SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[X] Amendment No. 1
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
NATURAL HEALTH TRENDS CORP.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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<PAGE>
(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by Registration Statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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NATURAL HEALTH TRENDS CORP.
250 PARK AVENUE
NEW YORK, NEW YORK 10177
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [JANUARY ___, 1999]
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Meeting") of Natural Health Trends Corp., a Florida corporation (the "Company")
will be held at 250 Park Avenue, New York, New York 10177 on January ___, 1999,
at 10:00 a.m. local time, for the following purposes, all as described more
fully in the Proxy Statement attached hereto:
1. To approve the issuance of such number of shares of Common Stock to be
issued upon: (i) conversion of $2,800,000 aggregate stated value of the
Company's Series F Preferred Stock, (ii) conversion of $350,000 aggregate stated
value of the Company's Series G Preferred Stock, and (iii) exercise of five-year
warrants ("Acquisition Warrants") to purchase 200,000 shares of Common Stock,
all to be issued in connection with the acquisition (the "Asset Acquisition") of
substantially all of the assets (the "Kaire Assets"), of Kaire International,
Inc. ("Kaire"), by NHTC Acquisition Corp., a newly formed Delaware corporation
and a wholly-owned subsidiary of the Company ("NHTC"), pursuant to an Asset
Purchase Agreement dated as of November 24, 1998 by and among the Company, NHTC,
and Kaire (the "Acquisition Agreement");
2. To ratify and approve the conversion of $1,650,000 aggregate stated
value of the Company's Series E Preferred Stock sold in the Company's August
1998 private placement (the "Series E Private Placement") into shares of Common
Stock;
3. To approve (i) the future offering and sale by the Company of up to
$4,000,000 aggregate stated value of the Company's Series H Preferred Stock (the
"Series H Preferred Stock"), and (ii) the full conversion, subsequent to any
sale of the Series H Preferred Stock, of the Series H Preferred Stock into
shares of Common Stock; and
4. To transact such other business as may properly be brought before the
meeting and any and all adjournments thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS OF THE COMPANY VOTE "FOR" PROPOSALS 1-3.
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The Board of Directors has fixed the close of business on Thursday,
December 31, 1998 as the record date for determining the stockholders of the
Company entitled to notice of, and to vote at the meeting or any adjournment
thereof.
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT, WHICH CONTAINS
INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE MEETING. YOU ARE
EARNESTLY REQUESTED TO DATE, SIGN AND RETURN THE ACCOMPANYING FORM OF PROXY IN
THE ENVELOPE ENCLOSED FOR THAT PURPOSE (TO WHICH NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES) WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN
PERSON. THE PROXY IS REVOCABLE BY YOU AT ANY TIME PRIOR TO ITS EXERCISE AND WILL
NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IN THE EVENT YOU ATTEND THE MEETING OR
ANY ADJOURNMENT THEREOF. THE PROMPT RETURN OF THE PROXY WILL BE OF ASSISTANCE IN
PREPARING FOR THE MEETING AND YOUR COOPERATION IN THIS RESPECT WILL BE
APPRECIATED.
By Order of the Board of Directors
------------------------------------
Joseph P. Grace, President
Dated: January ___, 1999
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<PAGE>
NATURAL HEALTH TRENDS CORP.
250 PARK AVENUE
NEW YORK, NEW YORK 10177
---------------------------
PROXY STATEMENT
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SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY ___, 1999
This Proxy Statement and the accompanying form of proxy is furnished to
stockholders of Natural Health Trends Corp., a Florida corporation (the
"Company"), in connection with the solicitation of proxies, in the accompanying
form, by the Company's Board of Directors to be voted at the Special Meeting of
Stockholders (the "Meeting") of the Company to be held on January ___, 1999 at
10:00 a.m. (local time) at 250 Park Avenue, New York, New York 10177 and at any
and all adjournments thereof.
Accompanying this Proxy Statement is a Notice of Special Meeting of
Stockholders, a form of proxy, a copy of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997 containing audited financial
statements and related data, and a copy of the Company's quarterly reports on
Form 10-QSB for the quarters ended March 31, 1998, June 30, 1998 and September
30, 1998, which contain certain unaudited financial statements at and for such
periods then ended.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, the stockholders of the Company will be asked:
1. To approve the issuance of such number of shares of Common Stock to be
issued upon: (i) conversion of $2,800,000 aggregate stated value of the
Company's Series F Preferred Stock, (ii) conversion of $350,000 aggregate stated
value of the Company's Series G Preferred Stock, and (iii) exercise of five-year
warrants ("Acquisition Warrants") to purchase 200,000 shares of Common Stock,
all to be issued in connection with the acquisition (the "Asset Acquisition") of
substantially all of the assets (the "Kaire Assets"), of Kaire International,
Inc. ("Kaire"), by NHTC Acquisition Corp., a newly formed Delaware corporation
and a wholly-owned subsidiary of the Company ("NHTC"), pursuant to an Asset
Purchase Agreement dated as of November 24, 1998 by and among the Company, NHTC,
and Kaire (the "Acquisition Agreement");
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<PAGE>
2. To ratify and approve the conversion of $1,650,000 aggregate stated
value of the Company's Series E Preferred Stock (the "Series E Preferred
Stock"), sold in the Company's August 1998 private placement (the "Series E
Private Placement") into shares of Common Stock;
3. To approve (i) the future offering and sale by the Company of up to
$4,000,000 aggregate stated value of the Company's Series H Preferred Stock (the
"Series H Preferred Stock"), and (ii) the full conversion, subsequent to any
sale of the Series H Preferred Stock, of the Series H Preferred Stock into
shares of Common Stock; and
4. To transact such other business as may properly be brought before the
meeting and any and all adjournments thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS OF THE COMPANY VOTE "FOR" PROPOSALS 1-3.
All proxies which are properly filled in, signed and returned to the
Company prior to or at the Meeting will be voted in accordance with the
instructions thereon. A proxy may be revoked by any stockholder giving the same
prior to the exercise thereof by: (a) a written notice delivered to the
Company's principal officers prior to the commencement of the Meeting; (b)
providing a signed proxy bearing a later date, or (c) appearing in person and
voting at the Meeting. The Company intends to vote executed but unmarked proxies
in favor of the Proposals 1-3 as set forth above (collectively, the
"Proposals"). Broker non-votes will be counted for purposes of determining a
quorum but otherwise will be considered not represented with regard to voting on
any matter with respect to which there is a broker non-vote.
The Board of Directors of the Company has fixed the close of business on
December 31, 1998 as the record date (the "Record Date") for the determination
of stockholders who are entitled to notice of, and to vote at the meting or any
adjournment thereof. Only holders of shares of Common Stock as of the Record
Date are entitled to vote at the Meeting. On or about January 8, 1999 this Proxy
Statement and the accompanying form of proxy are first being mailed to each
stockholder of record of the Company at the close of business on the Record
Date.
The expenses of preparing, assembling, printing and mailing the form of
proxy and the material used in solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
(who will receive no additional compensation therefor) to solicit proxies
personally, and by telephone. The Company has requested banks, brokerage firms
and other custodians, nominees and fiduciaries to forward copies of the proxy
material to their principals and to request authority for the execution of
proxies and will reimburse such persons for their services in doing so.
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VOTE REQUIRED TO APPROVE THE PROPOSALS, PRINCIPAL
STOCKHOLDERS AND STOCKHOLDINGS OF MANAGEMENT
Although the Florida Business Corporation Act, as amended (the "FBCA"),
does not require that the stockholders of the Company approve the Asset
Acquisition, under the rules of the NASDAQ SmallCap Market system ("NASDAQ") and
in the absence of a waiver therefrom, the Company must obtain stockholder
approval to issue a number of shares of common stock, par value $.001 per share
(the "Common Stock") equal to or greater than the number equal to twenty (20%)
percent of its theretofore issued and outstanding Common Stock, in order for the
Common Stock to remain listed on NASDAQ. The Company believes that the aggregate
number of shares of Common Stock issuable upon the full conversion of the Series
F Preferred Stock, the Series G Preferred Stock, the Series H Preferred Stock
and the Acquisition Warrants, will in the aggregate be in excess of twenty (20%)
percent of its issued and outstanding Common Stock, and as a result the Company
is seeking shareholder approval to such issuances at the Meeting.
At the Record Date, the Company had 4,610,917 shares of Common Stock issued
and outstanding, the holders of which are each entitled to one vote per share.
The presence in person or by proxy of at least a majority of the issued and
outstanding Common Stock of the Company is necessary to constitute a quorum at
the meeting. Approval of (i) the issuance of shares of Common Stock upon (a)
conversion of $2,800,000 aggregate stated value of the Company's Series F
Preferred Stock, (b) conversion of $350,000 aggregate stated value of the
Company's Series G Preferred Stock, and (c) exercise of the Acquisition Warrants
to purchase 200,000 shares of Common Stock, all being issued in connection with
the acquisition of substantially all of the Kaire Assets pursuant to the
Acquisition Agreement, (ii) the issuance of shares of Common Stock upon
conversion of $1,650,000 aggregate stated value of the Company's Series E
Preferred Stock previously sold by the Company in the Series E Private
Placement, and (iii) the future offer and sale of up to $4,000,000 aggregate
stated value of the Company's Series H Preferred Stock and the issuance of
shares of Common Stock upon conversion of the Series H Preferred Stock which may
be sold in the future by the Company in private placements, requires the
affirmative vote of holders of a majority of the issued and outstanding Common
Stock.
The following table sets forth, as of the Record Date, the number of shares
of Common Stock owned beneficially to the knowledge of the Company by each
director and by all officers and directors of the Company as a group and all
persons, to the best of the Company's knowledge, that beneficially own five (5%)
percent or more of the issued and outstanding Common Stock. The percentages have
been calculated on the basis of treating as outstanding for purposes of
computing the percentage ownership of a particular individual, all shares of
Common Stock outstanding as of such date and all shares of Common Stock issuable
to such individual in the event of exercise of outstanding options owned by such
holder at such date which are exercisable within 60 days of such date. Shares of
Common Stock issuable upon conversion of outstanding Series C Preferred Stock
and Series E Preferred Stock (or conversion of the Series F Preferred Stock,
Series G Preferred Stock, or the Series H Preferred Stock, or the exercise of
the Acquisition Warrants, all being issued in connection with the Asset
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Acquisition), are not deemed outstanding for these purposes as the number of
shares of Common Stock issuable upon conversion of each such security fluctuates
based on changes in the market price for the Common Stock. Except as indicated
in the footnote to the table, each individual is the sole beneficial owner with
sole voting rights and investment power with respect to the shares set forth
opposite his name (except for shares issuable upon exercise of his options, none
of which have been exercised).
Name and Address * Number of Shares
of Beneficial Owner 1 Beneficially Owned 2 Percent of Class
- ------------------- ------------------ ----------------
Joseph P. Grace 3 11,479 **
Martin C. Licht 4 1,300 **
Sir Brian Wolfson 5 850 **
Dirk D. Goldwasser 6 1,125 **
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* The address of each executive officer and director is c/o the Company, 250
Park Avenue, New York, New York 10177.
** Owns less than one (1%) percent.
1 Unless otherwise noted, all persons named in the table have sole voting and
dispositive power with respect to all shares of Common Stock beneficially owned
by them.
2 Does not include shares of Common Stock issuable upon the conversion of the
Company's issued and outstanding Series C Preferred Stock and Series E Preferred
Stock. Pursuant to the terms of the Series C Preferred Stock, the holders
thereof generally are not entitled to convert such instruments to the extent
that such conversion would increase the holders' beneficial ownership of Common
Stock to in excess of 4.9%, except in the event of a mandatory conversion. On
the date of a mandatory conversion of the Preferred Stock with respect to the
Series C Preferred Stock and the Series E Preferred Stock, a change in control
of the Company may occur, based upon the number of shares of Common Stock
issuable. As of the date of this Proxy Statement, 2,680 shares of Series C
Preferred Stock and 1,650 shares of Series E Preferred Stock are issued and
outstanding.
3 Mr. Grace is the Acting President and a Director of the Company.
4 Mr. Licht is a Director of the Company.
5 Sir Brian is a Director of the Company.
6 Mr. Goldwasser is a Director of the Company.
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Ralph Ellison 7 15,000 **
All Executive Offices and
Directors (Five Persons) 39,754 **
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7 Mr. Ellison is a Director of the Company. Includes warrants to purchase
20,000 shares of Common Stock at an exercise price of $1.00 per share, of which
5,000 warrants have vested and 5,000 additional warrants will vest on each of
March 1, June 1 and September 1, 1999.
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<PAGE>
MARKET PRICE DATA
The Company's Common Stock is traded on the Nasdaq SmallCap Market System
("NASDAQ") under the symbol "NHTCC." On December 4, 1998, the most recent date
for which it was practicable to obtain market price information prior to the
printing of this Proxy Statement, the closing bid price of the Common Stock on
NASDAQ was $3.28125 per share. There is no public market for the capital stock
of Kaire.
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<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following tables set forth certain unaudited pro forma condensed and
historical financial data for the Company and Kaire. The following data gives
effect to the Acquisition of the Kaire Assets accounted for as a purchase
business combination as if the Asset Acquisition had occurred as of September
30, 1998 with respect to the balance sheet data and as of January 1, 1997 with
respect to the statement of operations data for the fiscal year ended December
31, 1997 and nine months ended September 30, 1998. The following data should be
read in conjunction with the consolidated financial statements of the Company,
the consolidated financial statements of Kaire and the pro forma financial
information regarding the Acquisition and all notes relating thereto, all
appearing elsewhere in this Proxy Statement. This data should be read in
conjunction with the unaudited Pro Forma Condensed Financial Information of the
Company and Kaire included elsewhere in this Proxy Statement.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that could have occurred if the Asset Acquisition had been consummated
as of such dates, nor is it necessarily indicative of future operating results
or financial position.
Fiscal Year Ended Nine Months Ended
December 31, 1997 September 30, 1998
----------------- ------------------
(unaudited)
STATEMENT OF OPERATIONS:
Total Revenues $ 36,815,238 $22,020,397
Total Expenses $ 47,504,840 $27,516,012
Loss before taxes $(10,689,602) $(5,495,615)
Loss from continuing operations $(10,689,602) $(5,495,615)
Loss per share from
continuing operations $ (26.74) $ (4.29)
As of September 30, 1998
------------------------
(unaudited)
BALANCE SHEET DATA:
Total Assets $14,704,765
Total Liabilities $ 6,532,690
Stockholders' Equity $ 8,172,075
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SELECTED FINANCIAL DATA OF THE COMPANY
Certain of the selected consolidated financial data presented below for each of
the two fiscal years ended December 31, 1997 and 1996, has been derived from the
Company's consolidated financial statements which were audited for 1997 and 1996
by Feldman Sherb Ehrlich & Co., P.C., independent certified public accountants.
Certain of the selected consolidated financial data presented below for the nine
months ended September 30, 1998 and 1997, has been derived from the Company's
unaudited consolidated financial statements on the same basis as the audited
financial statements and include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of these periods.
This data should be read in conjunction with the Company's Consolidated
Financial Statements, related notes and other financial information included
elsewhere in this Proxy Statement.
NATURAL HEALTH TRENDS CORP.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ................................... $ 1,001,481 $ 535,202 $ 1,133,726 $ 0
Loss from continuing operations ...................... (2,088,351) (2,398,298) (4,304,073) (1,148,546)
Loss from continuing operations per share ............ (2.30) (6.57) (11.60) (4.10)
</TABLE>
BALANCE SHEET DATA:
AS OF AS OF
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Total assets ..................... $7,866,344 $13,804,921
Long term debt ................... 0 2,434,358
Redeemable preferred stock ....... 0 0
Dividends per common share ....... 0 0
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SELECTED CONSOLIDATED FINANCIAL DATA OF KAIRE
Certain of the selected consolidated financial data presented below for
each of the last two fiscal years ended December 31, 1997 and 1996, has been
derived from Kaire's consolidated financial statements which were audited by BDO
Seidman, LLP, independent certified public accountants for 1997 and 1996.
Kaire's independent certified public accountants stated in their report on the
December 31, 1997 consolidated financial statements that due to losses from
operations and a working capital deficit, there is substantial doubt about the
Company's ability to continue as a going concern. This data should be read in
conjunction with Kaire's Financial Statements, related notes and other financial
information included elsewhere in this Proxy Statement. The information for the
nine month periods ended September 30, 1998 and 1997 are unaudited but give
effect to all adjustment (none of which were other than normal recurring
adjustments) necessary, in the opinion of management of Kaire, to fairly present
this information. The results of operations for the interim periods should not
be taken as indicative of results for a full fiscal year. The information below
is in thousands except for per share amounts and other data.
THE CONSOLIDATED FINANCIAL STATEMENTS AND INFORMATION AND NOTES THEREETO OF
KAIRE REFERENCED ABOVE ARE INCLUDED ELSEWHERE IN THIS PROXY STATEMENT.
STOCKHOLDERS ARE URGED TO CAREFULLY REVIEW SUCH FINANCIAL STATEMENTS PRIOR TO
COMPLETING THEIR PROXY.
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
===================================================================================================
YEARS ENDED DECEMBER 31,
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1996 1997
---- ----
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<S> <C> <C>
Net Sales $51,499 $35,682
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Cost of Goods Sold 13,321 8,388
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Gross Profit 38,178 27,294
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Operating Expenses:
Associate Commissions 27,966 19,968
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Selling, General & Administrative Expenses 12,976 13,009
- ---------------------------------------------------------------------------------------------------
Loss from Operations (2,764) (5,683)
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Other Expense, Net (27) (562)
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Net Loss Before Income Tax
Benefit and Minority Interest (2,791) (6,245)
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Benefit from Income Taxes 1,103 13
- ---------------------------------------------------------------------------------------------------
Minority Interest in Subsidiaries (115) 134
- ---------------------------------------------------------------------------------------------------
Net Loss $(1,803) $(6,098)
===================================================================================================
===================================================================================================
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
(unaudited) (unaudited)
------------- -------------
- ---------------------------------------------------------------------------------------------------
Net Sales $18,929 $21,019
- ---------------------------------------------------------------------------------------------------
Cost of Sales 4,699 5,159
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Gross Profit 14,230 15,860
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Operating Expenses:
Associate Commission 11,072 10,854
- ---------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 5,997 7,309
- ---------------------------------------------------------------------------------------------------
Loss from Operations (2,839) (2,303)
- ---------------------------------------------------------------------------------------------------
Other Expenses, Net (10) (1,030)
- ---------------------------------------------------------------------------------------------------
Net Loss Before Income Tax
Benefit and Minority Interest (2,849) (3,333)
- ---------------------------------------------------------------------------------------------------
Benefit from Income Taxes -- --
- ---------------------------------------------------------------------------------------------------
Minority Interest in (Income) 55 141
Loss of Subsidiaries
- ---------------------------------------------------------------------------------------------------
Net Loss $(2,794) $(3,192)
===================================================================================================
</TABLE>
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CONSOLIDATED BALANCE SHEET DATA (IN 000S):
<TABLE>
<CAPTION>
===================================================================================================
AS OF DECEMBER 31,
------------------
- ---------------------------------------------------------------------------------------------------
1996 1997
---- ----
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Working Deficiency $(1,382) $(6,492)
- ---------------------------------------------------------------------------------------------------
Total Assets 6,350 4,324
- ---------------------------------------------------------------------------------------------------
Long-Term Obligations 114 15
- ---------------------------------------------------------------------------------------------------
Total Liabilities 6,026 9,149
- ---------------------------------------------------------------------------------------------------
Minority Interest in
Consolidated Subsidiaries 200 200
- ---------------------------------------------------------------------------------------------------
Stockholders' Equity (Deficit) 124 (5,025)
===================================================================================================
===================================================================================================
AS OF SEPTEMBER 30, 1998
(unaudited)
-------------------------
- ---------------------------------------------------------------------------------------------------
ACTUAL
------
- ---------------------------------------------------------------------------------------------------
Working Deficiency $(9,285)
- ---------------------------------------------------------------------------------------------------
Total Assets 2,942
- ---------------------------------------------------------------------------------------------------
Long-Term Obligations -0-
- ---------------------------------------------------------------------------------------------------
Total Liabilities 11,323
- ---------------------------------------------------------------------------------------------------
Minority Interest in Consolidated Subsidiaries 49
- ---------------------------------------------------------------------------------------------------
Stockholders' Deficit (8,332)
===================================================================================================
</TABLE>
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ACTION TO BE TAKEN AT THE MEETING
(PROPOSAL 1)
APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE SERIES F
PREFERRED STOCK AND SERIES G PREFERRED STOCK AND UPON EXERCISE OF THE
ACQUISITION WARRANTS, ALL OF WHICH ARE BEING ISSUED IN CONNECTION WITH THE
ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF KAIRE INTERNATIONAL, INC. BY
NHTC ACQUISITION CORP., THE COMPANY'S WHOLLY-OWNED SUBSIDIARY.
Although the Florida Business Corporation Act, as amended, does not require
that the stockholders of the Company approve the Asset Acquisition, Rule
4310(c)(25)(H) of the NASDAQ Marketplace Rules (the "NASDAQ Rule") requires that
in order for the Company to continue its listing of its Common Stock on NASDAQ,
the Company must either receive the approval of its shareholders at a
shareholders' meeting, or receive a waiver of such requirement from NASDAQ, in
order to issue a number of shares of Common Stock equal to or greater than
twenty (20%) percent of the number of its theretofore issued and outstanding
shares of Common Stock. As more fully described below, the Company believes the
issuance of the shares of Common Stock upon full conversion of the Series F
Preferred Stock and the Series G Preferred Stock and the exercise of the
Acquisition Warrants, all to be issued by the Company in connection with the
Asset Acquisition, as well as the shares of Common Stock issuable upon full
conversion of the Series H Preferred Stock which the Company in the future may
seek to sell, will in the aggregate, in all likelihood, be in excess of 20% of
the currently issued and outstanding Common Stock. The Series F Preferred Stock,
the Series G Preferred Stock and the Acquisition Warrants shall sometimes
collectively be referred to as the "Acquisition Securities." Accordingly, the
Company will conduct a shareholders' meeting and is soliciting proxies through
this Proxy Statement in order to obtain at such shareholders' meeting the
required shareholder approval.
On September 2, 1998, the Company had a hearing before the NASDAQ Listing
Qualifications Panel (the "Panel"), regarding the continued listing of its
Common Stock on NASDAQ. Pursuant to a letter (the "NASDAQ Letter"), dated
October 27, 1998 from NASDAQ to the Company, NASDAQ informed the Company that
the Panel had determined that although the Company was in compliance with all
requirements for continued listing, the Panel "lacked confidence in the
Company's ability to sustain compliance with the net tangible asset requirements
[of NASDAQ]" for continued listing on NASDAQ. As a result, the Panel informed
the Company that it was required on or before November 30, 1998 (which date
NASDAQ extended until December 7, 1998), to file a proxy statement with the
Securities and Exchange Commission (the "SEC") seeking shareholder approval to
the issuance of its securities in the Asset Acquisition and thereafter on or
before February 1, 1999, the Company must complete the Asset Acquisition and
demonstrate compliance with all of the NASDAQ continued listing requirements. On
December 7, 1998, the Company filed a proxy statement with the SEC.
Pursuant to a letter from NASDAQ dated December 14, 1998, NASDAQ informed the
Company that such filing evidenced compliance with the Panel's initial listing
requirement.
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DESCRIPTION OF THE ACQUISITION SECURITIES
Pursuant to the Acquisition Agreement, in connection with the proposed
acquisition of substantially all of the Kaire Assets by NHTC, the Company has
agreed to issue (i) to Kaire, $2,800,000 aggregate stated value of Series F
Preferred Stock; (ii) to two creditors of Kaire (who are owed by Kaire in the
aggregate approximately $350,000 of secured indebtedness), $350,000 aggregate
stated value of Series G Preferred Stock; and (iii) to Kaire, the Acquisition
Warrants to purchase 200,000 shares of Common Stock.
THE SERIES F PREFERRED STOCK. The Series F Preferred Stock to be issued to
Kaire shall pay a dividend (provided the Company has either sufficient surplus
or net profits), at the rate of six (6%) percent of the stated value per annum,
payable upon conversion of the shares of Series F Preferred Stock, in cash or,
at the option of the Company, in shares of Common Stock. The shares of the
Series F Preferred Stock are non-voting prior to conversion, and, subject to
certain limitations, are convertible by the holder at any time into shares of
Common Stock of the Company, at a conversion price per share determined by
dividing the stated value by ninety-five (95%) percent of the average closing
bid price of the Common Stock for the three (3) trading days immediately
preceding the date on which the Company receives notice of conversion from a
holder. The terms of the Series F Preferred Stock permit the Company at any
time, on five (5) days prior written notice, to redeem the outstanding Series F
Preferred Stock at a redemption price (the "Redemption Price"), equal to the
stated value and the accrued dividends thereon. The shares of Common Stock
issuable upon conversion of the Series F Preferred are subject to a lock-up
preventing the sale, pledge, hypothecation or other transfer of such shares, for
a period of two (2) years from the closing date (the "Closing Date") of the
Asset Acquisition. FOR A COMPLETE DESCRIPTION OF THE SERIES F PREFERRED STOCK
SEE THE ARTICLES OF AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
RELATING TO THE CERTIFICATE OF DESIGNATION FOR THE SERIES F PREFERRED STOCK
ANNEXED HERETO AS EXHIBIT 4.2.
THE SERIES G PREFERRED STOCK. The Series G Preferred Stock, to be issued to
two creditors of Kaire shall pay a dividend (provided the Company has either
sufficient surplus or net profits), at the rate of six (6%) percent of the
stated value per annum, payable upon conversion of the shares of Series G
Preferred Stock, in cash or, at the option of the Company, in shares of Common
Stock. The shares of the Series G Preferred Stock are non-voting prior to
conversion, and, subject to certain limitations, are convertible by the holder
at any time into shares of Common Stock of the Company, at a conversion price
per share determined by dividing the stated value by ninety-five (95%) percent
of the average closing bid price of the Common Stock for the three (3) trading
days immediately preceding the date on which the Company receives notice of
conversion from a holder. The terms of the Series G Preferred Stock permit the
Company at any time, on five (5) days prior written notice, to redeem the
outstanding Series G Preferred Stock at a redemption price (the "Redemption
Price"), equal to the stated value and the accrued dividends thereon. The
Company has agreed to register for sale under the Securities Act of 1933, as
amended (the "Act") all shares of Common Stock issuable upon conversion of the
Series G Preferred on any registration statement (other than on Form S-4, Form
F-8 or any
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similar or successor form) filed by the Company or upon demand of all of the
holders of the Series G Preferred Stock commencing eight (8) months following
the Closing Date of the Acquisition (or if all of the holders of the Series G
Preferred Stock so elect and agree to pay any and all costs associated
therewith, to register the underlying shares upon demand, but no earlier than 30
days following the Closing Date of the Acquisition). FOR A COMPLETE DESCRIPTION
OF THE SERIES G PREFERRED STOCK SEE THE ARTICLES OF AMENDMENT TO THE COMPANY'S
ARTICLES OF INCORPORATION RELATING TO THE CERTIFICATE OF DESIGNATION FOR THE
SERIES G PREFERRED STOCK ANNEXED HERETO AS EXHIBIT 4.3.
THE ACQUISITION WARRANTS. The Acquisition Warrants to be issued to Kaire
are exercisable for a period of five (5) years from the Closing Date of the
Asset Acquisition into an aggregate of 200,000 shares of Common Stock at an
exercise price equal to 110% of the closing bid price of the Common Stock of the
Company on the day prior to the Closing Date. The exercise price may be payable
at the option of the holder thereof in cash and/or by a cashless exercise based
on the difference between the fair market value of the shares of Common Stock
for which the Acquisition Warrants are being exercised, and the exercise price,
by delivering to the Company for cancellation the Acquisition Warrants owned by
such holders. The shares of Common Stock issuable upon exercise of the
Acquisition Warrants shall contain certain "piggyback" registration rights and
anti-dilution protections. FOR A COMPLETE DESCRIPTION OF THE ACQUISITION
WARRANTS, SEE THE FORM OF ACQUISITION WARRANT ANNEXED HERETO AS EXHIBIT 4.5.
DESCRIPTION OF THE PROPOSED ASSET ACQUISITION
Pursuant to the Acquisition Agreement, NHTC, the Company's newly formed,
wholly-owned subsidiary, has agreed to acquire substantially all of the tangible
and intangible assets of Kaire including, but not limited to, the names "Kaire,"
"Kaire International, Inc." and all variations thereof and any other product
name and all other registered or unregistered trademarks, tradenames, service
markets, patents, logos, and copyrights of Kaire, all accounts receivable,
contractual rights and product formulations to any and all products of Kaire,
product inventory, "800" and other "toll-free" telephone numbers, product supply
contracts (including, but not limited to, its EnzogenolTM product), independent
associate lists, and shares of capital stock owned by Kaire in each of its
wholly-owned and/or partially owned subsidiaries including, but not limited to,
Kaire New Zealand Ltd., Kaire Australia Pty Ltd., Kaire Trinidad, Ltd. and Kaire
Europe Ltd. (but excluding Kaire Korea Ltd.).
In exchange for the Kaire Assets, on the Closing Date the Company shall
issue (i) to Kaire, the $2,800,000 aggregate stated value of Series F Preferred
Stock; (ii) to two creditors of Kaire, the $350,000 aggregate stated value of
Series G Preferred Stock; and (iii) to Kaire, the Acquisition Warrants. In
addition, NHTC has agreed to make certain payments to Kaire each year for a
period of five (5) years (the "NHTC Net Income Payments") commencing with the
year ending December 31, 1999, to be determined as follows:
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(i) 25% of the Net Income (as determined based upon the year end
audited financial statements of NHTC prepared in accordance with GAAP
consistently applied) of NHTC, if the Net Sales (as determined based upon
the year-end audited financial statements of NHTC prepared in accordance
with GAAP consistently applied) of NHTC in any such year are between $1.00
and $10,000,000;
(ii) 33% of NHTC's Net Income if its Net Sales are between
$10,000,000 and $15,000,000;
(iii) 40% of NHTC's Net Income if its Net Sales are between
$15,000,000 and $40,000,000; and
(iv) 50% of NHTC's Net Income if its Net Sales are in excess of
$40,000,000.
The NHTC Net Income Payments shall be reduced on a dollar-for-dollar basis
to the extent of (A) all indebtedness of Kaire assumed by NHTC pursuant to the
Acquisition Agreement; (B) all other direct and/or indirect costs or expenses
assumed and/or otherwise incurred by NHTC and/or the Company of, or resulting
from, Kaire including, but not limited to, litigation costs, including, but not
limited to, reasonable attorneys' fees, payments of sales or other taxes,
expenses of officers of Kaire, and other payments or expenses resulting directly
and/or indirectly from the transactions contemplated by the Acquisition
Agreement; and (C) any reasonable inter-company obligations of the Company to
NHTC resulting from third party payments made by the Company on behalf of (or
allocable proportionately to) NHTC by the Company) that resulted from the
transactions contemplated by the Acquisition Agreement. In addition, all amounts
set-off against NHTC Net Income Payments are cumulative and shall if not set-off
in the year they are paid (or incurred) because NHTC did not have a sufficient
amount of Net Income (or for any other reason), such set-off amounts shall
accrue and be used as a set-off in the earliest possible year or years.
Pursuant to the Acquisition Agreement, NHTC has agreed to assume certain
specified liabilities of Kaire including: (i) approximately $475,000 owed to MW
International Inc.; (ii) approximately $50,000 owed to Manhattan Drug Company;
(iii) approximately $120,000 in the aggregate owed to Robert Richards and Mark
Woodburn (both officers and directors of Kaire); (iv) up to approximately
$120,000 in unpaid payroll taxes of Kaire up to the Closing Date; and (v) up to
$180,000 owed to STAR Financial Bank.
The closing of the Asset Acquisition is also subject to a number of
conditions precedent including, but not limited to: (i) delivery of all required
consents and approvals of the parties to the transactions contemplated by the
Acquisition Agreement, (ii) the Kaire Assets being delivered to NHTC at the
closing of the Asset Acquisition free and clear of all liens, claims,
restrictions and other encumbrances, and (iii) the Company's Common Stock
remaining listed on NASDAQ.
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Pursuant to the Acquisition Agreement, following the closing of the Asset
Acquisition, the Company shall appoint to its Board of Directors one (1) nominee
of Kaire. Kaire has informed the Company that it currently intends to appoint
_________________ as its appointee to the Board of Directors of NHTC. See
"DESCRIPTION OF KAIRE INTERNATIONAL, INC. - Kaire Management." In addition, NHTC
has agreed to indemnify certain officers of Kaire against all amounts paid
following the Closing Date by such persons resulting from unpaid sales taxes
accrued by Kaire prior to the Closing Date.
THE FOREGOING DESCRIPTION OF THE ACQUISITION AGREEMENT IS A SUMMARY ONLY.
THE FORM OF ACQUISITION AGREEMENT IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT
2.1. READERS ARE STRONGLY RECOMMENDED TO READ THE ACQUISITION AGREEMENT IN ITS
ENTIRETY PRIOR TO MAKING A VOTING DECISION.
DESCRIPTION OF KAIRE INTERNATIONAL, INC.
BUSINESS
Kaire develops and distributes, through a network of independent
associates, products that are intended to appeal to health-conscious consumers.
Current Kaire products include health care supplements and personal care
products. Kaire offers a line of approximately 50 products which it divides into
nine categories, including Antioxidant Protection, (Bodily) Defense, Digestion,
Energy and Alertness, Stress, Vital Nutrients, Weight Management, Anti-Aging and
Personal Care.
Kaire develops products that it believes will have market appeal to its
associates and their customers, and assists its associates in establishing their
own businesses. Kaire associates can start a home based business without
significant start-up costs and other difficulties usually associated with new
ventures. Kaire provides product development, marketing aids, customer service,
and essential record-keeping functions to its associates without charge. Kaire
also provides other support programs to its associates including 24-hour
TouchTalk system (as explained below), international teleconferencing calls,
seminars and business training systems with audio and video tapes.
It is Kaire's strategy and expectation that associates actively recruit
interested people to become new associates. These recruits are placed beneath
the recruiting associate in the "network" and are referred to by Kaire as that
associate's "organization." Associates earn commissions on purchases by the
associates in their organization as well as retail profits on the sales they
make themselves. Kaire's marketing program is designed to provide incentives for
associates to build an organization of recruited associates to maximize their
earning potential. Approximately 60,000 of Kaire's associates have had product
purchases in excess of $50 during 1997 and are considered to be "active," as
opposed to approximately 108,000 and 156,000 in 1996 and 1995, respectively.
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Kaire purchases most of its products directly from manufacturers and
markets them to its independent associates located in all fifty states, the
District of Columbia, Puerto Rico, Guam, and Canada. In 1995, Kaire expanded the
number of its associates located in other parts of the world, particularly
Australia and New Zealand. Kaire expanded its operations into South Korea,
Trinidad and Tobago and the United Kingdom during 1997. Kaire has since
discontinued its operations in South Korea in October 1998.
INDUSTRY OVERVIEW. According to The Direct Selling Association, network
marketing is one of the fastest growing segments for the distribution of
products. The Direct Selling Association reports that worldwide, over 17.5
million individuals are now involved in directly selling (of which network
marketing is a major segment) and that those involved in direct selling generate
$80 billion in annual sales around the world. Network marketing sales in the
United States are estimated to be approximately $22 billion annually.
Currently, Kaire has associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and Tobago
and the United Kingdom. Management believes that significant market potential
exists for its products in international markets, and it is Kaire's intention to
explore expansion into Japan, Europe, Hong Kong, Taiwan, India and the
Philippines. Statistics from the World Federation of Direct Selling Associations
as reported in May 1998 indicate that the direct sales market in the foregoing
countries amounted to over $37 billion with 6.4 million individuals being
involved in some form of direct marketing. This compares to $28.6 billion in
sales and 7.2 million individuals involved in the markets currently serviced by
Kaire.
DISTRIBUTION AND MARKETING. Kaire's products are distributed through its
network marketing system of associates. Associates are independent contractors
who purchase products directly from Kaire for resale to retail consumers.
Associates may elect to work on a full-time or a part-time basis. Management
believes that its network marketing system is well suited to marketing its
nutritional supplements and other products because sales of such products are
strengthened by ongoing personal contact between retail consumers and
associates, many of whom use Kaire's products.
Associates' revenues are derived from several sources. First, associates
may receive revenues by purchasing Kaire's products at wholesale prices and
selling Kaire's products to customers at retail prices. Second, associates earn
the right to receive bonuses (commissions) based upon purchases by members of
their organization. There are basically three types of bonuses that an associate
can earn on product purchases by their organization. The standard bonus is
available to any individual who has attained "Broker" status in Kaire. "Broker"
status is attained by purchasing a minimum quantity for a month. The percentages
used to determine the bonus and the number of levels in the organization the
associate receives bonuses upon is based on the individual's status in Kaire.
The first status level is that of a "Broker" and the highest being an
"Executive." There are two intermediary levels between "Broker" and "Executive."
An associate achieves higher levels in the bonus structure primarily through
increased purchases by associates sponsored directly by them (their first level)
although the
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minimum monthly purchase as an individual does increase between certain levels.
The requirements for an associate to reach an "Executive" level are generally
monthly personal purchases exceeding $300 and monthly volume of $900 on their
first level. The program is such that each month an associate must qualify at
that level to be paid at that level. The advantage to this is that the associate
must remain active in purchasing and sponsoring to retain their bonus, but if
they miss a month, their income is only reduced that one month. A second form of
bonus is available to those having multiple "Executives" in their first level.
Based on the number of "Executives" they have at this first level, associates
will receive a percentage of their standard bonus as an additional bonus.
Finally, for those "Executives" attaining the highest levels in Kaire, they are
allowed to participate in a percentage of the company-wide Gross Bonusable Sales
to be divided among qualifying "Executives." Management believes that the right
of associates to earn bonuses contributes significantly to the Kaire's ability
to retain its productive associates.
Kaire management believes their associate compensation plan is superior to
that of other network marketing organizations because the program offers an
earning opportunity without the need to finance a large inventory of products
and requires only a modest amount of sales to meet the bonus requirements.
To become an associate, a person must simply sign an agreement to comply
with the policies and procedures of Kaire. No investment is necessary to become
an associate. Kaire considers approximately 60,000 of its associates to be
"active," that is, an individual associate who has ordered at least $50 of
Kaire's products during the preceding 12 month period.
Kaire has regularly sponsored opportunity meetings in various key cities
and participates in motivational and training events in its market areas
designed to inform prospective and existing associates about Kaire's product
line and selling techniques. Associates give presentations relating to their
experiences with Kaire's products and the methods by which they have developed
their own organization of associates. Specific selling techniques are explained,
and emphasis is placed on the need for consistency in using such techniques.
Participants are encouraged to ask questions regarding selling techniques and
product developments, to share information with other associates and to develop
confidence in selling and goal-setting techniques. Motivation is offered to
participants in the form of recognition, gifts, excursions and tours, which are
intended to foster an atmosphere of excitement throughout the associate
organization. Prospective associates are educated about the structure, dynamics
and benefits of Kaire's network marketing system.
Kaire continues to develop marketing strategies and programs to motivate
associates. These programs are designed to increase associates' monthly product
sales and the recruiting of new associates. An example of these programs is
Kaire's KAIRE SELECT PROGRAM.
Under the Kaire Select Program, an associate may enroll in a minimum
ordering program to maintain eligibility for performance bonuses. Minimum orders
ranging from $50 to $550 per month are automatically placed by credit card or
autodraft. The associate also gets preferred
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pricing, no minimum purchase requirement (once they have a qualifying select
order set up), exclusive access to some product introductions, and discounts on
Kaire sponsored events.
As part of Kaire's maintenance of constant communication with its associate
network, Kaire offers the following support programs to its associates:
TOUCHTALK AND FAXBACK. An automated telephone system that associates can
call 24 hours a day to place orders, receive reports on the sales activity of
their organization and listen to selected messages on special offers, marketing
program updates, product information, and similar information. Certain
information is also available via facsimile to the associate.
24 HOUR TELECONFERENCE. A weekly teleconference on various subjects such as
technical product discussions, associate organization building and management
techniques. An associate can listen to any of the last four weekly
teleconferences.
INTERNET. Kaire maintains a web-site at http:\\www.kaireint.com. There, the
user can read news letters, learn more about products, place an order or sign up
to be an associate. This web-site became fully functional in early 1997. In
addition, associates can send messages and orders to Kaire e-mail address of
kaireint.com. This allows associates to potentially be able to sponsor
associates and order products 24 hours a day.
PRODUCT LITERATURE. Kaire produces for its associates color catalogues and
brochures displaying and describing Kaire's products.
TOLL FREE ACCESS. A toll free number is available to place orders and
sponsor new associates. Kaire believes that it was one of the first companies in
the network marketing industry to permit associates to sponsor new associates
over the telephone.
BROADCAST FAX/BROADCAST E-MAIL. Kaire announcements and product specials
are automatically sent via facsimile and/or e-mail to associates who have
requested this service.
MARKETS. Kaire has operations in the United States, Canada, Australia and
New Zealand, Trinidad and Tobago and the United Kingdom. Kaire closed down its
operations of its South Korean subsidiary in October 1998 and on June 30, 1998,
Kaire recorded a $471,000 write down of its assets in its South Korean
subsidiary to what Kaire believed to be their "net realizable value." See Note
12 of the Consolidated Financial Statements for Net Sales, Income from
Operations and Identifiable Assets for the related geographical areas. Kaire
also has sustained substantial operating losses trying to penetrate the United
Kingdom market.
Upon deciding to enter a new market, Kaire hires local counsel to assist
ensuring that Kaire's network marketing system and products comply with all
applicable regulations and that Kaire's profits may be expatriated. In addition,
local counsel assists in establishing favorable relations in the new market area
by acting as liaison between Kaire and local regulatory authorities, public
officials and business people. Local counsel also is responsible for explaining
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Kaire's products and product ingredients to appropriate regulators and, when
necessary, will arrange for local technicians to conduct any required ingredient
analysis tests of Kaire's products.
If regulatory approval is required in a foreign market, Kaire's local
counsel interfaces with local regulatory agencies to confirm that all of the
ingredients of Kaire's products are permissible within the new market. During
the regulatory compliance process, Kaire may alter the formulation, packaging or
labeling of its products to conform to applicable regulations as well as local
variations in customs and consumer habits, and Kaire may modify certain aspects
of its network marketing system as necessary to comply with applicable
regulations.
Following completion of the regulatory compliance phase, Kaire undertakes
the steps necessary to meet the operational requirements of the new market.
Kaire then initiates plans to satisfy inventory, distribution, personnel and
transportation requirements of the new market, and modifies its associate
training materials as may be necessary to be suitable for the new market. Kaire
has prepared manuals in Korean, French and Spanish.
PRODUCTS. Kaire's product line consists primarily of consumable products
that are targeted to growing consumer interest in natural health alternatives
for nutrition and personal care. In developing its product line, Kaire has
emphasized quality, purity, potency, and safety.
ANTIOXIDANT PROTECTION. This line is primarily nutritional supplements
based in antioxidants including Maritime Prime and EnzoKaire Complete. Most of
the products are based on exclusive formulations in several combinations
containing natural products including Pycnogenol, Enzogenol and Arctic Root.
Products containing Pycnogenol have not been approved for direct importation
into Australia. Kaire is currently seeking approval to import its products
containing Pycnogenol into Australia in conjunction with the Therapeutic Goods
Association of Australia. Maritime Plus is not available in Canada due to
Canadian regulations on the ascorbate that is contained in this product. Kaire
is also working with French authorities for approval to import the Maritime
Prime line into France.
Pycnogenol and Enzogenol have been recognized by sources not associated
with Kaire as a potent antioxidant. Pycnogenol, in Kaire's formulation, are
believed to be highly bioavailable and retained in the body for several days.
Antioxidants have been shown to be effective in fighting the effects of
oxidation on the body. Oxidation is the same process that causes metals to rust
and apples to turn brown. Free radicals, which are molecules damaged by
oxidation, are being studied as the causes of various infirmities in humans. A
free radical is an unstable oxygen molecule seeking, at the molecular level, to
pair up with an electron. Free radicals can be created in the atmosphere by the
exposure of oxygen to sunlight and pollution. Free radicals can also be created
by natural metabolic processes. Antioxidants are molecules which can combine
with and, as a result, neutralize free radicals.
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DEFENSE. The products in this category are primarily oriented towards
working with the body's natural defense systems to make them more efficient. It
consists of three of the more recent additions to the Kaire line, Colloidal
Silver Kaire, Immunol and Noni.
Colloidal Silver Kaire is a solution of silver particles
electro-magnetically suspended in deionized water and provides dietary support
for the immune system. It is used by individuals for a number of purposes
including eye drops, a topical solution, nose drops and a drink.
Immunol is a shark liver based capsule which Kaire believes aids the human
immune system. This product is imported exclusively by Kaire, which obtained the
worldwide marketing rights to this product in March 1996 from Marine Biologics,
Inc.
Noni is the most recent addition to the product line. Derived from a fruit
grown only in the Central and South Pacific, it contains high levels of
naturally occurring vitamins, minerals, trace elements, enzymes, and
phytochemicals. The processing method of flash freezing the fruit and then
processing it into capsules retains the high level of nutrients that may be lost
through the pasteurization of liquid presentations of this product.
DIGESTION. The main constituent of this group has long been the Aloe
products. Aloe has been studied for a number of years as everything from a
topical for skin irritations and sunburn to a supplement for improving the
general health of the body. Kaire has recently introduced Fruit-N-Aloe which is
a more palatable form of the Aloe juice as it is mixed with fruit juices to get
the Aloe benefits without the strong taste and AloElite, a more concentrated
form of the Aloe juice.
Two other products currently round out this line, a colon-cleansing product
for periodic use in cleaning the lower digestive system and Synerzyme, a
combination of naturally occurring enzymes and trace minerals to enhance the
efficacy of the enzymes, which may assist the body with the breakdown and
assimilation of various foods and fats.
ENERGY AND ALERTNESS. AquaKaire Daytime and Night-time are two recently
introduced Kaire products. They are concentrated, "clustered" water products
whose purpose is to increase the metabolic efficiency of the body. Inner Chi is
another recent addition, combining raw honey with Chinese herbs and botanicals
for a balanced, energy enhancing tonic.
STRESS. Products in this category serve two primary purposes. The first is
to provide adaptogens in an efficient medium and the second is to provide a
natural relaxant for rest and sleep. Arctic Root is an adaptogen, an herb which
works with the body to allow energy to be used by the body as needed as opposed
to stimulants and depressants which affect the body's energy as a whole, over a
certain period of time. Kavatu combines the extract from the Pacific KavaKava
plant with other nutrients to form a product allowing for a more complete rest
and sleep without the "hangover" effects of many artificial relaxants and sleep
aids. Kaire introduced St. John's Wart in the second quarter of 1998.
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VITAL NUTRIENTS. This category provides for many of the basic vitamins and
nutrients which are missing in the typical adult or child's diet.
WEIGHT MANAGEMENT. One of the newest members of Kaire's product family is a
weight management program that includes a number of products designed to work as
a system to assist weight loss safely while giving the dieter a higher level of
energy while maintaining a healthy body. This system concept is based upon a
complete program including Kaire products, walking or other sensible exercise
available to virtually all individuals and sensible permanent eating habits.
Weight management products of Kaire include LipeX (a product designed to inhibit
the absorption of fat by the body), fiber wafers to reduce appetite, lubricate
the system and inhibit fat absorption and nutritional bars to provide both a
healthy meal snack alternative and to provide nutrients which interact with the
LipeX to increase metabolism and fat burning in the system.
Kaire believes that the Weight Management Program is well designed to
promote long-term, sustained weight loss. However, Kaire's experience has been
that many dieters are highly motivated to lose significant pounds quickly and
the Yes! Weight Management Program does not work quickly enough for such
persons. As a result, Kaire is exploring several products which will allow it to
penetrate the rapid weight loss market.
ANTI-AGING. These products are intended to combat the effects of aging on
the human body.
DHEA. This is a hormonal product which replaces the same hormone in the
body. Research shows that as a person matures their body generates diminishing
amounts of DHEA. According to a number of research studies, DHEA is the hormone
which allows the body to know its energy level. Kaire has obtained from Dr.
Steve Chernisky, author of "The DHEA Breakthrough" the exclusive rights to his
signature line of products.
ARTHRIKAIRE AND OSTEO FORMULA. ArthriKaire and Osteo Formula are Kaire
products introduced in June 1997. Osteo Formula is a comprehensive bone
supplement that provides 18 nutrients including four different types of calcium
for maximum absorption and assimilation. ArthriKaire is designed to provide
dietary support for joints, tendons and ligaments. This proprietary formula
combines proteoglycans, vitamins and herbs that support the integrity of
connective tissue.
PERSONAL KAIRE. This includes JoBelle Gold (a skin softener containing gold
flakes), Dermakaire (Kaire's original moisturizing lotion with Pycnogenol), and
the JoBelle Skin Care System consisting of shampoo, conditioner and body lotion
as well as a "top of the line" six part face care system. Kaire is attempting to
develop an upscale image for this product line with an appeal to a younger
market than Kaire's current United States associate base.
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The following table indicates how many of Kaire's products were available
as of September 30, 1998 in each of Kaire's current markets.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRODUCTS OFFERED
--------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Total Trinidad
Product Products New and United
Categories/Lines Offered U.S. Canada Zealand Australia Tobago Kingdom
- ---------------- -------- ---- ------ ------- --------- -------- -------
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Antioxidant Protection
8 8 6 4 0 8 2
- ---------------------------------------------------------------------------------------------
Defense 3 3 3 2 0 2 1
- ---------------------------------------------------------------------------------------------
Digestion 5 5 5 5 2 3 2
- ---------------------------------------------------------------------------------------------
Energy and Alertness
3 3 3 1 1 2 2
- ---------------------------------------------------------------------------------------------
Stress 3 3 2 2 0 1 1
- ---------------------------------------------------------------------------------------------
Vital Nutrients 4 4 2 2 0 3 2
- ---------------------------------------------------------------------------------------------
Weight
Management 3 3 0 0 0 3 0
- ---------------------------------------------------------------------------------------------
Anti-Aging 3 3 1 0 0 1 0
- ---------------------------------------------------------------------------------------------
Personal Care 18 18 14 12 12 12 0
-- -- -- -- -- -- -
- ---------------------------------------------------------------------------------------------
50 50 36 28 15 35 10
=============================================================================================
</TABLE>
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Presented below are the revenue amounts (in thousands) of each of
Kaire's product categories for the years ended December 31, 1995, 1996 and 1997.
- --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
Product Category December 31, 1995 December 31, 1996 December 31, 1997
- ---------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------------
Antioxidant
Protection $37,387 $33,947 $23,560
- --------------------------------------------------------------------------------
Defense 3,463 3,000 2,740
- --------------------------------------------------------------------------------
Digestion 3,141 2,534 1,779
- --------------------------------------------------------------------------------
Energy and
Alertness --- 31 1,079
- --------------------------------------------------------------------------------
Stress 508 681 508
- --------------------------------------------------------------------------------
Vital Nutrients 957 750 975
- --------------------------------------------------------------------------------
Weight
Management --- 611 328
- --------------------------------------------------------------------------------
Anti-Aging --- 43 608
- --------------------------------------------------------------------------------
Personal Care 1,792 1,261 1,861
- --------------------------------------------------------------------------------
Other 10,593 8,641 2,244
------ ------- -----
- --------------------------------------------------------------------------------
$57,841 $51,499 $35,682
================================================================================
NEW PRODUCT DEVELOPMENT. Additional products being considered in these
areas are additional antioxidants, anti-aging, weight management, and energy
products. In addition to the introduction of single products, Kaire is also
focusing on promoting groups of products to be taken in conjunction with each
other to address specific needs (such as weight loss, stress, daily wellness,
etc.) that an individual may have.
Kaire continually seeks to identify, develop and introduce innovative,
effective and safe products. In Fiscal 1996 and Fiscal 1997, Kaire introduced
over twenty new products or services. Management believes that its ability to
introduce new products increases its associates' visibility and competitiveness
in the marketplace.
New product ideas are derived from a number of sources, including trade
publications, scientific and health journals, Kaire's management and
consultants, and outside parties. Prior to introducing products into Kaire's
markets, Kaire's scientific consultants, legal counsel and other representatives
retained by Kaire investigate product formulation matters as they relate to
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regulatory compliance and other issues. Kaire's products are formulated to suit
both the regulatory and marketing requirements of particular markets.
Kaire maintains its own product review and evaluation staff but relies upon
independent research, vendor research departments, research consultants and
others for product research, development and formulation services. When Kaire,
one of its consultants or another party identifies a new product concept or when
an existing product must be reformulated for introduction into a new or existing
market, the new product concept or reformulation is generally submitted to
Kaire's suppliers for technological development and implementation. Kaire owns
the proprietary rights to a majority of its product formulations.
Kaire expended no funds on new product research and development during
Fiscal 1996 and Fiscal 1997, respectively.
PRODUCT WARRANTIES AND RETURNS. Kaire's product warranties and policy
regarding returns of products are similar to those of other companies in its
industry. If a consumer of any of Kaire's products is not satisfied with the
product, she/he may return it to the associate from whom the purchase was made,
within 90 days of purchase. The associate is required to refund the purchase
price to the consumer. The associate may then return the unused portion of the
product to Kaire for an exchange of equal value. If an associate requests a
refund in lieu of an exchange, a check or credit card credit is issued. All
products are warranted against defect by the manufacturer of those products.
Most products returned to Kaire, however, are not found to be defective in
manufacture.
MANAGEMENT INFORMATION SYSTEM. Kaire maintains a computerized system for
processing associate orders and calculating associate commission and bonus
payments enabling it to promptly remit payments to associates. Kaire believes
that prompt remittance of commissions and bonuses is vital to maintaining a
motivated network of associates and that associate loyalty has been enhanced by
Kaire making commission and bonus payments as scheduled.
Kaire's computer system provides each associate a detailed monthly
accounting of all sales and recruiting activity in his or her organization.
These convenient statements eliminate the need for substantial record keeping on
behalf of the associate. As a precaution, duplicate copies of Kaire's computer
records are transferred daily to an off-site location for safekeeping. Kaire is
utilizing both internal and external resources to identify, correct or
reprogram, and test the system for the Year 2000 compliance. It is anticipated
that all reprogramming efforts will be completed by December 31, 1998, allowing
adequate time for testing. Management has assessed Kaire's Year 2000 compliance
expense to be $250,000. Kaire has not yet established a contingency plan in the
event that it is unable to correct the "Year 2000" problem and as of the date of
the Proxy Statement has no plans to do so.
MANUFACTURING AND SUPPLIES. Kaire currently purchases all of its vitamins,
nutritional supplements and all other products and ingredients from parties that
manufacture such products
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to Kaire's specifications and standards. During Fiscal 1997, approximately
one-half of the products purchased by Kaire were supplied by MWI, a distribution
company which purchases and imports Pycnogenol from Horphag along with other raw
materials. MWI is Kaire's source of Pycnogenol. Kaire places significant
emphasis on quality control. All nutritional supplements, raw materials and
finished products are subject to sample testing, weight testing and purity
testing by independent laboratories.
Kaire has no written agreements with any of its suppliers including MWI. In
the event of loss of any of its sources of supply, Kaire believes that suitable
replacement sources of similar products and product ingredients exist and are
available to Kaire. However, there can be no assurance that Kaire would be able
to obtain replacement suppliers on a timely basis, and on commercially
reasonable terms.
TRADEMARKS AND SERVICE MARKS. Most products are packaged under Kaire's
"private label." Kaire has registered trademarks with the United States Patent
and Trademark Office for its name, logo and various products names. It has
applied for trademark registration in several countries outside of those it is
currently operating in for its name, logo and various product names.
COMPETITION. Kaire competes with many companies which market and sell
products similar to its own products. It also competes intensely with other
network marketing companies in the recruitment of associates.
There are many network marketing companies with which Kaire competes for
associates. Some of the largest of these are Nutrition for Life International,
Inc., Nature's Sunshine, Inc., Herbalife International, Inc., Amway and Rexall
Sundown, Inc. Each of these companies is substantially larger than Kaire and has
significantly greater financial and personnel resources than Kaire. Kaire
competes for associates by means of its marketing program that includes its
commission structure, training and support services, and other benefits.
Not all competitors market all types of products marketed by Kaire, and
some competitors market products and services in addition to those marketed by
Kaire. For example, some competitors are known for and are identified with sales
of herbal formulations, some are known for and are identified with sales of
household cleaning and personal care products, and others are known for and are
identified with sales of nutritional and dietary supplements. Kaire's principal
methods of competition for the sale of products are its responsiveness to
changes in consumer preferences and its commitment to quality, purity, and
safety.
GOVERNMENT REGULATION. Although Kaire confines its activities to marketing
and distribution, the manufacturing, processing, formulation, packaging,
labeling and advertising of Kaire's products are subject to regulation by
federal agencies, including the Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Postal Service and
the United States Environmental Protection Agency. These activities are also
subject
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to regulation by various agencies of the jurisdictions, states and localities in
which Kaire's products are sold.
In November 1991, the FDA issued proposed regulations designed to, among
other things, amend its food labeling regulations. The proposed regulations met
with substantial opposition. In October 1994, the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law") was enacted. Section 11 of
the Dietary Supplement Law provided that the advance notice of proposed rule
making by the FDA concerning dietary supplements was null and void. FDA
regulations that became effective on June 1, 1994 require standard format
nutrition labeling on dietary supplements. However, because the new Dietary
Supplement Law also addresses labeling of dietary supplements, the FDA indicated
that it would not enforce its labeling regulations until January 1, 1998. To the
date of this Proxy Statement, no new regulations which affect Kaire's labeling
practices have been promulgated. In the interim, new regulations are expected to
be proposed by the FDA. Because the FDA has not yet reconciled its existing
regulations with the new Dietary Supplement Law, Kaire cannot determine to what
extent any changed or amended regulations will affect its business.
The Dietary Supplement Law did not affect the July 1, 1994 effectiveness of
the FDA's health claims regulations. Those regulations prohibit any express or
implied health claims for dietary supplements unless such claims are approved in
advance by the FDA through the promulgation of specific authorizing regulations.
Such approvals are rarely provided by the FDA. Therefore, no claim may be made
on a dietary supplement label or in printed sales literature, "that expressly or
by implication characterizes the relationship of any substance to a disease or
health-related condition." Kaire cannot determine what effect currently proposed
FDA regulations, when and if promulgated, will have on its business in the
future. Such regulations could, among other things, require expanded or
different labeling, recalling or discontinuing of certain products, additional
record keeping and expanded documentation of the properties and certain products
and scientific substantiation. In addition, Kaire cannot predict whether new
legislation regulating its activities will be enacted, which new legislation
could have a material adverse effect on Kaire.
Kaire has an ongoing compliance program with assistance from FDA counsel
regarding the nature and scope of food and drug legal matters affecting Kaire's
business and products. Kaire is unaware of any legal actions pending or
threatened by the FDA or any other governmental authority against Kaire.
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, that
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and Kaire's history of operations in such
markets to date, Kaire believes that its method of
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distribution is in compliance in all material respects with the laws and
regulations relating to direct selling activities of the countries in which
Kaire currently operates. Even though management believes that laws governing
direct selling are generally becoming more permissive, many countries currently
have laws in place that would prohibit Kaire from conducting business in such
markets. There can be no assurance that Kaire will be allowed to continue to
conduct business in each of its existing markets that it currently services or
any new market it may enter in the future.
Kaire is subject to or affected by extensive governmental regulations not
specifically addressed to network marketing. Such regulations govern, among
other things, (i) product formulation, labeling, packaging and importation, (ii)
product claims and advertising, whether made by Kaire, or its associates, (iii)
fair trade and distributor practices, and (iv) taxes, transfer pricing and
similar regulations that affect foreign taxable income and customers duties.
Based on Kaire's experience and research (including assistance from local
counsel) and the nature and scope of inquiries from government regulatory
authorities, Kaire believes that it is in material compliance with all
regulations applicable to it. Despite this belief, Kaire could be found not to
be in material compliance with existing regulations as a result of, among other
things, the considerable interpretative and enforcement discretion given to
regulators or misconduct by associates. There can be no assurances that Kaire
will not be subject to inquiries and regulatory investigations or disputes and
the effects of any adverse publicity resulting therefrom. Any assertion or
determination that Kaire or any of its associates are not in compliance with
existing laws or regulations could have a material adverse effect on Kaire's
business and results of operations. In addition, in any country or jurisdiction,
the adoption of new laws or regulations or changes in the interpretation of
existing laws or regulations could generate negative publicity and/or have a
material adverse effect on Kaire's business and results of operations. Kaire
cannot determine the effect, if any, that future governmental regulations or
administrative orders may have on Kaire's business and results of operations.
Moreover, governmental regulations in countries where Kaire may commence or
expand its operations may prevent, delay or limit market entry of certain
products or require the reformulation of such products. Regulatory action,
whether or not it results in a final determination adverse to Kaire, has the
potential to create negative publicity, with detrimental effects on the
motivation and recruitment of associates and consequently, on Kaire's sales and
earnings.
PROPERTIES. Kaire leases an aggregate of approximately 45,000 square feet
of office and warehouse space in three buildings in Longmont, Colorado. The
lease terms expire over a span of one month to six months, and the current
monthly rate is approximately $15,000 per month. The Australian and New Zealand
subsidiaries also lease their office and warehouse facilities of approximately
8,000 square feet for a period of approximately five years. Kaire has entered
into leases at June 1, 1997 through its South Korean (which previously ceased
operations) and Trinidad and Tobago subsidiaries. The former is a three year
lease on the second floor in one of the office/commercial buildings in downtown
Seoul, South Korea. The Trinidad and Tobago office is approximately 1,100 square
feet in downtown Port-of-Spain, Trinidad, which lease is for one year with two
one-year renewals. In January 1998, Kaire entered into, through its United
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Kingdom subsidiary, a lease of approximately 4,800 square feet for 11 years in
Solihull, England, with an option to review the leases after five years, and
terminate with notice. Management of Kaire believes that such properties are
suitable and adequate for current operating needs.
EMPLOYEES. At September 30, 1998, Kaire had employed approximately 59 full
time persons of whom three were executive, 13 were engaged in finance and
administrative activities, 11 in order entry, one in travel services, six in
Management Information Services ("MIS"), three in purchasing, two in compliance,
three in data support services, one in international development, two in human
resources, one in associate services, five in customer relations, one in
marketing and seven in shipping. None of Kaire's employees is represented by a
collective bargaining unit. Kaire believes that its relationship with its
employees is good.
LEGAL PROCEEDINGS. To the knowledge of the management of Kaire, there is no
material litigation pending or threatened against Kaire nor are there any such
proceedings to which Kaire is a party.
However, Kaire is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. Kaire was initially contacted in January 1997 and was advised, in
writing, that it is not a "target" of the Department's investigation, but that
it is a "subject" (meaning that its conduct is deemed to be within the scope of
the investigation) thereof. Kaire has completed all obligations and requests
pertaining to this matter.
Kaire has also received a voluntary request for information from the FTC
regarding a separate investigation into dietary supplement interactions with
certain disorders. Kaire voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. Kaire is currently responding with clarifications to
previous inquiries.
KAIRE MANAGEMENT
The directors and executive officers of Kaire are as follows:
Name Age Company Positions
Robert L. Richards 53 Chief Executive Officer and Director
Michael Lightfoot 45 President
Loren E. Bagley 56 Chairman of the Board
J.T. Whitworth 62 Chief Operating Officer, Chief Financial
Officer and Director
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William F. Woodburn 56 Treasurer and Director
L. Charles Laursen 44 Vice President of Finance
Mark D. Woodburn 28 Secretary and Director
Set forth below is a brief background of the Executive Officers and
Directors of Kaire, based upon information supplied by them.
ROBERT L. RICHARDS, co-founder of Kaire, has been Senior Executive Vice
President (since November 1994), Chief Executive Officer (since August 1996) and
a Director of Kaire since its inception in October 1992. Mr. Richards also
served as Kaire's Executive Vice President and Chief Financial Officer from 1992
to 1994. From 1989 until joining Kaire, Mr. Richards was the vice president of
Continental Tax Corporation, a property tax consulting firm. From 1982 to 1989,
Mr. Richards was the president of RARADAN Oil Company, a company engaged in the
development of oil and gas joint ventures. Mr. Richards was a Captain in the
United States Air Force and an instructor-pilot from 1970 to 1975. He is an
athlete, having been National Champion and All American in 1966 in the 3,000
meter steeplechase. He was also on the United States Olympic Training Team
(steeplechase) in 1968 and 1972. Mr. Richards graduated from Brigham Young
University with a Bachelor of Science degree in Geology.
MICHAEL LIGHTFOOT has been President of Kaire International, Inc. since
August 1997. Mr. Lightfoot has been involved with Kaire since 1993, when he
joined Kaire as an associate and formed Kaire International (Canada) Ltd. in
September 1993. Prior to 1993, Mr. Lightfoot was regional general manager for
Forever Living Products, Inc. of British Columbia, Canada. Mr. Lightfoot has
over 20 years experience in network marketing.
LOREN E. BAGLEY has been Chairman of Kaire's Board of Directors since its
inception. Mr. Bagley is also president and chief executive officer of Trans
Energy, Inc. ("TEI"), a company whose securities are listed on NASDAQ, having
been TEI's executive vice president from August 1991 until assuming his current
responsibilities at TEI in September 1993. From 1979 to the present, Mr. Bagley
has also been self employed in the oil and gas industry as president, chief
executive officer or vice president of various corporations which he has either
started or purchased, including Ritchie County Gathering Systems, Inc. Prior to
becoming involved in the oil and gas industry, Mr. Bagley was employed by the
United States Government with the Agriculture Department. Mr. Bagley attended
Ohio University and Salem College and received a Bachelor of Arts degree.
J.T. WHITWORTH joined Kaire in 1994 as Vice President of Operations. In
1995 he was promoted to Executive Vice President of Operations and Chief
Financial Officer. He was promoted to Chief Operating Officer and Chief
Financial Officer in 1997. He was elected a Director of Kaire in 1996. From 1983
until joining Kaire, Mr. Whitworth was manager of
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worldwide commerce, import, export, and corporate distribution of AGCO
Corporation ("AGCO"), a major farm equipment manufacturer. During his tenure
with AGCO, which was from 1961 until 1994, he held several managerial positions.
WILLIAM F. WOODBURN has been Treasurer and a Director of Kaire since its
inception. Mr. Woodburn is also vice president in charge of TEI's operations and
has been a director of TEI since August 1991. Mr. Woodburn has been actively
engaged in the oil and gas business in various capacities for the past fourteen
years. Prior to his involvement in the oil and gas industry, Mr. Woodburn was
employed by the United States Army Corps of Engineers for twenty four years and
was resident engineer on several construction projects. Mr. Woodburn graduated
from West Virginia University with a Bachelor of Science degree in Civil
Engineering.
L. CHARLES LAURSEN, a Certified Public Accountant, joined Kaire in July
1994 as its Controller. Mr. Laursen was promoted to the position of Vice
President of Finance in May 1996. From 1990 until joining Kaire, Mr. Laursen was
the controller of Solid Systems Engineering, a heavy equipment distributor. From
1985 until 1990, Mr. Laursen was the controller of Pratt Partnership, an
industrial park complex encompassing construction, maintenance, property
management, and hotel operations. Mr. Laursen graduated from Colorado State
University with a Bachelor of Science degree in Accounting.
MARK D. WOODBURN has been Secretary and a Director of Kaire since its
inception. He also serves as assistant secretary of TEI, a position which he has
held for the past four years. Mark D. Woodburn is the son of William F.
Woodburn.
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KAIRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
CONSOLIDATED FINANCIAL STATEMENTS OF KAIRE AND NOTES THERETO, INCLUDED ELSEWHERE
IN THIS PROXY STATEMENT. THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS OF BOTH KAIRE AND THE COMPANY.
THE CAUTIONARY STATEMENTS MADE IN THIS PROXY STATEMENT SHOULD BE READ AS BEING
APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR HERE.
OVERVIEW. Kaire develops, purchases and distributes primarily natural
source products intended for nutritional or personal care purposes. Kaire's
products are distributed through a network of over 430,000 associates, of which
approximately 15% are "active" (as defined herein) in several countries in four
continents, North America, Australia, Asia and Europe. Kaire offers
approximately 50 products in nine categories, including Antioxidant Protection,
(Bodily) Defense, Digestion, Energy and Alertness, Stress, Vital Nutrients,
Weight Management, Anti-Aging and Personal Care.
Kaire commenced operations in October 1992 with the introduction of
MARITIME PRIME. MARITIME PRIME features the ingredient Pycnogenol, a derivative
of Southern France's Maritinus Pinus tree. Pycnogenol was combined with a blend
of other natural ingredients developed by Horphag Research Ltd. ("Horphag"), a
European corporation not otherwise affiliated with Kaire which is Pycnogenol's
manufacturer.
During Fiscal 1992 and Fiscal 1993, Kaire's focus was on obtaining the
information on Pycnogenol and the properties associated with it from Horphag and
disseminating that information in the United States and, in Fiscal 1993, in
Canada. At inception, Kaire elected to market its product by "network" as the
most effective way to disseminate product information. During these two fiscal
years, Kaire also sold several complimentary products as well as an aloe vera
line of products. During 1993, Kaire developed a "uni-level" compensation plan
designed to be simple and financially attractive to associates (product
distributors). By the end of Fiscal 1993, sales revenues had increased to a rate
of approximately $400,000 per month.
In Fiscal 1994, Kaire experienced substantial growth in sales revenues. By
September of 1994, net sales increased to a rate of approximately $5,000,000 per
month and new associates were being sponsored at a rate exceeding approximately
10,000 per month. New products introduced during 1994 were nutritional - and/or
Pycnogenol-based. During the summer of 1994 sales volume briefly exceeded
Kaire's product delivery capacity but by the fall of 1994, this was rectified
and Kaire was delivering product on a timely basis. A price increase was
instituted in October 1994 to offset the weakening of the United States dollar
with respect to the French franc and a price increase from the manufacturer of
Pycnogenol via the importer.
In Fiscal 1995, Kaire commenced operations in New Zealand and Australia
through its subsidiaries domiciled there. Although the subsidiaries had a brief
period of rapid growth in
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sales revenues, Kaire believes that sales leveled off as the apparent
success of these subsidiaries became known in the network marketing industry and
competitors began offering competitive products and/or comparable commission
programs. Kaire believes that most significant competition was from competitors
selling grape seed and grape skin products which have some of the same
properties as Pycnogenol, but are less expensive to produce and could be sold
for substantially less than Kaire's Pycnogenol based products. In addition, a
grape supplier asserted that its product was a generic version of Pycnogenol and
could be marketed as such. Actions ranging from letters to lawsuits by Kaire and
Pycnogenol's importer and manufacturer and accompanying cease-and-desist orders
were required to end these assertions.
Based upon management's network marketing industry experience and a
leveling off of sales in the latter part of 1995, Kaire anticipated that it
would reach maturity as a network marketing concern and could face the
possibility of diminishing sales unless Kaire acted. In an effort to thwart the
possibility of diminishing sales, in March 1996, Kaire revised its associate
commission program to include, among other things, providing the sponsor of an
associate with a substantially higher commission on the first purchase made by
the sponsored associate (in the past, the sponsor had received no such
additional compensation on a first sale). Kaire's goals in altering its
associate commission program was to encourage associates to not only sponsor new
associates but have the sponsors assist the new associates in making sales and
forming their own sales organization comprised of additional levels of
associates and, ultimately, attract a more entrepreneurial younger associate
than it had attracted in the past. The nature of Kaire's products was believed
by Kaire to be a draw to middle aged associates whose apparent focus was to
assist friends, relatives, etc. by introducing them to Kaire's products and not
necessarily having an additional focus of earnings. Additionally, at or about
the same time, Kaire introduced a weight loss program, a line of cosmetics,
Kaire World Magazine, and new and improved training materials.
Kaire believes that the changes in its associate commission program were
not well received by its existing associates and attracted a number of new
associates whose primary focus was apparently directed at garnering the larger
commissions on initial product sales to associates whom they had sponsored, as
opposed to developing a self-sustaining sales organization. Kaire believes that
as a consequence, sales revenues declined while product returns increased. Also,
newly introduced products, such as Immunol, Synerzyme and the Yes! Weight
Management Program, did not have the revenue impact anticipated. In the fall of
1996, Kaire essentially returned to the prior commission program, with some
increase in commissions being added to the original structure, while greater
emphasis was placed on seeking professional network marketers versed and
established in the network industry. Kaire believes that its new and improved
training materials have been useful to Kaire and well received by its
associates.
In 1996, Kaire also decided to open new markets and expand into additional
countries. By January 1997, it began to establish operations in South Korea and
Trinidad and Tobago. In June 1997, Kaire opened an office in Port-of-Spain,
Trinidad and Tobago. Also in June 1997, Kaire received approval from the South
Korean government to begin recruitment and engage associates in that country. In
July 1997, Kaire completed South Korea's product approval and
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quarantine procedures and the sales of selected products commenced.
Initially, only a high-end line of skin care products (JoBelle Gold Line) was
available in South Korea. Maritime Prime was approved late in August 1997, and
additional Kaire supplements were approved in November 1997. Kaire sustained
substantial losses in trying to penetrate the South Korean market. Kaire ceased
operations of its South Korean subsidiary in 1998 and at June 30, 1998, Kaire
recorded a $471,000 write-down of its assets in its South Korean subsidiary to
what Kaire believed to be their net realizable value. Kaire incorporated Kaire
Europe, Ltd. in the United Kingdom in July 1997 and commenced sales in November
1997. Approval efforts are being undertaken for various product lines in Canada,
Trinidad and Tobago, New Zealand, Australia, the United Kingdom and France.
There can be no assurance, however, that any of such approvals will be
forthcoming in a timely fashion, or at all, or will not be contingent on various
conditions or restrictions which may be imposed by the appropriate governmental
authorities. Also, in 1997, Kaire decided to modify its commission program with
the objective of increasing the flow of funds to Kaire and stabilize its
financial position. The modification consisted of the elimination of a 5% bonus,
a restructuring of supplemental bonuses for top executives, the institution of a
program to pay the car expenses of certain associates in North America, New
Zealand and Australia and a change in qualification and the number of sponsored
levels paid under the international sponsoring program. It is anticipated that
this change will lower the total bonus payout by approximately four (4%)
percent.
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RESULTS OF OPERATIONS. The following table sets forth for the periods
indicated, selected consolidated statement of operations data of Kaire expressed
as a percentage of net sales.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
(Unaudited)
------------------------- -----------------
- --------------------------------------------------------------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------------------
Cost of Goods Sold 25.0% 25.9% 23.5% 23.6% 24.5%
- --------------------------------------------------------------------------------------------
Gross Profit 75.0% 74.1% 76.5% 76.4% 75.5%
- --------------------------------------------------------------------------------------------
Operating Expenses
Associate Commissions 53.3% 54.3% 56.0% 56.0% 51.7%
Selling, General and
Administrative 17.9% 25.2% 36.5% 35.0% 34.8%
- --------------------------------------------------------------------------------------------
Income (Loss) from Operations 3.8% (5.4)% (16.0)% (14.6)% (11.0)%
- --------------------------------------------------------------------------------------------
Other Income (Expense) Net (0.1)% (0.0)% (1.6)% (0.6)% (4.9)%
- --------------------------------------------------------------------------------------------
Net Income (Loss) Before Taxes and
Minority Interest 3.7% (5.4)% (17.6)% (15.2)% (15.9)%
- --------------------------------------------------------------------------------------------
Income Tax (Provision) Benefit (1.5)% 2.1% 0.0% 0.0% 0.0%
- --------------------------------------------------------------------------------------------
Minority Interest in Subsidiaries (0.1)% (0.2)% 0.4% 0.2% 0.7%
- --------------------------------------------------------------------------------------------
Net Income (Loss) 2.1% (3.5)% (17.2)% (15.0)% (15.2)%
============================================================================================
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 ("NINE MONTHS 1998") COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 ("NINE MONTHS 1997")
NET SALES. Net sales for Nine Months 1998 were approximately $21,019,000 as
compared to Nine Months 1997 sales of approximately $27,887,000 a decline of
$6,868,000 or 24.6%. Domestically, the Company has been experiencing declining
sales since March 1996. This decline in sales has slowed in Nine Months 1998 as
compared to Nine Months 1997. Domestic sales in Nine Months 1997 included
significant sales to the South Korean community in the United States. Some
comparable sales had been reflected in South Korean sales in Nine Months 1998,
but the South Korean sales have not achieved their projections and in October
1998 the Company ceased operations in South Korea due to a significant decline
in all Far Eastern economies and the decline of the relative value of the South
Korean Won against the U.S. Dollar.
COST OF GOODS SOLD. Cost of goods sold for Nine Months 1998 was $5,159,000
or 24.5% of net sales. Cost of goods sold for Nine Months 1997 was $6,587,000 or
23.6% of net sales. The total cost of goods sold declined by approximately
$1,428,000 or 21.7% from Nine Months 1997 to Nine Months 1998. The primary
factor affecting this category was the decline in sales resulting in lower total
dollars. Affecting the reduction in cost of goods sold was a change in freight
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carrier which lowered the cost of shipping products to customers while not
affecting shipping revenue and the introduction of several new products in the
latter part of 1997 which maintained a lower cost percentage.
GROSS PROFIT. Gross profit decreased from approximately $21,300,000 or
76.4% of net sales in Nine Months 1997 to approximately $15,860,000 or 75.5% of
net sales in Nine Months 1998. The decline was approximately $5,440,000 or
25.5%. The reason for the gross decline was the reduction in sales discussed
above.
COMMISSION. Associate commissions decreased from approximately $15,626,000
or 56.0% of sales in Nine Months 1997 to approximately $10,854,000 or 51.7% of
sales in Nine Months 1998, a decline of $4,772,000 or 30.5%. The primary reason
for the decline was the decrease in sales that the commissions are based upon.
There were several reasons for the reduction in the percentage of commissions
paid to associates. The first was a "purging" of the associate genealogy which
occurred in December 1996. Under the standard compensation plan, an associate
can go deep into his/her organization to fill up to six levels of compensation.
His/her position, however, is determined by sales on his/her first level without
this "rollup and compression." The purge moved active associates onto the first
line of associates that they were previously rolling up to. This qualified the
new "first line sponsor" for higher, deeper paying positions in the Company,
increasing their commission without having to do any new sponsoring or selling.
This effect gradually disappears due to the maturation of the commission
structure and has been substantially diluted by Nine Months 1998, but the Nine
Months 1997 bonus may have been negatively affected by one to three percent.
Second was a reduction in the bonus payout at a level available to top
associates and a reduction in the "Eagles Nest" bonus percentage from 1% to 0.5%
for all countries except South Korea. Finally, South Korean operations and sales
became a factor in Nine Months 1998. There is a statutory limitation of 35% of
sales for commissions in that country. As South Korean sales increased as a
percentage of total sales, this effectively reduced the average commission
payment percentage. The Company since ceased operations in South Korea in
October 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs decreased from approximately $9,739,000 or 35.0% of net
sales in Nine Months 1997 to approximately $7,310,000 or 34.8% of net sales in
Nine Months 1998, a decrease of $2,429,000 or 24.9%. Part of the expense in Nine
Months 1997 was a program Kaire believed would increase the number of
professional network marketers joining Kaire as opposed to grass roots and first
time individuals who had made up much of its initial growth. It was hoped that
the professionals would bring stability and leadership to the associate base.
The total cost of this program was approximately $1,188,000 and was incurred
from August 1996 through August 1997. Significant expenses were therefore
incurred in Nine Months 1997. No expenses were incurred for this program in Nine
Months 1998. In addition to the discontinuance of the program, Kaire has
embarked on a number of cost saving measures both domestically and abroad. The
management of the marketing department during 1998 decreased expenses through a
reduction in personnel salaries and reduced operating costs. Kaire also
instituted cost-cutting measures in its domestic
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operations (of which the marketing department is a part), reducing operating
expenses for selling, general and administrative expenses from approximately
$1,000,000 during September 1997 to under $500,000 per month during September
1998. The Company accomplished this by reducing staff, cutting out inefficient
programs and limiting optional spending. Increasing sales, general and
administrative expenses for Nine Months 1998 was the inclusion of operations in
South Korea (which subsequently ceased operations), Trinidad and Tobago and the
United Kingdom. Such operations in South Korea and Trinidad and Tobago began
late in the second quarter of 1997, but did not have a significant impact on
Nine Months 1997 operating expenses. Also contributing to the operating expenses
in Nine Months 1998 was the reduction in net realizable value of South Korean
assets due to the continued losses in South Korea and the decline of the South
Korean economy. This reduction totaled approximately $471,000.
LOSS FROM OPERATIONS. Operating losses decreased from approximately
$4,065,000 or 14.6% of net sales in Nine Months 1997 to approximately $2,303,000
or 11.0% of net sales in Nine Months 1998. This represented a 43.3% decrease in
loss or approximately $1,762,000 between the periods. This decrease was a result
of improved margins in the cost of sales and commissions areas combined with a
reduction in selling, general and administrative expenses.
OTHER EXPENSES. Other expenses increased from approximately $161,000 or
0.6% of sales in Nine Months 1997 to approximately $1,030,000 or 4.9% of sales
in Nine Months 1998, a change of approximately $869,000 or 639.8%. This increase
is almost exclusively attributable to the interest on the increased borrowings
in 1998 needed to fund operations, and the writeoff of deferred offering costs.
These borrowings were necessitated by the inability to achieve profitability
while incurring costs associated with the above development programs.
INCOME TAXES. Income tax benefits were not reflected in either period. The
anticipated benefits of utilizing net operating losses against future profits
was not recognized in Nine Months 1998 or Nine Months 1997 under the provisions
of Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 109 (Accounting for Income Taxes), by utilizing its loss
carryforwards as a component of income tax expenses. As of September 30, 1998,
Kaire has a significant amount of net operating loss available to carryforward
and offset against future earnings. A valuation allowance equal to the net
deferred tax asset has been recorded, as Kaire management has not been able to
determine that it is more likely than not that the deferred tax assets will be
realized.
MINORITY INTEREST. The offset for minority interest increased from
approximately $44,000 or 0.2% of sales in Nine Months 1997 to approximately
$141,000 or 0.7% of sales in Nine Months 1998, a change of approximately $97,000
or 320.5%, reflecting losses incurred in the South Korean and Australian
subsidiaries offset by income from the New Zealand subsidiary. Losses in South
Korea and income from New Zealand both increased in Nine Months 1998 offsetting
each other despite the fact the minority interest percentage in South Korea is
much lower than in New Zealand.
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NET LOSS. Net loss was approximately $3,192,000 in Nine Months 1998 or
15.2% of net sales as compared to approximately $4,182,000 or 15.0% of net sales
in Six Months 1997, a decline of approximately $990,000 or 23.7%. The reduced
loss is a result of significant cost cutting measures in selling, general and
administrative expenses combined with lower cost percentages in the cost of
goods sold and commissions to associates.
YEAR ENDED DECEMBER 31, 1997 ("FISCAL 1997") COMPARED TO YEAR ENDED
DECEMBER 31, 1996 ("FISCAL 1996")
NET SALES. Fiscal 1997 and Fiscal 1996 were periods of declining sales for
Kaire. Revenues for Fiscal 1997 were approximately $35,682,000 which was a
decline of approximately $15,817,000 or approximately 30.7% from Fiscal 1996 of
$51,499,000. Fiscal 1996 was the year in which Kaire hit its high water mark to
date for domestic sales and then saw a consistent decline from that point. Kaire
had observed its sales growth slowing in the latter part of Fiscal 1995 and
responded to this leveling with a new marketing and compensation program
beginning in March 1996 in an effort to stimulate sales. While sales did
experience a temporary increase under the new program, sales soon started to
decline at approximately 4% per month. Kaire believes that the new associates
attracted by the new program were focused on the large initial bonus offered by
the new program. In addition, Kaire believes that many existing associates did
not accept the program and left Kaire. As a result, by October 1996, Kaire had
substantially abandoned this new program and returned to a commission program
more comparable to the program used in prior years. Despite the return to the
old program, sales continued to decline through both the end of 1996 and
throughout Fiscal 1997. During Fiscal 1997, the rate of decline had slowed
substantially and there were several months with sales growth from the prior
month, but generally, the trend was downward. To combat this, Kaire took several
steps to turn the situation around including a focused effort to attract
professional network marketers through several recruiting programs and entering
international markets in South Korea, Trinidad and Tobago and the Caribbean and
the United Kingdom and Europe. The programs to recruit the professional
marketers included a bonus program called the Eagles Nest which was a bonus pool
consisting of 1% of world-wide sales to be split among the top qualifying
associates; a support program wherein established network marketers were
subsidized while they were building their organization within Kaire; and an
aggressive recruitment, training and support program run by associates who had
been solicited by Kaire specifically for that purpose. Kaire has since
discontinued its South Korean operations.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1997 was $8,388,000 or
approximately 23.5% of net sales. Cost of goods sold for Fiscal 1996 was
approximately $13,321,000 or 25.9% of net sales. The total cost of goods sold
declined by approximately $4,933,000 or 37.0% from Fiscal 1996 to Fiscal 1997.
The primary factory affecting this category was the decline in sales resulting
in lower total dollars. Affecting the percentage was a slight price increase
that was put in place as a part of the March 1996 compensation program change
and a change in the product sales mix due predominantly to the introduction of
new, higher margin products. In Fiscal 1997, 29.5% of total product sales were
of non-Pycnogenol related products (all but those considered Antioxidant
Protection in the table on page 24) as compared to 22.4% in Fiscal
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1996. The average cost of goods sold for products in the "Antioxidant
Protection" category is approximately 23% as opposed to approximately 13-19% in
the other categories. Therefore, as the percentage of products other than
Antioxidant Protection products increases as a percentage of total sales, the
overall cost of goods sold percentage will continue to decline. Returns for
Fiscal 1997 averaged approximately $72,000 per month of 2.36% of gross sales.
Returns for Fiscal 1996 averaged approximately $64,000 per month or 1.47% of
gross sales.
GROSS PROFIT. Gross profit decreased from approximately $38,178,000 in
Fiscal 1996 to approximately $27,294,000 in Fiscal 1997. The decline was
approximately $10,884,000 or 28.5%. The reason for the gross profit decline was
the reduction in sales discussed above. The reason the percentage decline was
less than the sales decline were the factors mentioned above in the Cost of
Goods Sold section that results in a greater gross profit on each dollar of
sales.
COMMISSIONS. Associate commissions decreased from approximately $27,966,000
or 54.3% in Fiscal 1996 of sales to approximately $19,968,000 or 56.0% in Fiscal
1997 of sales, a decline of approximately $7,998,000 or 28.6%. The primary
reason for the decline was the decrease in sales that the commissions are based
on. The commissions as a percentage of sales increased because of the
compensation program that was put in place in March 1996 and eliminated in
September 1996 paid an overall lower percentage of the net sales. The Quick
Start bonus which paid on only one level, 45% to the sponsor on the first
qualifying order, was one of the primary reasons that the program paid less to
the associates in 1996. Fiscal 1997 showed a larger percentage payout also
because of two compensation decisions made late in 1996. The first paid an
additional 5% bonus on the seventh level (originally taken from the first level,
but later not removed when the first level bonus was restored). The second was a
"purging" of the associate genealogy. Under the standard compensation plan, an
associate can go deep into his or her organization to fill up to seven levels of
compensation. This position, however, is determined by sale son his or her first
level without this "rollup and compression." The purge moved active associates
onto the first line of associates they were previously rolling up to. This
qualified the new "sponsor" for higher, deeper paying positions in Kaire,
increasing their commission without having to do any new sponsoring or selling.
This effect will gradually wear away, but as the change was made in December
1996, the Fiscal 1997 bonus may have been negatively affected by 1-3% for the
year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs increased from approximately $12,976,000 in Fiscal 1996 to
approximately $13,009,000 in Fiscal 1997, an increase of $33,000 or 0.3%. This
increase is not consistent with the decline in sales and is one of the
predominant reasons for the net loss for the year. The first reason for the
overall increase was an increase in selling costs as a result of the institution
of a program which Kaire believed would increase the number of professional
network marketers joining Kaire as opposed to grass roots and first time
individuals who had made up much of Kaire's initial growth. It was hoped that
the professionals would bring stability and leadership to the associate base.
The total cost of this program was approximately $1,188,000 and was incurred
from August 1996 through August 1997. The majority of the expenses were
therefore incurred in Fiscal 1997. In addition, development costs of
approximately $1,040,000 to commence
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operations in Trinidad and Tobago, South Korea and the United Kingdom were
incurred in Fiscal 1997. In addition to the development expenses, as with most
new ventures, these subsidiaries showed losses in Fiscal 1997 as they were
building their sales forces to the levels needed to achieve profitability.
Offsetting these expense increases were changes in the management of the
marketing department during Fiscal 1997 which decreased expenses through both
reduced personnel salaries and reduced operating costs.
In addition, Kaire instituted cost-cutting measures in its domestic
operations (of which the marketing department is a part), reducing operating
expenses for selling, general and administrative expenses from approximately
$1,200,000 per month during July through September 1996 to approximately
$750,000 by December 1997. Kaire accomplished this by reducing staff, cutting
out inefficient programs and limiting optional spending. This would represent a
savings of $450,000 per month or approximately $5,400,000 on an annualized
basis.
LOSS FROM OPERATIONS. Operating losses increased from approximately
$2,764,000 in Fiscal 1996 to approximately $5,683,000 in Fiscal 1997. This
represented a 105.6% increase in the loss or approximately $2,919,000 between
the two years. This increase was a result of the decline in sales accompanied by
the increases in selling, general and administrative expenses associated with
new foreign subsidiaries and a professional recruitment program.
OTHER EXPENSES. Other expenses increased from approximately $27,000 or .05%
of sales in Fiscal 1996 to approximately $562,000 or 1.6% of sales in Fiscal
1997, a change of approximately $535,000. This increase is almost exclusively
attributable to the interest, of approximately $600,000, on the increased
borrowings in Fiscal 1997 needed to fund operations. This borrowing was
necessitated by the inability to achieve profitability while incurring costs
associated with the above development programs.
INCOME TAXES. Income tax benefits declined from approximately $1,103,000 in
Fiscal 1996 to approximately $13,000 in Fiscal 1997 as the ability to carry net
operating losses back to prior years to claim refunds was substantially used up
in Fiscal 1996. The anticipated benefits of utilizing net operating losses
against future profits was not recognized in Fiscal 1997 under the provisions of
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 109 (Accounting for Income Taxes), utilizing its loss carryforwards as a
component of income tax expense. As of December 31, 1997, Kaire had
approximately $4,700,000 in Federal net operating losses available to
carryforward and offset against future earnings. As a result of the IMT
Agreement and Plan of Reorganization and subsequent changes in ownership,
certain limitations will be placed on the unrestricted loss carryforwards. A
valuation allowance equal to the net deferred tax asset has been recorded, as
Kaire management had not been able to determine that it is more likely than not
that the deferred tax assets will be realized.
MINORITY INTEREST. The income offset for minority interest was a reduction
in Kaire's income (increase in the loss) in Fiscal 1996 of approximately
$115,000 reflecting income earned in the Australia and New Zealand subsidiaries.
A reduction in Kaire's loss for Fiscal 1997 in
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the amount of approximately $134,000 is a reflection of the decreased revenue
and/or losses recognized by the New Zealand, Australian and South Korean
subsidiaries as well as the reduction in value of the assets of the foreign
entities in comparison to the United States dollar which is presented in these
statements. These factors serve to reduce the interest attributable to the
minority shareholders of the foreign subsidiaries.
NET LOSS. Net loss was approximately $6,098,000 in Fiscal 1997 or 17.1% of
net sales as compared to approximately $1,803,000 or 3.5% of net sales in Fiscal
1996. The increased losses are primarily a result of declining sales, an
unsuccessful change in the commission program and the cost of opening several
new markets.
YEAR ENDED DECEMBER 31, 1996 ("FISCAL 1996") COMPARED TO YEAR ENDED DECEMBER 31,
1995 ("FISCAL 1995")
NET SALES. Fiscal 1995 and Fiscal 1996 represent the peak of Kaire's
performance to date with respect to net sales. Revenues for Fiscal 1996 were
approximately $51,499,000 which was a decline of approximately $6,342,000 or
approximately 11.0% from Fiscal 1995 revenues of approximately $57,841,000.
Fiscal 1995 was a year of growth in domestic sales for Kaire at a slower rate
than in Fiscal 1994. In addition, Australian and New Zealand operations were
acquired in November 1995 adding to the sales total for Fiscal 1995. Kaire
recognized that sales were leveling off near the end of Fiscal 1995. In response
to this leveling off, Kaire adopted a new marketing and compensation program in
March 1996 in an effort to stimulate sales. While sales did respond with a
temporary increase, they soon started to fall on a monthly basis. Kaire believes
that the new associates attracted by the new program were focused on the larger
initial bonus offered by the new program and not focused on the development of a
sales organization and many then existing associates did not accept the new
program and left Kaire. As a result, by October 1996, Kaire abandoned this new
program and returned to a program more comparable to the program used in prior
years. The decline in net sales in Fiscal 1996 was not as pronounced because net
sales from Australia and New Zealand were included for a full twelve months in
Fiscal 1996 as opposed to the two post-acquisition months in Fiscal 1995.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1996 was approximately
$13,321,000 which represented 25.9% of net sales. Cost of goods sold for Fiscal
1995 was approximately $14,476,000 or 25.0% of net sales. This represented a
decrease of approximately $1,155,000 or 8.7% from Fiscal 1995 to Fiscal 1996.
The decline in total cost of goods sold was caused by the decreased sales
revenue for Fiscal 1996. Kaire believes that the increase in the cost of goods
sold percentage was related to an increase in sales returns. Also, there was a
minor price increase in Fiscal 1996, but no other adjustments in the cost or
sales price of the products sold. The returns stemmed from the new program which
encouraged larger initial purchases as well as broadcast claims made by an
unrelated third party about the effectiveness of Pycnogenol on certain medical
conditions. While these events did generate additional sales, Kaire believes a
higher percentage of those purchasing under the new program returned the product
for refunds under Kaire's satisfaction guaranteed policy than had made returns
in the past. In addition, Kaire released a new, more concentrated version of
its MARITIME PRIME (SUPER PRIME) late in 1996.
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This product was initially not well accepted by the associates as they indicated
that the anticipated results from its use were not achieved. While a
reformulation of the SUPER PRIME product apparently corrected the perceived
problem, Kaire also replaced this product at its cost when so requested.
Sales returns averaged approximately $27,000 per month or 0.6% of gross
sales in January 1996 through April 1996. This percentage had remained
consistent with Fiscal 1994 and Fiscal 1995. For the last eight months of 1996,
the returns increased to approximately $82,000 per month or 1.9% of sales.
Kaire's return policy is satisfaction guaranteed with time restrictions (90 days
from the date of sale) on most purchases. Partially used or empty bottles may be
returned if the customer was not fully satisfied. Depending on whether the
purchaser was an end user or an associate will affect if the refund was given as
an inventory trade or a cash refund. As the net sales are reduced by non-salable
returns, the cost of goods remains the same, therefore the cost of goods
percentage of net sales will increase. Kaire has been reviewing its refund
policies.
Kaire's policy has been to account for refunds in the period that the
refund request is received. The policy allows 90 days from the date of purchase
to accept refunds but many are received in the month of sale. Because of the
foregoing, Kaire has elected not to establish a reserve for anticipated refunds
as the effect on the statement of operations and the balance sheet would not be
material and there is no long term liability due to the 90 day return policy.
GROSS PROFIT. Gross profit decreased from approximately $43,365,000 in
Fiscal 1995 to approximately $38,178,000 in Fiscal 1996, approximately 12.0%.
The primary reason for the decline in gross profit was the decline in net sales
described above. In addition, gross profit as a percentage of net sales declined
from approximately 75.0% in Fiscal 1995 to 74.1% in Fiscal 1996 due primarily to
the increase in returns.
COMMISSIONS. Associate commissions decreased from approximately $30,831,000
in Fiscal 1995 to approximately $27,966,000 in Fiscal 1996, a decline of
approximately $2,865,000 or 9.3%. As a percentage of net sales, commissions
increased from 53.3% in Fiscal 1995 to 54.3% in Fiscal 1996. Commissions were
constant in Fiscal 1995 as the program was not changed from prior years. In
March 1996 the new program was implemented. The new program was not successful
as it attracted associates interested in short term gain and not long term
stability, the smaller associates (who represent a large portion of Kaire's
associate base) were adversely effected the most in proportion to their income
and sales leaders did not support the new program. As of September 1996, the
original program was substantially restored. Kaire also enhanced the original
program in an effort to stop further declines in sales raising the effective
commission rate by 10% of sales. Kaire purged inactive associates which Kaire
believes made a significant number of associates qualify for higher positions in
the commission structure and increased their bonus percentages without a
corresponding increase in sponsoring and sales. This change increased its
effective bonus rate by an additional 3%. The net effect of these changes in the
latter part of Fiscal 1996 was to increase commissions measured as a percentage
of net sales for Fiscal 1996 by approximately 1.9% from Fiscal 1995.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were approximately $12,976,000 or 25.2% of net sales in
Fiscal 1996 as compared to approximately $10,370,000 or 17.9% of net sales in
Fiscal 1995, an increase of approximately $2,606,000 or 25.1%. The largest
factor in this increase was the acquisition of the interests in the New Zealand
and Kaire Australia subsidiaries in November 1995. During Fiscal 1995, Kaire
incurred approximately $250,000 in selling, general and administrative expenses
through those entities. During Fiscal 1996, the first full year of ownership of
said entities, approximately $1,800,000 of their selling, general and
administrative expenses were included within Kaire's overall selling, general
and administrative expenses. Also, an increased marketing effort was undertaken
in Fiscal 1996 to promote the new (commission) program and introduce an internet
marketing opportunity for associates. An additional approximate $478,000, in
comparison to approximately $410,000 in Fiscal 1995, was spent on these
marketing efforts in Fiscal 1996. Finally, personnel costs increased
approximately $746,000 from approximately $3,621,000 in Fiscal 1995 to
approximately $4,267,000 in Fiscal 1996. This was due to the addition of several
managerial positions, the installation of Kaire's 401(k) plan with matching
contributions and an increase in medical insurance costs in Fiscal 1996.
INCOME (LOSS) FROM OPERATIONS. Loss from operations in Fiscal 1996 was
approximately $2,764,000, a decrease of approximately $4,928,000 from Fiscal
1995's income from operations of approximately $2,164,000. The primary reasons
for this decline was the drop in net sales and corresponding decline in gross
profit. Most of Kaire's selling, general and administrative expenses are fixed
and do not fluctuate with changes in net sales. These expenses did not
correspondingly decline when net sales declined resulting in a loss instead of a
profit.
OTHER INCOME (EXPENSES). There was no significant variance in other
expenses from Fiscal 1996 to Fiscal 1995. In neither year did other income or
other expense have a material effect on the overall profitability of Kaire.
INCOME TAXES. Kaire's income tax provision for Fiscal 1995 was $862,000
based on income earned during that year. In Fiscal 1996, Kaire recorded an
income tax benefit of approximately $1,103,000 from utilizing net operating
losses against prior income taxes paid. No benefit, from utilizing net operating
losses against future profits, was reflected in Fiscal 1996 operations. This
treatment was consistent with the provisions of the Financial Standards Board
Statement of Financial Accounting Standards No. 109 (Accounting for Income
Taxes) ("FASB 109"), utilizing its loss carryforwards as a component of income
tax expense, since Kaire's management has not been able to determine that it is
more likely than not that the deferred tax assets will be realized.
MINORITY INTEREST. The provision for Minority Interest was approximately
$86,000 in Fiscal 1995 and $115,000 in Fiscal 1996. This slight increase for
Fiscal 1996 was indicative of the increase in profitability of the foreign
subsidiaries in Fiscal 1996.
NET INCOME (LOSS). Kaire's net loss was approximately $1,803,000 for Fiscal
1996 compared to net income of approximately $1,186,000 for Fiscal 1995. This
change from
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profitability to a loss was primarily due to the decrease in net sales and gross
profit without a corresponding decrease in selling, general and administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
Kaire's capital requirements in connection with its operations, foreign
development and marketing activities have been and will continue to be
significant. As of September 30, 1998 and December 31, 1997, Kaire had working
capital deficits of approximately $9,285,000 and $6,492,000, respectively.
Kaire's independent certified public accountants stated in their report on the
December 31, 1997 consolidated financial statements that due to losses from
operations and a working capital deficit, there is substantial doubt about
Kaire's ability to continue as a going concern. Despite the fact that Kaire has
not made its payroll and sales tax deposits on a timely basis, Kaire has
continued to pay its associates timely and has negotiated out of any default
situations with its creditors and debtholders. Kaire believes it is addressing
the going concern issue in virtually every aspect of its operation. Kaire has
cut its operating expenses and is continuing to search for, and introduce, new
products, such as EnzoKaire Complete, which it believes will provide, but as to
which there can be no assurance of, improved profit margins and anticipated high
profile and user appeal. Kaire has also suspended expansion efforts into
additional foreign markets until the existing markets penetrated in 1997 achieve
a positive cash flow from operations. Kaire is dependent upon the proceeds from
additional capital raising activities or mergers to continue its foreign
development activities and domestic operations and fund its marketing plans, as
well as other working capital requirements.
Through 1995, Kaire has generated significant cash flow from operations due
to revenue growth and minimal capital requirements. Additionally, Kaire does not
extend credit to associates, but requires payment prior to shipping products and
accordingly does not maintain high receivable balances. A typical sales
transaction consists of the placement of an order by an associate. At the time
the order is placed, the associate must provide a valid credit card, be
pre-approved for using autodraft (direct withdrawal from their bank account), a
check or cash. No payment terms are offered to purchasers. The order is shipped
after the payment is processed. The only receivables created are therefore those
sales accepted at month end for which the funds are not received until the
following month, those accounts where a "hard" form of payment (check or
cashier's check) was submitted by mail and the actual order was calculated to be
a different amount than the funds sent or a failure to pay due to an
insufficient funds check or autodraft or credit card dispute. As a result, the
receivable is small in relation to sales and turns over rapidly. Non-collectable
accounts are written off to Selling, General and Administrative expenses on a
regular basis. Kaire's principal need for funds has been for distributor
incentives, working capital (principally inventory purchases), and the expansion
into new markets. Prior to 1997, Kaire had generally relied entirely on cash
flow from operations to meet its business objectives without incurring long term
debt to unrelated third parties.
In Nine Months 1998, the cash applied to operating activities was
approximately $1,032,000. This was primarily because of the net loss of
approximately $3,192,000 which was off-set by decreases in inventories of
approximately $567,000 and increases in
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accrued liabilities and accounts payable of approximately $547,000. The decrease
in inventories as well as the increase in accrued liabilities and accounts
payable were attributed to better cash flow and asset management by Kaire.
Investing activities provided approximately $30,000. Cash was primarily used for
the funding of a restricted cash account in the amount of approximately $125,000
related to a change in credit card processors and approximately $46,000 for the
purchase of additional property and equipment. This was offset by a decline in
deposits of approximately $200,000. Cash was generated from financing activities
in the amount of approximately $880,000. Net proceeds from additional borrowing
totaled approximately $1,153,000 after payment of $440,000 on notes payable and
capital lease obligations. The decline in the value of foreign currencies in
relation to the dollar accounted for an additional approximately $122,000
increase in cash. The net effect was no effect in total cash for Nine Months
1998.
In Fiscal 1997, the cash applied to operating activities was approximately
$3,433,000. Operating cash was provided by increases in accounts payable of
approximately $1,245,000 and collections of income tax refunds of approximately
$1,025,000. Cash of approximately $107,000 was used for investing, primarily in
the purchases of property and equipment of approximately $275,000 and increasing
deposits by approximately $289,000. Both of these investments relate primarily
to the investment required to open Kaire's South Korean subsidiary. Financing
activities generated approximately $3,341,000. Net borrowings from related and
non-related parties generated approximately $3,795,000. The sale of Kaire common
stock generated an additional approximately $171,000. Some of these proceeds
were used to pay for deferred offering costs and debt issue costs of
approximately $331,000. The effect of foreign exchange rate changes on cash was
a reduction in cash in the amount of approximately $79,000. For Fiscal 1997,
cash decreased by approximately $279,000.
In Fiscal 1996, cash used in operating activities was approximately
$1,622,000. Additional operating cash expenditures were approximately $725,000
for refundable income taxes and a reduced in accrued liabilities of
approximately $322,000. These were offset by collections on accounts receivable
of approximately $597,000 and increases in accounts payable of approximately
$157,000. Cash used in investing totaled approximately $891,000. The invested
cash was used for property and equipment of approximately $243,000, the purchase
of stock in an unrelated company of $250,000, advances to distributors of
approximately $225,000 and investments in intangibles such as trademarks of
approximately $172,000. Financing activities generated approximately $1,448,000.
Most of this was generated by the issuance of checks in excess of deposits of
approximately $1,376,000. Additional borrowings generated $525,000 less payments
on notes and other long term debt of approximately $453,000. Foreign currency
fluctuations generated additional cash of approximately $34,000. For Fiscal
1996, the net decrease in cash was approximately $1,031,000.
In Fiscal 1995, cash generated by operating activities was approximately
$1,060,000. Operating cash in the amount of approximately $300,000 was applied
to an increase in refundable income taxes while approximately $169,000 was
applied to increases in receivables. Investing activities used approximately
$217,000 of which approximately $194,000 was used for
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the purchase of property and equipment. Financing activities used approximately
$264,000 for payments of principal on capital lease obligations. For Fiscal
1995, approximately $578,000 of cash and cash equivalents were generated.
"Checks written in excess of deposits" represents checks either written and
held or issued in anticipation of deposits from sales. Kaire has avoided an
insufficient check charge in all but an extremely limited number of situations
based on the amount of checks written on a monthly basis. It is Kaire's intent
to discontinue this method of financing as a tool in generating cash once
sufficient cash balances have been attained through either operations or
financing activities to warrant this discontinuance of this practice.
The downturn in the South Korean economy has not had a significant impact
on Kaire's overall liquidity due in part to the fact that revenues from South
Korea represented less than three (3%) percent of its consolidated revenues
during 1997. However, Kaire sustained substantial losses in trying to penetrate
the South Korean market, and at September 30, 1998 it recorded a $471,000
write-down of its assets in its South Korean subsidiary to what was believed to
be their net realizable value. Kaire has since ceased operations of its South
Korean subsidiary in October 1998.
Because of the significant losses incurred by Kaire over the past two
fiscal years, it has become substantially dependent on loans from its officers
and directors and private placements of its securities to fund its operations.
These financings are described below.
On or about January 1, 1997, Kaire sold $300,000 in Agreement Notes to
three private investors. As partial consideration for their purchase of the
Agreement Notes, Kaire issued warrants to the three investors to purchase an
aggregate of approximately 22,050 shares of Kaire's Common Stock at an exercise
price of approximately $.02 per share of Common Stock. The Agreement Notes and
related interest were paid in full in July 1997. The foregoing warrants were
exercised in July 1998.
During January 1997, Kaire borrowed $200,000 for working capital purposes
from a corporation, not otherwise affiliated with Kaire, pursuant to demand
promissory notes, bearing interest at the rate of 10% per month, and guaranteed
by certain officers and directors of Kaire. An August 25, 1997 agreement
modified the repayment provisions of principal and interest, and required that
Kaire repay all interest and principal by December 31, 1997 and reduced the
interest rate from 10% per month to 2% per month payable monthly, retroactive to
March 5, 1997. Furthermore, in the event that Kaire was unable to repay the
principal and accrued interest on such notes in full by December 31, 1997, Kaire
would then be required to make twelve monthly payments, beginning January 1,
1998, in the amount of $18,911 each. In connection with this transaction, the
lending corporation was issued options to purchase 50,000 shares of Kaire's
Common Stock at $6.60 per share. As of September 30, 1998, such options had not
been exercised. On January 15,1998, Kaire entered into an agreement with the
lender to make monthly payments of interest only and to amend the term of the
promissory note to a demand
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note. In connection with the reverse stock split on October 1, 1998, the lender
was issued additional warrants to purchase 12,500 shares of Kaire's Common Stock
at $6.60 per share.
On or about March 20, 1997, Kaire completed a private placement of an
aggregate of 500,000 shares of its Common Stock and 500,000 warrants for gross
proceeds of $250,000 from five private investors (the "March 1997 Private
Placement"). Following the payment of commissions and non-accountable expenses,
an initial payment towards its non-accountable expenses for a proposed Public
Offering and counsel fees and expenses for that private placement, Kaire
received net proceeds of approximately $171,500. In connection with the reverse
stock split on October 1, 1998, the lender was issued additional warrants to
purchase 250,000 shares of Kaire's Common Stock at $6.60 per share.
In May 1997, Kaire Korea, Ltd., pursuant to a demand promissory note
bearing interest at the rate of 9.5% per year and guaranteed by Kaire, borrowed
$500,000 from Horphag, Kaire's Pycnogenol manufacturer. An option expiring in
May 2000 to acquire 15% of the capital stock of Kaire Korea Ltd. at the par
value of Kaire Korea Ltd.'s capital stock was granted to Horphag as partial
consideration for the note. The note provides for additional options to be
issued in the event of late payments and/or the failure to pay the entire
principal balance plus accrued interest within six months of the origination
date of the note. As of September 30, 1998, a principal balance of $475,000
remained outstanding. The options to acquire capital stock of Kaire Korea Ltd.
had been exercised on November 15, 1997 by Horphag. In an agreement executed on
June 2, 1998 but effective as of January 1, 1998, Horphag agreed to waive any
options it may have had in Kaire Korea Ltd. due to late payments or the failure
to repay the promissory note in consideration for Kaire pledging its 85%
interest in Kaire Korea Ltd. As security on the promissory note to Horphag,
Kaire and Horphag also agreed to amend the repayment terms on the promissory
note to a demand note. The note was due on September 15, 1998. The Company is
currently in default on its note payable. Kaire intends to repay the note and
accrued interest from future cash flows provided by operations.
Between June 3, 1997 and December 8, 1997, Kaire completed a private
placement of an aggregate of 172,500 shares of its Common Stock and $1,725,000
in principal amount of its promissory notes (10% Notes") to nine investors (the
"Summer 1997 Private Placement"). Following the payment of commission and
non-accountable expenses, additional payments towards its non-accountable
expenses for a proposed but as-yet-unconsummated public offering and counsel
fees and expenses, Kaire received approximately $1,400,000 in net proceeds. The
10% Notes bear interest at a rate of ten percent per year and mature and are
payable in full (principal plus accrued but unpaid interest) upon the earlier of
(a) eighteen months after issuance, (b) the completion date of an equity
financing of Kaire pursuant to which it receives gross proceeds of not less than
$3,000,000, or (c) Kaire's receipt of at least $1,000,000 in proceeds from the
"Key Man" life insurance policies on any of its executive officers and
directors. The 10% Notes are secured by the accounts and accounts receivable of
Kaire (as defined in the 10% Notes) but are subordinated to Kaire's banking
obligations.
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During August 1997, Kaire borrowed $200,000 from two lenders, not otherwise
affiliated with it, pursuant to unsecured promissory notes bearing interest at
the rate of 12% per year and due in September and October 1997. These notes were
paid in full in December 1997. In connection with this borrowing, the lenders
were each issued options to purchase 7,500 shares of Kaire's Common Stock at
$.02 per share. As of October 1998, the options had been exercised by the
lenders.
During August and September 1997, Kaire borrowed approximately $492,000
from a lender, not otherwise affiliated with Kaire, pursuant to two promissory
notes bearing interest at a rate of .33% per day and guaranteed by certain
officers and directors of Kaire. Both notes were repaid by Kaire in December
1997.
During 1997, J.T. Whitworth, the Chief Operating Officer, Chief Financial
Officer and a Director of Kaire, and Robert L. Richards, Chief Executive Officer
and a Director of Kaire, advanced $140,071 and $118,226, respectively, for
working capital requirements. On November 28, 1997, Kaire issued demand
promissory notes bearing interest at the rate of ten (10%) percent per year in
the amount of $258,337 to the two officers for funds provided by those
individuals to that date.
During 1997, Kaire borrowed $663,000 from William F. Woodburn and Loren E.
Bagley, two directors of Kaire pursuant to demand promissory notes bearing
interest at the rate of ten (10%) percent per year and secured by Kaire's shares
of Aloe Commodities International, Inc. In September 1997, Kaire sold its shares
of Aloe Commodities International, Inc., at cost, and made a partial payment on
the notes. The remaining outstanding balance of approximately $241,000 was
renegotiated to two unsecured demand promissory notes bearing interest at the
rate of ten (10%) percent per year.
During November 1997, Kaire borrowed $700,000 from Integrated Medical
Technologies, Inc. ("IMT"). On December 9, 1997, Kaire and certain of its
stockholders entered into an Agreement and Plan of Reorganization (the
"Agreement") with IMT whereby IMT agreed to provide an additional $300,000
equity investment in Kaire and convert the $700,000 previously borrowed by Kaire
to equity in the Company and for IMT to provide $2,000,000 additional equity
investments to the Company by February 15, 1998. The additional equity
investment of $2,000,000 was not made by IMT. The Agreement restricted the
payment of dividends and the purchase of treasury shares, among other things.
Also, IMT acquired approximately 81% of the Common Stock of Kaire from certain
holders of common stock for approximately 45% of the common shares of IMT, as
defined in the Agreement. During late March 1998, it became apparent that IMT
was unable to provide the additional capital that was provided for under the
Agreement. IMT reached an agreement with Global Market LLC ("Global") to sell
1,250,078 shares, 54% of Kaire's stock to Global in return for Global
immediately loaning $1,000,000 to Kaire. These funds were needed by Kaire as
Kaire had issued checks in anticipation of a receipt of funds by IMT. Such loans
was evidenced by a $1,000,000 promissory note payable to Global. The note bears
interest at the rate of ten (10%) percent per annum, is uncollateralized and is
payable upon demand.
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During April 1998, Kaire borrowed $100,000 from William F. Woodburn, a
Director of Kaire for a demand promissory note. The note bears interest at the
rate of ten (10%) percent per annum, is collateralized by the assets of Kaire
and is due on demand. As of September 30, 1998, $19,000 of this note had been
repaid.
During January 1998, Kaire borrowed $150,000 from a corporation for a
promissory note payable at an interest rate of two (2%) percent per month or
twenty-four (24%) percent annual interest. Interest and principal are due on
demand. The note is collateralized and is personally guaranteed by certain
officers and directors of Kaire.
During January 1998, Kaire borrowed $103,000 for working capital from
William F. Woodburn and Loren E. Bagley, two Directors of Kaire, pursuant to
demand promissory notes bearing interest at the rate of ten (10%) percent per
year.
At the present time, Kaire has no plans or commitments for capital
expenditures.
"YEAR 2000" PROBLEM. Kaire management is aware of the issues associated
with the programming code in existing computer systems as the millennium (year
2000) approaches. The "Year 2000" problem is pervasive and complex as virtually
every computer operation will be affected in some way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. Kaire is utilizing both internal and external resources
to identify, correct or reprogram, and test the computer system for the Year
2000 compliances. It is anticipated that all reprogramming efforts will be
completed by December 31, 1998, allowing adequate time for testing. Kaire
management has assessed its Year 2000 compliance expense to be $250,000. Kaire
has not yet established a contingency plan in the event that it is unable to
correct the "Year 2000" problem and as of the date of this Proxy Statement has
no plans to do so.
RECENT ACCOUNTING PRONOUNCEMENTS. During 1998, Kaire management implemented
Financial Accounting Standards No. 128, entitled "Earnings Per Share" ("SFAS
128"), recently issued by the Financial Accounting Standards Board ("FASB").
SFAS 128 provides a different method of calculating earnings per share than is
currently used in accordance with Accounting Board Opinion ("ABP") No. 15,
entitled "Earnings Per Share." SFAS 128 provides for the calculation of "Basic"
and "Diluted" earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
SFAS 128 became effective for financial statements issued for periods ending
after December 15, 1997. All prior period earnings per share data has been
restated to reflect the requirements of SFAS No. 128. The adoption of SFAS No.
128 did not effect the earnings per share calculations at September 30, 1998 and
1997 and December 31, 1997, 1996 and 1995. See Note 8 for computation of
earnings per share.
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In June 1997, FASB issued Statement of Financial Accounting Standard No.
130, entitled "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standard No. 131, entitled "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. SFAS 131 supersedes Statement of
Financial Accounting Standard No. 14, entitled "Financial Reporting for Segments
of a Business Enterprise." SFAS 131 establishes standards of the way the public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Kaire management adopted SFAS 130 and Kaire's
financial statements for all prior periods have been restated in accordance
therewith.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Kaire management believes the adoption of this statement will
have no material impact on Kaire's financial statements.
The FASB has recently issued Statement of Financial Accounting Standard No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 established standards for recognizing all derivative
instruments including those for hedging activities as either assets or
liabilities in the statement of financial position and measuring those
instruments at fair value. This Statement is effective for fiscal years
beginning after June 30, 1999. Kaire has not yet determined the effect of SFAS
No. 133 on its financial statements.
The FASB recently issued Statement of Financial Accounting Standards No.
134 "Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No.
134"). SFAS No. 134 establishes accounting and reporting standards for certain
activities of mortgage banking enterprises and other enterprises that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise.
This statement is effective for the first fiscal quarter beginning after
December 15, 1998. The Company has not yet determined the effect of SFAS No. 134
on its financial statements. Management believes the adoption of this statement
will have no material impact of the Company's financial statement.
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Change in Accountants
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On or about August 1, 1996, Kaire changed the independent certified public
accounting firm engaged to prepare Kaire's annual audited financial statements
from Jones, Jensen and Company to BDO Seidman, LLP. The report on Kaire's
financial statements as prepared by Jones, Jensen and Company did not contain
any adverse opinion, disclaimers of opinion, modifications or qualifications or
scope limitations. The decision was based on the recommendation of counsel to a
proposed underwriting. Kaire's board of directors approved the change.
There were no disputes with the dismissed firm over accounting, auditing,
financial statement disclosures or internal control issues. No discussions were
held with the newly engaged auditor with respect to specific accounting
treatments or transactions, changes in the audit opinion, scope or any
limitations on the opinion, or any other accounting, internal control or other
reporting related issues.
KAIRE RISK FACTORS
RECENT SUBSTANTIAL LOSSES. From its inception in late 1992 through the end
of its Fiscal 1995, Kaire had experienced a rapid expansion in its net sales,
growing from net sales of approximately $2,719,000 during its first full fiscal
year, Fiscal 1993, to net sales of approximately $36,895,000 and $57,841,000,
for Fiscal 1994 and Fiscal 1995, respectively. During these three fiscal years
Kaire's net income experienced corresponding increases, with Kaire sustaining a
net loss of approximately $207,000 during Fiscal 1993 and net income of
approximately $1,091,000 and $1,186,000 during Fiscal 1994 and Fiscal 1995,
respectively. Fiscal 1996 and Fiscal 1997 were periods of declining revenues and
net losses. During Fiscal 1996 and Fiscal 1997, Kaire sustained net losses of
approximately $1,803,000 and $6,098,000, respectively, upon net sales of
approximately $51,499,000 and $35,682,000, respectively. During Nine Months
1998, Kaire sustained a net loss of approximately $3,192,000 on net sales of
approximately $21,019,000 (which net losses amount to approximately 15.2% of net
sales). This is in comparison to Nine Months 1997 during which Kaire sustained a
net loss of approximately $4,182,000 upon net sales of approximately $27,887,000
(which net losses amount to approximately 15% of net sales). See "Risk Factors -
Going Concern Modification in Independent Certified Public Accountants' Report."
Management believes that the foregoing net sales decreases and losses resulted
from Kaire maturing as a network marketing enterprise, having reached a leveling
off of its net sales during the latter part of 1995, and Kaire's own initial
efforts to overcome this maturation. In an effort to overcome this maturation,
Kaire formulated several approaches. Those approaches were to attract a younger
and more entrepreneurial minded associate than it had attracted in the past;
attract persons who had been successful network marketers with other companies;
continue to expand its line of products, including efforts to develop products
directed at a younger market; and further expand geographically outside of the
United States. Attracting new, younger and entrepreneurial minded associates
was, by its nature, the first approach undertaken. In an effort to accomplish
this,
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among other things, Kaire changed its commission program that had been in place
since 1994. The change in commission structure was not well received by Kaire's
associates and, in addition, Kaire's new commission structure attracted
associates who misused the new commission program which increased commissions on
first time sales without providing for commission recovery by Kaire on product
returns and refunds. Exacerbating Kaire's losses were to lesser degrees: the
time and cost of personnel devoted to promoting the new commission program,
competition in recently penetrated markets of Australia and New Zealand of
"copycat" products, the introduction of new products that were not as well
received by the market as had been expected, a new product not as consistent as
the product it replaced and a corporate infrastructure (new personnel and
facilities) with related fixed costs that had grown correspondingly with the
growth in sales in prior fiscal years. Kaire, in the latter part of Fiscal 1996,
reverted to essentially its former commission program. There can be no assurance
that following the Acquisition future unforeseen developments, such as the
failure to successfully penetrate new geographically targeted markets that Kaire
had targeted, generate revenue growth as market competition increases, create or
secure new products that will be accepted in the market place, contain its
general and administrative overhead costs and other unforeseen circumstances
will not have a material adverse effect on NHTC's operations in its current or
expanded market areas. Moreover, no assurance can be given that following the
Acquisition the future operations of NHTC will be profitable.
GOING CONCERN MODIFICATION IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
REPORT. The report dated May 1, 1998, except for the first paragraph of Note 8
which is dated October 1, 1998, from BDO Seidman, LLP, the independent certified
public accountants for Kaire, expressed "substantial doubt" about Kaire's
ability to continue as a going concern due to recurring losses and negative
working capital. See Kaire's Consolidated Financial Statements.
LOSSES SUSTAINED IN ATTEMPTING TO PENETRATE NEW MARKETS; RISKS INVOLVED IN
ENTERING NEW MARKETS. Kaire has sustained substantial losses in trying to
penetrate the South Korean market. During the period ended September 30, 1998,
Kaire recorded a $471,000 write-down of its assets in its South Korean
subsidiary to what Kaire believed to be their net realizable value. Following
the Acquisition, NHTC intends to complete Kaire's expansion efforts into the
United Kingdom. Completing the establishment of its operations in the United
Kingdom will require the recruitment and training of new personnel, paying
salaries of the United Kingdom personnel and their related benefits, continuing
compliance with the laws and regulations of that country, delivering products
into that country which are subject to quarantine periods, purchasing equipment,
continuing leasehold payments and payments of other costs and expenses until the
United Kingdom operations generate sufficient revenues to cover the foregoing
and other costs and expenses related to Kaire's United Kingdom operations. Until
such time as the United Kingdom operations generate sufficient revenue to cover
the foregoing costs and expenses, of which no assurance can be given, the United
Kingdom operations will continue to sustain losses. In addition to the
foregoing, future events, including problems, delays, expenses and complications
frequently encountered by companies seeking to penetrate new markets, foreign
currency exchange fluctuations, as well as changes in governmental policies,
economic
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or other conditions may occur that could cause NHTC, following the Asset
Acquisition, to be unsuccessful in such expansion efforts. See "Business."
NEED FOR ADDITIONAL FUTURE FINANCING; POSSIBLE ADDITIONAL DILUTION.
Following the Asset Acquisition, NHTC may seek equity or debt financing in order
to complete its expansion efforts into any additional geographic areas that NHTC
may target in the future or for additional working capital if it continues to
sustain losses or its United Kingdom or other expansion areas continues to
suffer losses. There can be no assurance that the Company will be able to obtain
additional financing on terms acceptable to NHTC or at all. In the event
additional financing for NHTC is unavailable, NHTC may be materially adversely
affected.
GOVERNMENT REGULATION OF PRODUCTS AND MARKETING. Kaire's business (and
NHTC's following the Acquisition) is subject to or affected by extensive
governmental regulations not specifically addressed to network marketing. Such
regulations govern, among other things, (i) product formulation, labeling,
packaging and importation, (ii) product claims and advertising, (iii) fair trade
and distributor practices, and (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties. Based on
Kaire's experience and research, the nature and scope of inquiries from
government regulatory authorities, and the advice it receives from various
counsel, Kaire believes that it is in material compliance with all regulations
applicable to Kaire. However, there can be no assurances that NHTC following the
Acquisition will not be subject to inquiries and regulatory investigations or
disputes and the effects of any adverse publicity resulting therefrom. Any
assertion or determination that NHTC is not in compliance with existing laws or
regulations could potentially have a material adverse effect on NHTC's business
and results of operations. In addition, in any country or jurisdiction, the
adoption of new laws or regulations or changes in the interpretation of existing
laws or regulations could generate negative publicity and/or have a material
adverse effect on NHTC following the Acquisition. NHTC cannot determine the
effect, if any, that future governmental regulations or administrative orders
may have on NHTC following the Acquisition. Moreover, governmental regulations
in countries where NHTC plans to commence or expand operations following the
Acquisition may prevent, delay or limit market entry of certain products or
require the reformulation of such products. Regulatory action, whether or not it
results in a final determination adverse to NHTC has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of associates and, consequently, on NHTC's possible future sales and earnings.
GOVERNMENT REGULATION OF DIRECT SELLING ACTIVITIES. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes.
Such schemes, often referred to as "pyramid" or "chain sales" schemes, often
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products. See
"Business -- Government Regulation."
As is the case with most network marketing companies, Kaire has from time
to time received inquiries from various government regulatory authorities
regarding the nature of its
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business and other issues such as compliance with local business opportunity and
securities laws. To date none of these inquiries has resulted in a finding
materially adverse to Kaire. There can be no assurance that NHTC, following the
Asset Acquisition, will not face inquiries in the future which, either as a
result of findings adverse to either of them or as a result of adverse publicity
resulting from the initiation of such inquiries, could have a material adverse
effect on the NHTC's business and results of operations following the Asset
Acquisition. See "Business -- Government Regulation."
TAXATION RISKS AND TRANSFERS PRICING. Kaire was and NHTC, following the
Asset Acquisition, will be subject to federal and state taxation in the United
States. In addition, each of Kaire's subsidiaries (certain of which will become
subsidiaries of NHTC following the Asset Acquisition) are subject to taxation in
the country in which it operates, currently ranging from a statutory tax rate of
up to 35% in Trinidad and Tobago. After the Asset Acquisition, NHTC will in all
likelihood be eligible for foreign tax credits in the United States for the
amount of foreign taxes actually paid in a given period. In the event that
NHTC's operations following the Asset Acquisition in high tax jurisdictions such
as Trinidad and Tobago grow disproportionately to the rest of its operations,
NHTC may be unable to fully utilize its foreign tax credits in the United
States, which could, accordingly, result in NHTC paying a higher overall
effective tax rate on its worldwide operations.
Because Kaire's subsidiaries (and following the Asset Acquisition, NHTC's
subsidiaries) operate outside of the United States, Kaire is, and NHTC will,
following the Asset Acquisition, be subject to the jurisdiction of the relevant
foreign tax authorities. In addition to closely monitoring the subsidiaries
locally based income, these tax authorities regulate and restrict various
corporate transactions, including intercompany transfers. No assurance can be
given that Kaire's structures will not be challenged by foreign tax authorities
or that such challenges will not have a material adverse effect on NHTC's
business or results of operations following the Asset Acquisition.
INCREASED EMPHASIS ON OPERATIONS OUTSIDE OF THE UNITED STATES. Less than
18% of Kaire's net sales during Fiscal 1997 were derived from operations outside
of the United States. Following the Asset Acquisition, NHTC's future operations
may be materially and adversely affected by economic, political and social
conditions in the countries in which it will then operate. A change in policies
by any government in such markets and proposed markets, could adversely affect
NHTC's future operations through, among other things, changes in laws, rules or
regulations, or the interpretation thereof, confiscatory taxation, restrictions
on currency conversion, currency repatriation or imports, or the expropriation
of private enterprises. This could be especially true in the event of a change
in leadership, social or political disruption or upheaval, or unforeseen
circumstances affecting economic, political or social conditions or policies.
There can be no assurance that such activities, or other similar activities in
such markets, will not result in passage of legislation or the enactment of
policies which could materially adversely affect the Company's operations in the
market areas where Kaire currently operates. In addition, NHTC's ability to
expand Kaire's current operations into new markets will directly depend on its
ability to secure the requisite government approvals and comply with the
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local government regulations. See " -- Losses Sustained in Attempting to
Penetrate New Markets; Risks Involved in Entering New Markets."
CURRENCY RISKS. Kaire's foreign-derived sales and selling, general and
administrative expenses are converted to U.S. dollars for reporting purposes.
Consequently, Kaire's reported earnings are significantly impacted by changes in
currency exchange rates, generally increasing with a weakening dollar and
decreasing with a strengthening dollar. Given the uncertainty of the extent of
exchange rate fluctuations, Kaire (and NHTC) cannot estimate the effect of these
fluctuations on its future business, product pricing, results of operations or
financial condition. However, because Kaire's revenue is, and NHTC's following
the Asset Acquisition will be, realized in local currencies and the majority of
its cost of sales is denominated in U.S. dollars, Kaire's gross profits (and
NHTC's following the Asset Acquisition) are positively affected by a weakening
in the U.S. dollar and will be negatively affected by a strengthening in the
U.S. dollar. There can be no assurance that any of the foregoing currency risks
will not have a material adverse effect upon NHTC following the Asset
Acquisition, or its results from operations or financial condition thereafter.
Fluctuations in currency exchange rates, particularly those caused by an
increase in the value of the United States dollar, could have a material adverse
effect on NHTC's financial position, results of operations and cash flows.
RELIANCE UPON INDEPENDENT DISTRIBUTOR NETWORK AND HIGH TURNOVER RATE OF
DISTRIBUTORS. Kaire distributes its products exclusively through independent
associates. Associate agreements with Kaire are voluntarily terminable by the
associates at any time. Kaire's revenue is directly dependent upon the efforts
of these independent associates, and any growth in future sales volume will
require an increase in the productivity of these associates and/or growth in the
total number of associates. As is typical in the direct selling industry, there
is turnover in associates from year to year, which requires the sponsoring and
training of new associates by existing associates to maintain or increase the
overall associate force and motivate new and existing associates. Kaire
experiences seasonal decreases in associate sponsoring and product sales in some
of the countries in which Kaire operates because of local holidays and customary
vacation periods. The size of the associate force can also be particularly
impacted by general economic and business conditions and a number of intangible
factors such as adverse publicity regarding Kaire, or the public's perception of
Kaire's products, product ingredients, Kaire associates or direct selling
businesses in general. Historically, Kaire has experienced periodic fluctuations
in the level of associate sponsorship (as measured by associate applications).
However, because of the number of factors that impact the sponsoring of
associates, and the fact that Kaire has little control over the level of
sponsorship of new associates, Kaire cannot predict the timing or degree of
those fluctuations. There can be no assurance that the number or productivity of
Kaire's associates will be sustained at current levels or increased in the
future. Moreover, there can be no assurances any of Kaire's associates will
agree to become associates of NHTC following the Acquisition. In addition, the
number of associates as a percent of the population in a given country or market
could theoretically reach levels that become difficult to exceed due to the
finite number of persons inclined to pursue a direct selling opportunity.
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POTENTIAL EFFECTS OF ADVERSE PUBLICITY. The size of the distribution force
and the results of Kaire's operations can be particularly impacted by adverse
publicity regarding Kaire, or its competitors, including the legality of network
marketing, the quality of NHTC's products and product ingredients or those of
its competitors, regulatory investigations of Kaire or Kaire's competitors and
their products, associate actions and the public's perception of Kaire's
associates and direct selling businesses generally. Following the Asset
Acquisition, there can be no assurance that such adverse publicity will not have
a material adverse effect on NHTC's ability to attract and retain customers or
associates, or on NHTC's results from operations or financial condition
generally.
DEPENDENCE ON KEY PERSONNEL. Kaire's (and NHTC's, following the Asset
Acquisition) future success depends on the continued availability of certain key
management personnel, including Robert L. Richards, Michael Lightfoot, and J.T.
Whitworth. The business of Kaire (and NHTC, following the Asset Acquisition)
could be adversely affected by the loss of services of any of the foregoing
individuals. Kaire does not (and NHTC, following the Asset Acquisition, will
not) have employment contracts with any of the foregoing individuals. See
"Management--Executive Compensation." Kaire's (and NHTC's, following the Asset
Acquisition) growth and ability to return to profitability may depend on its
ability to attract and retain other management personnel, of which no assurance
can be given. Kaire only maintains Key Man Life Insurance on Robert L. Richards.
LACK OF WRITTEN CONTRACTS WITH SUPPLIERS OR MANUFACTURERS. With the
exception of one manufacturing and distribution agreement with ENZO
Nutraceuticals, Inc., Kaire does not have any written contracts with any of its
suppliers or manufacturers or commitments from any of its suppliers or
manufacturers to continue to sell products to Kaire (or NHTC following the Asset
Acquisition). Due to the absence of any written contract with almost all of its
suppliers, there is a risk that, following the Asset Acquisition, Kaire's
suppliers or manufacturers will not sell their products to NHTC. Although NHTC
believes that it could establish alternate sources for most of its products,
there can be no assurance that any such alternative sources will be available or
willing to transact business with NHTC.
COMPETITION. Kaire (and, following the Asset Acquisition, NHTC will)
competes with many companies marketing products similar to those currently sold
and marketed by Kaire. Kaire also competes intensely with other network
marketing companies in the recruitment of associates, of which there are many
such companies. Some of the largest of these are Nutrition for Life
International, Inc., Nature's Sunshine, Inc., Herbalife International, Inc.,
Amway and Rexall Sundown, Inc. Each of these companies is substantially larger
than Kaire (or NHTC following the Asset Acquisition) and has significantly
greater financial and personnel resources than either Kaire or NHTC.
DEPENDENCE UPON SUPPLIERS. Kaire has one source of Pycnogenol, MW
International ("MWI"), and approximately two-thirds of Kaire's revenues have
been derived from Pycnogenol. During Fiscal 1995, Fiscal 1996, Fiscal 1997 and
Nine Months 1998, Kaire purchased approximately 40%, 57%, 48% and 50% of its
products, respectively, from MWI. During the same foregoing fiscal periods,
Kaire purchased approximately 40%, 22%, 6% and 7% of its products from Manhattan
Drug, Inc. Kaire has no written agreements with its suppliers and although Kaire
believes that suitable replacement and comparable product sources are available,
there can be no assurance that Kaire would be able to obtain replacement
suppliers on a timely basis, on commercially reasonable terms or at all, in the
event this supplier discontinues its association with Kaire, goes out of
business or for some other reason its products become unavailable to Kaire. See
"Business - Manufacturing and Supplies."
PRODUCT LIABILITY EXPOSURE. Although Kaire does not (and NHTC following the
Acquisition will not) engage in the manufacture of any of the products it
markets and distributes, Kaire is (and NHTC following the Acquisition will be)
subject to product liability claims for the
-56-
<PAGE>
products which it distributes. Kaire is not aware of any such claims to date.
Although Kaire (and NHTC shall after the Acquisition) maintains product
liability insurance which it believes to be adequate for its needs, there can be
no assurance that Kaire (or NHTC following the Acquisition) will not be subject
to claims in the future or that its insurance coverage will be adequate.
FORWARD-LOOKING STATEMENTS. This Proxy Statement contains forward-looking
statements. Additional written or oral forward-looking statements may be made by
the Company or Kaire from time to time in filings with the Commission or
otherwise. Such forward-looking statements are within the meaning of that term
in Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934 ("Exchange Act"). Such statements may include, but not be limited
to, projections of revenues, income, or loss, capital expenditures, plans for
future operations, financing needs or plans, and plans relating to products or
services of Kaire, as well as assumptions relating to the foregoing. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in
this Proxy Statement, including those contained in the sections entitled "Kaire
Risk Factors," "Kaire Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Kaire International, Inc.
- - Business" and in the notes to the Financial Statements of either Kaire or the
Company or the pro forma statements giving effect to the Asset Acquisition as if
consummated as of September 30, 1998, describe factors, among others, that could
contribute to or cause such differences.
"YEAR 2000" PROBLEM. The Company, Kaire and NHTC are aware of the issues
associated with the programming code in existing computer systems being acquired
from Kaire by NHTC as the millennium (Year 2000) approaches. The "Year 2000"
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the latter two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Kaire's management has assessed the "Year 2000" compliance expense to be
approximately $250,000. Kaire has not yet established a contingency plan in the
event that it is unable to correct the "Year 2000" problem and as of the date of
initial filing of this Proxy with the SEC has no plans to do so. There can be no
assurance that such problem can be resolved by NHTC in a timely or cost
effective fashion, or at all, or that any difficulty or inability in resolving
such problem will not have a material adverse effect upon NHTC following the
Asset Acquisition.
REASONS WHY THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF PROPOSAL ONE
The Board of Directors of the Company believes that there is a strategic
fit and synergy in the current product offerings of Kaire and NHTC, and that
following the Asset Acquisition,
-57-
<PAGE>
NHTC will be able to achieve efficiencies of scale including efficiencies in
sales and marketing, product distribution, product research and development, and
management and personnel. The Board of Directors of the Company believes that
the Kaire Assets which will be acquired pursuant to the Asset Acquisition will
provide NHTC with greater opportunities to develop and enhance markets for the
Company's and Kaire's products, license the products and certain technology
related to their production and development, and engage in other strategic
combinations and transactions involving their products and technologies. The
Board of Directors of the Company believes that the combined variety of the
product offerings following the Asset Acquisition will permit quicker and more
effective responses to market competition, scientific and technological advances
and discoveries and recent research findings, and other rapid innovations, and
will be more appealing to existing and potential customers. The Board also
believes that the Asset Acquisition may result in a larger customer base and
greater profile (including greater brand name recognition) in the market, thus
presenting greater marketing opportunities for products.
AS A RESULT, THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE ISSUANCE OF THE SHARES OF COMMON STOCK UNDERLYING THE
ACQUISITION SECURITIES.
-58-
<PAGE>
(PROPOSAL 2)
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK UPON THE CONVERSION OF
THE $1,650,000 AGGREGATE STATED VALUE OF THE COMPANY'S SERIES E PREFERRED STOCK.
In August 1998, the Company sold $1,650,000 aggregate stated value of its
Series E Preferred Stock to investors in the Series E Private Placement. As
discussed elsewhere in this Proxy Statement, the Nasdaq Rule prevents the
Company from issuing a number of shares of Common Stock equal to or greater than
twenty (20%) percent of the number of the Company's outstanding shares of Common
Stock, unless such issuance is either approved by the Company's shareholders or
Nasdaq waives such requirement. The terms of the Series E Preferred Stock
provided that the holders of the Series E Preferred Stock may not convert the
Series E Preferred Stock into more than twenty (20%) percent of the issued and
outstanding Common Stock outstanding on the date of close of the Series E
Private Placement unless this Proposal is approved or a waiver is obtained. Each
share of Series E Preferred Stock is redeemable by the Company at 133% of its
stated value plus all accrued interest and is convertible into shares of Common
Stock at a conversion price equal to the lower of (i) the closing bid price of
the Common Stock on the date of issuance, or (ii) seventy-five (75%) percent of
the average closing bid price of the Common Stock for the five (5) trading days
immediately preceding the date of the notice of conversion. Each share of Series
E Preferred Stock shall automatically be converted into Common Stock on the date
which is 24 months from the date of issuance. FOR A COMPLETE DESCRIPTION OF THE
SERIES E PREFERRED STOCK, SEE ARTICLES OF AMENDMENT TO COMPANY'S ARTICLES OF
INCORPORATION CONTAINING THE CERTIFICATE OF DESIGNATION FOR THE SERIES E
PREFERRED STOCK ANNEXED HERETO AS EXHIBIT 4.1.
The Board of Directors believes that it is in the Company's best interests
to convert the shares of Series E Preferred Stock in accordance with its terms
rather than redeem such securities at 133% of their face value in accordance
with its terms.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE ISSUANCE
OF ADDITIONAL SHARES TO PERMIT THE CONVERSION IN FULL OF THE SERIES E PREFERRED
STOCK.
-59-
<PAGE>
(PROPOSAL 3)
APPROVAL OF THE OFFER AND SALE OF UP TO THE $4,000,000 AGGREGATE STATED
VALUE OF SERIES H PREFERRED STOCK OF THE COMPANY AND THE ISSUANCE OF SHARES OF
COMMON STOCK UPON THE FULL CONVERSION OF THE SERIES H PREFERRED STOCK.
Management of the Company believes that following the Acquisition, it may
raise additional funds to, among other items, provide working capital for the
Company and NHTC. Accordingly, the Board of Directors of the Company has
approved the offer and sale in a private placement pursuant to Regulation D of
the Securities Act by the Company of up to the $4,000,000 aggregate stated value
of the Company's Series H Preferred Stock. Although shareholder approval for the
offer and sale of Series H Preferred Stock is not required under the Florida
Business Corporation Act, because the shares of Common Stock issuable upon
conversion of any Series H Preferred Stock sold by the Company in the future,
together with the shares of Common Stock issuable upon conversion of the Series
F Preferred Stock, the Series G Preferred Stock and the Acquisition Warrants may
in the aggregate be in excess of twenty (20%) percent of the issued and
outstanding Common Stock, the Company is seeking approval of such issuance to
comply with the continued listing requirements of NASDAQ. The Company has no
current prospective buyers for any of its Series H Preferred Stock and no
assurances can be given when, if ever, the Company will sell any of such Series
H Preferred Stock.
The Series H Preferred Stock shall have a stated value of $1,000 per share,
shall pay a dividend (provided the Company has either sufficient surplus or net
profits), at the rate of eight (8%) percent of the stated value per annum,
payable in cash or in shares of Common Stock (valued at the conversion price set
forth below) at the option of the Company upon conversion of the shares of
Series H Preferred Stock. The shares of the Series H Preferred Stock are
non-voting prior to conversion, and are convertible into shares of Common Stock,
at a conversion price per share equal to the lower of (i) $3.259375
(representing the average closing bid price of the Common Stock for the ten (10)
business days prior to the date the Company initially filed this Proxy Statement
with the SEC), or (ii) the quotient determined by dividing the stated value of
each share of Series H Preferred Stock being converted by seventy-five (75%)
percent of the average closing bid price of the Common Stock for the three (3)
trading days immediately preceding the date on which the Company receives notice
of conversion from a holder. The terms of the Series H Preferred Stock permit
the Company at any time, on five (5) days prior written notice, to redeem the
outstanding Series H Preferred Stock at a redemption price (the "Redemption
Price"), equal to 133% of the stated value plus the accrued dividends thereon.
The shares of Common Stock issuable upon conversion of the Series H Preferred
have certain piggyback registration rights as well as demand registration rights
commencing forty-five (45) days following the initial sale of any shares of
Series H Preferred Stock. FOR A COMPLETE DESCRIPTION OF THE SERIES H PREFERRED
STOCK SEE THE ARTICLES OF AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION
PERTAINING TO THE CERTIFICATE OF DESIGNATION FOR THE SERIES H PREFERRED STOCK
ANNEXED HERETO AS EXHIBIT 4.4.
-60-
<PAGE>
The Board of Directors of the Company believes that by obtaining
shareholder approval to the future sale of the Series H Preferred Stock and the
issuance of the shares of Common Stock issuable upon conversion thereof in
advance it may make the Series H Preferred Stock a more attractive investment to
potential investors. The Board believes that because of the NASDAQ Rule,
investors may be required, following their purchase of the Series H Preferred
Stock, to postpone converting their Series H Preferred Stock until following
shareholder approval at a shareholders' meeting. However, if shareholder
approval to the issuance of the shares of Common Stock issuable upon exercise of
the Series H Preferred Stock is obtained in advance, potential investors could
avoid the conversion waiting period, which the Board believes may make the
Series H Preferred Stock a more attractive investment to potential investors,
and, thus allow the Company to raise funds, if needed, in a shorter period of
time.
AS A RESULT, THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE FUTURE SALE AND ISSUANCE OF THE SERIES H PREFERRED STOCK AND THE
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF.
-61-
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
UNAUDITED PRO FORMA FINANCIAL STATEMENTS:
Description page F-2
Pro forma Balance Sheet at September 30, 1998 F-3
Pro forma Statement of Operations for the nine months ended
September 30, 1998 F-4
Pro forma Statement of Operations for the year ended
December 31, 1997 F-5
Notes to Pro forma financial statements F-6
AUDITED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996:
Independent Auditors' Report F-7
Consolidated Balance Sheet F-8
Consolidated Statements of Operations F-9
Consolidated Statement of Stockholders' Equity F-10
Consolidated Statement of Cash Flows F-11
Notes to Consolidated Financial Statements F-13
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997:
Consolidated Balance Sheet dated September 30, 1998 F-27
Consolidated Statements of Operations F-28
Consolidated Statement of Cash Flows F-29
Notes to Consolidated Financial Statements F-30
F-1
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed financial statements
have been prepared to show the effects of the November 24, 1998 acquisition of
Kaire International, Inc. ("Kaire") by Natural Health Trends Corp. (the
"Company") for preferred stock with a face amount of $2,800,000 issued to the
sellers, and additional preferred stock with a face amount of $350,000 issued
for settlement with certain creditors and five year warrants, issued to the
sellers, to purchase 200,000 shares of the Company's common stock at 110% of the
closing bid price of the common stock on the day before the closing upon which
the Company has computed an aggregate value of $682,000 utilizing the Black
Scholes Option Pricing Model. The acquisition is accounted for as a purchase
business combination.
The following unaudited proForma consolidated balance sheet is adjusted
to present the pro forma financial position of the Company at September 30, 1998
as if the acquisition of Kaire had occurred on such date. Included are
adjustments to record the purchase consideration paid, the assets acquired,
liabilities assumed and the resulting goodwill.
The unaudited pro forma consolidated statements of operations for the
year ended December 31, 1997 and the nine month period ended September 30, 1998
reflect the combined results of the Company and Kaire as if the acquisition had
occurred on January 1, 1997. Adjustments include amortization of goodwill and
dividends on the preferred stock issued in the acquisition. The accompanying
unaudited pro Forma statements of operations exclude the operations of the
Company's discontinued schools line of business, which was disposed of in August
1998, for both periods presented.
The accompanying unaudited pro forma balance sheet does not necessarily
reflect the actual financial position of the Company that would have resulted
had the acquisition of Kaire been consummated on September 30, 1998. The
unaudited pro forma consolidated statements of operations do not necessarily
represent actual results that would have been achieved had the companies been
together as of January 1, 1997, nor are they indicative of future operations.
These unaudited pro forma consolidated financial statements should be read in
conjunction with the Company's historical financial statements and notes
thereto.
F-2
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
Natural Health Kaire
Trends, Corp. International, Inc.
September 30, September 30,
--------------------- ---------------------
1998 1998
--------------------- ---------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,021,626 $ 460,701
Restricted cash - 125,000
Accounts receivable, net 19,031 249,397
Inventory 436,915 1,067,283
Prepaid expenses and other current assets 514,413 135,374
--------------------- ---------------------
TOTAL CURRENT ASSETS 1,991,985 2,037,755
PROPERTY AND EQUIPMENT 46,265 673,735
PATENTS AND CUSTOMER LISTS 4,733,363 -
GOODWILL 844,780 -
DEPOSITS AND OTHER ASSETS 249,951 230,436
NET ASSETS HELD FOR DISPOSITION - -
--------------------- ---------------------
$ 7,866,344 $ 2,941,926
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ - $ 1,049,566
Accounts payable and accrued expenses 989,589 5,368,155
Revolving credit line - -
Accrued expenses for discountinued operations 789,833 -
Deferred revenue - -
Accrued expenses for discontinued operations 314,593 -
Accrued consulting contract 360,131 -
Notes payable - 2,230,521
Notes payable - related parties - 2,114,747
Current portion of long-term debt, net of discount 587,184 48,897
Other current liabilities 104,939 510,987
--------------------- ---------------------
TOTAL CURRENT LIABILITIES 3,146,269 11,322,873
LONG TERM DEBT - -
MINORITY INTEREST - (49,194)
COMMON STOCK SUBJECT TO PUT 380,000 -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 1,500,000 shares
authorized, 4,330 shares issued and outstanding
(actual) and 7,480 (pro forma) 3,789,525 -
Common stock, $ .0001 par value, 50,000,000 shares
authorized, 4,041,598 shares issued and outstanding
(actual) and (pro forma) 4,042 22,312
Additional paid-in capital 14,530,911 1,365,537
Cumulative translation adjustment - (534,067)
Retained earnings (deficit) (13,604,403) (9,185,535)
Common stock subject to put (380,000) -
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 4,340,075 (8,331,753)
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,866,344 $ 2,941,926
===================== =====================
</TABLE>
ASSETS
<TABLE>
<CAPTION>
Pro Forma
Adjustments
-----------------------
DR (CR) Total
----------------------- --------------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ (7,233) $ 1,475,094
Restricted cash - 125,000
Accounts receivable, net - 268,428
Inventory (207,319) 1,296,879
Prepaid expenses and other current assets (95,254) 554,533
----------------------- --------------------
TOTAL CURRENT ASSETS (309,806) 3,719,934
PROPERTY AND EQUIPMENT (75,146) 644,854
PATENTS AND CUSTOMER LISTS - 4,733,363
GOODWILL 4,303,426 5,148,206
DEPOSITS AND OTHER ASSETS (21,979) 458,408
NET ASSETS HELD FOR DISPOSITION - -
--------------------------- --------------------
$ 3,896,495 $ 14,704,765
=========================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ - $ 1,049,566
Accounts payable and accrued expenses 3,655,197 2,702,547
Revolving credit line -
Accrued expenses for discountinued operations - 789,833
Deferred revenue -
Accrued expenses for discontinued operations - 314,593
Accrued consulting contract - 360,131
Notes payable 2,035,521 195,000
Notes payable - related parties 2,114,747 -
Current portion of long-term debt, net of discount - 636,081
Other current liabilities 510,987 104,939
--------------------------- --------------------
TOTAL CURRENT LIABILITIES 8,316,452 6,152,690
--------------------------- --------------------
LONG TERM DEBT - -
MINORITY INTEREST (49,194) -
COMMON STOCK SUBJECT TO PUT - 380,000
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 1,500,000 shares
authorized, 4,747 shares issued and outstanding
(actual) and 7,897 (pro forma) (3,150,000) 6,939,525
Common stock, $ .0001 par value, 50,000,000 shares
authorized, 1,367,995 shares issued and outstanding - -
(actual) and (pro forma) 22,312 4,042
Additional paid-in capital 683,537 15,212,911
Cumulative translation adjustment (534,067) -
Retained earnings (deficit) (9,185,535) (13,604,403)
Common stock subject to put - (380,000)
--------------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (12,163,753) 8,172,075
--------------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ (3,896,495) $ 14,704,765
=========================== ====================
</TABLE>
See notes to pro forma financial statements.
F-3
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Natural Health Kaire
Trends, Corp. International, Inc.
Nine months ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
1998 1998
---------------------------- ---------------------------
<S> <C> <C>
REVENUES $ 1,001,481 $ 21,018,916
COST OF GOODS SOLD 283,206 5,158,842
---------------------------- ---------------------------
GROSS PROFIT 718,275 15,860,074
DISTRIBUTOR COMMISSIONS - 10,853,535
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,470,312 7,309,552
---------------------------- ---------------------------
OPERATING LOSS (1,752,037) (2,303,013)
INTEREST INCOME (EXPENSE) (336,314) (684,808)
MINORITY (INCOME) EXPENSE - 140,661
OTHER INCOME (EXPENSE) - (345,104)
PROVISION FOR TAXES - -
---------------------------- ---------------------------
LOSS FROM CONTINUING OPERATIONS (2,088,351) (3,192,264)
PREFERRED STOCK DIVIDENDS (2,028,196) -
---------------------------- ---------------------------
LOSS TO COMMON SHAREHOLDERS $ (4,116,547) $ (3,192,264)
============================ ===========================
NET LOSS PER SHARE - BASIC $ (2.30)
============================
WEIGHTED AVERAGE SHARES 1,786,500
============================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Adjustments
----------------
DR (CR) Total
---------------- ---------------------
<S> <C> <C>
REVENUES $ - $ 22,020,397
COST OF GOODS SOLD - 5,442,048
---------------- ---------------------
GROSS PROFIT - 16,578,349
DISTRIBUTOR COMMISSIONS - 10,853,535
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 215,000(1) 9,994,864
---------------- ---------------------
OPERATING LOSS (215,000) (4,270,050)
INTEREST INCOME (EXPENSE) - (1,021,122)
MINORITY (INCOME) EXPENSE - 140,661
OTHER INCOME (EXPENSE) - (345,104)
PROVISION FOR TAXES - -
---------------- ---------------------
LOSS FROM CONTINUING OPERATIONS (215,000) (5,495,615)
PREFERRED STOCK DIVIDENDS 142,000(2) (2,170,196)
---------------- ---------------------
LOSS TO COMMON SHAREHOLDERS $ (357,000) $ (7,665,811)
================ =====================
NET LOSS PER SHARE - BASIC - $ (4.29)
================ =====================
WEIGHTED AVERAGE SHARES - 1,786,500
================ =====================
</TABLE>
See notes to pro forma financial statements.
F-4
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Natural Health Kaire
Trends, Corp. International, Inc.
Year ended Year ended
December 31, December 31,
--------------------- -----------------------
1997 1997
--------------------- -----------------------
<S> <C> <C>
REVENUES $ 1,133,726 $ 35,681,512
COST OF GOODS SOLD 375,034 8,387,963
--------------------- -----------------------
GROSS PROFIT 758,692 27,293,549
DISTRIBUTOR COMMISSIONS - 19,968,230
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,194,044 13,008,859
--------------------- -----------------------
OPERATING LOSS (3,435,352) (5,683,540)
INTEREST INCOME (EXPENSE) (868,721) (671,819)
MINORITY (INCOME) EXPENSE - 133,590
OTHER INCOME (EXPENSE) - 110,267
BENEFIT FROM TAXES - 12,973
--------------------- -----------------------
LOSS FROM CONTINUING OPERATIONS (4,304,073) (6,098,529)
PREFERRED STOCK DIVIDENDS (733,333) -
--------------------- -----------------------
LOSS TO COMMON SHAREHOLDERS $ (5,037,406) $ (6,098,529)
===================== =======================
NET LOSS PER SHARE - BASIC $ (11.60)
=====================
WEIGHTED AVERAGE SHARES 434,265
=====================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Adjustments
------------------------
DR (CR) Total
------------------------ -----------------
<S> <C> <C>
REVENUES $ - $ 36,815,238
COST OF GOODS SOLD - 8,762,997
------------------------ -----------------
GROSS PROFIT - 28,052,241
DISTRIBUTOR COMMISSIONS - 19,968,230
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 287,000 (1) 17,489,903
------------------------ -----------------
OPERATING LOSS (287,000) (9,405,892)
INTEREST INCOME (EXPENSE) - (1,540,540)
MINORITY (INCOME) EXPENSE - 133,590
OTHER INCOME (EXPENSE) - 110,267
BENEFIT FROM TAXES - 12,973
------------------------ -----------------
LOSS FROM CONTINUING OPERATIONS (287,000) (10,689,602)
PREFERRED STOCK DIVIDENDS 189,000(2) (922,333)
------------------------ -----------------
LOSS TO COMMON SHAREHOLDERS $ (476,000) $ (11,611,935)
======================== =================
NET LOSS PER SHARE - BASIC - $ (26.74)
======================== =================
WEIGHTED AVERAGE SHARES - 434,265
======================== =================
</TABLE>
See notes to pro forma financial statements.
F-5
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
A. The following unaudited pro-forma adjustments are included in the
accompanying unaudited pro forma consolidated balance sheet at
September 30, 1998:
(1) To record the acquisition of certain assets and the assumption of
certain liabilities of Kaire for $2,800,000 face amount of the
Company's Series F convertible preferred stock, with the acquisition
accounted for as a purchase business combination. Additionally, the
Company issued $350,000 face amount of Series G preferred stock for
settlement of certain Kaire liabilities. The preferred stock pays
dividends at the rate of 6% per annum, and is convertible into common
stock at 95% of the common stock's market value. In addition to the
Series F Preferred Stock, the sellers received five year warrants to
purchase 200,000 shares of common stock at an exercise price of 110% of
the closing bid price of the common stock on the date before the
closing. The Company has computed an aggregate $682,000 value on the
warrants under the Black Scholes Option Pricing Model. No value is
attributed to the 5% discount off market upon the conversion of the
preferred stock into common, since substantially all the common stock
obtainable upon such conversion is subject to a two year lock-up and
the 5% level of discount is considered reasonable in light of this
restriction. Recorded goodwill totals $4,303,426, but is based on a
preliminary purchase allocation which is subject to adjustment. The
computation is as follows:
Assets Acquired:
Cash $ 578,468
Accounts receivable 249,397
Inventory 859,964
Prepaid expenses and other assets 248,577
Property and equipment 598,589
-----------
$ 2,534,995
Liabilities Assumed:
Cash overdraft 1,049,566
Accounts payable and accrued expenses 1,712,958
Note payable and capital obligations 243,897
-----------
3,006,421
-----------
Net book value (471,426)
Purchase price (including value of
Warrants) 3,832,000
-----------
Goodwill $ 4,303,426
===========
B. The following pro-forma adjustments are included in the accompanying
unaudited pro forma consolidated statements of operations for the year
ended December 31, 1997 and the nine months period ended September 30,
1998:
(1) To amortize goodwill over 15 years.
(2) To record preferred stock dividends.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
Pompano Beach, Florida
We have audited the accompanying consolidated balance sheet of Natural
Health Trends Corp. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
the financial position of Natural Health Trends Corp. and Subsidiaries as of
December 31, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses in
each of the last two fiscal years and as more fully described in Note 2, the
Company anticipates that additional funding will be necessary to sustain the
Company's operations through the fiscal year ending December 31, 1998. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Feldman Sherb Ehrlich & Co., P.C.
--------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
(Formerly Feldman Radin & Co., P.C.)
Certified Public Accountants
New York, New York
March 10, 1998 and
April 14, 1998 as to
Notes 2 (O), 6 (E) and 16 and
July 1, 1998 as to Note 7 (B)
F-7
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
CURRENT ASSETS:
Cash $ 104,784
Restricted cash 250,000
Accounts receivable 1,979,948
Inventories 1,026,999
Prepaid expenses and other current assets 184,576
-----------
TOTAL CURRENT ASSETS 3,546,307
PROPERTY AND EQUIPMENT 3,518,117
DEPOSITS AND OTHER ASSETS 6,740,497
-----------
$13,804,921
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,026,436
Accrued expenses 1,199,887
Revolving credit line 217,422
Accrued expenses for discontinued operations 338,446
Current portion of long term debt 2,020,349
Deferred revenue 1,089,647
Current portion of accrued consulting contract 246,607
Other current liabilities 325,115
-----------
TOTAL CURRENT LIABILITIES 8,463,909
-----------
LONG-TERM DEBT 2,254,591
DEBENTURES PAYABLE 179,767
ACCRUED CONSULTING CONTRACT 113,524
ACCRUED EXPENSES DISCONTINUED OPERATIONS 17,616
COMMON STOCK SUBJECT TO PUT 380,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,500,000
shares authorized; 2,200 shares
issued and outstanding 1,900,702
Common stock, $.001 par value;
5,000,000 shares authorized; 758,136 shares
issued and outstanding at December 31, 1997 758
Additional paid-in capital 11,941,381
Retained earnings (accumulated deficit) (11,053,577)
Common stock subject to put (380,000)
Prepaid stock compensation (13,750)
-----------
TOTAL STOCKHOLDERS' EQUITY 2,395,514
-----------
$13,804,921
===========
See notes to consolidated financial statements.
F-8
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------
1997 1996
-------------- -------------
REVENUES $ 1,133,726 $ 0
COST OF SALES 375,034 0
----------- ----------
GROSS PROFIT 758,692 0
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,194,044 1,092,247
NON-CASH IMPUTED COMPENSATION EXPENSE -- 22,000
LITIGATION SETTLEMENT -- --
----------- ----------
OPERATING INCOME (LOSS) (3,435,352) (1,114,247)
OTHER INCOME (EXPENSE):
Interest (net) (868,721) (32,209)
Other -- --
Miscellaneaous Revenue -- (2,090)
----------- ----------
INCOME(LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX (4,304,073) (1,148,546)
PROVISION FOR INCOME TAX -- --
----------- ----------
INCOME (LOSS) FROM CONTINUED
OPERATIONS (4,304,073) (1,148,546)
----------- ----------
DISCONTINUED OPERATIONS:
Income (Loss) From
Discontinued Operations (2,919,208) 176,558
Gain (Loss) On Disposal (501,839) 82,450
----------- ----------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (3,421,047) 259,008
----------- ----------
NET INCOME (LOSS) $(7,725,120) $ (889,538)
=========== ==========
BASIC INCOME (LOSS) PER COMMON SHARE:
Continued Operations $ (11.60) $ (4.10)
Discontinued Operations (7.88) 0.93
----------- ----------
NET INCOME (LOSS) PER COMMON SHARE $ (19.48) $ (3.17)
=========== ==========
WEIGHTED AVERAGE COMMON SHARES USED 434,265 280,350
=========== ==========
See notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Preferred Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ----------- --------- --------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 267,728 $ 268 -- $ --
Shares issued for acquisitions 9,500 9 -- --
Shares issued for consulting agreement 2,500 2 -- --
Amortization of prepaid consulting -- -- -- --
Shares issued to employees 400 1 -- --
Convertible debentures treated as converted 28,522 29 -- --
Common stock subject to put -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1996 308,650 309 -- --
Sale of convertible Series A preferred stock -- -- 2,200 1,900,702
Preferred stock dividends imputed -- -- -- --
Conversion of debentures 303,986 303 -- --
Stock issued for acquisition 145,000 145 -- --
Other issuances 500 1 -- --
Issuance of stock options -- -- -- --
Amortization of deferred stock compensation -- -- -- --
Discount on debentures -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1997 758,136 $ 758 2,200 $ 1,900,702
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common
Additional Retained Stock Deferred
Paid-in Earnings Subject Stock
Capital (Deficit) to Put Compensation Total
------------- ------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 $ 3,877,730 $ (1,705,584) $ -- $ -- $ 2,172,414
Shares issued for acquisitions 1,367,991 -- -- -- 1,368,000
Shares issued for consulting agreement 164,998 -- -- (165,000) --
Amortization of prepaid consulting -- -- -- 68,750 68,750
Shares issued to employees 21,999 -- -- -- 22,000
Convertible debentures treated as converted 809,971 -- -- -- 810,000
Common stock subject to put -- -- (380,000) -- (380,000)
Net loss -- (889,539) -- -- (889,539)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1996 6,242,689 (2,595,123) (380,000) (96,250) 3,171,625
Sale of convertible Series A preferred stock -- -- -- -- 1,900,702
Preferred stock dividends imputed 733,333 (733,333) -- -- --
Conversion of debentures 1,207,172 -- -- -- 1,207,475
Stock issued for acquisition 2,899,855 -- -- -- 2,900,000
Other issuances 24,999 -- -- -- 25,000
Issuance of stock options 400,000 -- -- -- 400,000
Amortization of deferred stock compensation -- -- -- 82,500 82,500
Discount on debentures 433,333 -- -- -- 433,333
Net loss -- (7,725,120) -- -- (7,725,120)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1997 $ 11,941,381 $(11,053,577) $ (380,000) $ (13,750) $ 2,395,514
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
December 31
----------------------------------
1997 1996
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(7,725,120) $ (889,539)
----------- -----------
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization 567,670 244,571
Non-cash imputed compensation expense 425,000 22,000
Loss on disposal of fixed assets, net 105,001 --
Interest settled by issuance of stock 116,065 --
Write-off of goodwill 1,325,605 --
Amortization of note payable discount 433,333 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (533,815) (707,544)
(Increase) decrease in inventories (271,235) (130,295)
(Increase) decrease in prepaid expenses (24,566) 31,393
(Increase) decrease in due from affiliate -- (1,200)
(Increase) decrease in deposits and other assets (112,238) (34,518)
Increase (decrease) in accounts payable 1,613,581 97,959
Increase (decrease) in accrued expenses 737,197 286,463
Increase (decrease) in deferred revenue 325,767 278,636
Increase (decrease) in other current liabilities (55,989) --
Increase (decrease) in accrued expenses for disc. operations 356,062 --
Increase (decrease) in accrued consulting contract 360,131 --
----------- -----------
TOTAL ADJUSTMENTS 5,367,569 87,465
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,357,551) (802,074)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (611,863) (438,650)
Net cash provided by (used for) acquistions 20,241 (11,388)
Loan to Global Health Alternatives, Inc. (1,964,000) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,555,622) (450,038)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in due from officer 136,495 (1,887)
(Increase) decrease in due to related parties 23,724 --
(Increase) decrease in restricted cash 8,932 (258,932)
Proceeds from preferred stock 2,200,000 --
Proceeds from sale of debentures 1,626,826 810,000
Payment of debentures (355,650) --
Offering costs of preferred stock (299,299) --
Proceeds from notes payable and long-term debt 3,273,551 349,851
Payments of notes payable and long-term debt (2,113,945) (44,215)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,500,634 854,817
----------- -----------
NET INCREASE (DECREASE) IN CASH (412,539) (397,295)
CASH, BEGINNING OF YEAR 517,323 914,618
----------- -----------
CASH, END OF YEAR $ 104,784 $ 517,323
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
Year ended
December 31
---------------------------
1997 1996
----------- -----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 450,470 $236,671
========== ========
Income taxes $ -- $ --
========== ========
DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
During fiscal year 1997, debentures
and accrued interest totaling $1,207,474
were converted to Common Stock.
See notes to consolidated financial statements.
F-12
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
Natural Health Trends Corp. (formerly known as Florida
Institute of Massage Therapy, Inc.) (the "Company") was incorporated
under the laws of the State of Florida in December 1988.
The Company's primary business is the operation of schools
which develop, market and offer curricula in therapeutic massage
training and skin care therapy. The Company presently has a total of
three schools, located in the Miami, Pompano Beach and Orlando, Florida
areas. Natural Health Shoppe, Inc. is a wholly owned subsidiary which
owns and operates on-site book stores servicing the school's students,
practicing therapists and the public.
In July 1997, the Company acquired Global Health Alternatives,
Inc.,("Global") a company incorporated in Delaware and headquartered in
Portland, Maine, which is in the business of marketing and distribution
of over-the-counter homeopathic pharmaceutical health products. Global
operates its business through its wholly owned subsidiaries: GHA (UK),
Ltd., Ellon, Inc. ("Ellon"), Maine Naturals, Inc. ("MNI") and Natural
Health Laboratories, Inc.
In 1996, the Company opened two natural health care centers
which provided multi- disciplinary complementary health care in the
areas of alternative and nutritional medicine. These facilities were
closed during 1997 and accordingly are being accounted for as
discontinued operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
financial statements include the accounts of Natural Health Trends
Corp. and its subsidiaries. All material inter-company transactions
have been eliminated in consolidation.
B. ACCOUNTS RECEIVABLE - Accounts receivable are stated net of
allowance for doubtful accounts of $92,912.
F-13
<PAGE>
C. INVENTORIES - Inventories consisting primarily of books and supplies
for the schools, and natural remedies for Global, are stated at the
lower of cost or market. Cost is determined using the first-in,
first-out method.
D. PROPERTY AND EQUIPMENT - Property and equipment is carried at cost.
Depreciation is computed using the straight-line method and accelerated
methods over the useful lives of the various assets, which is generally
five to seven years for equipment, and furniture and fixtures, and
thirty-nine years for the building.
E. CASH EQUIVALENTS - Cash equivalents consist of money market accounts
and commercial paper with an initial term of fewer than three months.
For purposes of the statement of cash flows, the Company considers
highly liquid debt instruments with original maturities of three months
or less to be cash equivalents.
F. DEFERRED REVENUE - Deferred revenue represents tuition revenues
which will be recognized into income as earned. Tuition revenue is
recognized as earned over the enrollment period.
G. EARNINGS (LOSS) PER SHARE - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS No. 128"), which became
effective for both interim and annual financial statements for periods
ending after December 15, 1997. FAS No. 128 requires a presentation of
"Basic" and (where applicable) "Diluted" earnings per share. Generally,
Basic earnings per share are computed on only the weighted average
number of common shares actually outstanding during the period, and the
Diluted computation considers potential shares issuable upon exercise
or conversion of other outstanding instruments where dilution would
result. Furthermore, FAS No. 128 requires the restatement of prior
period reported earnings per share to conform to the new standard. The
per share presentations in the accompanying financial statements
reflect the provisions of FAS No. 128. Loss per share is reduced by
$733,333 of preferred stock dividends for 1997.
H. ACCOUNTING ESTIMATES - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
I. CONCENTRATION OF CREDIT RISK - The Company has most of its cash
maintained in an asset trust account with a financial institution where
account balances are not federally-insured. The Company has not
experienced any losses in the account. The Company believes it is not
exposed to any significant credit risk on cash and cash equivalents.
F-14
<PAGE>
J. INCOME TAXES - Pursuant to SFAS 109, the Company accounts for income
taxes under the liability method. Under the liability method, a
deferred tax asset or liability is determined based upon the tax effect
of the differences between the financial statement and tax basis of
assets and liabilities as measured by the enacted rates which will be
in effect when these differences reverse.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported
in the balance sheet for cash, receivables, and accrued expenses
approximate fair value based on the short-term maturity of these
instruments.
L. STOCK BASED COMPENSATION - The Company accounts for stock
transactions in accordance with APB Opinion No. 25, "Accounting For
Stock Issued To Employees." In accordance with Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based
Compensation," the Company has adopted the pro forma disclosure
requirements of Statement No. 123 in fiscal 1997.
M. IMPAIRMENT OF LONG - LIVED ASSETS - The Company reviews long-lived
assets, certain identifiable assets and goodwill related to those
assets for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be
recovered. At December 31, 1997, the Company believes that there has
been no impairment of its long-lived assets.
N. RECENT ACCOUNTING PRONOUNCEMENTS - SFAS No. 130, "Reporting
Comprehensive Income," established standards for the reporting and
display of comprehensive income and its components. SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
establishes standards for reporting information about operating
segments in annual and interim financial statements. The Company will
adopt these standards in the first quarter of 1998. They will not have
any significant effect on the Company's financial position or results
of operations.
O. BASIS OF PRESENTATION - At December 31, 1997, the Company has a
working capital deficiency of approximately $4,918,000 and has recorded
a net loss of approximately $7,725,000 for the year then ended. The
Company's continued existence is dependent on its ability to obtain
additional debt or equity financing and to generate profits from
operations. Management has instituted certain plans in regard to these
matters as more fully described in Note 16.
P. ROYALTY EXPENSE - Royalties that are incurred on a per unit sold
basis are included in Cost of Sales. Additional royalty amounts
incurred to meet contractual minimum levels are classified as Selling,
General and Administrative Expenses.
F-15
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1997:
Life Range Amount
----------- -------------
Equipment, furniture and fixtures 5 to 7 $ 393,507
Building and improvements 3 to 5 2,693,449
Land --- 893,809
-------------
3,980,764
Less: Accumulated depreciation (462,647)
=============
$ 3,518,117
=============
4. OTHER ASSETS
Other assets consisted of the following at December 31, 1997:
Deposits and other assets $ 162,732
Goodwill, net of accumulated
amortization of $50,181 1,223,276
Deferred finance costs, net of accumulated
amortization of $72,832 185,985
Patents and customer list, net of
accumulated amortization of $216,909 5,063,091
Other intangible assets net of accumulated
amortization of $194,800 105,413
-----------
$ 6,740,497
===========
The goodwill, the patents, and the customer list arise in
connection with the acquisitions of businesses made by the Company in
1997, 1996 and 1995. The deferred finance costs relate to convertible
debentures made in 1997. The goodwill, the patents, the customer list,
and the deferred finance costs are being amortized over their estimated
useful lives which are 5 years for the customer list, 20 years for
goodwill and 11 and 17 years for patents.
F-16
<PAGE>
<TABLE>
<CAPTION>
5. LONG-TERM DEBT
<S> <C>
Long-term debt consisted of the following at December 31, 1997:
Note payable for purchase of school, bearing interest at
8.75%, principal and interest payments due quarterly
commencing February 1996 through November 1999 $ 67,896
Mortgage Note payable to a bank, bearing interest at
8.24%. Monthly payments consisting of principal and
interest are approximately $29,352 and are payable through
November 2007, at which time the balance of principal is
due in a balloon payment in November 2007 2,247,725
$100,000 promissory note, bearing interest at 18%.
Interest starts accruing on August 26, 1997, with monthly
interest payments of $1,500 due on the 15th day of each
month. Principal amount due in full on August 26, 1998 100,000
Line of Credit - Merrill Lynch, for a maximum availability
of $300,000, annually renewable in November with
interest at prime +1%, collateralized by money market
accounts held with Merrill Lynch 217,422
$375,000 face amount note payable, noninterest bearing,
due October 1, 2000 (less unamortized discount based on
imputed interest rate of 12% per annum - $41,385). Initial
payment of $93,750 on October 15, 1996, then monthly
payments of $7,813 beginning on November 1, 1997 and
ending October 1, 2000 239,865
$75,000 face amount note payable, noninterest bearing,
due September 15, 1998 (less unamortized discount based
on imputed interest rate of 12% per annum - $1,349).
Monthly payments of $4,166 from October 1996 through
September 1997, and $2,084 from October 1997 through
September 1998 47,819
$69,000 face amount note payable, noninterest bearing,
due October 15, 1997 (less unamortized discount based on
imputed interest rate of 12% per annum - $0). Initial
payment of $19,500 on October 15, 1996, then monthly
payments of $4,500 from December 1996 through October
1997 27,000
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Various bridge notes totaling $685,000, bearing interest at
12.5%. In the event of default, 14.5% interest rate will be
applied from the date of default on the unpaid principal
and interest balances. Principal and interest payments due
in full on September 15, 1997 685,000
Bridge notes issued in October and November 1997,
bearing interest at 14% per annum, due in February 1998,
$700,000 of which are secured by the schools and the
Pompano building, and $150,000 of which are secured by
Global common stock 850,000
------------
Other 9,635
------------
4,492,362
Less: Current portion (2,237,771)
------------
$ 2,254,591
============
The two noninterest bearing notes and the various bridge notes
above were not paid on the maturity date and accordingly all unpaid
balances are included in current portion of long-term debt.
Long-term debt maturities for the next five years are as follows:
</TABLE>
1998 $ 2,237,771
1999 66,411
2000 33,647
2001 36,527
2002 39,653
6. STOCKHOLDERS' EQUITY
A. Common Stock - The Company was authorized to issue 40,000,000 shares
of common stock, $.001 par value per share.
B. Preferred Stock - The Company is authorized to issue a maximum of
1,500,000 shares of $.001 par preferred stock, in one or more series
and containing such rights, privileges and limitations, including
voting rights, dividend rates, conversion privileges,
F-18
<PAGE>
redemption rights and terms, redemption prices and liquidation
preferences, as the Company's board of directors may, from time to
time, determine.
In June 1997, the Company sold 2,200 shares of its convertible
Series A preferred stock for $1,000 a share realizing net proceeds of
$1,900,702. The preferred stock pays dividends at the rate of 8% per
annum payable in cash or shares of the Company's common stock valued at
75% of the closing bid price. The preferred stock has a liquidation
preference of $1,000 per share. The preferred stock is convertible
commencing 60 days after issuance, provided that a registration
statement covering the resale of the shares of common stock is
effective, at the rate of 75% of the average closing bid price of the
common stock over the five days preceding the notice of redemption. The
Company has the right to redeem the preferred stock for 240 days after
the date of issuance at the rate of 125% of the stated value. If a
registration statement is not deemed effective within 60 days of the
date of issuance, then the Company is obligated to pay a penalty at the
rate of 2.5% per month.
C. Convertible Debentures - In April 1997, the Company issued
$1,300,000 of 6% convertible debentures (the "Debentures"). Principal
on the Debentures is due in March 2000. The principal and accrued
interest on the Debentures are convertible into shares of common stock
of the Company. The Debentures are convertible into shares of common
stock at a conversion price equal to the lesser of $1.4375 or 75% of
the average closing bid price of the Common Stock for the five trading
days immediately preceding the notice of conversion. In June 1997, the
Company repaid $300,000 of the Debentures. As of December 1997,
$820,233 of such debentures were converted into shares of common stock.
In conjunction with the issuance of the Debentures, the
Company issued warrants to purchase an aggregate of 5,000 shares of
Common Stock. The warrants are exercisable until April 3, 2002.
Warrants to purchase 2,500 shares of Common Stock are exercisable at
$2.4375 per share, and the balance are exercisable at $3.25 per share.
D. Issuance Of Options - During the quarter ended September 30, 1997,
the Company's president and secretary were issued an aggregate of
20,000, 10 year options, exercisable at $.001 per share. The Company
has recorded a non-cash expense of $400,000 representing the difference
between the exercise price and the fair value of the common stock.
E. 1 For 40 Reverse Stock Split - On April 6, 1998, the Company
effected a 1 for 40 reverse split of its Common Stock, amending its
certificate of incorporation to provide for the authority to issue
5,000,000 shares of $.001 par value Common Stock. All per share data in
these financial statements is retroactively restated to reflect this
reverse split.
F-19
<PAGE>
7. DISCONTINUED OPERATIONS
A. During the third quarter of 1997, the Company reached a decision to
discontinue the medical clinic line of business. Net assets of the
medical clinics were approximately $1,509,405 consisting primarily of
furniture and equipment, accounts receivable and goodwill. Liabilities
were approximately $213,987. The Company has accrued an estimated loss
on disposal of approximately $716,193 representing primarily accrued
employment contract and lease terminations. Accordingly, the results of
the clinic operations are shown separately as "discontinued
operations." The Company's 1996 financial information has been
reclassified to conform with the 1997 presentation. Revenues of the
discontinued medical clinic line of business were $1,754,066 for 1997
and $2,374,469 for 1996.
B. During the quarter ended June 30, 1998, the Company discontinued its
schools line of business. The accompanying financial statements have
been restated to present this line of business as discontinued
operations. Revenues of the discontinued schools line of business were
$5,858,790 and $4,844,372 for the fiscal years ended December 31, 1997
and 1996 respectively.
8. INCOME TAXES
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires the recognition
of deferred tax assets and liabilities for both the expected impact of
differences between the financial statement and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from
tax loss and tax credit carryforwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. At December 31, 1997,
the Company had net deferred tax assets of approximately $4,119,000.
The Company has established a valuation allowance for the full amount
of such deferred tax assets. The following table gives the Company's
deferred tax assets and (liabilities) at December 31, 1997:
Net operating loss deduction $ 3,760,000
Deferred revenue 436,000
Section 481 adjustment (124,000)
Other 5,000
Valuation allowance (4,077,000)
----------------
$ --
================
F-20
<PAGE>
The provision for income taxes (benefits) differs from the
amount computed by applying the statutory federal income tax rate to
income (loss) before income taxes as follows:
Year Ended
------------------------------
December 31,
------------------------------
1997 1996
-------------- ------------
Income tax (benefit) computed at statutory rate $(2,704,000) $ (670,000)
Effect of temporary differences 152,000 146,000
Effect of permanent differences 13,000 19,000
Tax benefit not recognized 2,539,000 505,000
----------- -----------
Provision for income taxes (benefit) $ -- $ --
=========== ===========
The net operating loss carryforward at December 31, 1997 was
approximately $9,401,000 and expires in the years 2011 to 2012.
9. COMMITMENTS AND CONTINGENCIES
A. The Company leases its school facilities under non-cancelable
operating leases. The lease terms are five years and expire from
October 1998 through December 2002. The Company leases its Portland
Maine office under a lease expiring in 1999. Rent expense for the years
ended December 31, 1997 and 1996 was $1,306,597 and $647,907,
respectively. Minimum rental commitments over the next five years are
as follows:
1998 $ 538,899
1999 364,378
2000 378,272
2001 293,317
2002 302,112
F-21
<PAGE>
B. During the quarter ended March 31, 1997, the Company renegotiated
with a former stockholder of Sam Lily, Inc. with whom it was obligated
under an employment agreement to cancel the employment agreement and
replaced it with a consulting agreement. The consulting agreement
requires the individual to provide services to the Company for one day
per week through December 1998 at the rated of $5,862 per week. The
Company has determined that the future services, if any, that it will
require will be of little or no value and is accounting for this
obligation as a cost of severing the employment contract. Accordingly,
the present value (applying a discount rate of 10%) of all future
payments is accrued in full at September 1997. The expense associated
with this accrual is recorded as part of the loss from discontinued
operations.
C. Litigation - On August 4, 1997 Samantha Haimes brought an action in
the Fifteenth Judicial Circuit of Palm Beach County, Florida, against
the Company and Health Wellness Nationwide Corp., the Company's
wholly-owned subsidiary. The Company has asserted counterclaims against
Samantha Haimes and Leonard Haimes. The complaint arises out of the
defendant's alleged breach of contract in connection with the Company's
medical clinic located in Pompano Beach, Florida. The Company is
vigorously defending the action. The plaintiff is seeking damages in
the amount of approximately $535,000. No accrual for the litigation has
been made in the financial statements as it is the Company's belief
that it will prevail in the litigation.
On September 10, 1997 Rejuvenation Unlimited, Inc. and Sam Lilly, Inc.
brought an action in the Fifteenth Judicial Circuit of Palm Beach
County, Florida, arising out of the Company's alleged breach of
contract in connection with the acquisition of the Company's medical
clinic in Pompano Beach, Florida from the plaintiff. The plaintiff is
seeking damages in excess of $15,000. The Company is vigorously
defending the action and believes that the loss, if any, will be
immaterial.
10. PURCHASE OF BUILDING AND REFINANCE
The Company purchased a building located in Pompano Beach,
Florida (the "Pompano Property") to which it relocated its Lauderhill,
Florida school and corporate offices. The purchase price for the
property was $2,350,000, of which $1,875,000 was financed through a
first and second mortgage. The Pompano Property was encumbered by
mortgages securing repayment of loans made to acquire an adjacent
parcel which is owned by Justin Real Estate Corp. ("Justin Corp."). All
of the common stock of Justin Corp. is owned by principal shareholders
of the Company.
In October 1997, the Company refinanced the mortgage and
entered into a new mortgage with another financial institution in the
amount of $2,250,000. Monthly payments, including principal and
interest are $17,725 through October 2007, with the balance of any
unpaid principal due in November 2007. The interest rate is 8.24% per
annum.
F-22
<PAGE>
Simultaneously with this transaction, the Company paid off the
underlying mortgage on the adjacent parcel owned by Justin Corp. in the
amount of $435,000. The Company has recorded this amount as an increase
in the basis of the land.
11. REVENUES
The schools obtain a large proportion of their revenues from
Federal and State student financial aid programs. For the year ended
December 31, 1997, the schools derived approximately 66% of tuition
collections from students with financial aid and approximately 34% from
students without financial aid. The schools' ability to obtain such
funding is dependent on a number of factors, including meeting various
educational accreditation and licensing standards and also certain
financial standards such as maintaining at least a 15% ratio of
non-financial aid students. The Company believes it has complied with
all other factors necessary to obtain funding.
The duties of disbursing Federal aid funds is handled by an
independent service company through separate federal trust accounts.
All requests and payments for Federal funds are done by the outside
service company. Federal aid funds are wired into a separate U.S.
Federal Pell Trust Account and the money can only be transferred to the
Company's operating accounts with check registers issued by the outside
service company. The Company believes that it is in compliance with
Federal requirements with respect to the administration of Federal aid
programs.
12. COMMON STOCK SUBJECT TO PUT
In connection with the January 1996 acquisition of the net
assets of Sam Lilly, Inc. the 9,500 shares issued in connection with
the acquisition are subject to the seller's ability to require the
Company to repurchase such shares for a three year period for $380,000,
in the event that the aggregate market value of the shares falls below
$380,000. Such shares are excluded from permanent equity on the
accompanying balance sheet. As of March 1998, this matter is subject to
litigation.
13. STOCK OPTION PLAN
Under the Company's 1994 Stock Option Plan, up to 16,667
shares of common stock are reserved for issuance. The exercise price of
the options will be determined by the Stock Option Committee selected
by the board of directors, but the exercise price will not be less than
85% of the fair market value on the date of grant. Towards the end of
1995, 50 options were issued to each of two directors at an exercise
price equal to the market price at the time. During 1996 the Company
issued 250 options to a director at a price equal to the fair market
F-23
<PAGE>
value on the date of grant. In August 1997, the Company adopted a stock
option plan covering officers, directors, employees and consultants. In
August the Company issued 43,750 ten year options under the 1997 Plan,
exercisable at fair market value (which was $22.40 per share) to
certain of its officers who were former principals of Global. Options
to purchase 21,875 shares will be exercisable in August 1998, and the
remaining 21,875 will be exercisable in August 1999.
In fiscal 1997, the Company adopted the disclosure provisions
SFAS No. 123, "Accounting for Stock-Based Compensation". For disclosure
purposes, the fair value of options is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for stock options granted during the
years ended December 31, 1997 and December 31, 1996: annual dividends
of $0; expected volatility of 50%; risk free interest rate of 7% and
expected life of 10 years. The weighted average fair value of stock
options granted during the years ended December 31, 1997 and December
31, 1996 was $21.60 and $142.00, respectively. If the Company had
recognized compensation cost of stock options in accordance with SFAS
No. 123, the Company's proforma net income (loss) and net income (loss)
per share would have been $(8,608,120) and $(19.82) per share for the
fiscal year ended December 31, 1997 and $(983,538) and $(3.40) per
share for the fiscal year ended December 31, 1997. Pro forma income
(loss) from continuing operations would have been $(6,083,679) and
$(14.01) per share in 1997 and $(850,346) and $(3.03) per share in
1996.
14. ACQUISITIONS
On July 23, 1997, the Company closed on the acquisition of the
capital stock of Global Health Alternatives, Inc. ("Global"). The
purchase price for the acquisition of Global was settled with the
issuance of 145,000 shares of the Company's common stock. The Company
has agreed to issue to former Global shareholders additional shares of
common stock as follows: I) up to 20,000 shares if Global's pre-tax
operating earnings equal or exceed $1,200,000 for the period from July
1, 1997 through June 30, 1998, and ii) shares equal in market value to
the lesser of $45 million or eight times Global pre-tax operating
earnings for the period from July 1, 1999 through June 30, 2000 minus
the fair market value on the date of issuance of the 145,000 share
initial consideration or the 20,000 contingent shares, if they are
earned. The following table summarizes the acquisition.
Purchase price $ 2,900,000
Liabilities assumed 4,530,741
Fair value of assets acquired (6,511,954)
------------
Goodwill $ 918,787
============
F-24
<PAGE>
The assets acquired included two patents, one (the"Troy
Patent") is valued at $4,819,000, and is being amortized over its
remaining life of 11 years, the other (the "Xu Patent") is valued at
$404,000 and is being amortized over its remaining life of 17 years.
Additionally, the Company acquired a customer list valued at $57,000,
which is being amortized over 5 years.
The following schedule combines the unaudited pro-forma
results of operations the Company and Global, as if the acquisition
occurred on January 1, 1996 and includes such adjustments which are
directly attributable to the acquisition, including the amortization of
goodwill. It should not be considered indicative of the results that
would have been achieved had the acquisition not occurred or the
results that would have been obtained had the acquisitions actually
occurred on January 1, 1996.
Year ended December 31,
---------------------------------
1997 1996
--------------- ------------
Revenues $ 7,856,071 $ 5,129,857
=============== ===========
Loss from continuing operations $ (7,709,728) $(2,933,434)
=============== ===========
Net loss $ (10,234,169) $(3,036,626)
=============== ===========
Loss per share from
continuing operations $ (15.21) $ (6.90)
=============== ===========
Net loss per share $ (20.20) $ (7.14)
=============== ===========
Shares used in computation 506,765 425,350
=============== ===========
15. SEGMENT INFORMATION
Summary information for the Company's two significant industry segments
is as follows:
Natural and
Health
Year ended December 31, 1997 Schools Products Total
------------ ------------ ------------
Revenues $ 5,858,790 $ 1,133,726 $ 6,992,516
============ ============ ============
Operating income (loss) $ (2,188,027) $ (3,012,652) $ (5,200,679)
============ ============ ============
Identifiable assets $ 8,712,964 $ 5,091,957 $ 13,804,921
============ ============ ============
Other information:
Depreciation and amortization $ 177,881 $ 196,669
============ ============
Capital expenditures $ 431,570 $ 37,588
============ ============
F-25
<PAGE>
16. SUBSEQUENT EVENTS
A. SALE OF PREFERRED STOCK - In April 1998, the Company sold
an aggregate of $4,000,000 of 10% convertible preferred stock,
realizing proceeds after expenses of approximately $3.5 million, $2.5
million of which were utilized to redeem previously issued preferred
stock. The preferred stock provides for a conversion to common at 75%
of the market price.
B. RENEGOTIATION OF PATENT AGREEMENT - In April 1998, the
Company renegotiated the terms of its acquisition of the Troy Patent,
due to the agreement being in breach because of unpaid minimum
royalties. Under the new agreement, royalties are payable at the rate
of 3% of the first $2,000,000 of related product sales; 2% of the next
$2,000,000 in sales and 1% of sales in excess of $4,000,000. In
connection with the new agreement, the Company was required to assume
$585,000 of debt owed to third parties by the Troy Sellers.
C. PROPOSED SALE OF SCHOOLS - In February 1998, the Company
entered into discussions with its Chief Executive Officer, who is also
a principal stockholder and director, and his wife, who is the
Company's secretary and a principal stockholder and director, for the
sale of the schools division. The contemplated sales price is
$1,800,000.
D. PROPOSED SALE OF BUILDING - In March 1998, the Company
entered in discussions for the sale of the building, in which its
Pompano School is located.
F-26
<PAGE>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
September 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 1,021,626
Accounts Receivable 19,031
Inventories 436,915
Prepaid Expenses 514,413
TOTAL CURRENT ASSETS 1,991,985
------------
PROPERTY, PLANT AND EQUIPMENT 46,265
PATENTS AND CUSTOMER LISTS 4,733,363
GOODWILL 844,780
DEPOSITS AND OTHER ASSETS 249,951
------------
$ 7,866,344
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 989,589
Accrued Expenses 789,833
Accrued Expenses for Discontinued Operations 314,593
Current Portion of Long-Term Debt 587,184
Accrued Consulting Contract 360,131
Other Current Liabilities 104,939
------------
TOTAL CURRENT LIABILITIES 3,146,269
COMMON STOCK SUBJECT TO PUT 380,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value; 1,500,000 shares authorized;
4,330 shares issued and outstanding at September 30, 1998 3,789,525
Common Stock, $.001 par value; 50,000,000 shares authorized;
4,041,598 shares issued and outstanding at September 30, 1998 4,042
Additional Paid-in Capital 14,530,911
Retained Earnings (Accumulated Deficit) (13,604,403)
Common Stock Subject to Put (380,000)
------------
TOTAL STOCKHOLDERS' EQUITY 4,340,075
------------
$ 7,866,344
============
</TABLE>
See Notes to Consolidated Financial Statements
F-27
<PAGE>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30
------------
1998 1997
-------------------------------
REVENUES $1,001,481 $ 535,202
COST OF SALES 283,206 125,073
-------------- --------------
GROSS PROFIT 718,275 410,129
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 2,470,312 2,092,885
-------------- --------------
OPERATING INCOME (LOSS) (1,752,037) (1,682,756)
OTHER INCOME (EXPENSE):
Interest (net) (336,314) (715,542)
-------------- --------------
LOSS FROM CONTINUED OPERATIONS
BEFORE INCOME TAXES (2,088,351) (2,398,298)
PROVISION FOR INCOME TAXES 0 0
LOSS FROM CONTINUED OPERATIONS (2,088,351) (2,398,298)
-------------- --------------
DISCONTINUED OPERATIONS:
Loss From Discontinued Operations (33,289) (2,655,412)
Gain (Loss) on Disposal 595,379 (613,406)
-------------- --------------
GAIN (LOSS) FROM DISCONTINUED OPERATIONS 562,090 (3,268,818)
-------------- --------------
LOSS BEFORE EXTRAORDINARY GAIN (1,526,261) (5,667,116)
EXTRAORDINARY GAIN - FORGIVENESS OF DEBT 869,516 0
-------------- --------------
NET INCOME (LOSS) $ (656,745) $ (5,667,116)
-------------- --------------
INCOME (LOSS) PER COMMON SHARE:
Continued Operations $ (2.30) $ (6.57)
Discontinued Operations 0.31 (8.95)
Extraordinary Gain 0.49 0.00
-------------- --------------
Net Income (Loss) $ (1.50) $ (15.52)
-------------- --------------
WEIGHTED AVERAGE COMMON SHARES USED 1,786,500 365,116
============== ==============
See Notes to Consolidated Financial Statements
F-28
<PAGE>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------------------------
1998 1997
---------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (656,745) $ (5,667,116)
Adjustments to reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and amortization 513,401 334,660
Non-cash imputed compensation expense 0 425,000
Loss on disposal of fixed assets, net 0 87,191
Interest settled by issuance of stock 112,971 90,650
Write-off of Goodwill 322,219 1,325,605
Amortization of note payable discount 0 433,333
Proceeds from sale of Discontinued Operations (1,783,333) 0
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 1,960,917 (732,460)
(Increase) Decrease in Inventories 590,084 (175,712)
(Increase) in Prepaid Expenses (329,837) (213,155)
Decrease in Property and Equipment 1,197,603 0
(Increase) Decrease in Deposits & Other Assets 202,621 (213,083)
Increase (Decrease) in Accounts Payable (2,036,847) 861,312
Increase (Decrease) in Accrued Expenses (410,054) 559,379
Increase (Decrease) in Deferred Revenue (1,089,647) 596,660
Increase (Decrease) in Other Current Liabilities (220,176) 31,081
Increase (Decrease) in Accrued Expenses for Discontinued Operations (41,469) 613,105
Increase in Accrued Consulting Contract 0 360,131
---------------------- ---------------------
TOTAL ADJUSTMENTS (1,011,547) 4,383,697
---------------------- ---------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,668,292) (1,283,419)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (51,997) (184,026)
Net cash provided by acquisitions 0 20,240
Proceeds from disposition of Discontinued Operations 4,132,106 0
Pre-acquisition loan to Global Health Alternatives, Inc. 0 (1,964,000)
---------------------- ---------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,080,109 (2,127,786)
---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from officer 0 (4,904)
Decrease in Restricted Cash 250,000 8,932
Proceeds from preferred stock 5,283,000 2,200,000
Proceeds from sale of debentures 0 1,626,826
Payments of debentures 0 (355,650)
Loan origination costs - preferred stock 0 (299,299)
Proceeds from note payable and long-term debt 196,517 119,873
Payments of notes payable and long-term debt (3,506,695) (286,458)
Redemption of common stock (96,197) 0
Redemptions of preferred stock (3,621,600) 0
---------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,494,975) 3,009,320
---------------------- ---------------------
NET INCREASE (DECREASE) IN CASH 916,842 (401,885)
CASH, BEGINNING OF PERIOD 104,784 517,323
---------------------- ---------------------
CASH, END OF PERIOD $ 1,021,626 $ 115,438
====================== =====================
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but reflect all
adjustments which, in the opinion of management, are necessary for a
fair presentation of financial position and the results of operations
for the interim periods presented. All such adjustments are of a normal
and recurring nature. The results of operations for any interim period
are not necessarily indicative of the results attainable for a full
fiscal year.
EARNINGS (LOSS) PER SHARE
Basic per share information is computed based on the weighted average
number of shares outstanding during the period. The earnings per share
reflects a charge of $2,028,196 which represent imputed preferred stock
dividends. Prior year per share information has been restated to
reflect the one for 40 reverse split which was effected in April 1998.
GAIN ON FORGIVENESS OF DEBT
During the three months ended September 30, 1998, the Company's
subsidiary Global Health Alternatives, Inc.(GHA) failed to make
payments to three large creditors pursuant to settlement agreements
entered into earlier in the year. Accordingly, the Company reduced its
realized gain on the work-out of various debt and payables of GHA by
approximately $639,000 to about $870,000 year-to-date.
PREFERRED STOCK
In February 1998, the Company sold 300 shares of its convertible Series
B preferred stock for $1,000 a share realizing proceeds of $261,500. As
of September 30, 1998, all 300 shares of the Series B preferred stock
had been converted into a total of 541,330 shares of common stock.
In April 1998, the Company sold 4,000 shares of its convertible Series
C preferred stock for $1,000 a share realizing proceeds of $3,507,000.
The preferred stock pays dividends at the rate of 10% per annum payable
in cash or shares of the Company's common stock valued at 75% of the
closing bid price. The preferred stock has a liquidation preference of
$1,000 per share. The preferred stock is convertible commencing 41 days
after issuance at the rate of 75% of the average closing bid price of
the common stock over the five days preceding the notice of conversion.
From the proceeds raised, the Company paid $2,500,000 to retire
$1,568,407 face value of Series A preferred stock outstanding. As of
September 30, 1998, 1,320 shares of the Series C preferred stock had
been converted into a total of 1,418,912 shares of common stock.
F-30
<PAGE>
In July 1998, the Company sold 75 shares of its convertible Series D
preferred stock for $1,000 a share realizing proceeds of $75,000. The
preferred stock was redeemed at 120 percent of the stated value, plus
8% per annum dividend, in August 1998 upon the sale of the Company's
vocational schools (see Note 6).
In August 1998, the Company sold 1,650 shares of its convertible Series
E preferred stock for $1,000 a share realizing proceeds of $1,439,000.
The preferred stock pays dividends at the rate of 10% per annum payable
in cash or shares of the Company's common stock valued at 75% of the
closing bid price. The preferred stock has a liquidation preference of
$1,000 per share. The preferred stock is convertible commencing 60 days
after issuance at the rate of 75% of the average closing bid price of
the common stock over the five days preceding the notice of conversion.
CONVERSION OF NOTES PAYABLE
In August 1998, $595,000 of short-term notes payable, plus $104,113 of
accrued interest thereon, were converted into 1,195,472 shares of the
Company's common stock.
DISCONTINUED OPERATIONS
In August 1998, the Company sold its three vocational schools and
certain related businesses. Revenues for the vocational school
operations were $ 2,316,028 for the six months ended June 30, 1998 and
$ 2,459,429 for the comparable period in 1997.
Following is a calculation of the gain on the disposition of the
Company's vocational school operations:
Proceeds from sale of schools:
Cash $1,778,333
Market value of redeemed NHTC Stock 96,197
----------
$1,874,530
Less book value of school assets transferred:
Cash $(50,710)
Restricted Cash 256,577
Accounts Receivable 1,697,777
Inventories 398,953
Prepaid Expenses 110,757
Property Plant & Equipment 161,335
Deposits & Other Assets 112,491
----------
(2,687,180)
Add liabilities assumed by purchaser:
Accounts Payable $578,076
Accrued Expenses 374,852
Revolving Credit Line 227,953
Deferred Revenue 1,115,983
Other Current Liabilities 110,359
Long-Term Debt 152,026
----------
2,559,249
Less Goodwill written off (322,220)
----------
Gain from sale of schools $1,424,379
==========
In November 1998, the Company sold an office building located in
Pompano Beach, Florida that previously accommodated the Company's
corporate headquarters and one of its vocational schools. Following is
a calculation of the estimated loss on the disposition of the building:
Proceeds from sale of buildings $2,900,000
Less estimated closing costs (314,000)
Less net book value of assets transferred (3,261,000)
Less write off of deferred financing costs (154,000)
----------
Estimated Loss from sale of building ($829,000)
==========
The Company has realized the estimated loss on building sale during the
current quarter under Discontinued Operations. Also, the assets and
liabilities related to the building, including the long-term mortgage
debt obligation, have been reclassified as Net Assets Held for Disposal
of $248,951 and are included in Other Assets as of September 30, 1998.
F-31
<PAGE>
KAIRE INTERNATIONAL INC.
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS F-33
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS F-34 - F-35
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME F-36 - F-37
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT) F-38 - F-39
CONSOLIDATED STATEMENTS OF CASH FLOWS F-40 - F-41
SUMMARY OF ACCOUNTING POLICIES F-42 - F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-48 - F-71
F-32
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Kaire International, Inc.
Longmont, Colorado
We have audited the accompanying consolidated balance sheets of Kaire
International, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of operations and comprehensive
income, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1997, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kaire International,
Inc. and subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and has a
working capital deficit of $6,492,288 at December 31, 1997. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
May 1, 1998, except for the first paragraph
of Note 8 which is dated October 1, 1998
Denver, Colorado
F-33
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 ------------------------
(UNAUDITED) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
ASSETS (Notes 1, 5 and 6)
CURRENT:
<S> <C> <C> <C>
Cash and cash equivalents $ 460,701 $ 460,663 $ 739,267
Restricted cash 125,000 - -
Accounts receivable, less allowance of
$0, $168,805 and $30,000 for possible
losses (Notes 5 and 6) 249,397 301,135 148,406
Inventories (Note 5) 1,067,283 1,612,960 2,194,315
Refundable income taxes (Notes 7 and 9) - - 1,025,000
Note receivable - related party (Note 2) - - 94,670
Advances - other - - 226,855
Prepaid expenses and other 135,374 267,123 101,225
- -------------------------------------------------------------------------------------------------------------------
Total current assets 2,037,755 2,641,881 4,529,738
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Note 4):
Computer equipment 927,168 914,451 895,577
Computer software 579,955 579,955 596,178
Office equipment 418,292 424,714 421,915
Furniture and fixtures 264,308 322,171 153,678
Leasehold improvements and other 119,284 174,985 90,762
- -------------------------------------------------------------------------------------------------------------------
2,309,007 2,416,276 2,158,110
Accumulated depreciation and amortization (1,635,272) (1,344,463) (901,212)
- -------------------------------------------------------------------------------------------------------------------
Net property and equipment 673,735 1,071,813 1,256,898
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Investment (Note 3) - - 250,000
Deposits and other 213,656 405,638 313,483
Debt issuance costs, net of accumulated
amortization of $331,450, $143,886 and $0 (Note 6) 16,780 204,344 -
- -------------------------------------------------------------------------------------------------------------------
Total other assets 230,436 609,982 563,483
- -------------------------------------------------------------------------------------------------------------------
$ 2,941,926 $ 4,323,676 $ 6,350,119
===================================================================================================================
</TABLE>
================================================================================
See accompanying report of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-34
<PAGE>
- --------------------------------------------------------------------------------
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 ------------------------
(UNAUDITED) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
<S> <C> <C> <C> <C>
Notes payable (Note 6) $ 2,035,521 $ 1,787,166 $ 200,000
Note payable to bank (Note 5) 195,000 240,000 250,000
Notes payable - related parties (Notes 2 and 3) 2,114,747 984,667 75,000
Current portion of capital lease
obligations (Note 4) 48,897 116,079 258,392
Checks written in excess of deposits 1,049,566 1,322,910 1,376,065
Accounts payable 3,261,030 2,495,829 1,341,637
Accounts payable, related party 137,459 26,255 -
Accrued commissions payable (Note 3) 1,091,612 1,369,305 1,991,476
Accrued payroll taxes payable and other (Note 7) 349,677 281,841 137,079
Sales taxes payable (Note 7) 528,377 268,299 -
Other accrued liabilities 510,987 241,818 282,062
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 11,322,873 9,134,169 5,911,711
CAPITAL LEASE OBLIGATION, less current maturities
(Note 4) - 14,713 114,010
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 11,322,873 9,148,882 6,025,721
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES (49,194) 199,636 199,907
COMMITMENTS AND CONTINGENCIES
(Notes 4, 6, 10 and 15)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 8):
Preferred stock: $.01 par value; 5,000,000
shares authorized; -0- shares issued and
outstanding - -
Common stock: $.01 par value; 25,000,000 shares
authorized; 2,231,226, 2,209,176 and
1,470,000 shares issued and outstanding 22,312 22,092 14,700
Additional paid-in capital 1,365,537 1,365,317 (6,604)
Cumulative translation adjustment (534,067) (418,980) 11,137
Retained earnings (deficit) (9,185,535) (5,993,271) 105,258
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (8,331,753) (5,024,842) 124,491
- -------------------------------------------------------------------------------------------------------------------
$ 2,941,926 $ 4,323,676 $ 6,350,119
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
See accompanying report of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-35
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
================================================================================
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
---------------------------------- Years Ended December 31,
1998 1997 -------------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES (Note 12) $ 21,018,916 $ 27,887,227 $ 35,681,512 $ 51,498,562 $ 57,841,350
COST OF SALES
(Notes 3 and 11) 5,158,842 6,586,767 8,387,963 13,321,062 14,476,630
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 15,860,074 21,300,460 27,293,549 38,177,500 43,364,720
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Distributor commissions 10,853,535 15,626,441 19,968,230 27,965,416 30,830,521
Selling general and
administrative expenses 7,309,552 9,738,877 13,008,859 12,975,915 10,370,482
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 18,163,087 25,365,318 32,977,089 40,941,331 41,201,003
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations (2,303,013) (4,064,858) (5,683,540) (2,763,831) 2,163,717
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES):
Other income 40,328 193,953 195,899 40,432 14,556
Interest income 22,997 29,268 54,573 79,029 75,618
Interest expense (707,805) (332,275) (726,392) (126,663) (85,936)
Write off of deferred
offering costs (365,525)
Gain (loss) on foreign
exchange 37,394 (8,389) (29,202) (17,335) (435)
Other expense (57,301) (43,548) (56,430) (2,775) (33,905)
- -------------------------------------------------------------------------------------------------------------------
Total other income
(expenses) (1,029,912) (160,991) (561,552) (27,312) (30,102)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest (3,332,925) (4,225,849) (6,245,092) (2,791,143) 2,133,615
Benefit from
(provision for)
income taxes (Note 9) - - 12,973 1,103,000 (862,000)
Minority interest in
(income) loss of
subsidiaries 140,661 44,321 133,590 (114,643) (85,264)
- -------------------------------------------------------------------------------------------------------------------
[NET INCOME (LOSS) (3,192,264) (4,181,528) (6,098,529) (1,802,786) 1,186,351]
Other comprehensive
income (loss):
Foreign currency
translation adjustment (115,087) 29,243 (430,117) 11,137 -
- -------------------------------------------------------------------------------------------------------------------
[COMPREHENSIVE INCOME
(LOSS) $ (3,307,351) $ (4,152,285) $ (6,528,646) $ (1,791,649) $ 1,186,351]
==================================================================================================================
</TABLE>
================================================================================
See accompanying report of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements
F-36
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Continued)
================================================================================
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
---------------------------------- Years Ended December 31,
1998 1997 -------------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE
(Note 8)
Basic and diluted $ (1.44) $ (2.11) $ (3.01) $ (1.23) $ .81
- -----------------------------------------------------------------------------------------------------------------------
Basic and diluted
weighted average
number of common
shares outstanding
(Note 8) 2,215,476 1,980,198 2,023,283 1,470,000 1,470,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
See accompanying report of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-37
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
================================================================================
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
---------------------------------- Paid-in Comprehensive
Shares (Note 8) Amount Capital Income/(Loss)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 1,400,000 $ 14,000 $ (13,000) $ --
Contribution to capital by subsidiaries -- -- 1,396
--
Issuance of common stock for services 70,000 700 5,000
--
Comprehensive income:
Net income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,470,000 14,700 (6,604) --
Comprehensive income/(loss):
Net loss -- -- -- --
Foreign currency translation
adjustments -- -- -- 11,137
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,470,000 $ 14,700 $ (6,604) $ 11,137
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Retained Total
Earnings Comprehensive Stockholders'
(Deficit) Income/(Loss) Equity (Deficit)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1995 $ 721,693 [$ 721,693] $ 722,693
===========
Contribution to capital by subsidiaries -- -- 1,396
Issuance of common stock for services -- -- 5,700
Comprehensive income:
Net income 1,186,351 [ 1,186,351] 1,186,351
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,908,044 [$ 1,186,351] 1,916,140
===========
Comprehensive income/(loss):
Net loss (1,802,786) [(1,802,786)] (1,802,786)
Foreign currency translation
adjustments -- [ 11,137] 11,137
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 105,258 [$(1,791,649)] $ 124,491
===========
- -------------------------------------------------------------------------------------------------------
</TABLE>
F-38
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
================================================================================
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
--------------------------- Paid-in Comprehensive
Shares (Note 8) Amount Capital Income/(Loss)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock for services 316,676 $ 3,167 $ 61,769 $ --
Issuance of common stock for cash net
of offering costs of $78,543 (Note 8) 250,000 2,500 168,957 --
Issuance of common stock in
connection with debt net of offering
costs of $29,580 (Note 6) 172,500 1,725 141,195 --
Conversion of debt to additional
paid-in capital (Note 8) -- -- 1,000,000 --
Comprehensive income/(loss):
Net loss -- -- -- --
Foreign currency translation
adjustment -- -- -- (430,117)
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,209,176 22,092 1,365,317 (418,980)
Issuance of Common Stock in
Connection with exercise of
Stock Warrants (unaudited) 22,050 220 220
Comprehensive income/(loss):
Net loss (unaudited) -- -- -- --
Foreign currency translation
adjustment (unaudited) -- -- -- (115,087)
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 (unaudited) 2,231,226 $ 22,312 $1,365,537 $(534,067)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Retained Accumulated Total
Earnings Comprehensive Stockholders'
(Deficit) Income/(Loss) Equity (Deficit)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of common stock for services $ -- $ -- $ 64,936
Issuance of common stock for cash net
of offering costs of $78,543 (Note 8) -- -- 171,457
Issuance of common stock in
connection with debt net of offering
costs of $29,580 (Note 6) -- -- 142,920
Conversion of debt to additional
paid-in capital (Note 8) -- -- 1,000,000
Comprehensive income/(loss):
Net loss (6,098,529) [(6,098,529)] (6,098,529)
Foreign currency translation
adjustment -- [(430,117)] (430,117)
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 (5,993,271) [$(6,528,646)] (5,024,842)
===========
Comprehensive income/(loss):
Issuance of Common Stock in
Connection with exercise of
Stock Warrants (unaudited) -- -- 440
Net loss (unaudited) (3,192,264) [(3,192,264)] (3,192,264)
Foreign currency translation
adjustment (unaudited) -- [(115,087)] (115,087)
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 (unaudited) $(9,185,535) [$(3,307,351)] $(8,331,753)
===========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
See accompanying report of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-39
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
1998 1997 ----------------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(3,192,264) $ (4,181,528) $ (6,098,529) $ (1,802,786) $ 1,186,351
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 645,928 387,644 876,836 440,873 340,254
Minority interest (140,661) (44,321) (133,590) 114,643 85,264
Loss on disposal of fixed assets -- -- 17,217 -- 34,240
Common stock issued for services -- 17,500 17,500 -- 5,700
Deferred income taxes -- -- -- (84,000) 26,366
Provision for doubtful
accounts 197,843 35,900 259,369 41,210 118,855
Writedown on inventory 66,135 -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable (152,666) (261,975) (435,517) 317,451 (86,178)
Related party receivable -- -- -- 238,638 (202,141)
Inventories 567,116 66,874 293,087 123,341 (90,349)
Prepaid expenses and other 290,187 (427,260) (315,748) (55,909) 102,781
Refundable income taxes -- 774,105 1,025,000 (725,000) (300,000)
Accounts payable 178,370 1,788,624 1,218,959 157,490 (79,217)
Accounts payable, related party 138,804 (339,243) 26,254 -- --
Accrued liabilities and other 369,195 -- (184,223) (322,349) (96,959)
Income taxes payable -- -- -- (65,755) 14,761
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (1,032,013) (2,183,680) (3,433,385) (1,622,153) 1,059,728
Investing activities:
Restricted cash (125,000) -- -- -- --
Deposits and other 200,402 (342,193) (289,238) -- --
Purchases of intangibles -- (63,417) (20,106) (172,488) (21,223)
Purchases of property and equipment (45,654) (364,302) (274,679) (243,415) (193,662)
Advances - other -- 145,136 226,855 (224,804) (2,051)
Investment -- 250,000 250,000 (250,000) --
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in
investing activities 29,748 (374,776) (107,168) (890,707) (216,936)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
1998 1997 ----------------------------------------------
(UNAUDITED) (UNAUDITED) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financing activities:
Checks written in excess of
deposits (273,344) (109,292) (53,155) 1,376,065 --
Proceeds from note payable
to bank -- -- -- 250,000 --
Payments on note payable to bank (45,000) (10,000) (10,000) -- --
Proceeds from notes payable 150,000 2,468,668 4,217,463 200,000 --
Payments on notes payable -- (325,000) (1,017,463) -- --
Proceeds from notes payable -
related party 1,443,000 967,046 1,165,531 75,000 --
Payments on notes payable -
related party (312,920) (547,451) (561,192) (228,738) --
Payments on capital lease
obligations (81,895) (197,547) (241,610) (223,902) (265,734)
Issuance of common stock 441 171,457 171,457 -- 1,396
Offering costs paid -- (94,405) (29,580) -- --
Payments for debt issue costs -- -- (300,794) -- --
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 880,282 2,323,476 3,340,657 1,448,425 (264,338)
- --------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rates
changes on cash 122,021 29,243 (78,708) 33,570 --
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 38 (205,737) (278,604) (1,030,865) 578,454
Cash and cash equivalents,
beginning of period 460,663 739,267 739,267 1,770,132 1,191,678
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 460,701 $ 533,530 $ 460,663 $ 739,267 $ 1,770,132
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
See accompanying report of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-41
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
ORGANIZATION AND BUSINESS
Kaire International, Inc. ("the Company"), was incorporated in Nevada in October
1992. The Company is engaged in the distribution of health and personal care
products through network marketers throughout the United States, Canada, New
Zealand, Australia, South Korea, Trinidad and Tobago, and the United Kingdom.
As of March 18, 1997, the Company was merged into a newly formed Delaware
corporation of the same name with the Nevada corporation ceasing to exist. The
transaction was accounted for on a basis similar to a pooling of interest with
no change in the historical financial statements of the Company. The newly
formed corporation had no operations prior to the merger.
The Company expanded its markets in 1995 by entering New Zealand and Australia
with its health and personal care products. Kaire New Zealand Ltd. ("Kaire New
Zealand") and Kaire Australia Pty. Ltd. ("Kaire Australia") were incorporated in
August 1995 and began operations on November 1, 1995. The Company acquired a 51%
interest in these two subsidiaries on the date of incorporation.
During 1997, the Company expanded its markets into South Korea, Trinidad and
Tobago, and the United Kingdom. Kaire Korea, Ltd. ("Kaire Korea") was
incorporated on March 19, 1997 in South Korea as a wholly owned subsidiary of
the Company through November 15, 1997. On November 15, 1997, the Company sold
15% of Kaire Korea, in consideration of $143,375 of interest expense due on a
note payable. Operations and sales began during July 1997 (see Note 6). During
October 1998, the Company began trying to sell its South Korean subsidiary, and
at September 30, 1998, the Company has reflected its assets in its South Korea
subsidiary at their net realizable value. The Company recorded a $471,000
writedown of its assets in its South Korean subsidiary. Kaire Europe Limited
("Kaire Europe") was incorporated as a wholly owned subsidiary of the Company on
July 24, 1997 in the United Kingdom, commencing sales during November 1997.
Kaire Trinidad Limited ("Kaire Trinidad"), a wholly owned subsidiary of the
Company, was incorporated on May 21, 1997 in the Republic of Trinidad and Tobago
and began operations during June 1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, its majority owned subsidiaries Kaire New Zealand, Kaire Australia and
Kaire Korea, and its wholly owned subsidiaries Kaire Europe, and Kaire Trinidad.
All significant intercompany accounts and transactions
have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
statements for the nine months ended September 30, 1998 and 1997 are presented
on a basis consistent with the audited consolidated financial statements and
reflect all adjustments, consisting only of normal recurring accruals, necessary
for fair presentation of the results of such periods. The results of operations
for the interim period ended September 30, 1998 are not necessarily indicative
of the results to be expected for the year ending December 31, 1998.
F-42
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
CONCENTRATION OF RISK
The Company maintains its cash accounts in several bank accounts. Accounts in
the United States are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. The Company's cash balance in some of its bank accounts
generally exceeds the insured limits.
The Company sells its products through network marketers throughout the United
States, Canada, New Zealand, Australia, South Korea, Trinidad and Tobago, and
the United Kingdom. Credit is extended for returned checks and or until credit
card purchases have cleared the bank.
Credit losses, if any, have been provided for in the financial statements and
are based on management's expectations. The Company's accounts receivable are
subject to potential concentrations of credit risk. The Company does not believe
that it is subject to any unusual or significant risks, in the normal course of
business.
CASH AND CHECKS WRITTEN IN EXCESS OF DEPOSITS
The cash balance on the accompanying balance sheet represents cash from the
Company's subsidiaries which are not overdrawn. The checks in excess of deposits
represents bank overdrafts on the parent conmpany's financial statements. The
cash held in the Company's subsidiary accounts is not available to cover the
parent company's bank overdrafts.
INVENTORIES
Inventories consist mainly of health and personal care products and are stated
at lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization are
computed, using primarily the straight-line method, over the estimated useful
lives of the assets which range from three to seven years. Maintenance and
repair costs are expensed as incurred.
LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the expected undiscounted future cash flow from the
use of the assets and its eventual disposition is less than the carrying amount
of the assets, an impairment loss is recognized and measured using the asset's
fair value.
RESTRICTIVE CASH
The Company has a restricted cash account with a credit card processing company.
The primary purpose of this account is to provide a reserve for potential
uncollectible amounts and chargebacks by the Company's credit card customers.
DEFERRED OFFERING COSTS
Deferred offering costs include professional fees directly related to the
Company's proposed public offering. If the offering is successful, costs
incurred will be offset against the proceeds of the offering. Since the offering
was unsuccessful, such costs have been expensed.
DEBT ISSUE COSTS
Debt issue costs are being amortized using the straight-line method over the
term of the notes payable.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors. Sales are
recorded when products are shipped.
F-43
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
Under the Kaire Direct program the Company provides a 100% refund (less shipping
and handling), to all end users, for any unopened product that is returned
within 30 days from the date of purchase in resalable condition. The Company
provides a 100% product exchange for any product that does not meet customer
satisfaction if returned within 30 days under the "Kaire Direct" program. An
Associate is allowed 90 days from order date for exchange or refund only if
product bottles (empty, partial or full) are returned. Statement of Financial
Accounting Standards No. 48 "Revenue Recognition When Right of Return Exists"
requires the Company to accrue losses that may be expected from sales returns.
For the nine months ended September 30, 1998 and 1997, the Company recorded
sales returns of $324,470 and $691,650, and for the years ended December 31,
1997, 1996 and 1995, the Company recorded sales returns of $869,305, $861,213
and $87,156. The Company monitors its historical sales returns and will accrue a
liability for sales returns when and if sales returns become significant.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires the
use of the "liability method". Accordingly, deferred tax liabilities and assets
are determined based on the temporary differences between the financial
statement and tax basis of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
FINANCIAL
INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Fair values of accounts receivables, accounts payable, and accrued liabilities
are assumed to approximate carrying values for these financial instruments since
they are short term in nature and their carrying amounts approximate fair value
or they are receivable or payable on demand.
NOTE RECEIVABLE AND NOTES PAYABLE TO RELATED PARTIES
Due to its related party nature and terms of the receivable and payables to
related parties, the Company cannot estimate the fair market value of such
financial instrument.
NOTES PAYABLE
Substantially all of these notes bear interest at fixed rates of interest based
upon the terms of the Agreements. The fair value of these notes are not
materially different than their reported carrying amounts at September 30, 1998
and December 31, 1997 and 1996.
F-44
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
INVESTMENT IN COMMON STOCK
The Company acquired 1,400,000 shares of common stock of Aloe Commodities
International, Inc. ("Aloe") representing a 14% interest in Aloe for $250,000 in
1996. During 1997, the Company sold its investment in Aloe for $250,000 and used
the proceeds as partial payment on certain notes payable (see Note 3).
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of subsidiaries, are translated at the rate of exchange
in effect on the balance sheet date; income and expenses of subsidiaries are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments are reflected as a cumulative translation
adjustment in consolidated stockholders' equity. Foreign currency gains and
losses resulting from transactions are included in results of operations in the
period in which the transactions occurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items included in the 1996 and 1995 financial statements have been
reclassified to conform to the current year presentation. Such reclassifications
have no impact on the Company's financial position or results of operations.
NET INCOME (LOSS) PER COMMON SHARE
During 1998, the Company implemented Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 provides for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. All prior period earnings per share data has
been restated to reflect the requirements of SFAS No. 128. The adoption of SFAS
No. 128 did not effect the EPS calculations at September 30, 1998 and 1997, and
December 31, 1997, 1996 and 1995. See Note 8 for computation of earnings per
share.
F-45
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
STOCK OPTIONS
The Company applies Accounting Pronouncements Bulletin Opinion 25, "Accounting
for Stock Issued to Employee", ("APB 25") and related interpretations in
accounting for all stock option plans. Under APB Opinion 25, no compensation
cost has been recognized for stock options granted as the option price equals or
exceeds the market price of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), requires the Company to provide pro forma
information regarding net income (loss) as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black Scholes option-pricing model.
COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). The implementation of
SFAS No. 130 required comparative information for earlier years to be presented.
The Company has elected to report comprehensive income on the consolidated
statements of operations and the consolidated statements of stockholders' equity
(deficit). Comprehensive income is comprised of net income (loss) and all
changes to the consolidated statements of stockholders' equity (deficit), except
those due to investments by stockholders, changes in paid in capital and
distributions to stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 supersedes Statement of
Financial Accounting Standard No. 14 "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards of the way the public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by the implementation of this standard.
F-46
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS No. 132") which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established standards for
recognizing all derivative instruments including those for hedging activities as
either assets or liabilities in the statement of financial position and
measuring those instruments at fair value. This Statement is effective for
fiscal years beginning after June 30, 1999. The Company has not yet determined
the effect of SFAS No. 133 on its financial statements. Management believes the
adoption of this statement will have no material impact on the Company's
financial statements.
The FASB recently issued Statement of Financial Accounting Standards No. 134
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134").
SFAS No. 134 establishes accounting and reporting standards for certain
activities of mortgage banking enterprises and other enterprises that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise.
This statement is effective for the first fiscal quarter beginning after
December 15, 1998. The Company has not yet determined the effect of SFAS No. 134
on its financial statements. Management believes the adoption of this statement
will have no material impact of the Company's financial statements.
F-47
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
1. GOING CONCERN
The Company incurred significant losses during the years ended December 31, 1997
and 1996 and, at December 31, 1997, has a negative working capital of
$6,492,288. Additionally, the Company has not made its payroll tax and sales tax
deposits on a timely basis. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The Company has continued to pay its associates on a timely basis and has
negotiated out of any default situations with its creditors and debtholders.
There are a number of factors which contributed to the losses for 1997 and 1996
including several marketing promotions which did not generate the anticipated
results, a decline in sales from the normal business cycle of a mature business
in the network marketing industry, the creation of a number of marketing videos,
changes in the bonus plan effecting the total payout, the start up of operations
in Korea, Europe and Trinidad and Tobago, and the implementation of an
aggressive recruitment plan. In response to those challenges, the Company has
taken significant steps including the discontinuance of the unsuccessful
marketing promotions, the elimination of videos from the marketing plan, a full
restructuring of the marketing department with significant emphasis on budgeting
and performance, changes to the compensation structure for the associates to
predominantly return to the former compensation structure, a curtailment of any
future expansion plans into foreign countries until adequate capital is
available, an overall reduction in the Company's operating expenses and the
implementation of significant controls over expenses to maintain a very
conservative operational approach.
F-48
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
In addition, the Company is continuing to search for, and introduce, new
products that management believes will provide improved profit margins and
anticipated high profile and user appeal. Management believes that many of the
products introduced over the past two years are excellent products but were
either not fully promoted or lacked the spotlight appeal demanded by many of the
consumers in the network marketing industry. Management's long term goal is to
improve on identifying products which have greater market appeal and then
properly introduce and promote them. The Company has also introduced new
marketing tools to promote sales to end users without the need for the associate
who introduced the product to them to stay with the Company. The Company is also
exploring several avenues of improving its gross profit margin.
During 1997, the Company actively pursued a rapid international growth strategy.
The Company obtained a "door to door" selling license in Korea through a newly
formed subsidiary, Kaire Korea, leased office space in Seoul, received approval
for a portion of their product line and started selling products in Korea in the
second half of the year. The Company has sustained losses in trying to penetrate
the South Korean market. The Company is actively trying to sell its South Korean
subsidiary, and at September 30, 1998, the Company has reflected its assets in
its South Korean subsidiary at their net realizable value. The Company recorded
a $471,000 writedown of its assets in its South Korean subsidiary. This amount
is reflected in selling, general and administrative expenses for the nine months
ended September 30, 1998. In May 1997, the Company formed Kaire Trinidad, leased
office space in Port of Spain and began sales operations in Trinidad and Tobago.
During the second half of 1997, the Company formed Kaire Europe in the United
Kingdom, leased office space north of London and began operations.
These locations were strategically chosen. The Asian market, including Japan, is
the largest in network marketing. Korea was targeted for the entry into that
market as it could be done at a lower cost than Japan. The Company had contacts
with a potentially large associate base of Koreans and Korean-Americans, and it
was believed that the Company would be better accepted by the Koreans for using
it as the starting point into the Asian market as opposed to the more
traditional bases of Hong Kong, Singapore, Taiwan and Japan. The Company has
decided to exit the Korean market due to the recent Asian financial crisis
allowing more time and capital to be allocated to other existing markets.
Trinidad was selected for the low cost of operations as the Trinidad economy has
a larger "middle class" than most of the Caribbean islands, and as an entry into
both the Caribbean and South American markets with which it maintains strong
trading ties. The United Kingdom was selected for the entry point into the
strong European direct sales market. The United Kingdom presented an English
speaking country, a member of the European Union and regulatory and tax
situations similar to several of the countries the Company was already doing
business in.
As with many new entities, the costs of operations in the first months of
operations are high while the sales force and corresponding sales are building.
Therefore, all these entities showed a loss during 1997. Management anticipates
that as these companies become more established and mature, they will be able to
both cut down on their operating expense as a percentage of sales and increase
sales to contribute to the profitability of the Company in future years.
F-49
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
In summary, Management believes that the Company is addressing the going concern
issue in virtually every aspect of its operations. It has cut its domestic
operating expenses. As a part of this reduction, marketing expenses have been
reduced sharply with no perceived impact on the effectiveness of the Company's
marketing strategy. The Company is continuing to pursue outside financing
options including consolidating its various debt instruments with one lending
institution. Management believes that its plan will enable the Company to remain
viable for at least 12 months from the date of the consolidated financial
statements. There are no assurances that any of these financing events will
occur, or that the Company's plan to achieve profitability and a positive cash
flow will be successful. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
2. NOTE RECEIVABLE-RELATED PARTY
On October 18, 1994, the Company accepted a 10% promissory note receivable from
a related party in the amount of $115,549. The note was uncollateralized and due
on demand. During 1997, the Company offset the promissory note and accrued
interest against certain loans made to the Company by the related party (See
Note 3).
3. RELATED PARTY TRANSACTIONS
During 1997 and 1996, three officers of the Company advanced funds to the
Company for working capital requirements. The Company recorded these advances as
current liabilities. On November 28, 1997, the Company issued 10% promissory
notes payable to the officers. The notes are uncollateralized and due on demand.
As of September 30, 1998 and December 31, 1997 and 1996, the Company owed
$258,337, $262,037 and $75,000 to the officers.
During January 1997, the Company borrowed $205,000 from two individual
directors. The Company and the two individual directors agreed to offset the
$115,549 note receivable balance as stated in Note 2 with the advance of
$205,000. The Company then entered into a demand note payable for the balance
with the two directors for $89,451 paying 10% interest per annum. In July 1997,
the Company borrowed an additional $458,000 from the same two directors for
notes payable at 10%, due and payable upon demand. The Company pledged as
collateral on the July 1997 notes payable its investment in the shares of Aloe
Commodities International, Inc. The Company sold its investment in the shares of
Aloe Commodities International, Inc. to an unrelated third party, valued at
$250,000, which was the Company's cost of those shares. No public market existed
for those shares. The proceeds were used to pay down the note. The Company
repaid an additional $71,500 to the directors and issued 10% promissory notes
for the remaining balances. The remaining principal balance plus accrued but
unpaid interest was refinanced under separate note agreements. The notes are
uncollateralized and due upon demand. As of September 30, 1998 and December 31,
1997, the Company owed $242,410 and $247,630, respectively, under these notes to
the directors. In addition, during 1997, the two directors advanced an
additional $113,000 to the Company which was repaid by the Company during 1997.
F-50
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
In December 1997, the directors and officers entered into an agreement with the
Company to which they agreed that the Company not make repayments on the notes
issued to them until after the end of the first calendar quarter in which the
Company has achieved positive cash flow. The agreement requires payments only
after calendar quarters during which the Company has received positive cash flow
and that the Company is only required to pay the officers and directors on a pro
rata basis as to their indebtedness in an aggregate amount equal to 50% of the
positive net cash flow for each such quarter.
F-51
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
Kaire Korea, pursuant to a demand promissory note guaranteed by the Company and
personally guaranteed by certain officers of the Company, borrowed $500,000 from
a corporation during May 1997 pursuant to the terms of a note payable at an
annual interest rate of 9.5%. The note was due in principal installments of:
$25,000 due August 31, 1997, $125,000 due September 30, 1997, $175,000 due
October 31, 1997 and $175,000 due November 30, 1997. An option to acquire 15% of
the capital stock of Kaire Korea Ltd. at the par value of Kaire Korea's capital
stock expiring May 2000 was granted to the lender. During 1997, Kaire Korea
defaulted under the note agreement. On November 15, 1997, the Corporation
exercised its option to acquire 15% of Kaire Korea from the Company in
consideration of $143,375 in interest expense due by Kaire Korea under the note
agreement. The Company renegotiated the terms of the original note agreement on
January 1, 1998. The January 1, 1998 Agreement modifies the repayment provisions
of principal and interest, stipulating that the Company make monthly interest
only payments until the note is paid in full. The note was due on September 15,
1998. The Company is currently in default on its note payable. The Company has
classified this liability as a current liability. The Company also pledged its
stock in Kaire Korea as collateral on this note. As of September 30, 1998 and
December 31, 1997, Kaire Korea owes $475,000 to its minority stockholder.
During November 1997, Interactive Medical Technologies, Ltd. ("IMT") loaned the
Company $700,000. Pursuant to an Agreement and Plan of Reorganization, IMT
agreed to convert its $700,000 of debt to equity in the Company (see Note 8).
F-52
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
On January 5, 1998, the Company borrowed $103,000 from two directors of the
Company for notes payable. The notes payable bear interest at 10%, are
uncollateralized and due on demand. On April 29, 1998, the Company borrowed
$100,000 from a director of the Company for a note payable. The note payable
bears interest at 10%. The note is collaterized by all the assets of the Company
and is due on demand. As of September 30, 1998, the Company owed $139,000, under
these notes to the directors.
During March and April 1998, Global Marketing, LLC, a stockholder of the
Company, advanced a total of $1,000,000 to the Company for working capital
requirements. On April 16, 1998, the Company entered into a $1,000,000 note
payable with the stockholder. The note bears interest at 10% per annum, is
uncollateralized and is payable upon demand.
As of September 30, 1998 and December 31, 1997, the Company owes $137,459 and
$26,255 in accounts payable to officers and directors.
4. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations which are collateralized by
equipment. Interest rates under the agreements range from 7.1% to 31.9%, with
monthly principal and interest payments ranging from $51 to $11,349.
F-53
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
Future minimum lease payments and the present value of the minimum lease
payments under the noncancelable capital lease obligations as of September 30,
1998 and December 31, 1997 are as follows:
September 30,
1998 December 31,
(Unaudited) 1997
- --------------------------------------------------------------------------------
1998 $ 39,646 $ 131,879
1999 15,347 15,347
- --------------------------------------------------------------------------------
Total future minimum lease payments 54,993 147,226
Less amounts represent-
ing interest 6,096 16,434
- --------------------------------------------------------------------------------
Present value of minimum lease payments 48,897 130,792
Less current maturities 48,897 116,079
- --------------------------------------------------------------------------------
Total long-term obligations $ - $ 14,713
- --------------------------------------------------------------------------------
At September 30, 1998, December 31, 1997 and 1996, property and equipment
includes equipment under capital lease obligations with a total cost of $757,689
and accumulated amortization of $525,590, $413,900 and $263,588.
5. NOTE PAYABLE TO BANK
The Company had a $250,000 line of credit agreement with a bank. The credit line
bore interest at 10% per annum and was collateralized by inventories, accounts
receivable, certain other assets, and the personal guarantees of certain
officers and directors of the Company. On December 26, 1997, the line of credit
was converted to a term loan. The term loan bears interest at 10.5% per annum
and is collateralized by inventories, accounts receivable, certain other assets,
and the personal guarantees of certain officers and directors of the Company.
The term loan is payable in monthly principal payments of $5,000 plus accrued
interest and is due January 1999. As of September 30, 1998, December 31, 1997
and 1996, the balance was $195,000, $240,000 and $250,000. As of September 30,
1998 and December 31, 1997, the term loan is classified as a current liability.
F-54
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
6. NOTES PAYABLE
Notes payable consists of the following:
September 30,
1998 December 31,
(Unaudited) 1997 1996
- --------------------------------------------------------------------------------
Notes payable to
individuals (1) $ -- $ -- $ 200,000
Note payable to a
corporation (2) 200,000 200,000 --
Notes payable to
individuals (3) 1,685,521 1,587,166 --
Note payable to a
corporation (4) 150,000 -- --
---------- ---------- ----------
Total notes payable $2,035,521 $1,787,166 $ 200,000
---------- ---------- ----------
(1) At December 31, 1996, the Company had two $100,000 notes with two
individuals. The notes bore interest at 14% and matured on June 30, 1997.
The notes were collateralized by all accounts and notes receivable and
certain other assets. In connection with this borrowing, the lenders were
each issued warrants to purchase 7,350 shares of the Company's common stock
at $.02 per share. The warrants expire on December 30, 1999. As of December
31, 1997, the notes were paid in full, and the warrants had not been
exercised. The warrants were exercised in July 1998.
(2) During January 1997, the Company borrowed $200,000 from a corporation for a
note payable at an interest rate of 10% per month, with interest payments
due monthly. The note is guaranteed by certain officers and directors and
is due upon demand. The Company renegotiated the terms of the original
agreement on August 25, 1997, as the Company had not met the interest
payment requirements of the agreement. The August 25, 1997 agreement
modifies the repayment provisions of principal and interest, stipulating
that the Company repay all interest and principal due under the original
agreement by December 31, 1997. Also, the interest rate was reduced from
10% per month to 2% per month payable monthly, retroactive to March 5,
1997. On January 15, 1998, the note was amended and changed to a demand
note as the Company was unable to repay the note by December 31, 1997 as
stated in the August 25, 1997 amendment. The Company is required to make
monthly interest only payments of $4,000 per month. In connection with the
original terms of this borrowing, the lender was issued warrants to
purchase 12,500 shares of the Company's common stock at $6.60 per share.
The warrants expire six years after the effective date of the initial
public offering. As of September 30, 1998, the warrants had not been
exercised. On October 1, 1998, the lender was issued additional warrants to
purchase 12,500 shares of the Company's common stock at $6.60 per share as
a result of the reverse stock split (see Note 8).
F-55
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
(3) During 1997, the Company borrowed $1,725,000 pursuant to a private
placement offering consisting of the issuance of promissory notes and
common stock of the Company. In connection with this private placement
offering, the Company incurred $348,230 in debt issue costs. The debt issue
costs are being amortized using the straight line method over the term of
the promissory notes. The promissory notes are due the earlier of eighteen
months from the date of issue, the completion date of an equity financing
of the Company pursuant to which it receives gross proceeds of not less
than $3,000,000, or the Company's receipt of at least $1,000,000 in
proceeds from the "Key Man" life insurance policies on any of its executive
officers and/or directors. The promissory notes bear interest at 10% per
annum. In connection with the private placement offering, debt holders were
issued 172,500 shares of the Company's common stock. Original issue
discount of $172,500 was recorded as part of the private offering financing
and is being charged to interest over the life of the promissory notes
under the effective interest method. The shares issued were valued based
upon their estimated fair market value at date of issuance. As of September
30, 1998 and December 31, 1997, the notes payable are disclosed net of
unamortized original issue discount of $39,479 and $137,834.
(4) During January 1998, the Company borrowed $150,000 from a corporation for a
note payable at an interest rate of 2% per month or 24% annual interest.
Interest and principal are due on demand. The note is uncollateralized and
is personally guaranteed by certain officers and directors of the Company.
All warrants issued in connection with the above financing transactions
have been valued using the Black Scholes Model and are considered to be
nominal in value.
7. PAYROLL TAX AND SALES TAX LIABILITIES
During 1998 and 1997, the Company has not made its payroll tax deposits with the
Internal Revenue Service ("IRS") and the various state taxing authorities on a
timely basis. The Company has filed all required payroll tax returns (see Note
15). The Company has been negotiating with the IRS to work out a payment plan.
As of September 30, 1998 and December 31, 1997, the Company owes approximately
$225,141 and $51,096 of delinquent payroll tax liabilities including interest
and penalties.
During September 1998, the Company reached an agreement with the IRS to pay
certai current and prior payroll tax lisbilities. The Company has also agreed to
pay all future payroll taxes on a current basis. Any failure to meet the terms
of the agreement with the IRS, could result in a federal tax lien being filed.
The Company has not made all required payroll tax deposits in accordance with
the agreement.
During 1998 and 1997, the Company did not make its sales tax deposits with the
various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of September 30, 1998 and December 31, 1997, the
Company owed approximately $528,400 and $268,300 in current and delinquent sales
taxes. The Company's failure to pay its delinquent sales taxes could result in
tax liens being filed by various taxing authorities.
F-56
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
8. STOCKHOLDERS' EQUITY
STOCK SPLIT AND AUTHORIZATION OF SHARES
On October 1, 1998 the Board of Directors authorized a 1 for 2 reverse stock
split for shareholders of record on October 1, 1998. All references to common
share and per share amounts in the accompanying financial statements have been
restated to reflect the effect of this reverse stock split. As a result of the 1
for 2 reverse stock split, certain warrant holders received an additional
712,500 warrants to purchase common stock of the Company at $6.60 per share. The
warrants expire six years after the effective date of the initial public
offering. These warrants granted on October 1, 1998 were considered nominal
value.
On February 1, 1997, the Board of Directors authorized a stock split, effected
in the form of a dividend of 2,800 shares of common stock for each common share
held by shareholders of record on February 1, 1997. All references to common
share and per share amounts in the accompanying financial statements have been
restated to reflect the effect of this stock dividend.
During March 1997, the Board of Directors adopted certain resolutions which were
approved by the Company's stockholders to increase the number of authorized
shares of common stock from 1,000,000 to 25,000,000 shares. The stockholders
also approved the authorization of the issuance of a new class of 5,000,000
shares of preferred stock. The preferred stock of the Company can be issued in
series. With respect to each series issued, the Board of Directors of the
Company will determine, among other things, the number of shares in the series,
voting rights and terms, dividend rates and terms, liquidation preferences and
redemption and conversion privileges. No preferred stock has been issued as of
September 30, 1998.
ISSUANCE OF COMMON STOCK
On March 20, 1997, the Company sold 250,000 shares of common stock pursuant to a
private placement offering for $171,457, net of $78,543 in offering costs, and
warrants to purchase an additional 250,000 shares of common stock at a purchase
price of $6.60 per share. On October 1, 1998, the investors were issued
additional warrants to purchase 250,000 shares of the Company's common stock at
a purchase price of $6.60 per share as a result of the reverse stock split. The
warrants are exercisable for a period of four years commencing two years from
the date the Securities and Exchange Commission declares the Company's
registration statement effective. The effective date is the first date the
Company may offer the sale of its common stock in an initial public offering.
The Company may redeem the warrants commencing one year from the effective date
at a redemption price $.05 per warrant if: (1) the closing bid price of the
common stock for twenty (20) consecutive trading days exceeds $10.00, (2) the
redemption occurs during the first two years following the effective date and
the Company receives the prior written consent of the underwriter for such
redemption, and (3) the warrants are exercisable. The warrants issued in
connection with this transaction are considered nominal in value.
F-57
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
During 1997, the Company borrowed $700,000 from IMT. On December 9, 1997, the
Company entered into an Agreement and Plan of Reorganization (the "Agreement")
with IMT whereby IMT agreed to convert its $700,000 of debt previously borrowed
by the Company to equity in the Company, and invest an additional $300,000 in
equity in the Company at closing. The Agreement for reorganization of the
Company contemplated an exchange between the shareholders of Kaire
International, Inc. for IMT shares whereby IMT issued, in total, shares equal to
forty-five percent (45%) of its common stock outstanding (as defined in the
agreement) immediately prior to the closing date of the Agreement in exchange
for not less than 80% of the issued and outstanding common stock of the Company.
During March 1998, IMT exchanged 57% of the common stock of the Company to
Global Marketing, LLC. IMT's controlling interest in the Company was deemed
temporary and as such did not result in any adjustment to the Company's
consolidated financial statements as of date of the Agreement.
STOCK OPTIONS AND WARRANTS
During 1997, the Company adopted a stock option plan. No options have been
granted under this Plan as of September 30, 1998. The Company has reserved
500,000 shares of its common stock for future grants under this Plan.
SFAS No. 123 requires the Company to provide pro forma information regarding net
loss and net loss per share as if compensation costs for the Company's stock
option plans and other stock awards had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. No stock awards were issued
to employees during the periods ended 1998, 1997, 1996 and 1995. For stock
awards issued to non-employees, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1996, respectively. The options and warrants granted during 1997 and 1996 to
non-employees were considered nominal in value. No stock awards were issued to
non-employees during the periods ended 1998 and 1995.
F-58
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
1997 1996
- --------------------------------------------------------------------------------
Dividend yield 0% 0%
Expected volatility 0% 0%
Risk-free interest rates 5.85% to 6.6% 6%
Expected lives in years 3 to 6 years 3 years
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock option and warrant plan as of
September 30, 1998 and December 31, 1997 and 1996 is presented below.
<TABLE>
<CAPTION>
Options Warrants
- ------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding,
January 1, 1996 -- $ -- -- $ --
Granted -- -- 14,700 0.02
- ------------------------------------------------------------------------------------------------
Outstanding,
December 31, 1996 -- -- 14,700 0.02
Granted 65,000 0.02 719,850 6.53
- ------------------------------------------------------------------------------------------------
Outstanding,
December 31, 1997 65,000 $ 0.02 734,550 6.40
Granted -- -- -- --
Exercised -- -- (22,050) 0.02
- ------------------------------------------------------------------------------------------------
Outstanding,
September 30, 1998 (unaudited) 65,000 $ 0.02 712,500 $ 6.60
- ------------------------------------------------------------------------------------------------
Exercisable,
December 31, 1996 -- $ -- 14,700 $ 0.02
- ------------------------------------------------------------------------------------------------
Exercisable,
December 31, 1997 65,000 $ 0.02 22,050 $ 0.02
- ------------------------------------------------------------------------------------------------
Exercisable,
September 30, 1998 (unaudited) 65,000 $ 0.02 -- $ --
- ------------------------------------------------------------------------------------------------
</TABLE>
F-59
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
Options Warrant
- --------------------------------------------------------------------------------
Weighted average fair
value of options and
warrants granted
during 1996 $ None $ 0.48
Weighted average fair
value of options and
warrants granted
during 1997 $ 0.49 $ None
- --------------------------------------------------------------------------------
The following table summarizes information about exercisable stock options and
warrants at September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------------------- ----------------------
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
SEPTEMBER 30, 1998 Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS
$ 0.02 65,000 3.48 $ 0.02 65,000 $ 0.02
- ----------------------------------------------------------------------------------------------------------------------
WARRANTS
6.60 712,500 6.00 6.60 - -
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
OPTIONS
$ 0.02 65,000 4.23 $ 0.02 65,000 $ 0.02
- ----------------------------------------------------------------------------------------------------------------------
WARRANTS
$ 0.02 22,050 2.00 $ 0.02 22,050 $ 0.02
6.60 712,500 6.00 6.60 -- --
- ----------------------------------------------------------------------------------------------------------------------
$ 0.02-6.60 734,550 5.88 $ 6.50 22,050 $ 0.02
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-60
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------------- Years Ended December 31,
1998 1997 ---------------------------------
(unaudited) (unaudited) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income
(loss) $(3,192,264) $(4,181,528) $(6,098,529) $(1,802,786) $ 1,186,351
Denominator:
Denominator for basic
and diluted earnings
per share - weighted
average shares
outstanding 2,215,476 1,980,198 2,023,283 1,470,000 1,470,000
- ---------------------------------------------------------------------------------------------------------
Basic and diluted
net income (loss)
per share $ (1.44) $ (2.11) $ (3.01) $ (1.23) $ .81
- ---------------------------------------------------------------------------------------------------------
</TABLE>
For the periods ended September 30, 1998 and 1997 and for the years ended
December 31, 1997 and 1996, total stock options and stock warrants of 777,500,
674,550, 799,550, and 14,700 were not included in the computation of diluted
earnings per share because their effect was anti-dilutive. For the year ended
December 31, 1995, the Company did not have any stock options and stock warrants
outstanding.
F-61
<PAGE>
- --------------------------------------------------------------------------------
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
9. INCOME TAXES Income taxes consist of the following:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, Years Ended December 31,
---------------------------- -------------------------------------------
1998 1997
(unaudited) (unaudited) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Current (expense)
benefit:
<S> <C> <C> <C> <C> <C>
Federal $ -- $ -- $ 12,973 $ 1,017,000 $ (763,000)
Foreign -- -- -- -- --
State -- -- -- 2,000 (130,000)
- -----------------------------------------------------------------------------------------------------------
-- -- 12,973 1,019,000 (893,000)
- -----------------------------------------------------------------------------------------------------------
Deferred benefit:
Federal 702,000 1,150,000 1,440,000 68,000 29,000
Foreign 239,000 -- 205,000 -- --
State 85,000 111,000 62,000 100,000 2,000
- -----------------------------------------------------------------------------------------------------------
1,026,000 1,261,000 1,707,000 168,000 31,000
- -----------------------------------------------------------------------------------------------------------
1,026,000 1,261,000 1,719,973 1,187,000 (862,000)
Change in valuation
allowance (1,026,000) (1,261,000) (1,707,000) (84,000) --
- -----------------------------------------------------------------------------------------------------------
Income tax (expense)
benefit $ -- $ -- $ 12,973 $ 1,103,000 $ (862,000)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the Company had available net operating loss carryforwards
as follows:
Amount Expire
- --------------------------------------------------------------------------------
Federal net operating loss
carryforwards $ 3,700,000 2017
State net operating loss
carryforwards 4,700,000 2010 to 2017
Foreign net operating loss
carryforwards 924,000 2003 to 2005
Foreign net operating loss
carryforwards 155,000 Indefinite
- --------------------------------------------------------------------------------
The utilization of certain of the loss carryforwards are limited under Section
382 of the Internal Revenue Code of approximately $233,000 per year. The types
of temporary differences between the tax basis of assets and liabilities that
give rise to a significant portion of the net deferred tax liability and their
approximate tax effects are as follows:
F-62
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
September 30,
1998 December 31,
----------------- ----------------------------
(Unaudited) 1997 1996
- --------------------------------------------------------------------------------
Operating loss
carryforwards $ 2,337,000 $ 1,436,000 $ 148,000
Foreign
operating loss
carryforwards 444,000 205,000 --
Property and
equipment (72,000) (90,000) (125,000)
Inventories 95,000 216,000 47,000
Accounts
receivable
allowance -- 11,000 14,000
Contribution
carryforwards 13,000 13,000 --
- --------------------------------------------------------------------------------
Net deferred
tax assets 2,817,000 1,791,000 84,000
Less valuation
allowance 2,817,000 1,791,000 84,000
- --------------------------------------------------------------------------------
Net deferred
taxes $ -- $ -- $ --
- --------------------------------------------------------------------------------
A valuation allowance equal to the net deferred tax assets has been recorded, as
management of the Company has not been able to determine that is more likely
than not that the net deferred tax assets will be realized.
F-63
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
A reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
--------------------------------- Years Ended December 31,
1998 1997 --------------------------------------------
(unaudited) (unaudited) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal income tax
(benefit) computed
at the federal
statutory rate $ (702,000) $(1,437,000) $(1,452,973) $(1,085,000) $ 734,000
State income tax
(benefit), net of
federal benefit (85,000) (139,000) (62,000) (102,000) 64,000
Foreign tax (benefit)
at statutory rates (239,000) (167,000) (205,000) -- --
Increase in
valuation
allowance 1,026,000 1,261,000 1,707,000 84,000 --
Other -- 482,000 -- -- 64,000
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense
(benefit) $ -- $ -- $ (12,973) $(1,103,000) $ 862,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Refundable income taxes in 1996 relate to the carryback of net operating losses.
F-64
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under operating leases for office space, office
equipment and vehicles. Three leases are on a month to month basis and sixteen
require future minimum lease payments as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 $ 424,000
1999 187,000
2000 72,000
2001 70,000
2002 69,000
Thereafter 342,000
- --------------------------------------------------------------------------------
Total $ 1,164,000
- --------------------------------------------------------------------------------
Lease expense for all operating leases was $657,500, $301,600, $605,000,
$290,600 and $175,800 for the nine months ended September 30, 1998 and 1997 and
the years ended December 31, 1997, 1996, and 1995.
COMMITMENT WITH SUPPLIER
During August 1998, the Company entered into an agreement with a supplier where
the supplier will be the exclusive manufacturer of the product for the Company.
For a period of five years, the Company must purchase no less than $22,500 per
month for the first three months, no less than $45,000 per month for months four
through six, and no less than $73,750 per month thereafter.
SELF-INSURANCE
The Company is partially self insured for employee medical liabilities which
covers risk up to $10,000 per incident, per individual covered under the plan.
The Company has purchased excess medical liability coverage for individual
claims in excess of $10,000 and aggregate claims in excess of approximately
$312,000 annually with a national medical insurance carrier. Premiums and claim
expenses associated with the medical self insurance program are included in the
accompanying statements of operations. On July 1, 1998, the Company discontinued
its self insured plan.
F-65
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
CONSULTING AGREEMENT
On February 4, 1997, the Company entered into a consulting agreement with Magic
Consulting Group, Inc. ("Consultant"). Consultant is to receive the following
compensation for services: (i) an option to purchase 50,000 shares of common
stock of the Company for $.02 per share; (ii) 50,000 warrants to purchase an
aggregate of 50,000 shares of common stock of the Company at $6.60 per share
and; (iii) $2,500 per month for a period of 60 months. As of September 30, 1998,
no warrants were exercised. On October 1, 1998, Consultant was issued additional
warrants to purchase 50,000 shares of the Company's common stock at $6.60 per
share as a result of the reverse stock split (see Note 8). During October 1998,
Consultant exercised its option to purchase 50,000 shares of common stock of the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends on the continued availability of certain
key management personnel. The Company does not have employment contracts with
any of its employees. The business of the Company could be adversely affected by
the loss of services of any of its key employees.
401(K) PROFIT SHARING PLAN
On January 1, 1996 the Company established a 401(k) profit sharing retirement
plan. The plan requires one year of service and attainment of age 21 to become
eligible. Employer contributions vest over a five year period. The Company's
contributions to the plan for the nine months ended September 30, 1998 and 1997
were approximately $0 and $41,300 and for the years ended December 31, 1997 and
1996 were approximately $53,000 and $67,000.
LEGAL PROCEEDINGS
The Company is the subject of an investigation by the United States Department
of Justice, Office of Consumer Litigation, into the actions by certain
specifically named individuals active in the dietary supplement industry. The
Company was initially contacted in January, 1997 and was advised, in writing,
that it is not a "target" of the Department's investigation, but that it is a
"subject" (meaning that its conduct is deemed to be within the scope of the
investigation) thereof. The Company has completed all obligations and requests
pertaining to this matter.
The Company has also received a voluntary request for information from the FTC
regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company
F-66
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
voluntarily produced information to the FTC with regards to the initial request,
and has received a subsequent request for additional information. The Company is
currently responding with clarifications to previous inquiries.
11. MAJOR SUPPLIERS
During the nine months ended September 30, 1998 and 1997 and the years ended
December 31, 1997, 1996, and 1995, the Company purchased amounts of its products
from a limited number of vendors, including significant amounts from MW
International of 50%, 67%, 48%, 57% and 40% and from Manhattan Drug of 7%, 8%,
6%, 22% and 40%. The Company currently buys all of its Pycnogenol, an important
component of its products, from one supplier. Although there are a limited
number of manufacturers of this component, management believes that other
suppliers could provide similar components on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
F-67
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
12. FOREIGN SALES
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED SEPTEMBER 30, 1998 UNITED AUSTRALIA OTHER
(unaudited) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $15,152,125 $ 3,350,142 $ 1,740,159 $ 776,490 $ -- $ 21,018,916
Transfers between
geographic areas 1,484,364 -- -- -- (1,484,364) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $16,636,489 $ 3,350,142 $ 1,740,159 $ 776,490 $(1,484,364) $ 21,018,916
====================================================================================================================================
Income (loss) from
operations $(1,116,162) $ (282,185) $ (1,204,519) $ (115,197) $ 415,050 $ (2,303,013)
====================================================================================================================================
Identifiable assets at
September 30, 1998 $ 1,773,653 $ 561,364 $ 406,932 $ 199,977 $ -- $ 2,941,926
====================================================================================================================================
PERIOD ENDED SEPTEMBER 30, 1997 UNITED AUSTRALIA OTHER
(unaudited) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $23,317,499 $ 4,131,780 $ 437,948 $ -- $ -- $ 27,887,227
Transfers between
geographic areas 1,236,792 -- -- -- (1,236,792) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $24,554,291 $ 4,131,780 $ 437,948 $ -- (1,236,792) $ 27,887,227
====================================================================================================================================
Income (loss) from
operations $(3,380,654) $ (476,144) $ (430,656) $ -- $ 222,596 $ (4,064,858)
====================================================================================================================================
Identifiable assets at
September 30, 1997 $ 3,756,605 $ 962,068 $ 1,252,964 $ -- $ -- $ 5,971,637
====================================================================================================================================
</TABLE>
F-68
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1997 UNITED AUSTRALIA OTHER
(unaudited) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $29,278,545 $ 5,302,119 $ 808,117 $ 292,731 $ -- $ 35,681,512
Transfers between
geographic areas 2,211,101 -- -- -- (2,211,101) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $31,489,646 $ 5,302,119 $ 808,117 $ 292,731 $(2,211,101) $ 35,681,512
====================================================================================================================================
Income (loss) from
operations $(4,639,664) $ (693,875) $ (786,714) $ (155,037) $ 591,750 $ (5,683,540)
====================================================================================================================================
Identifiable assets at
December 31, 1997 $ 2,526,853 $ 702,695 $ 859,954 $ 288,282 $ (54,108) $ 4,323,676
====================================================================================================================================
PERIOD ENDED DECEMBER 31, 1996 UNITED AUSTRALIA OTHER
(unaudited) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $44,122,950 $ 7,375,612 $ -- $ -- $ -- $ 51,498,562
Transfers between
geographic areas 1,784,815 -- -- -- (1,784,815) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $45,907,765 $ 7,375,612 $ -- $ -- $(1,784,815) $ 51,498,562
====================================================================================================================================
Income (loss) from
operations $(3,034,684) $ (299,886) $ -- $ -- $ 570,739 $ (2,763,831)
====================================================================================================================================
Identifiable assets at
December 31, 1996 $ 5,153,240 $ 1,196,879 $ -- $ -- $ -- $ 6,350,119
====================================================================================================================================
PERIOD ENDED DECEMBER 31, 1995 UNITED AUSTRALIA OTHER
(unaudited) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $56,718,455 $ 1,122,895 $ -- $ -- $ -- $ 57,841,350
Transfers between
geographic areas 171,742 -- -- -- (171,742) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $56,890,197 $ 1,122,895 $ -- $ -- $ (171,742) $ 57,841,350
====================================================================================================================================
Income (loss) from
operations $ 2,168,623 $ (4,564) $ -- $ -- $ (342) $ 2,163,717
====================================================================================================================================
Identifiable assets at
December 31, 1995 $ 5,752,254 $ 1,034,890 $ -- $ -- $ -- $ 6,787,144
====================================================================================================================================
</TABLE>
F-69
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
13. SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
--------------------------------- Years Ended December 31,
1998 1997 --------------------------------------------
(unaudited) (unaudited) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Interest $ 84,680 $141,147 $ 278,139 $ 120,839 $ 104,502
Income taxes $ -- $ -- $ -- $ -- $ 853,582
Non-cash investing and
financing transactions:
Note payable
converted to
capital $ -- $ -- $1,000,000 $ -- $ --
Note receivable-
related party
offset to notes
payable-related
parties $ -- $ 94,670 $ 94,670 $ -- $ --
Issuance of common
stock in connection
with long-term
debt $ -- $172,500 $ 172,500 $ -- $ --
Increase in minority
interest from sale
of 15% interest in
subsidiary $ -- $ -- $ 143,375 $ -- $ --
Equipment
acquired under
capital lease
obligations $ -- $ -- $ -- $ 79,374 $174,931
Equipment
purchased
from related
party under
notes payable $ -- $ -- $ -- $ -- $ 66,865
Inventory
purchased
from related
party under
notes payable $ -- $ -- $ -- $ -- $153,764
Common stock
issued for
debt issue costs $ -- $ 47,436 $ 47,436 $ -- $ --
Common stock
issued for
services $ -- $ 64,936 $ 17,500 $ -- $ 57,002
====================================================================================================================================
</TABLE>
F-70
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
================================================================================
14. VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance
Beginning Charged to at End
of Period Expenses Deductions of Period
- --------------------------------------------------------------------------------
Allowance for
doubtful accounts:
Period ended
September 30, 1998
(unaudited) $ 168,805 $ 197,843 $ 366,648 $ --
Year ended
December 31, 1997 $ 30,000 $ 259,369 $ 120,564 $ 168,805
Year ended
December 31, 1996 $ 56,000 $ 41,210 $ 67,210 $ 30,000
Year ended
December 31, 1995 $ 56,000 $ 118,855 $ 118,855 $ 56,000
- --------------------------------------------------------------------------------
15. SUBSEQUENT EVENTS (UNAUDITED)
ASSET PURCHASE AGREEMENT WITH NATURAL HEALTH TRENDS CORPORATION
On November 24, 1998, the Company entered into an Asset Purchase Agreement with
Natural Health Trends Corp. (NHTC), a publicly traded company, where NHTC, in
exchange for the Company's assets and assumption of certain liabilities, will
issue to Kaire $2,800,000 of its Series F Preferred stock; $350,000 of its
Series G Preferred stock and warrants to purchase 200,000 shares of Common
stock. Furthermore, based upon NHTC's net income and sales levels, NHTC has
agreed to pay certain amounts to the Company each year for a period of five
years, commencing with the year ended December 31, 1999. This transaction must
be approved by the stockholders of NHTC and, if approved, is anticipated to
close in January, 1999.
NOTE PAYABLE
During December 1998, the Company borrowed $250,000 from NHTC under a note
payable agreement at an interest rate of 10% per annum. The note is guaranteed
by certain officers of the Company and is due on demand. The note is
collateralized by all right, title and interest in connection with the supplier
agreement discussed at Note 10.
CONTINGENT TAX LIABILITY
On November 17, 1998, the Company received a notice of proposed assessment from
the State of California Franchise Tax Board ("Franchise Tax Board") for state
income tax. The Franchise Tax Board proposed that the Company was liable for
approximately $450,000 related to tax year 1996. For calendar year 1996, the
Company believes that it does not have an income tax liability for this
contingency as the Company suffered a substantial loss during 1996 and therefore
has not recorded a liability. The Company is currently protesting the proposed
assessment.
F-71
<PAGE>
PROXY CARD FRONT
NATURAL HEALTH TRENDS CORP.
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Joseph P. Grace and
__________________, and each of them, with full power of substitution, as
proxies to represent the undersigned and vote all the shares of Common Stock of
Natural Health Trends Corp., which the undersigned is entitled to vote at the
Special Meeting of Shareholders to be held on January ___, 1999, at 10:00 a.m.
local time at the ______________________, _____________________, New York, and
at any adjournments thereof, in the following manner:
Management recommends that you vote FOR Proposal 1.
1. Proposal to approve the issuance of up to ______________ additional
shares of Common Stock upon the conversion or exercise of the Acquisition
Securities, in connection with the acquisition of substantially all the assets
of Kaire International, Inc. by NHTC Acquisition Corp., a wholly-owned
subsidiary of Kaire.
2. Proposal to ratify and approve the issuance of shares of Common Stock
upon the conversion of the Company's Series E Preferred Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to approve (i) the future offer and sale of up to $4,000,000
aggregate stated value of the Company's Series H Preferred Stock and the
issuance of shares of Common Stock upon the full conversion of the Series H
Preferred Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IN ACCORDANCE WITH THEIR BEST JUDGMENT, the Proxy is authorized to vote
upon any other matter which may properly come before the Meeting.
<PAGE>
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN. UNLESS
OTHERWISE DIRECTED, OR IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2 AND 3.
Date:
-------------------------
- -------------------------------
Signature
- -------------------------------
Signature if jointly held
Please date and sign exactly as your name
appears hereon. If shares are jointly held,
all joint owners should sign. Trustees and
others signing in a representative capacity
shall sign as such. If the owner is a
corporation or partnership, a duly authorized
officer or partner shall sign the full
corporate or partnership name.
