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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
Amendment No. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
VITAL LIVING PRODUCTS, INC.
----------------------------------------------
(Name of Small Business Issuer in its charter)
DELAWARE 56-1683886
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5001 Smith Farm Road, Matthews, NC 28104
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (704) 821-3200
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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------------------------------------- -----------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Vital Living Products, Inc. (the "Company", which may be referred to as
"we", "us" or "our"), was incorporated in North Carolina in January 1990. On
December 23, 1991 the Company merged into a Delaware corporation bearing the
same name as a result of which the Company became a Delaware corporation.
We do business under the name American Water Service and sell a variety
of water treatment and testing products and services, including home water test
kits, water treatment equipment and high purity drinking water vended from
machines placed at retail locations.
We began as a manufacturer and distributor of two proprietary drinking
water programs: The Drinking Water Machine(TM) and The Raindrop Shoppe(TM). The
Drinking Water Machine(TM) was the first in-store water bottling program for
grocery stores. The Raindrop Shoppe(TM) provided consumers with an in-store
water vending program.
In April 1992, we consummated an initial public offering of our shares
of common stock at $3.25 per share. During the first twelve months of trading on
the Nasdaq Stock Market our stock price fell to $.25 per share. The following
year operational losses completely depleted all cash raised from the initial
public offering.
In March 1993, the chairman of our board, C. Wilbur Peters, made
changes in management personnel, personally assumed the role of president and
chief executive officer and began funding the Company's operations using his own
financial resources. Soon thereafter, the Company halted placements of the
unprofitable Drinking Water Machine(TM) and Raindrop Shoppe(TM) and began
installing self-serve coin-operated water vending machines on revenue share
programs with retailers.
In March 1994, our common stock, trading as low as $.04 per share,
ceased to be traded on the Nasdaq Stock Market. Since then it has been traded on
the Nasdaq OTC Bulletin Board. Vending machine installations continued to grow,
however, and in 1994 we began selling water treatment equipment for home and
commercial use.
In 1995 we began developing a line of home water test kits designed to
enable consumers to test the safety and quality of their home's tap water. In
late 1996 we launched the first of our PurTest(R) line of home water testing
products, our PurTest(R) Bacteria test kit. By the fall of 1997 we had a
comprehensive home water test kit product line on the market. Since then,
because we believe the continued development of our PurTest(R) line of products
offers the best opportunity to grow our business, it has been our primary focus.
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WATER TESTING PRODUCTS
We are currently the only U.S. provider of a comprehensive set of home
water test kits. Our PurTest(R) line of test kits includes: PurTest(R) Bacteria,
Nitrate, Nitrite; PurTest(R) Lead; PurTest(R) Iron Hardness Plus; PurTest(R)
Pesticide; and PurTest(R) Home Water Analysis Kit.
Concern with the safety of water is growing in the United States as
well as in other countries. According to a recent study conducted by the Water
Quality Association, a water industry group, many Americans are concerned about
their water and want to know more about what is in their water. In the United
States there are over 16 million private drinking wells which the Environmental
Protection Agency (the "EPA") recommends be tested annually for nitrates and
coliform bacteria and more frequently for pesticides if a problem is suspected.
We developed our PurTest(R) line of home water test kits to provide people
concerned with the safety of their water with an alternative to laboratory
testing:
o Our PurTest(R) Bacteria, Nitrate, Nitrite test kit utilizes EPA based
methods to determine the absence or presence of coliform bacteria and
instantly shows whether or not water is above or below the EPA safe
standards for nitrates or nitrites. This test kit typically retails
for around $13.00.
o Our PurTest(R)Pesticide test kit tests for 13 triazine elements and
produces results in less than eight minutes. This test kit typically
retails for around $13.00.
o Our PurTest(R) Iron Hardness Plus test kit instantly tests for eight
items including iron, hardness, copper, nitrates, nitrites, chlorine,
water pH, and alkalinity. This test kit typically retails for around
$6.00.
o Our PurTest(R)Lead test kit detects lead down to the EPA safe standard
of 15 ppb (parts per billion) and produces results in less than one
hour. This test kit typically retails for around $15.00.
o Our comprehensive PurTest(R) Home Water Analysis kit includes the
Bacteria, Nitrate, Nitrite kit, Iron Hardness Plus kit, and Lead test
kit, allowing the user to screen water for 12 contaminants and
conditions without needing to use a laboratory. This comprehensive
test kit typically retails for around $30.00.
We market our PurTest(R) line of products as a quick and inexpensive
alternative to laboratory testing. Recommended uses include initial and regular
follow-up testing to ensure continued water safety as well as testing following
the installation of water treatment products to verify treatment effectiveness.
Each of our test kits includes a toll-free number the customer can call to
obtain free advice from our trained employees regarding water safety and
available water treatment products.
PurTest(R) products are available through our website
(www.americanwaterservice.com) and nationwide at retailers including Ace
Hardware, Lowe's, HomeBase, Menards, Meijers, Savon Drugs, Osco Drugs and many
Home Depots, as well as water treatment dealers, water well drillers and other
independent retailers and
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building centers. Through various international distributors, PurTest(R)
products are sold internationally in 18 countries.
Component parts for PurTest(R) products are manufactured for us to our
specifications by various suppliers. The principal active components are test
strips of paper and powders designed for mixing with water samples. The test
strips and powders contain chemical compounds that cause the test strip or water
sample to change color to indicate the presence of the items being tested. These
test strips and powders are supplied to us on an exclusive basis pursuant to
marketing and manufacturing agreements we have entered into with four different
suppliers which prohibit the supplier from selling them to other manufacturers
or directly to consumers. We consider such exclusive arrangements to be
important because of the time and effort invested in locating such suppliers,
developing specifications and coordinating product development with such
suppliers, and to keep competitors from obtaining the benefit of our product
development work without making such investment themselves. We have one contract
with a supplier of test strips which has a five-year term expiring in July 2004
and which automatically renews for one year terms unless it is terminated at
least 60 days prior to its expiration. The remaining three contracts, each with
a supplier of powder, are intended to be long-term but permit the supplier to
terminate on 120 days notice. However, if any such contract is so terminated the
supplier is required to provide us with all technical information necessary for
us to either produce the powder ourselves, or have another supplier produce the
powder for us. All component parts we use, including those supplied to us on an
exclusive basis, can be purchased from other manufacturers. We believe the
arrangements we have developed with our suppliers are adequate to meet our
current needs. There can be no assurance, however, that we could obtain
component parts from other manufacturers on terms as favorable as those we have
with our current suppliers. We assemble and package the final product at our
facilities in Matthews, North Carolina.
WATER TREATMENT EQUIPMENT AND SERVICES
We also sell and service water treatment products for both home and
office use. Our Puritron(TM) unit utilizes reverse osmosis technology to produce
high purity drinking water at a location's primary drinking water faucet by
filtering out contaminants such as dirt, sediment, dissolved solids, viruses,
organic molecules, pesticides and chlorine. We sell Puritron(TM) units at
wholesale to water treatment dealers for about $250 and will sell a unit to a
retail customer with installation for around $600. We also offer Puritron(TM)
service plans to customers for $20 to $30 per month. All new Puritron(TM) units
we sell to consumers come with a five year limited warranty.
Our PurGuard(R) unit utilizes ultraviolet technology to treat bacteria
in water and is designed to treat water at its entry point into a household so
that treated water is available throughout the household. We sell PurGuard(R)
units at wholesale to water treatment dealers for between $200 and $300 and will
sell a unit to a retail customer with installation for between $600 and $800. We
also offer PurGuard(R) service plans to customers for $19.95 per month. All new
PurGuard(R) units we sell come with a seven year limited warranty.
We also offer a complete line of point of entry water treatment
products including among other items softeners, neutralizers and iron filters
and sell other water treatment products including replacement bulbs and filters
and American Aqua(R) brand counter-top and shower head filtration products. We
offer financing on the installed water treatment products we sell to customers
with satisfactory credit ratings.
On a parts and labor basis, within the greater Charlotte, North
Carolina region we service all water treatment products we sell as well as all
other water treatment products available on the market.
Because we install and service most water treatment units we sell
directly, our retail water treatment equipment business is limited
geographically primarily to the greater Charlotte, North Carolina region.
However, our full line of water treatment products is available for purchase
though our website and our PurGuard(R) line of products is sold nationwide by
Lowe's and by many water treatment dealers.
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Our water treatment units are built for us to our specifications by
various suppliers. We believe other sources of supply for such products are
available and therefore do not believe the loss of any one of our current
suppliers would have a material adverse effect on our operations.
VENDING MACHINES AND MISTING SYSTEMS
We also sell drinking water dispensed to consumers through self-service
vending machines as well as high purity water used by grocery stores in
produce-misting systems. Our vending machines dispense high quality, low priced
drinking water under the brand name "America's Purist Water." We charge around
$.35 per gallon for water dispensed by our machines.
We place our vending machines inside or outside retail stores and have
revenue sharing arrangements with the stores. Establishments with whom we have
such agreements include K-Mart, Harris Teeter, Kroger, Winn Dixie, Hannaford and
The Pantry stores. In some locations, in addition to vending water to consumers,
our machines are used to purify water used in produce-misting systems we
maintain for grocers. In other locations, we place machines used solely to
provide water for produce-misting systems.
Our vending machines utilize a combination of reverse osmosis,
activated carbon, sediment filtration and/or ultra violet disinfection to
process and treat water.
We had approximately 200 vending and misting units in operation as of
December 31, 1999 placed in various locations in Georgia, North Carolina, South
Carolina, Tennessee, Virginia and West Virginia.
Our water vending and misting units are built for us to our
specifications by various suppliers. We believe other sources of supply are
available and therefore do not believe the loss of any one of our current
suppliers would have a material adverse effect on our operations
MAJOR CUSTOMERS
Sales to three major customers comprised approximately 18%, 13% and 13%
of our total 1999 sales. Sales to one major customer comprised approximately 15%
of our total 1998 sales.
COMPETITION
While there are various companies that offer home water testing kits
that compete directly with one or more of our individual PurTest(R) products,
our PurTest(R) product line is the most comprehensive set of home water test
kits available to U.S. retailers and consumers. Because we are able to offer
retailers the ability to purchase a comprehensive line of products from a single
supplier we believe retailers are more likely to purchase product from us so
they may avoid having to deal with multiple suppliers. By adding to their
product offerings, however, other firms could develop similarly comprehensive
lines of products. Also, companies not currently involved in the home water test
kit market could enter it by developing competing lines of products. Potential
competitors could include larger companies which have greater financial,
development, marketing and distribution resources than we do.
In addition, laboratory testing which is available nationwide competes
directly with our water test kit business. In many locations, laboratory testing
is offered by health departments and
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other governmental agencies or by local commercial laboratories that will test
water for a fee. There are also a number of laboratories that offer mail-order
water testing services. In many areas water treatment equipment dealers offer
free home water testing as a part of their marketing efforts.
We believe our home water test kits offer significant competitive
advantages over laboratory testing. Our test kits are generally less expensive
than other available testing services and are also more convenient since the
user performs the test right at the source without needing to bring or mail a
sample to a laboratory or schedule an appointment with a technician. Our
PurTest(R) products also generally produce results much more quickly than
laboratory alternatives. Because PurTest(R) products are utilized at the home
there is no danger of sample contamination as can happen when samples are sent
through the mail to laboratories. Also, users of our PurTest(R) products, unlike
users of the free water testing performed by water treatment dealers, can
quickly and inexpensively test their water without being subject to any unwanted
sales pitch.
The water treatment industry is highly competitive. Our water treatment
equipment business competes with many local, regional and national water
treatment dealers and their franchisees. Some of our competitors are larger
companies which have significantly greater resources than we do. We believe that
because our current supply arrangements are favorable we are able to offer more
competitive prices on our water treatment products than many of our competitors
and that our PurGuard(R) unit features technology superior to that of many
competing products. We also believe our ability to service all makes and models
of water treatment equipment gives us a competitive advantage over many other
water treatment equipment servicers.
Our water vending business competes in the non-sparkling segment of the
highly competitive bottled water market with companies that deliver water to
homes and offices, off-the-shelf marketers and other vending machine operators
as well as with water treatment products similar to our Puritron(TM) and
PurGuard(R) units available on the market. Many of our vending business's
competitors, including water vending companies like Glacier Water Services
(Glacier), as well as bottled water companies like the Perrier Group (Poland
Spring), have significantly greater resources than we do. In addition, there are
a number of smaller companies that place water vending machines in territories
we serve and compete directly with our vending business. Because our vending
business's primary competitive advantage over water delivery services and
off-the-shelf marketers is price, a substantial decline in the price of either
delivered or off-the-shelf bottled water could adversely affect the demand for
water dispensed from our vending machines.
REGULATION
The water industry is subject to a variety of federal, state and local
laws and regulations. Various state laws and regulations require us to obtain
licenses for our vending machines, pay annual license and inspection fees,
comply with certain detailed design and quality standards regarding our vending
machines and our vended water, and continuously control the quality of our
vended water. In some states our vending machines are subject to routine and
random state-conducted regulatory quality inspections. Installation of our water
treatment products is generally subject to local plumbing codes. Although we
believe we are operating in substantial compliance with these laws and
regulations, they and their interpretations and enforcement are subject to
change. There can be no assurance that additional or more stringent requirements
will
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not be imposed on our operations in the future. Failure to comply with such
current or future laws and regulations could result in the imposition of fines,
a temporary shutdown of our vending operations, the loss of certification to
sell our vended water or, even in the absence of governmental action, a
reduction in our profit margins based on increases in licensing or inspection
fees payable by us or other additional compliance costs.
EMPLOYEES
As of December 31, 1999, we had a total of 20 full time employees and
two part time employees. None of our employees is covered by a collective
bargaining agreement. We believe that our relations with our employees are good.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Company's Financial Statements and the related notes thereto attached hereto
beginning at page F-1.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31,
1999
Increasing sales of our PurTest(R) line of products was our primary
focus in 1998 and 1999. We sought to increase sales primarily by developing
relationships with national chain stores like Menards, which began selling
PurTest(R) products in September 1999, and regional chain stores like HomeBase,
which began selling PurTest(R) products in August 1999. We also sought to
increase consumer awareness of PurTest(R) products by obtaining endorsements
from organizations like the American Quality Institute, which awarded the
PurTest(R) product line its "Consumer Product Award" for 1999 and 2000, and
"Today's Homeowner" magazine which selected our PurTest(R) product line as one
of its "Best New Products for 2000."
Revenues from operations for 1999 increased 39% to $1,947,021 from
$1,396,112 in 1998. The large increase in operating revenues was primarily the
result of a 104 % increase in sales of our PurTest(R) line of products, which
grew from $586,451 in 1998 to $1,196,090 in 1999. Sales of our PurTest(R)
products improved principally as a result of the successful implementation of
our efforts to expand distribution of such products at the retail level. Due
chiefly to a shift in focus and resources toward development of our PurTest(R)
line of products, revenues from the sales and service of water treatment
equipment decreased 7% from $436,048 in 1998 to $405,319 in 1999 and revenues
from our water vending and misting operations decreased 4% from $352,871 in 1998
to $339,367 in 1999.
Primarily as a result of both our securing a five year contract with a
test strip provider, which enabled us to obtain test strips at a lower cost and
resulted in total cost savings in 1999 of approximately $35,000, and
improvements in operating efficiencies made possible by our increased production
of PurTest(R) products, gross margin increased to 32% in 1999 from 21% in 1998.
We would anticipate continued improvement in operating efficiencies, and
therefore in gross margin, to the extent we are able to execute our strategy of
expanding distribution of our PurTest(R) products.
Loss from operations only was reduced to $431,572 in 1999 from $603,695
in 1998. Expense items contributing to this loss included product development
costs of $47,000 in 1999, up from $0 in 1998; sales and marketing costs for our
PurTest(R) line totaling $304,936 in 1999, up 63% from $187,605 in 1998; and
professional fees, primarily associated with the Company's debt restructuring
which were $91,161 in 1999, up from $53,309 in 1998. We anticipate incurring a
relatively high level of sales and marketing costs as we continue to focus on
increasing sales of our PurTest(R) line of products and anticipate incurring a
relatively high level of professional fees associated with our becoming a public
reporting company. We also may incur further development costs in connection
with the expansion of our PurTest(R) product line.
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Net loss for 1999 was $795,119, compared to a net loss of $1,075,594 in
1998. Net loss improved primarily because of a decrease in interest expense from
$479,796 in 1998 to $369,951 in 1999. Interest expense was reduced as a result
of the elimination during 1999 of debt owed to C. Wilbur Peters, Chairman of our
board. On June 30, 1999, Mr. Peters forgave approximately $2,150,000 of our debt
to him and on November 5, 1999, Mr. Peters released and discharged the balance
due on our $3,035,529 promissory note to him in exchange for our issuing 31,290
shares of our Series B, Class B preferred stock to Mr. Peters.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred operating losses each year since our inception.
Throughout that time C. Wilbur Peters, chairman of our board, or entities
controlled by Mr. Peters have funded our operations by lending money to us and
by leasing equipment to us used in our business. Under a $400,000 promissory
note dated September 1, 1992 issued by us to CTF, Inc., a non-profit corporation
controlled by Mr. Peters, we owed approximately $403,500 at December 31, 1999.
This note is payable on demand and bears interest at prime plus 2%. As of June
30, 1999 our total indebtedness to Mr. Peters for money borrowed and for accrued
and unpaid amounts due under equipment leases was approximately $5,180,000. On
June 30, 1999 Mr. Peters forgave approximately $2,150,000 of our debt to him and
on November 5, 1999 Mr. Peters released and discharged the balance due on our
$3,035,529 promissory note to him in exchange for our issuing 31,290 shares of
our Series B, Class B preferred stock to Mr. Peters. On July 1, 1999, we
established a line of credit with Mr. Peters in the amount of $750,000 evidenced
by a promissory note bearing interest at the LIBOR Market Index Rate plus 1.50%,
due and payable on June 30, 2001. At December 31, 1999, the outstanding balance
of that note was $37,752. Mr. Peters has no legal obligation to make advances
upon that note.
Net cash used by operating activities was $430,333 in 1998 and $251,177
in 1999. In both such years cash to fund such negative cash flows was obtained
from the financing arrangements described above. We do not expect positive cash
flows from our operations during 2000 and into 2001. Even if we are successful
in continuing to expand our product distribution, we expect that such expansion
will continue to require additional cash. We believe that our cash on hand, cash
generated from operations, and advances on our current line of credit (which Mr.
Peters is not obligated to make) will enable us to continue our operations
through July 2001. No assurance can be given, however, that Mr. Peters will
continue to advance funds under the line of credit, that such funds will satisfy
our needs for such period or that, if needed, additional funds will be
available. If we are unable to obtain any such additional necessary financing
our financial condition and results of operations could be materially adversely
affected.
CAUTIONARY STATEMENT AS TO FORWARD LOOKING INFORMATION
Statements in this report as to projections of future financial or
economic performance of the Company, and statements of our plans and objectives
for future operations are "forward looking" statements, and are being provided
in reliance upon the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Important factors that could cause actual results
or events to differ materially from those projected, estimated, assumed or
anticipated in any such forward looking statements include: general economic
conditions in our markets including inflation; recession; increased competition
from existing competitors and from any new entrants in our markets; any loss of
key management personnel; changes in governmental regulations applicable to
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our business; and the availability of additional funding necessary to support
our operations in the event our currently available funding sources prove
inadequate or unavailable.
ITEM 3. DESCRIPTION OF PROPERTY
Our principal office and operating facilities are located in Matthews,
North Carolina, in a building that we lease. The building, which contains
approximately 2,300 square feet of office and 10,700 square feet of warehouse
space, is in good condition. Our lease is for a term ending March 31, 2002,
subject to extension at our option for an additional two years, at a monthly
rate of $3,400. We believe that our current facilities will be adequate to meet
our needs for the foreseeable future and that suitable additional or alternative
space will be available if needed.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 15, 2000, certain
information regarding beneficial ownership of our common stock by:
o each person or group of affiliated persons we know to be the
beneficial owner of 5% or more of our outstanding shares of
common stock
o each director
o each executive officer; and
o all directors and executive officers as a group
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<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OF COMMON PERCENT OF COMMON
OF BENEFICIAL OWNER(1) STOCK OWNED(2) STOCK OUTSTANDING
---------------------- ---------------- -----------------
<S> <C> <C>
C. Wilbur Peters 2,294,057(3) 52.69%
2004 Valencia Terrace
Charlotte, NC 28226
Donald R. Podrebarac 622,200(4) 17.79%
1154 Baron Road
Weddington, NC 28173
Larry C. Pratt 373,888(5) 11.00%
5001 Smith Farm Road
Matthews, NC 28104
Duane G. Hansen -- --
1999 Candlewick Drive
Fort Mill, SC 29715
Phil Divine -- --
2235 Ramblewood Lane
Charlotte, NC 28210
CTF, Inc. 1,294,056(6) 38.58%
2004 Valencia Terrace
Charlotte, NC 28226
Brian E. Huey 230,000 7.42%
1629 Stevens Ridge Road
Matthews, NC 28105
Gary Moore 160,000(7) 5.16%
c/o McKinney Reese McAlister
& Company
P.O. Box 25579
Greenville, SC 29616-0579
All Directors and executive 3,290,144(3)(4)(5) 65.10%
officers as a group (5 persons)
</TABLE>
--------------------------------
(1) The information about ownership was furnished to the Company by the
indicated beneficial owners, except for information with respect to
Gary Moore which was provided to us by our transfer agent.
(2) All shares are owned directly and with sole voting and dispositive
power except as otherwise noted.
(3) Includes 1,038,501 shares held by CTF, Inc. and 255,556 shares issuable
upon conversion of the 575,000 shares of Series A, Class B preferred
stock owned by CTF, Inc. as well as 1,000,000 shares subject to
presently exercisable options owned directly by Mr. Peters. Mr. Peters
and his wife are the sole directors of CTF, Inc., a non-profit
corporation. As such they have the sole power to vote and dispose of
the shares owned by CTF, Inc.
(4) Includes 212,200 shares owned jointly by Mr. Podrebarac and his wife
and 400,000 shares subject to presently exercisable options held by Mr.
Podrebarac.
(5) Includes 300,000 shares subject to presently exercisable options held
by Mr. Pratt.
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(6) Includes 255,556 shares obtainable upon conversion of the 575,000
shares of Series A, Class B preferred stock owned by CTF, Inc.
(7) Includes shares registered in the name of Gary Moore, which are the
only shares known by us to be owned by Mr. Moore.
SERIES A PREFERRED STOCKHOLDERS RIGHT TO ELECT MAJORITY OF BOARD OF DIRECTORS
Pursuant to the terms of our Certificate of Incorporation, if by June
30, 1996 we have not redeemed all outstanding shares of Series A, Class B
preferred stock or if we fail to make two quarterly dividend payments in any one
year on such shares, the holders of our shares of Series A, Class B preferred
stock are entitled to elect a majority of our board of directors. Currently all
our outstanding shares of Series A, Class B preferred stock are owned by CTF,
Inc., a non-profit corporation controlled by C. Wilbur Peters, chairman of our
board. We have not redeemed any shares of our Series A, Class B preferred stock
and have not made any quarterly dividend payments on such shares since June
1992. As a result, since January 1993 CTF, Inc. has been entitled to elect a
majority of our board of directors. CTF, Inc. will continue to have the right to
elect a majority of our board of directors until we have redeemed all
outstanding shares of our Series A, Class B preferred stock.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME &
DIRECTOR SINCE AGE POSITION
-------------- --- --------
<S> <C> <C>
Donald R. Podrebarac 50 Chief Executive Officer, President and Director
1993
C. Wilbur Peters 77 Chairman of the Board, Treasurer and Director
1990
Larry C. Pratt 50 Vice President, Secretary and Director
1990
Duane G. Hansen 69 Director
1993
Phil Divine 54 Director
1993
</TABLE>
Our board of directors has five members. All directors currently hold
office until the next annual meeting of stockholders or until their successors
have been elected and qualified. There are no family relationships between any
of our directors or executive officers.
Donald R. Podrebarac has served as our Chief Executive Officer and
President since 1996 and has also served on our board of directors since 1993.
Mr. Podrebarac served as Executive Vice President from 1994 to 1996. From 1992
to 1994 Mr. Podrebarac served as a consultant to the Company. From 1991 to 1992
Mr. Podrebarac served as President of Alsaka Falls Bottling Company, a bottled
water company and a wholly-owned subsidiary of Liqui-box Corporation, a
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publicly-traded bottled water company. From 1982 to 1989 Mr. Podrebarac served
as President of Ambrosia Premium Water Company, a bottled water company founded
by Mr. Podrebarac.
C. Wilbur Peters has served as a director since our inception in 1990.
He has served as Chairman of the Board and Treasurer since 1993. From 1993 to
1996 Mr. Peters served as Chief Executive Officer and President. Mr. Peters was
the founder, Chief Executive Officer and President of Minnesota Fabrics, Inc., a
publicly-traded piece goods retail company which was acquired by Hancock
Fabrics, Inc., a fabric retailer, in 1985. Since 1985 Mr. Peters has been
President and director of CTF, Inc., a non-profit corporation.
Larry C. Pratt has served as a director since our inception in 1990. He
has served as Vice President and Secretary since 1993. Since 1989 Mr. Pratt has
served as a venture consultant for C. Wilbur Peters in connection with Mr.
Peters' private investments. From 1985 to 1989 Mr. Pratt served as
Administrative Manager of Hancock Fabrics, Inc, a fabric retailer.
Duane G. Hansen joined our board of directors in 1993. Mr. Hansen was
Group Vice President of Minnesota Fabrics, Inc. at the time of its acquisition
by Hancock Fabrics, Inc. in 1985 and continued as Vice President until 1987.
Since 1987 Mr. Hansen has been self-employed and from 1991 to 1996 he served as
York County (S.C.) Republican Chairman.
Phil Divine joined our board of directors in 1993. Since 1999 Mr.
Divine has served as Director of Management Development and Training for Osprey
Systems, Inc., an electronic commerce consulting firm. From 1997 to 1999 Mr.
Divine served as Chief Information Officer for Osprey Systems. From 1996 to 1997
Mr. Divine served as Practice Manager for Osprey Systems. From 1995 to 1996 Mr.
Divine was a consultant for Phil Divine, Inc., a management consulting firm.
ITEM 6. EXECUTIVE COMPENSATION
EXECUTIVE AND DIRECTOR COMPENSATION
Executive Compensation. Mr. Podrebarac is our only employee who
receives compensation in excess of $100,000 per year. Mr. Podrebarac's salary is
$122,751 per year. We pay the premiums on a $500,000 term life insurance for the
benefit of Mr. Podrebarac and reimburse him for operating and maintenance
expenses on his vehicle. We also may from time to time in our discretion pay
performance bonuses to Mr. Podrebarac. Mr. Podrebarac is eligible to receive
options to purchase shares of our common stock pursuant to our 1991 Stock Option
Plan.
Director Compensation. We pay each outside director a $500 fee for each
meeting of the board of directors attended. Directors who are officers or
employees of the Company receive no additional compensation for serving as
directors. We reimburse all directors for all reasonable out-of-pocket expenses
incurred in attending meetings of our board of directors and any of its
committees.
12
<PAGE> 13
The following table shows the compensation paid by us for each of the
years ended December 31, 1999, December 31, 1998 and December 31, 1997,
respectively, to or for the account of Donald R. Podrebarac, our Chief Executive
Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS ALL OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS ------------- COMPENSATION
POSITION YEAR ($) ($) OPTIONS (#) ($)
------------------ ---- --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Donald R. Podrebarac 1999 121,962 -- -- 998(1)
President & CEO 1998 116,234 5,000 -- 998(1)
1997 110,450 -- 500,000 998(1)
</TABLE>
--------------------
(1) Represents value of term life insurance premiums paid by us for the
benefit of Mr. Podrebarac.
The following table sets forth information relating to the exercise of
options by Mr. Podrebarac during the year ended December 31, 1999 and the
year-end value of his unexercised stock options.
AGGREGATED OPTION EXERCISES IN
1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS
SHARES AT YEAR-END (#) AT YEAR-END ($)
ACQUIRED ------------------- -------------------
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Donald R. Podrebarac -- -- 500,000/0 1,000,000(1)/0
</TABLE>
-------------------
(1) Based on the closing price of the Company's common stock as quoted on
the Nasdaq OTC Bulletin Board on December 31, 1999 ($2.13 per share).
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since our inception our primary lender has been C. Wilbur Peters,
chairman of our board, or entities controlled by Mr. Peters. Under a $400,000
promissory note dated September 1, 1992 issued by us to CTF, Inc., a non-profit
corporation controlled by Mr. Peters, we owed approximately $403,500 at December
31, 1999. This note is payable on demand and bears interest at prime plus 2%. As
of June 30, 1999, our total indebtedness to Mr. Peters for money borrowed and
for accrued and unpaid amounts due under equipment leases with Mr. Peters was
approximately $5,180,000. Effective June 30, 1999 and as an accommodation to the
Company, Mr. Peters executed an Instrument of Forgiveness of Indebtedness in
favor of the Company pursuant to which Mr. Peters released and discharged
approximately $2,150,000 of the Company's indebtedness to him.
13
<PAGE> 14
On November 5, 1999, Mr. Peters and the Company entered into an
Exchange Agreement pursuant to which the balance due under our $3,035,535
promissory note to Mr. Peters and title to certain equipment being leased by the
Company from Mr. Peters were exchanged for the issuance of 31,290 shares of the
Company's Series B, Class B preferred stock to Mr. Peters.
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 20,000,000
shares of common stock, par value $0.01 per share, 3,303,375 shares of Class A
preferred stock, par value $.01 per share), and 1,000,000 shares of Class B
preferred stock, par value $0.01 per share. Our Certificate of Incorporation
provides that shares of Class B preferred stock may be issued in one or more
series with relative rights, preferences and limitations as fixed by our board
of directors. To date our board of directors has established two different
series of shares of Class B preferred stock, denominated Series A, Class B
preferred stock and Series B, Class B preferred stock, respectively. 575,000
shares of Series A, Class B preferred stock have been authorized, 31,290 shares
of Series B, Class B preferred stock have been authorized and 393,710 shares of
Class B preferred stock remain undesignated and are available for issuance. As
of February 15, 2000 we had 3,320,298 shares of common stock outstanding,
3,303,375 shares of Class A preferred stock outstanding, 575,000 shares of
Series A, Class B preferred stock outstanding and 31,290 shares of Series B,
Class B preferred stock outstanding.
VOTING RIGHTS
Each holder of common stock is entitled to one vote per share on any
matter requiring a shareholder vote. Our shares of common stock do not have
cumulative voting rights in the election of directors, and directors are elected
by a plurality of the votes cast for nominees for the positions to be filled by
shareholder vote. Holders of shares of preferred stock have no general voting
rights other than as required by law. If, however, by June 30, 1996 we have not
redeemed all outstanding shares of Series A, Class B preferred stock or if we
fail to make two quarterly dividend payments in any one year on such shares, the
holders of our shares of Series A, Class B preferred stock are entitled to elect
a majority of our board of directors. We have not redeemed any shares of our
Series A, Class B preferred stock and have not made any quarterly dividend
payments on such shares since June 1992. As a result, since January 1993 the
sole holder of our shares of Series A, Class B Preferred stock, CTF, Inc., a
non-profit corporation controlled by the chairman of our board, C. Wilbur
Peters, has been entitled to elect a majority of our board of directors. CTF,
Inc. will continue to have the right to elect a majority of our board of
directors until we have redeemed all outstanding shares of our Series A, Class B
preferred Stock. Consequently, the holders of our shares of common stock are
entitled to elect only two members of our five member board of directors.
DIVIDEND RIGHTS
Holders of our shares of Class A preferred stock are not entitled to
receive any dividends on such shares.
14
<PAGE> 15
Holders of our shares of Series A, Class B preferred stock are entitled
to a cumulative quarterly dividend of 12% per year based on a per share value of
$2.00 per share ("Series A, Class B Dividends"). Series A, Class B Dividends
accrue on a daily basis whether or not declared and whether or not we have
sufficient legally available funds to pay them. Series A, Class B Dividends are
payable prior and in preference to any other distributions payable with respect
to any other classes or series of our capital stock.
After all accrued Series A, Class B Dividends have been paid, holders
of our Series B, Class B preferred stock are entitled to dividends of up to
$12.00 per share per calendar year (noncumulative) as declared by our board of
directors and prior and in preference to any other distributions payable with
respect to any other classes or series of our capital stock ("Series B, Class B
Dividends").
After payment of all accrued Series A, Class B Dividends and payment of
$12.00 per share of Series B, Class B Dividends in a calendar year, and any
preferred dividends declared on any other series of Class B preferred stock that
may be designated in the future, holders of our shares of common stock are
entitled to dividends as declared by our board of directors. The determination
and declaration of dividends on our shares of Series B, Class B preferred stock
and our shares of common stock is within the discretion of the board of
directors subject to legal limitations.
LIQUIDATION RIGHTS
Upon our liquidation holders of our shares of Series A, Class B
preferred stock are entitled to a liquidation preference of $.01 per share prior
and in preference to any other distributions payable with respect to any other
classes or series of our capital stock (the "Series A, Class B Liquidation
Preference").
Upon our liquidation and following payment of the Series A, Class B
Liquidation Preference, holders of our shares of Series B, Class B preferred
stock are entitled to a liquidation preference of $10.00 per share prior and in
preference to any other distributions payable with respect to any other classes
or series of our capital stock (the "Series B, Class B Liquidation Preference").
Upon our liquidation and following payment of the Series A, Class B
Liquidation Preference and the Series B, Class B Liquidation Preference, holders
of our shares of Class A preferred stock are entitled to a liquidation
preference of $.01 per share prior and in preference to any other distributions
payable with respect to any other classes or series of our capital stock (the
"Class A Liquidation Preference").
Upon our liquidation and following payment of the Series A, Class B
Liquidation Preference, the Series B, Class B Liquidation Preference and the
Class A Liquidation Preference, and any liquidation preference on any other
series of Class B preferred stock that may be designated in the future, our
remaining assets are available for distribution to holders of our shares of
common stock.
15
<PAGE> 16
CONVERSION RIGHTS; COMPANY'S RIGHT TO REDEEM SHARES OF PREFERRED STOCK
Our Certificate of Incorporation provides that, subject to adjustment
for stock dividends, subdivisions, combinations, reorganizations and
reclassifications, each share of our Class A preferred stock is convertible at
the holder's election into one share of our common stock. However, all 3,220,298
outstanding shares of our Class A preferred stock are currently being held in
escrow pursuant to an Escrow Agreement (the "Escrow Agreement") dated March 31,
1992 by and among us, all the original holders of outstanding shares of Class A
preferred stock, J.W. Gant & Associates, Inc. (the underwriter for our 1992
initial public offering) and First Union National Bank ("Escrow Agent") under
which the original holders have agreed that during the escrow period provided
for in the Escrow Agreement they will not exercise any conversion rights with
respect to the shares of Class A preferred stock held in escrow thereunder.
Under the terms of the Escrow Agreement, the Escrow Agent was required to
release the shares of Class A preferred stock held in escrow thereunder to the
original holders only upon the Company's achieving certain performance targets
during its first five full fiscal years following March 31, 1992. None of such
performance targets were met. The Escrow Agreement further provided that
following the Company's failure to meet such performance targets and the
expiration of the escrow period, the Escrow Agent was to release the shares of
Class A preferred stock held under the Escrow Agreement to the Company and the
Company was to redeem such shares at par value ($.01 per share, or an aggregate
of $32,203). The shares of Class A preferred stock held under the Escrow
Agreement have not yet been released to the Company. At the board meeting held
March 7, 2000, our board of directors resolved that the Company should take
action to cause all outstanding shares of Class A preferred stock to be released
from escrow so that such shares may be redeemed by the Company pursuant to the
terms of the Escrow Agreement or on such other terms as may be agreed upon
between the Company and the original holders of the Class A preferred stock.
Such original holders include CTF, Inc. (a non-profit corporation of which Mr.
Peters and his wife are the sole directors) and Mr. Pratt, who hold 1,156,182
and 165,169 shares, respectively, of the Class A preferred stock.
Subject to adjustment for stock dividends, subdivisions, combinations,
reorganizations and reclassifications, each share of our Series A, Class B
preferred stock is convertible at the holder's election into four-ninths (4/9)
of a share of our common stock (or an aggregate of 255,556 shares of common
stock). Subject to adjustment for stock dividends, subdivisions, combinations,
reorganizations and reclassifications, following November 5, 2000 each share of
our Series B, Class B preferred stock is convertible at the holder's election
into fifty shares of our common stock (or an aggregate of 1,564,500 shares of
common stock).
At any time, we may redeem all outstanding shares of our Series A,
Class B preferred stock for $2.00 per share (or an aggregate of $1,150,000). At
any time, we may redeem all outstanding shares of our Series B, Class B
preferred stock for $100.00 per share (or an aggregate of $3,129,000), provided
we have paid all declared dividends on the Series B, Class B preferred stock.
16
<PAGE> 17
NO PREEMPTIVE RIGHTS
Holders of the shares of capital stock do not have preemptive rights to
subscribe for additional shares on a pro rata basis if and when additional
shares are offered for sale by the Company.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
As of February 15, 2000, the Company had issued and outstanding
3,098,326 shares of common stock held by approximately 157 holders of record.
From March 1994 through May 17, 2000 our Company's common stock was
quoted on the Nasdaq OTC Bulletin Board under the symbol "VLPI". The range of
high and low sales prices for the common stock as quoted on the OTC Bulletin
Board are listed below for the periods indicated. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
High Low
---- ---
Fiscal Year 1998: Quarter Ended:
----------------- --------------
First Quarter March 31, 1998 $0.45 $0.17
Second Quarter June 30, 1998 $0.48 $0.22
Third Quarter September 30, 1998 $0.38 $0.27
Fourth Quarter December 31, 1998 $0.34 $0.23
Fiscal Year 1999: Quarter Ended:
----------------- --------------
First Quarter March 31, 1999 $0.75 $0.25
Second Quarter June 30, 1999 $0.56 $0.40
Third Quarter September 30, 1999 $0.69 $0.44
Fourth Quarter December 31, 1999 $3.00 $0.44
Fiscal Year 2000: Quarter Ended:
----------------- --------------
First Quarter March 31, 2000 $3.38 $1.50
We have never declared or paid any cash dividends on our common stock.
We currently anticipate that we will retain any future earnings to fund the
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Our Certificate of Incorporation provides
that we may not pay dividends on our common stock unless we have first paid all
accrued dividends on our Series A, Class B preferred stock and have first paid
dividends of $12.00 per share during the calendar year on our Series B, Class B
preferred stock. Accrued dividends on our Series A, Class B preferred stock
totaled $1,035,000 at December 31, 1999, and no dividends have been paid on our
Series B, Class B preferred stock during 2000 through February 29, 2000. Payment
of future dividends, if any, will be at the discretion of our board of directors
17
<PAGE> 18
after taking into account various factors, including our earnings, financial
conditions, operating results and current and anticipated cash needs.
ITEM 2. LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings. However,
we are currently and may from time to time in the future become a party to
various legal proceedings incidental to our business.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On November 5, 1999 and pursuant to an Exchange Agreement with C.
Wilbur Peters, chairman of our board and our primary lender, we issued 31,290
shares of our Series B, Class B preferred stock to Mr. Peters in exchange for
the release and discharge indebtedness totaling $3,035,535. The transaction was
deemed to be exempt from registration under the Securities Act of 1933 (the
"Securities Act") in reliance on Section 4(2) of the Securities Act, as a
transaction by an issuer not involving a public offering
Since January 1, 1997 and pursuant to our 1991 Stock Option Plan we
have issued options to purchase an aggregate of 1,828,875 shares of our common
stock. On January 18, 2000 and in connection with the exercise of a stock option
granted pursuant to our 1991 Stock Option Plan, we issued 100,000 shares of our
common stock to Donald R. Podrebarac, our president and chief executive officer,
for aggregate consideration of $12,500. On January 18, 2000 and in connection
with the exercise of a stock option granted pursuant to our 1991 Stock Option
Plan, we issued 1,875 shares of our common stock to Sandra Miller for aggregate
consideration of $468.75. These transactions were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated under
Section 3(b) of the Securities Act, as transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
rule.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation provides that no director shall be
liable to the Company for monetary damages for breach of fiduciary duty as a
director except for liability for:
o any breach of the duty of loyalty to the Company or its
stockholders
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law
o unlawful dividends or unlawful stock repurchases or
redemptions; or
o any transaction from which the director derived an improper
personal benefit
18
<PAGE> 19
Our Certificate of Incorporation and our Bylaws require us to indemnify
our officers and directors to the fullest extent permitted by the Delaware
General Corporation Law. The Delaware General Corporation Law permits a
corporation to indemnify a person for expenses, judgments, fines and amounts
paid in settlement incurred in connection with actions, suits or proceedings
(other than any actions by or in right of the corporation) brought against the
person because the person was an officer or director of the corporation so long
as the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action the person had no reasonable cause to believe his
or her conduct was unlawful. The Delaware General Corporation Law permits a
corporation to indemnify a person for expenses incurred in connection with
actions, suits or proceedings by or in right of the corporation brought against
the person because the person was an officer or director of the corporation so
long as the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that any such indemnity may be provided only to the extent the court in
which such action or suit was brought determines that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnification.
19
<PAGE> 20
PART F/S
The following financial statements are included herein:
Page
----
Independent Auditor's Report F-1
Balance Sheet F-2
Statement of Operations F-4
Statement of Changes in Stockholders' Equity F-6
Statement of Cash Flows F-7
Notes to Financial Statements F-9
20
<PAGE> 21
WAGNER NOBLE & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
of Vital Living Products, Inc.
We have audited the accompanying balance sheet of Vital Living Products, Inc. as
of December 31, 1999, and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vital Living Products, Inc. as
of December 31, 1999, and the results of its operations and its cash flows for
the years ended December 31, 1999 and 1998, 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 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that 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 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 17 to the financial statements, the Company's 1999 salary
expense previously reported as $318,821 should have been $351,961, and 1998
salary expense previously reported as $308,523 should have been $339,329. This
discovery was made subsequent to the issuance of the financial statements. The
financial statements have been restated to reflect this correction. Also, as
discussed in Note 17 to the financial statements, forgiveness of debt of
$3,461,504, which was previously reported as an extraordinary item for the year
ended December 31, 1999, has been restated as a contribution to additional paid
in capital.
Wagner Noble & Company
Charlotte, North Carolina,
March 1, 2000, except for Note 17,
as to which the date is July 25, 2000.
F-1
<PAGE> 22
VITAL LIVING PRODUCTS, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $661
Accounts receivable, less allowance for doubtful accounts of $12,075 150,855
Installment accounts receivable 19,191
Inventory 280,072
-----------
Total current assets 450,779
PROPERTY AND EQUIPMENT:
Office furniture and equipment 37,215
Warehouse equipment 94,600
Computer equipment 126,577
Vehicles 99,833
Water service equipment 443,141
Leasehold improvements 22,433
-----------
823,799
Less accumulated depreciation 645,917
-----------
Net property and equipment 177,882
OTHER ASSETS:
Installment accounts receivable 18,736
Deferred costs, net of accumulated amortization of $45,852 19,444
-----------
38,180
-----------
$666,841
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-2
<PAGE> 23
VITAL LIVING PRODUCTS, INC.
BALANCE SHEET
DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Bank overdrafts $38,626
Trade accounts payable 85,583
Accrued interest payable to related party 3,709
Demand notes payable to related parties 437,752
Accrued dividends 1,035,000
Accrued payroll taxes 16,800
Current portion of long-term notes payable 6,450
Other accrued liabilities 73,473
------------
Total current liabilities 1,697,393
LONG-TERM NOTES PAYABLE 6,137
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized;
3,320,298 shares issued and 2,996,451 shares outstanding 33,203
Preferred stock - Class A, $.01 par value, 3,303,375 shares
authorized, issued and outstanding 33,034
Preferred stock - Class B, convertible, $.01 par value,
1,000,000 shares authorized
Series A - 575,000 shares outstanding 1,150,000
Series B - 31,290 shares outstanding 1,783,935
Paid-in capital 7,871,605
Treasury stock, 323,847 shares, at cost (75,000)
Retained earnings (deficit) (11,833,466)
------------
Total stockholders' equity (1,036,689)
------------
$666,841
============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-3
<PAGE> 24
VITAL LIVING PRODUCTS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
REVENUES:
Product sales $1,521,004 $949,472
Service revenues 426,017 446,640
----------- -------------
Total revenues 1,947,021 1,396,112
COST OF GOODS SOLD:
Direct material costs 747,137 529,405
Labor, taxes and fringes 293,785 365,395
Travel, vehicle and other costs 82,812 119,680
Lawsuit settlement costs 62,407 -
Research and development costs 47,000 -
Depreciation 94,302 89,016
----------- -------------
Total cost of goods sold 1,327,443 1,103,496
----------- -------------
GROSS MARGIN 619,578 292,616
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries, taxes and fringes 351,961 339,329
Sales commissions and brokerage costs 111,616 78,560
Marketing, advertising and promotion 304,936 187,605
Travel and vehicle costs 47,051 39,801
Professional fees and costs 91,161 53,309
Bad debt expense 5,198 26,202
Office and telephone costs 110,959 106,585
Depreciation and amortization 12,206 45,224
Insurance and other 16,062 19,696
----------- -------------
Total selling, general and administrative expenses 1,051,150 896,311
INCOME (LOSS) FROM OPERATIONS ($431,572) ($603,695)
----------- -------------
</TABLE>
Continued
F-4
<PAGE> 25
VITAL LIVING PRODUCTS, INC.
STATEMENTS OF OPERATIONS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
INCOME (LOSS) FROM OPERATIONS ($431,572) ($603,695)
OTHER REVENUES (EXPENSES):
Interest expense (369,951) (479,796)
Other 6,404 7,897
----------- -------------
Total other revenues (expenses) (363,547) (471,899)
----------- -------------
NET INCOME (LOSS) BEFORE INCOME TAXES (795,119) (1,075,594)
INCOME TAX (PROVISION) BENEFIT - -
----------- -------------
NET INCOME (LOSS) ($795,119) ($1,075,594)
=========== =============
BASIC INCOME (LOSS) PER COMMON SHARE ($0.31) ($0.41)
=========== =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,996,451 2,996,451
=========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-5
<PAGE> 26
VITAL LIVING PRODUCTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Class B,
-------------------- Retained Class A Class B Ser B Total
Number of $.01 Paid-in Treasury Earnings Preferred Preferred Preferred Stockholders'
Shares Par Value Capital Stock (Deficit) Stock Stock Stock Equity
---------- --------- ----------- --------- ------------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 3,320,298 $33,203 $4,346,155 ($75,000) ($9,686,753) $33,034 $1,150,000 $ - ($4,199,361)
Dividends accrued on
Series A, Class B,
preferred stock at
$.16 per share - - - - (138,000) - - - (138,000)
Services provided at no
charge by stockholder 30,806 30,806
Net loss for the year
ended December 31, 1998 - - - - (1,075,594) - - - (1,075,594)
---------- --------- ----------- --------- ------------- --------- ---------- ---------- -------------
BALANCE, December 31, 1998 3,320,298 $33,203 $4,376,961 ($75,000) ($10,900,347) $33,034 $1,150,000 $ - ($5,382,149)
========== ========= =========== ========= ============= ========= ========== ========== =============
Dividends accrued on
Series A, Class B,
preferred stock at
$.16 per share - - - - (138,000) - - - (138,000)
Services provided at no
charge by stockholder 33,140 33,140
Issue of Series B,
Class B Preferred stock,
31,290 shares in
exchange for debt - - - - - - - 1,783,935 1,783,935
Contribution to capital
by related party - - 3,461,504 - - - - - 3,461,504
Net loss for the year
ended December 31, 1999 - - - - (795,119) - - - (795,119)
---------- --------- ----------- --------- ------------- --------- ---------- ---------- -------------
BALANCE, December 31, 1999 3,320,298 $33,203 $7,871,605 ($75,000) ($11,833,466) $33,034 $1,150,000 $1,783,935 ($1,036,689)
========== ========= =========== ========= ============= ========= ========== ========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-6
<PAGE> 27
VITAL LIVING PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers and others $2,001,000 $1,410,661
Cash paid to suppliers and employees (2,192,264) (1,847,207)
Interest paid (52,069) (38,890)
----------- -------------
Net cash used by operating activities (242,333) (475,436)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (54,740) (60,202)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) draws on bank overdraft, net (8,844) 45,103
Net proceeds from demand notes payable to related parties 316,252 508,669
Payments on notes payable (6,203) (2,979)
Payments on obligations under capital leases payable to
related party (8,997) (16,953)
----------- -------------
Net cash provided by financing activities 292,208 533,840
----------- -------------
NET DECREASE IN CASH (4,865) (1,798)
CASH, beginning of year 5,526 7,324
----------- -------------
CASH, end of year $661 $5,526
=========== =============
</TABLE>
NON-CASH TRANSACTIONS:
Preferred Series A, Class B dividends of $138,000 were accrued during each of
the years ended December 31, 1999 and 1998.
In June 1999, approximately $2,150,000 of capital lease obligations and
related accrued interest along with accrued interest on a demand note payable
were all forgiven by the related party to whom these amounts were owed.
In November 1999, a demand note with a related party for approximately
$3,036,000, related accrued interest of approximately $64,000, and certain
equipment were exchanged for 31,290 shares of Preferred Series B, Class B
stock. This stock was discounted to its fair market value of approximately
$1,784,000.
Certain salaries to Company employees totalling $33,140 and $30,806 were paid
by a stockholder during the years ended December 31, 1999 and 1998,
respectively.
Continued
F-7
<PAGE> 28
VITAL LIVING PRODUCTS, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED
BY OPERATING ACTIVITIES:
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
Net income (loss) ($795,119) ($1,075,594)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 106,507 133,945
Decrease in accounts receivable 52,773 32,853
Increase in inventory (47,594) (2,306)
(Increase) decrease in prepaid expenses 28,247 (6,733)
Increase (decrease) in trade accounts payable 7,961 (5,661)
Increase (decrease) in accrued interest payable
to related party (6,425) 440,906
Decrease in accrued payroll taxes (18,624) (976)
Increase (decrease) in accrued interest
and other accrued liabilities 72,494 (22,676)
Services provided at no charge by stockholder 33,140 30,806
Interest expense included in debt forgiveness 324,307 -
----------- -------------
Net cash used by operating activities ($242,333) ($475,436)
=========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-8
<PAGE> 29
VITAL LIVING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - Vital Living Products, Inc. sells various water
testing materials, including kits which test for lead, pesticides,
bacteria, iron and other substances and conditions; vending machines,
which dispense purified and filtered water at various locations,
including grocery stores and shopping centers; and misting apparatus.
It also sells and services water treatment equipment and water
softeners and filters. The Company operates under the name American
Water Service.
FISCAL YEAR END CHANGE - Vital Living Products, Inc. has changed its
fiscal year end to December 31 effective for the year ended December
31, 1998, and the accompanying financial statements for 1998 reflect
operations for the twelve months then ended. The Company believes this
change will better reflect the natural year end of its business cycle.
RECEIVABLES, INSTALLMENT RECEIVABLES AND RESERVE FOR BAD DEBTS - The
Company records amounts receivable for all earned revenues which have
not been collected. Installment receivables result from installment
equipment purchase contracts. These contracts generally have terms from
36 to 60 months, require interest payments calculated at 16% and
require monthly installment payments of principal and interest. The
purchased equipment under contract secures these receivables. The
Company maintains an allowance for bad debts to reflect all receivables
at estimated collectible balances.
INVENTORY - Inventories include both raw materials and finished goods,
each at first-in first-out cost, which is not in excess of market. The
valuation of finished goods inventory includes the labor and overhead
required for its production.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided by using both straight-line and accelerated
methods over the estimated useful lives of the assets, which are:
<TABLE>
<S> <C>
Office furniture and equipment 5 to 7 years
Warehouse equipment 7 years
Computer equipment 5 years
Vehicles 5 years
Water service equipment 4 years
Leasehold improvements 39 years
</TABLE>
DEFERRED COSTS - The Company has incurred certain costs related to
product design, patents and trademarks. Management believes that these
costs will be recovered through future operations, and accordingly, has
capitalized them as described in Note 6.
F-9
<PAGE> 30
REVENUE RECOGNITION - Service revenues are from equipment which is
installed in customers' facilities. This equipment may be rented from
month-to-month and service revenues are recognized as earned and billed
monthly. Revenues from product sales are recognized when such products
are sold and shipped to customers.
WARRANTY COSTS - The Company sells certain water purification equipment
subject to warranties which extend to five to seven years. Warranty
costs are nominal and are recorded in the period in which they are
incurred.
MARKETING, ADVERTISING AND PROMOTION COSTS - The Company expenses all
marketing, advertising and promotion costs as incurred.
STOCK-BASED COMPENSATION - The Company has a compensatory stock option
plan under which it grants options to employees and agents. As all
options granted to employees are at exercise prices which are equal to
or greater than fair market value of the stock, the Company records no
expense related to such grants. See Note 9. Stock options granted are
valued using the Black Sholes valuation model and quoted prices for the
Company's stock. When options are granted to non-employees, the
transaction is accounted for based on the fair value of the
consideration (goods and services) received or the fair value of the
options granted, whichever is more reliably measurable.
INCOME TAXES - Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to certain related
party payables not currently deductible for tax return purposes and to
net operating loss carryforwards available to offset income in future
years. The deferred tax assets represent the future tax return
consequences of those differences. Valuation allowances are
established, if necessary, to reduce the deferred tax assets to the
amount that will more likely than not be realized.
CASH AND CASH EQUIVALENTS - For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments to be cash
equivalents.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN:
As shown in the accompanying financial statements the Company has
incurred recurring losses from operations and resulting cash flow
deficits. It also has current liabilities significantly in excess of
current assets and a significant deficit in total stockholders' equity.
These factors raise substantial doubt about the Company's ability to
continue as a going concern as of December 31, 1999.
Management continues to focus on its marketing and sales of water testing
kits, which represent a relatively new product line. Management
believes that this new line will help the Company to achieve
profitability. The Company's ultimate ability to become profitable,
however, is contingent on its achieving significantly higher sales
levels. Until that occurs and until the
F-10
<PAGE> 31
Company generates positive cash flow from operations, additional
outside funding will continue to be required. The Company has in place
a credit line with Mr. Wilbur Peters, a related party and stockholder,
as discussed in Note 4. The Company anticipates that this credit line
will provide the necessary funding it requires for the next fiscal
year. However, Mr. Peters is not required to make advances on such line
of credit and as a result there is no guarantee that such funding will
be available.
The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
3. FORGIVENESS OF DEBT - CONTRIBUTION OF CAPITAL:
In June 1999, the Company entered into an agreement with Wilbur Peters, a
related party and stockholder, under which it agreed to issue a new
note to Mr. Peters for $3,035,535 in exchange for various notes,
accrued interest, and other obligations totaling approximately
$5,180,000. As a part of this transaction, Mr. Peters released the
Company from approximately $2,150,000 in obligations (net), with the
Company recording this amount as additional paid in capital. This note
provided for the payment of interest at 6% per year. Interest was to be
paid semiannually, and the note was to mature on June 30, 2001.
In November 1999, Mr. Peters and the Company agreed to exchange this
note, accrued interest on this note since June 30, and certain
equipment for 31,290 shares of the Company's Class B, Series B
preferred stock (see Note 10). The Company estimated the fair market
value of the stock to be $1,783,395, which represented a discount of
approximately 40% from its redemption price. It recorded the shares
issued at that value and reclassified the balance of the indebtedness
to additional paid in capital. Total debt reclassified to additional
paid in capital for the year ended December 31, 1999, totaled
$3,461,504.
4. RELATED PARTY TRANSACTIONS:
Through December 31, 1999, the Company had approximately $37,800 in
borrowings outstanding on a $750,000 revolving line of credit from
Wilbur Peters. This line of credit provides that advances will be made
at the discretion of the lender and requires monthly interest payments
at the LIBOR rate plus 1.5%. Interest accrued at December 31, 1999, was
approximately $200. Interest expense on this note totals approximately
$3,600 in the year ended December 31, 1999.
The Company had borrowings from CTF, Inc., an affiliate of Mr. Peters,
for $400,000 with accrued interest of approximately $3,500 at December
31, 1999. Interest expense for this note of approximately $41,100 and
$42,400 was recorded during the years ended December 31, 1999 and 1998,
respectively. The note is due on demand and has an interest rate of
prime plus 2%.
The Company leased vending machines, misting machinery and purification
equipment, and four service vans from Mr. Peters through June 30, 1999.
These obligations including accrued interest were forgiven by Mr.
Peters in the agreement described in Note 3.
F-11
<PAGE> 32
CTF, Inc. owns the preferred Series A Class B stock and is owed
$1,035,000 in accrued dividends. (See Note 10.)
The salaries for the chief financial officer and vice-president of the
Company and certain accounting personnel were paid by companies with
which Mr. Peters is affiliated. These salaries have been recorded in
the statements of operations, and the Company has also recorded
additional capital contributions from Mr. Peters. (See Note 17.)
5. INVENTORY:
The Company's inventories as of December 31, 1999, consist of the
following components:
<TABLE>
<S> <C>
Water testing kits $197,021
Water treatment parts 63,931
Bottles and other 19,120
--------
$280,072
========
</TABLE>
6. DEFERRED COSTS:
Deferred costs as of December 31, 1999, consists of the items shown
below. These are being amortized on a straight-line basis over their
estimated useful lives of from 5 to 17 years. Amortization expense
recorded during the year ended December 31, 1999, totaled approximately
$5,200.
<TABLE>
<S> <C>
Product design costs $ 8,558
Patents and trademarks 36,038
Non-compete agreement 14,500
Other 6,200
--------
65,296
Less accumulated amortization 45,852
--------
Net deferred costs $ 19,444
========
</TABLE>
7. LONG-TERM DEBT:
The Company has a note payable to a bank at December 31, 1999, totaling
$12,587. The interest rate on the note is 3.9%. Monthly payments of
principal and interest total $569. This loan, which is secured by a
vehicle at December 31, 1999, matures as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $ 6,450
2001 6,137
-------
$12,587
=======
</TABLE>
See Note 4 for discussion of related party notes payable.
F-12
<PAGE> 33
8. OBLIGATIONS UNDER CAPITAL LEASE:
The Company leased four service vans from Wilbur Peters, a related party
and stockholder, under capital lease agreements through June 1999, when
these obligations were forgiven (see Note 3). Each of these leases
required monthly payments of $416 of principal and interest at 8%.
Interest expense incurred during the six months ended June 30, 1999,
and the year ended December 31, 1998, was $975 and $1,845,
respectively.
In addition, the Company also leased certain vending machines, misting
machines and water purification equipment from Mr. Peters under
revolving five year lease agreements. At June 30, 1999, these leases
were also forgiven (see Note 3). During the six months ended June 30,
1999, and year ended December 31, 1998, the Company accrued interest of
$5,007 and $15,822, respectively, on these leases. Mr. Peters forgave
the remaining lease obligations, all accrued interest, and all
delinquent payments of principal and interest.
Substantially all of this equipment is leased to the Company's customers
on a month-to-month basis. As such, there are no minimum future rentals
related to these leases.
9. COMMON STOCK OUTSTANDING, STOCK OPTION PLAN AND LOSS PER COMMON SHARE:
The Company has 20,000,000 shares of authorized common stock, of which
2,996,451 shares are issued and outstanding and 323,847 shares are
issued and held as treasury shares. A total of 4,970,056 common shares
have been reserved for future issuance of stock through the exercise of
stock options and the conversion of Class B preferred stock, as
described below.
The 1991 Stock Option Plan provides for granting options for up to
3,150,000 shares of the Company's common stock to key employees,
directors, consultants, and agents of the Company. Options to be
granted may be either incentive or non-statutory stock options, and
restrictions apply to both the grant and exercise of options. As of the
date of this report, options for 1,980,543 shares have been granted to
key employees and agents. Options extend contractually for ten years.
Non-qualified options vest fully at the time of grant while incentive
stock options issued to employees vest ratably over four years. The
following is a summary of option activity during the years ended
December 31, 1999 and 1998.
Activity for non-qualified stock options (primarily non-employees) was as
follows:
F-13
<PAGE> 34
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------- ------------------------
Exercise Exercise
Shares Price* Shares Price*
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,943,668 $0.188 1,941,668 $0.187
Granted 10,000 1.000 2,000 0.250
Exercised -- -- -- --
Expired or forfeited -- -- -- --
--------- ---------
Outstanding at end of year 1,953,668 0.192 1,943,668 0.187
========= =========
Exercisable at end of year 1,953,668 $0.192 1,943,668 $0.187
========= =========
*weighted average
</TABLE>
Exercise prices for options outstanding at December 31, 1999, range
from $.125 to $1.12 per share.
Total shares by exercise price are as follows:
<TABLE>
<CAPTION>
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life*
--------------- ----------- ----------- -----------------
<S> <C> <C> <C>
0.125 1,820,000 1,820,000 7.5 yrs
0.250 2,000 2,000 8 yrs
1.000 10,000 10,000 10 yrs
1.120 121,668 121,668 3 yrs
--------- ---------
1,953,668 1,953,668
========= =========
</TABLE>
-------------
*weighted average
Activity for incentive stock options (granted to employees) was as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------- ------------------------
Exercise Exercise
Shares Price Shares Price
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 48,500 $0.25 -- $ --
Granted -- -- 48,500 0.25
Exercised -- -- -- --
Expired or forfeited (21,625) 0.25 -- --
--------- ----- --------- -----
Outstanding at end of year 26,875 0.25 48,500 $0.25
========= ===== ========= =====
Exercisable at end of year 8,125 $0.25 -- --
========= ===== ========= =====
</TABLE>
The Company has recorded no compensation expense under this plan during
1999 or 1998, as options have been granted at prices which are greater
than or equal to fair market value of the stock at the dates of the
grant. Since the Company is not required to adopt the fair value based
recognition provisions prescribed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
it has elected only to comply with the disclosure requirements set
forth in the statement.
During 1999, the Company granted options for 10,000 shares to a vendor.
Exercise price of these options is $1.00 per share. At the grant date,
the fair market value of the Company's common stock was $.625 per
share. Based on the value of services received from this vendor and the
amount paid in cash by the Company, the Company determined the value of
the options granted to approximate zero. Accordingly, it recorded no
additional expense based on the grant of the options.
F-14
<PAGE> 35
During 1999, the Company granted options for 48,500 shares to employees.
Using the Black Sholes valuation model, it calculated the value of
those shares to be approximately $.25 each. This valuation included the
following assumptions: risk-free interest rate - 4.8%; expected life -
4 years; expected volatility - 90%; expected dividends - none. The
Company estimated that 60% of these options will vest. Exercise price
of these options is $.25 per share. At the grant date, the fair market
value of the Company's common stock was approximately $.25 per share.
No value was assigned to the 2,000 options granted to a non-employee,
as they were otherwise paid for services at fair market value.
Had the Company recorded expense for these grants under FASB Statement
123, it would have recorded additional compensation cost of $1,819 in
both 1999 and 1998. Pro-forma net income (loss) and per share amounts
for each year would be as follows:
1999 1998
--------- ------------
Net Income (Loss), as reported $(795,119) $(1,075,594)
Pro-forma Net Income (Loss) $(796,938) $(1,077,413)
Pro-forma Basic Income (Loss)
per Common Share $ (0.31) $ (0.41)
Basic earnings (loss) per common share has been computed based on the
weighted average number of common shares outstanding. As there were no
changes in common stock outstanding during the years ended December 31,
1999 and 1998, the weighted average number of common shares outstanding
is the same as common shares issued and outstanding at year end 1999.
No calculation has been presented for diluted earnings per share for
either period. The inclusion of shares for the effect of any options or
preferred stock would be anti-dilutive because the Company has losses
for both years. The calculation of basic earnings (loss) per common
share is based on the Company's net income (loss) adjusted for the
amount of preferred dividends accrued ($138,000) during each of the
years ended December 31, 1999 and 1998.
F-15
<PAGE> 36
10. PREFERRED STOCK:
The Company has authorized 3,303,375 shares of class A preferred stock
with a par value of one cent per share. Each share of this class of
stock, which is nonvoting and has no dividend rights, has a liquidation
preference of $.01 per share and is convertible at the holder's option
into one share of the Company's common stock. However, all outstanding
shares of Class A preferred stock are currently held in escrow under an
agreement with its original holders which prohibits the holders from
converting the shares as long as they are being held in escrow. Since
certain financial thresholds were not met in prior years, under the
terms of the escrow agreement the shares of Class A preferred stock are
required to be released from escrow to the Company and the Company is
required to redeem such shares at $.01 per share ($33.034 in the
aggregate). The Company has requested that the escrow agent release the
certificates representing the outstanding shares of class A preferred
stock so that the Company may redeem such shares.
Also, the Company has authorized 1,000,000 shares of Class B preferred
stock with a par value of one cent per share. Its Series A, Class B
preferred shares have a liquidation preference of $.01 per share
($5,750 in aggregate), provide for the payment of dividends at 12% per
annum, are redeemable at any time at the Company's option at $2.00 per
share ($1,150,000 in aggregate), and are convertible by the holder into
shares of common stock at a ratio of 4/9 of a share of common for each
preferred share tendered. Holders of this Series A, Class B preferred
stock have the right to elect a majority of the Board of Directors.
Dividends accrued on these shares through December 31, 1999, totaled
$1,035,000 ($1.80 per share), including accrued dividends of $138,000
in both 1999 and 1998.
In November 1999, the Company issued 31,290 shares of its new Series B,
Class B, preferred shares in exchange for a note payable and equipment
held by Wilbur Peters. The note totaled $3,035,535, and the Company
discounted the preferred stock exchanged for these to $1,783,935, to
reflect the estimated fair market value of the stock. This new series
of stock is non-voting. Dividends are non-cumulative, and any dividends
to be paid on these shares are subordinate to all accrued dividends on
the Company's Series A, Class B preferred stock. Dividends on these
shares may not exceed $12 per year per share.
The Class B, Series B shares carry a $10 per share ($312,900 in
aggregate) liquidation preference, and they may be redeemed by the
Company at $100 per share ($3,129,000 in aggregate). After one year
from the date of issuance, each share is convertible by the holder into
50 shares of the Company's common stock. No dividends have been
declared on this class of stock since its issuance.
11. FINANCIAL INSTRUMENTS:
Except for accrued dividends, the Company estimates the fair value of all
financial instruments to be equal to the book value reflected in the
accompanying financial statements. The Company estimates that the fair
value of accrued dividends is less than their carrying amount as they
will not be paid until future periods. As the timing of such payment
cannot presently be determined, it is not practicable to calculate a
net present value of the liability or to estimate its fair value.
F-16
<PAGE> 37
12. OPERATING LEASES:
The Company exercised an option to extend its existing lease for office
and warehouse space through March 31, 2002. This extension requires
monthly lease payments of $3,400 beginning April 1, 2000 through March
31, 2002. Rent expense, for the years ended December 31, 1999 and 1998,
was approximately $38,000 and 37,000, respectively. Future rent
payments under the terms of the extended lease agreement for the years
ending December 31, 2000, 2001, and 2002 is approximately $40,000,
$41,000 and $10,000, respectively.
13. INCOME TAXES:
At December 31, 1999, net noncurrent deferred tax assets of approximately
$2,610,000 resulted mainly from net operating losses. A valuation
allowance for the entire $2,610,000 has also been established due to
the Company's uncertain financial condition (See Note 2).
The components of the net noncurrent deferred tax assets and related
valuation allowance are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Federal $2,550,000
State 60,000
----------
Total deferred tax assets 2,610,000
Valuation allowance 2,610,000
----------
Net deferred tax assets $ --
==========
</TABLE>
At December 31, 1998, the Company had net noncurrent deferred tax assets
of approximately $3,882,000, along with a corresponding valuation
allowance of the same amount. The $1,272,000 decrease in the noncurrent
deferred tax assets as of December 31, 1999, and the deferred tax
provision which would be reflected on the Company's statement of
operations has been offset by a corresponding decrease in the valuation
allowance. The statement of operations therefore reflects no deferred
tax provision.
As the Company has substantially no taxable income to date, it has
recorded no current provision for income taxes for the years ended
December 31, 1999 and 1998. Significant differences existed in the year
ending December 31, 1999, between the income reported in the Company's
financial statements and its tax returns. These include the debt
forgiveness income from a related party and the utilization of net
operating loss carryforwards.
F-17
<PAGE> 38
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $7,505,000 for federal income tax purposes.
<TABLE>
<CAPTION>
NET OPERATING LOSS
YEAR OF EXPIRATION AMOUNT
------------------ ------------------
<S> <C>
2007 $1,034,000
2008 3,573,000
2009 835,000
2010 541,000
2011 559,000
2012 242,000
2013 441,000
2014 280,000
----------
$7,505,000
==========
</TABLE>
Various state net operating loss carryforwards are also available for use
in reducing apportioned state taxable income. The most significant of
these is approximately $850,000 in North Carolina.
The deferred tax benefit (provision) for the years ended December 31,
1999 and 1998 are as follows:
1999 1998
----------- ---------
Deferred tax benefit (provision) -
Federal $ (938,000) $ 272,000
State (33,400) 61,000
----------- ---------
(1,272,000) 333,000
Change in valuation allowance 1,272,000 (333,000)
----------- ---------
Net deferred tax provision $ -- $ --
=========== =========
F-18
<PAGE> 39
The deferred provisions for 1999 and 1998 differ from amounts which would
be calculated at statutory rates due to changes in the valuation
allowance and the expiration of loss carryforwards for state purposes.
In 1999, a portion of the debt forgiveness described in Note 3 was
treated as income for tax return purposes and had the effect of
increasing the deferred tax provision by $1,543,000, before reflecting
the change in the valuation allowance.
14. SUPPLEMENTARY FINANCIAL INFORMATION:
Marketing, advertising and promotion costs include the following for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Advertising $ 49,625 $ 101,015
Promotions 162,545 21,016
Trade shows 43,077 45,710
Public relations and other 49,689 19,864
--------- ---------
$ 304,936 $ 187,605
========= =========
</TABLE>
15. MAJOR CUSTOMERS:
Sales to three major customers comprised approximately 18%, 13% and 13%
of total sales for the year ended December 31, 1999. Sales to one major
customer comprised approximately 15% of total sales for the year ended
December 31, 1998.
16. CONTINGENCIES:
The Company is involved in commercial litigation in the normal course of
its business. The Company does not expect any losses which would
materially affect the financial statements for the year ended December
31, 1999 as presented.
A significant portion of the Company's sales market is in hardware and
home center stores. Therefore, the Company's ability to make future
sales is dependent upon these retail markets.
F-19
<PAGE> 40
17. PRIOR PERIOD ADJUSTMENT AND REVISION:
The Company has adjusted its balance in retained earnings (deficit) as of
January 1, 1999 and 1998, to reflect additional salaries paid by an
affiliated company as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Retained earnings (deficit) at beginning of year:
As previously reported $(10,720,238) $ (9,537,450)
Adjustment for additional salaries
paid by stockholder (180,109) (149,303)
------------ ------------
Retained earnings (deficit) at
beginning of year, as restated (10,900,347) (9,686,753)
Dividends accrued on Series A, Class B,
preferred stock (138,000) (138,000)
Net income (loss), (as restated) (795,119) (1,075,594)
------------ ------------
Retained earnings (deficit) as restated
$(11,833,466) $(10,900,347)
============ ============
</TABLE>
The Company's chief financial officer and certain accounting personnel
are employees of a company affiliated with Mr. Wilbur Peters. These
salaries had previously been paid by this affiliated company and had
not been recorded as expenses of the Company. A historical analysis of
their time devoted to the Company was prepared and the expense of their
salaries calculated. This adjustment reflects this correction by
increasing salary expense and reducing income in the year ended
December 31, 1999 by $33,140 ($.01 per share) and by increasing salary
expense and increasing the net loss in the year ended December 31, 1998
by $30,806 ($.02 per share). This change has no effect on the tax
provision for either year. The Company has revised its financial
statements from the version previously issued to reflect these changes.
Also, the $3,461,504 forgiveness of debt referred to in Note 3 was
previously reported as an extraordinary item in the statement of
operations. The financial statements have been revised to reflect this
amount as a contribution to additional paid in capital in the year
ended December 31, 1999. This revision reduced net income by $3,461,504
($1.15 per share).
F-20
<PAGE> 41
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits required by Part III of Form 1-A are filed
herewith:
Exhibit No. Document Description
----------- --------------------
2.1* Certificate of Incorporation
2.2* Certificate of Designation Setting Forth the Preferences,
Rights and Limitations of Series A, Class B Preferred Stock of
Vital Living Products, Inc.
2.3* Certificate of Designation of Series B, Class B Preferred
Stock Setting Forth the Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of such Series of
Class B Preferred Stock
2.4* Bylaws of Vital Living Products, Inc.
6.1* Vital Living Products, Inc. 1991 Stock Option Plan
6.2* Instrument of Forgiveness of Indebtedness dated June 30, 1999
by C. Wilbur Peters
6.3* Note in favor of C. Wilbur Peters dated June 30, 1999
6.4* Revolving Credit Note dated July 1, 1999 in favor of C. Wilbur
Peters
6.5* Exchange Agreement dated November 5, 1999 between the Company
and C. Wilbur Peters
6.6* Promissory Note in favor of CTF, Inc. dated September 1, 1992
6.7* Escrow Agreement dated March 31, 1992 between the Company,
Henry H. Mummaw, Brian E. Huey, Joseph W. Mummaw, Larry C.
Pratt, CTF, Inc., J.W. Gant & Associates, Inc. and First Union
National Bank
27 Financial Data Schedule (filed in electronic format only)
* These exhibits were previously filed.
ITEM 2. DESCRIPTION OF EXHIBITS
See Part III, Item 1.
21
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, on July 31,
2000.
VITAL LIVING PRODUCTS, INC.
By: /s/ Donald R. Podrebarac
Donald R. Podrebarac
President and Chief Executive Officer
