a
payment to the parties of the second part, on a prorata basis, on such
indebtedness in an aggregate amount equal to 50% of the positive net cash
flow for each such calendar quarter.
/s/ Robert L. Richards /s/ J.T. Whitworth
- ------------------------------ ------------------------------
Kaire International, Inc. J.T. Whitworth
By its Chief Executive Officer
/s/ Loren E. Bagley /s/ Robert L. Richards
- ------------------------------ ------------------------------
Loren E. Bagley Robert L. Richards
/s/ W. F. Woodburn /s/ Mark D. Woodburn
- ------------------------------ ------------------------------
William F. Woodburn Mark D. Woodburn
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Kaire International, Inc.
Longmont, Colorado
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated May 1, 1998, relating to the
consolidated financial statements of Kaire International, Inc. which is
contained in that Prospectus. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Denver, Colorado
July 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kaire
International, Inc. Consolidated Financial Statements Years ended December 31,
1997, 1996 and 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 460,663 504,689
<SECURITIES> 0 0
<RECEIVABLES> 301,135 495,160
<ALLOWANCES> 168,805 163,297
<INVENTORY> 1,612,960 1,514,297
<CURRENT-ASSETS> 2,641,881 2,904,820
<PP&E> 2,416,276 2,435,857
<DEPRECIATION> 1,344,463 1,446,916
<TOTAL-ASSETS> 4,323,676 4,626,823
<CURRENT-LIABILITIES> 9,134,169 9,843,381
<BONDS> 3,026,546 3,671,719
0 0
0 0
<COMMON> 44,184 44,184
<OTHER-SE> (5,069,026) (5,480,323)
<TOTAL-LIABILITY-AND-EQUITY> 4,323,676 4,626,823
<SALES> 35,681,512 7,716,757
<TOTAL-REVENUES> 35,681,512 7,716,757
<CGS> 8,387,963 1,785,384
<TOTAL-COSTS> 32,977,089 6,045,386
<OTHER-EXPENSES> (561,552) (202,311)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (6,245,092) (316,324)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,098,529) (325,666)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,098,529) (325,666)
<EPS-PRIMARY> (1.51) (0.07)
<EPS-DILUTED> (1.51) (0.07)
</TABLE>
