<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1999
REGISTRATION NO. 333-89419
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
NATURAL HEALTH TRENDS CORP.
(Name of small business issuer in its charter)
--------------------------
<TABLE>
<S> <C> <C>
FLORIDA 5122 59-2705336
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
250 PARK AVENUE
NEW YORK, NEW YORK 10177
(212) 490-6609
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
MARK D. WOODBURN, CHIEF FINANCIAL OFFICER
NATURAL HEALTH TRENDS CORP.
250 PARK AVENUE
NEW YORK, NEW YORK 10177
(212) 490-6609
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copies to:
<TABLE>
<S> <C>
MARTIN C. LICHT, ESQ. JAY M. KAPLOWITZ, ESQ.
SILVERMAN, COLLURA & CHERNIS, P.C. GERSTEN SAVAGE & KAPLOWITZ, LLP
381 PARK AVENUE SOUTH 101 EAST 52ND STREET
NEW YORK, NEW YORK 10016 NEW YORK, NEW YORK 10022
TELEPHONE: (212) 779-8600 TELEPHONE: (212) 752-9700
FACSIMILE: (212) 779-8858 FACSIMILE: (212) 980-5192
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Common stock, par value $.001 per share...... 1,150,000(3) $2.50 $2,875,000 $799.25
Representative's Warrants (4)................ 100,000 $1.00 $-- $--(5)
Shares of common stock issuable upon exercise
of the Representative's Warrants........... 100,000(6) $3.00 $300,000 $83.40
Common stock purchase warrants............... 1,150,000 $.10 $115,000 $31.97
Shares of common stock underlying common
stock purchase warrants.................... 1,150,000 $3.25 $3,737,500 $1,039.03
Shares of common stock being sold by selling
securityholders............................ 795,613(7)(8) $2.50 $1,989,032.50 $552.96
Total Registration Fee....................... $2,506.61(9)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated in accordance with Rule 457 under the Securities Act of 1933, as
amended.
(3) Includes 150,000 shares of Common stock which the Representative may
purchase to cover over-allotments, if any.
(4) Represents warrants to be issued by the Company to the Representative at the
time of delivery and acceptance of the securities to be sold by the Company
to the public hereunder.
(5) None, pursuant to Rule 457(g).
(6) Includes 150,000 warrants which the Representative may purchase to cover
over-allotments, if any. Pursuant to Rule 416, there are also being
registered such additional securities as may become issuable pursuant to the
anti-dilution provisions contained in the Representative's Warrants.
(7) Includes the shares of common stock being sold by the selling
securityholders which include the resale of an aggregate of 795,613 shares
of common stock including 120,000 shares of common stock issuable upon the
exercise of certain option warrants and of such presently indeterminate
number of shares of common stock as shall be issued in respect of shares of
common stock issuable upon the conversion of notes in the aggregate amount
of $350,000. The number of shares of common stock indicated to be issuable
in connection with such convertible notes and offered for resale hereby is
an estimate determined in accordance with a formula based on the market
prices of the common stock, as described in this prospectus, and is subject
to adjustment and could be materially less or more than such estimated
amount depending upon factors which cannot be predicted by the Company at
this time. If, however, all of the notes were converted, the Company would
be obligated to issue a total of approximately 245,613 shares of common
stock. This presentation is not intended to constitute a prediction as to
the future market price of the common stock or as to the number of shares of
common stock into which such securities will be converted. Pursuant to Rule
416, there are also being registered such additional shares of common stock
as may become issuable to prevent dilution resulting from stock splits or
stock dividends.
(8) The offering price per share is estimated pursuant to Rule 457(c) solely for
the purpose of calculating the registration fee and is based upon the
average of the bid and asked prices of the common stock of the Company
reported on the Nasdaq SmallCap Market (which date is within five business
days prior to the date of the initial filing of this Registration
Statement).
(9) A fee of $2,506.61 was paid upon the initial filing of this Registration
Statement.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: one (the
"Company Prospectus") to be used in connection with an offering of 1,000,000
shares of common stock and 1,000,000 common stock purchase warrants by the
company through the Underwriter and one (the "Selling Securityholder
Prospectus") to be used in connection with the sale of 795,613 shares of common
stock by certain selling security holders (the "Concurrent Offering"). The
Company Prospectus and the Selling Securityholder prospectus will be identical
in all respects except for the pages of the Selling Securityholder Prospectus
which appear immediately following the Company Prospectus and before Part II of
this Registration Statement.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-89419
SUBJECT TO COMPLETION DATED NOVEMBER 1, 1999.
PROSPECTUS
NATURAL HEALTH TRENDS CORP.
1,000,000 SHARES OF COMMON STOCK
1,000,000 COMMON STOCK PURCHASE WARRANTS
Natural Health Trends Corp. is offering 1,000,000 shares of common stock and
1,000,000 common stock purchase warrants, which will be designated as Class C
Warrants. The public offering price of the common stock is anticipated to be
between $2.00 and $4.00 per share and will be equal to the closing bid price of
the common stock on the day preceding the date of this prospectus. The public
offering price of the warrants will be $.10 per warrant. Our common stock is
quoted on The Nasdaq SmallCap Market under the symbol "NHTC" and we have applied
for listing of the warrants on Nasdaq under the symbol NHTCW. As of October 19,
1999 the closing bid price of the common stock was 2 9/32.
These are speculative securities and this investment involves a high degree
of risk. See "Risk Factors" beginning on page 9.
Neither the Securities and Exchange Commission (the "SEC") nor any state
securities commission has approved or disapproved these securities or passed
upon the adequacy of the prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS COMPANY
-------- --------------- -----------
<S> <C> <C> <C>
Per Share................................................ $ $ $
Per Warrant.............................................. $ $ $
Total.................................................... $ $ $
</TABLE>
Selling Securityholders are offering, under an alternate prospectus
("Alternate Prospectus") 795,613 shares of common stock which includes 415,613
shares of common stock underlying certain convertible notes and warrants (which
have not been converted and/or exercised to date).
We have granted to the underwriters the right to purchase an aggregate of up
to 150,000 additional shares of our common stock and 150,000 additional warrants
to cover over-allotments. The underwriters are offering the securities offered
by us on a firm commitment basis.
MAY DAVIS GROUP, INC.
The date of this Prospectus is , 1999.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND
MAY NOT CONTAIN INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE OFFERING
FULLY, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, INCLUDING THE FINANCIAL
STATEMENTS. IN CERTAIN INSTANCES WHERE APPROPRIATE, "THE COMPANY," "WE," "US,"
OR "OUR" REFERS COLLECTIVELY TO NATURAL HEALTH TRENDS CORP AND ITS WHOLLY-OWNED
SUBSIDIARIES.
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. NATURAL HEALTH TRENDS CORP.'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS DOCUMENT.
THE COMPANY
GENERAL
We market and distribute products that are intended to appeal to health
conscious customers and to promote human wellness. We have utilized an
acquisition strategy for our growth. Through our acquisition (the "Kaire
Acquisition") of substantially all of the assets of Kaire International, Inc. in
February 1999 by our wholly-owned subsidiary Kaire Nutraceuticals, Inc. we
market a line of approximately 50 products. Through our acquisition of Global
Health Alternatives, Inc. in July 1997, we market a line of proprietary natural
health care products under the name Natural Relief 1222.
Our strategy is to focus on developing our business, which is to identify
natural products that have demonstrable health benefits and can be marketed
without prior approval of the United States Food and Drug Administration (the
"FDA") and to promote and market those products. Specifically, we intend to
focus our resources on the development of Kaire Nutraceuticals, our network
marketing business.
GLOBAL HEALTH
We have obtained initial distribution of Natural Relief 1222 in mass market
channels consisting primarily of chain drug stores. However, we plan to use our
resources for the development of other less capital intensive distribution
channels such as network marketing through Kaire Nutraceuticals and
institutional sales. We also market a line of homeopathic flower remedies under
the Ellon brand name, which utilize homeopathic active ingredients in a tincture
appropriate for oral consumption or in a topical form. As a result of a working
capital deficit of Global Health Alternatives, Inc. of $1,694,000 as of
June 30, 1999, we are considering filing a petition for Global Health
Alternatives, Inc. for protection from creditors under the bankruptcy laws.
However, we are presently attempting to achieve settlements with our creditors
and we are considering discontinuing the operations of Global Health
Alternatives, Inc. In the event that we are unable to achieve satisfactory
settlements with our creditors and we file a petition for protection from
creditors under the bankruptcy laws, there could be a material adverse effect on
our financial condition.
KAIRE NUTRACEUTICALS
We develop and distribute, through a network of independent associates, a
line of approximately 50 products which are divided into nine categories,
including Antioxidant Protection, (Bodily) Defense, Digestion, Energy and
Alertness, Stress, Vital Nutrients, Weight Management, Anti-Aging and Personal
Care.
Our marketing strategy revolves around associates actively recruiting
interested people to become new associates for us. These recruits are placed
beneath the recruiting associate in his or her "network" and are referred by us
as that associate's "organization." Associates earn commissions on sales
generated by the recruited associates in their organization as well as retail
profits on the sales they generate directly. We believe our marketing program is
designed to provide incentives for associates to build an organization
3
<PAGE>
of recruited associates in their organization to maximize their earning
potential. We presently have 40,000 active associates, which we define as
associates who have made product purchases in excess of $50 during the past
year.
------------------------
The company was initially formed primarily to operate vocational schools in
Florida. In August 1998 we sold our school division to a corporation controlled
by our former president. The schools division consisted of three vocational
schools which offered preparation and training for licensing in therapeutic
massage and holistic skin care. In July 1997, we acquired all of the outstanding
capital stock of Global Health, which operates our natural health care products
division. We also operated two alternative medical clinics in 1997, which
operations were discontinued in the third quarter of 1997. In February 1999 we
acquired substantially all of the assets of Kaire International, Inc. The
company was incorporated under the name Florida Institute of Massage
Therapy, Inc. in Florida in December 1988 and changed its name to Natural Health
Trends Corp. in June 1993. The company's principal offices are located at 250
Park Avenue, New York, New York and its telephone number is (212) 490-6609.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered to Public by the Company:..... 1,000,000 shares
Warrants Offered to the Public by the 1,000,000 warrants
Company:...................................
Description of Warrants:..................... Each of the warrants which will be designated
as Class C warrants will expire five years
from the date of this prospectus and entitles
the holder commencing on , 2001 or
earlier with the consent of May Davis Group,
Inc., to purchase one share of common stock
for a purchase price of 130% of the public
offering price. The warrants are redeemable
by us at a price of $0.25 per warrant
provided that our common stock trades at 150%
of the public offering price for 20
consecutive trading days ending three days
prior to the notice of redemption and 30 days
prior written notice is given. The warrants
will become immediately exercisable upon
receipt of the notice of redemption.
Over-allotment Option........................ Up to 150,000 shares and 150,000 warrants
Total Shares Outstanding Prior to Offering... 7,602,352 shares (assuming no exercise of
outstanding options, warrants or conversion
rights or the over-allotment option)
Total Shares Outstanding After Offering...... 8,602,352 shares (assuming no exercise of
outstanding options, warrants or conversion
rights or the over-allotment option)
Price Per Share to Public.................... $2.00 to $4.00 per share
Price Per Warrant to Public.................. $.10 per warrant
Total Proceeds Raised by the Offering........ $3,100,000
Underwriting Discounts and Commissions....... $310,000 or 10% of the total proceeds from
the shares sold by the company
Non-accountable Expense Allowance............ $93,000 or 3% of the total proceeds
Other Expenses of the Offering............... $350,000 (estimated)
Net Proceeds to the Company.................. $2,347,000 (estimated)
Use of Proceeds.............................. Redemption of preferred stock, payment of
payables, purchase of inventory and working
capital
Nasdaq SmallCap Symbol....................... NHTC
Proposed Nasdaq Small Cap Symbol of Warrants NHTCW
Divided Policy............................... No dividend expected.
</TABLE>
5
<PAGE>
SUMMARY PRO FORMA COMBINED SELECTED FINANCIAL DATA
Set forth below is certain selected unaudited summary pro forma combined
financial data for the company for the periods and as of the dates, indicated.
The summary pro forma combined selected financial data for the company for the
year ended December 31, 1998 and for the six months ended June 30, 1999 is based
on the historical financial statements of the company and has been prepared to
illustrate the effects on such historical financial data of the Kaire
Acquisition as if such transaction had occurred as of January 1, 1998. The Kaire
Acquisition is reflected using the purchase method of accounting for business
combinations. The historical pro forma combined selected financial data for the
year ended December 31, 1998 has been derived from our audited consolidated
financial statements included elsewhere in this prospectus and in the opinion of
management include all of the necessary adjustments for fair presentation of
such data. The historical pro forma combined selected financial data for the six
months ended June 30, 1999 has been derived from our unaudited interim
consolidated financial statements included elsewhere in this prospectus and in
the opinion of management, include all the necessary adjustments for fair
presentation of such data. The pro forma combined selected financial data is
provided for comparative purposes only and does not purport to be indicative of
the results that actually would have been obtained if this transaction had been
effected on the dates indicated. The information presented below is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Selected Financial Data" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Revenues................................................... $ 27,366,830 $ 9,928,397
Cost of sales.............................................. 6,704,803 1,962,905
------------ -----------
Gross profit............................................... 20,662,027 7,965,492
Distributor commissions.................................... 13,537,777 4,750,637
Selling, general and administrative expenses............... 14,007,733 4,608,751
Interest expense, (net).................................... 1,139,687 38,059
------------ -----------
Loss from continuing operations............................ (8,023,170) (1,431,955)
Preferred stock dividends.................................. 2,407,974 1,044,595
------------ -----------
Loss to common stockholders................................ $(10,431,144) $(2,476,550)
============ ===========
Basic and diluted loss per common share.................... $ (4.72) $ (0.40)
============ ===========
Basic and diluted weighted average common shares
outstanding.............................................. 2,210,458 6,220,331
============ ===========
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information for Natural Health Trends Corp. set forth
below is derived from the more detailed consolidated financial statements
appearing elsewhere in this Prospectus. This information should be read in
conjunction with such consolidated financial statements, including the notes
thereto. The information below is qualified in its entirety by, and should be
read in conjunction with, our consolidated financial statements and the related
notes, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Selected Financial Data."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- -----------------------------
1999 1998
1998 1997 1996 (UNAUDITED) (UNAUDITED)
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Revenues....................... $ 1,191,120 $ 1,133,726 $ -- $ 7,625,391 $ 832,831
Cost of sales.................. 454,370 375,034 -- 1,536,686 223,354
----------- ----------- --------- ----------- ----------
Gross profit................... 736,750 758,692 -- 6,088,705 609,477
Distributor commissions........ -- -- -- 3,605,488 --
Selling, general and
administrative expenses...... 3,277,047 4,194,044 232,371 3,673,137 1,697,450
----------- ----------- --------- ----------- ----------
Operating loss................. (2,540,297) (3,435,352) (232,371) (1,189,920) (1,087,973)
Minority interest in loss of
subsidiaries................. -- -- -- 10,616 --
Gain on foreign exchange....... -- -- -- 2,582 --
Interest expense (net)......... (199,757) (868,721) (32,209) (38,059) (269,053)
----------- ----------- --------- ----------- ----------
Loss from continuing
operations................... (2,740,054) (4,304,073) (264,580) (1,214,781) (1,357,026)
----------- ----------- --------- ----------- ----------
Loss from discontinued
operations................... (86,234) (2,919,208) (707,408) -- (83,471)
Gain (loss) on disposal........ 722,640 (501,839) 82,450 -- 19,028
----------- ----------- --------- ----------- ----------
Gain (loss) from discontinued
operations................... 636,406 (3,421,047) (624,958) -- (64,443)
----------- ----------- --------- ----------- ----------
Loss before extraordinary
gain......................... (2,103,648) (7,725,120) (889,538) (1,214,781) (1,421,469)
Extraordinary gain-forgiveness
of debt...................... 815,636 -- -- 1,471 1,508,092
----------- ----------- --------- ----------- ----------
Net income (loss).............. (1,288,012) (7,725,120) (889,538) (1,213,310) 86,623
Preferred stock dividends...... 2,011,905 733,333 -- 1,043,039 --
----------- ----------- --------- ----------- ----------
Net income (loss) to common
stockholders................. $(3,299,917) $(8,458,453) $(889,538) $(2,256,349) $ 86,623
=========== =========== ========= =========== ==========
Basic and diluted income (loss)
per common share:
Continuing operations.......... $ (1.24) $ (9.91) $ (0.94) $ (0.20) $ (1.40)
Discontinued operations........ 0.29 (7.88) (2.23) -- (0.07)
Extraordinary gain............. 0.37 -- -- -- 1.55
Preferred stock dividends...... (0.91) (1.69) -- (0.17) --
----------- ----------- --------- ----------- ----------
Net income (loss).............. $ (1.49) $ (19.48) $ (3.17) $ (0.37) $ 0.08
=========== =========== ========= =========== ==========
Basic and diluted weighted
average common shares
outstanding.................. 2,210,458 434,265 280,350 6,220,331 969,886
=========== =========== ========= =========== ==========
</TABLE>
7
<PAGE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1999
(ACTUAL) JUNE 30, 1999
DECEMBER 31, 1998 DECEMBER 31, 1997 (UNAUDITED) (AS ADJUSTED)(1)
----------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Working capital deficit........... $(2,016,734) $(4,647,844) $(4,828,142) $(3,908,142)
Inventories....................... $ 314,367 $ 719,726 $ 1,111,995 $ 1,611,995
Total assets...................... $ 6,852,716 $ 8,865,335 $15,779,931 $17,199,931
Current liabilities............... $ 2,898,022 $ 5,607,038 $ 7,436,056 $ 7,436,056
Long-term debt.................... $ -- $ 171,875 $ -- $ --
Common stock subject to put....... $ 380,000 $ 380,000 $ 380,000 $ --
Stockholders' equity.............. $ 3,574,694 $ 2,395,515 $ 7,841,624 $ 9,641,624
</TABLE>
- ------------------------
(1) Gives effect (i) the sale of 1,000,000 shares of common stock at an assumed
public offering of $3.00 per share (the midpoint of the currently
anticipated range of the public offering price), the sale of 1,000,000
warrants at a purchase price of $.10 per warrant and the anticipated
application of the estimated net proceeds therefrom, (ii) the conversion of
300,000 warrants into 185,769 shares of common stock, (iii) the conversion
of 610 shares of Series E Preferred Stock into 603,130 shares of common
stock and 516 shares of Series I Preferred Stock into 160,104 shares in the
nine months ended September 30, 1999, (iv) the conversion of shares of
Series E, G and H Preferred Stock into 2,193,523 shares of common stock
subsequent to this offering, (v) the issuance of an aggregate of 280,000
shares of common stock pursuant to consulting agreements (vi) the issuance
of 125,000 shares of common stock pursuant to a settlement agreement,
(vii) the issuance of 3,018 shares of common stock pursuant to a former
employee and 25,000 shares of common stock to a director and (viii) the
conversion of $250,000 of convertible notes into 263,158 shares of common
stock subsequent to this offering. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Business--Legal Proceedings," "Management--Consulting Agreements,"
Description of Securities--Preferred Stock."
8
<PAGE>
RISK FACTORS
YOUR INVESTMENT IN THE SECURITIES OFFERED HEREBY IS CONSIDERED TO BE HIGHLY
SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK, INCLUDING, BUT NOT LIMITED TO,
THE RISKS DESCRIBED BELOW. AN INVESTMENT SHOULD BE MADE ONLY IF YOU CAN AFFORD
THE LOSS OF YOUR ENTIRE INVESTMENT. AS A PROSPECTIVE INVESTOR, YOU SHOULD, PRIOR
TO MAKING AN INVESTMENT DECISION, CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
IN ADDITION TO ALL OF THE OTHER INFORMATION PROVIDED IN THIS PROSPECTUS.
WE HAVE HAD SIGNIFICANT LOSSES AND WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY.
For the years ended December 31, 1998 and 1997, we had a net loss of
$1,288,012 (on revenues of $1,191,120) and $7,725,120 (on revenues of
$1,133,726), respectively, and for the six months ended June, 1999 and 1998, we
had an unaudited net loss of $1,213,310 (on revenues of $7,625,391) and an
unaudited net income of $86,623 (on revenues of $832,831), respectively. We had
a working capital deficit of $4,647,844 and $2,016,734 for the years ended
December 31, 1997 and 1998, respectively and working capital deficits of
$2,925,798 and $4,828,142 at June 30, 1998 and 1999, respectively. We cannot
assure you that we can generate net income, increase revenues or successfully
expand our operations in the future. We are subject to all of the problems,
expenses, delays and other risks inherent in a business with a relatively short
history of operations and in a business seeking to expand its operations.
Therefore, we cannot predict with certainty the success or failure of our future
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OUR INDEPENDENT AUDITORS' REPORT WAS PREPARED ASSUMING THAT WE CONTINUE AS A
GOING CONCERN.
Our independent auditors' report on our financial statements was prepared on
the assumption that we will continue as a going concern. The report acknowledges
that we have incurred losses in each of the last three fiscal years and that we
anticipate that additional funding will be required to sustain operations. These
conditions cause substantial doubt as to our ability to continue as a going
concern. If we are unable to obtain sufficient financing or achieve
profitability during fiscal year 1999, then we would, in all likelihood,
experience severe liquidity problems and our ability to continue as a going
concern would be in doubt. See "Financial Statements."
WE HAVE FUNDED OUR OPERATIONS THROUGH BORROWINGS AND THE SALE OF OUR SECURITIES.
We have incurred significant losses and have not achieved profitability or
positive cash flow from our operations. As a result we have relied on
borrowings, the sale of our securities and the sale of assets to fund our
working capital requirements and capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OUR SUCCESS DEPENDS ON OUR PROPOSED EXPANSION PLANS.
Our expansion plans are based primarily upon increasing our existing sales
and the acquisition of additional alternative health care product companies. We
intend to develop and market a proprietary line of alternative health care
products. Our growth will depend, in part, upon the development of an
alternative health care product line which will be dependent upon a number of
factors:
- our ability to identify and acquire suitable alternative health care
product companies;
- our ability to finance the expansion of sales and future acquisitions;
- achieving market acceptance of our products;
- regulatory constraints;
- our ability to market and produce the alternative health care products on
a cost-effective basis; and
9
<PAGE>
- whether anticipated performance levels of new alternative health care
products will be achieved.
Many of the factors required for the new operations to succeed will be
beyond our control. These include, but are not limited to, the effectiveness of
our marketing efforts in the sale of our products.
Our growth depends to a significant degree on our ability to carry out our
proposed expansion program. We cannot assure you that we will be able to hire,
train and integrate employees, and adapt our management, information and other
operating systems, to the extent necessary to grow in a profitable manner. In
addition, the costs associated with our planned expansion may be significantly
greater than anticipated and may have a materially adverse impact upon our
results and prospects. If our plans for expansion are not successful, there
could be a material adverse effect on our business. See "Business."
WE MAY DISCONTINUE THE OPERATIONS OF GLOBAL HEALTH ALTERNATIVES, INC.
Global Health Alternatives, Inc. had a working capital deficit of $1,694,000
as of June 30, 1999. We have been attempting to achieve settlements with our
creditors but we have not achieved satisfactory settlement offers. We are
considering discontinuing the operations of Global Health Alternatives, Inc. and
filing for protection from our creditors under the bankruptcy laws. If we
discontinue the operations of Global Health Alternatives, Inc., there would be a
material adverse affect on our financial condition.
OUR SUCCESS DEPENDS ON THE MARKET ACCEPTANCE OF OUR PRODUCTS.
We do not believe that the market for products related to alternative health
care, subject to certain limited exceptions, is either well-developed or has an
established history. We believe that, as is typical in an undeveloped industry,
demand and market acceptance for the products that we intend to market will be
subject to a high level of uncertainty. We do not intend to conduct any formal
marketing or other concept feasibility studies to predict the commercial
viability of our concepts. We have limited financial, personnel and other
resources to undertake marketing activities. Due to the undeveloped markets for
our products and the lack of significant funds for acquisitions and marketing,
we cannot assure you that substantial markets will develop and, if so, whether
we can exploit them profitably. See "Business--Products."
OUR ABILITY TO CHANGE THE USES OF THE OFFERING PROCEEDS MAY INCREASE THE RISK
THAT THEY WILL NOT BE USED EFFECTIVELY.
Although we anticipate utilizing the proceeds of this offering as stated in
"Use of Proceeds", management will have broad discretion as to the actual uses
of such proceeds without having to seek the approval of the investors in this
offering. Future events may cause us to reallocate our resources, including
cash, for uses not presently contemplated by us. See "Use of Proceeds."
THERE WILL BE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR NEW INVESTORS.
The public offering price is substantially higher than the net tangible book
value per share of our outstanding common stock immediately after this offering.
If you purchase common stock in this offering, you will incur immediate dilution
of $3.30, (based on a public offering price of $3.10 per share, the midpoint of
the currently anticipated range) in the net tangible book value per share of
common stock from the price you pay for the common stock. In addition, because
our existing stockholders paid an average of $2.62 per share, new investors will
have a greater risk of loss per share. See "Dilution" for more details about the
calculation of dilution and such average price. See "Dilution."
WE MAY BE ADVERSELY AFFECTED BY ONGOING PAYMENTS.
We have ongoing obligations to Troy Laboratories and H. Edward Troy, as well
as obligations for liabilities assumed in connection with the acquisition of the
Kaire Assets. In addition, we purchase a significant portion of our products
from ENZO Nutraceuticals. We anticipate that these obligations will be
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<PAGE>
approximately $900,000 over the next twelve months and will have a significant
effect on our liquidity. See "Business--Product Acquisition and Licensing
Agreements" and "Business--Manufacturing."
OUR SUCCESS MAY DEPEND ON OUR ABILITY TO OBTAIN ADDITIONAL FINANCING FOLLOWING
THIS OFFERING.
We will require additional financing for our operations and to pursue our
expansion plans. We anticipate that the cash flow from operations together with
the proceeds of this offering will be sufficient for our operations for at least
six months assuming that we are not required to satisfy certain existing
obligations. However, we anticipate that additional financings will be required
to sustain our operations. We have no definitive agreement for additional
financing and we cannot assure you that we will obtain any additional financing.
If we secure such financing, we cannot assure you that such financing will be
sufficient. If our revenues are not adequate to fund our operations, or to
enable us to implement our present plans for expansion, then we will have to
seek further financing. In addition, we intend to seek to acquire additional
alternative health care product companies. However, we cannot assure that we
will do so. As it is likely that revenues from our operations will not be
sufficient, we will be required to raise additional capital to make such
acquisitions and finance the operations of such new businesses. Additional
financing may be in the form of indebtedness from institutional lenders or other
third parties or as equity financing. In addition, such additional financing may
cause dilution to investors in this offering. We cannot assure you that such
financing will be available, and if so, on acceptable terms. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OUR DEPENDENCE ON A LIMITED NUMBER OF MANUFACTURERS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We do not intend to develop our own manufacturing capabilities since we
believe that the availability of manufacturing services from third parties on a
contract basis is adequate to meet our needs. With the exception of one
manufacturing and distribution agreement with ENZO Nutraceuticals, Inc., we
maintain no existing contractual commitments or other arrangements for the
future manufacture of our products. Rather, we place orders from component or
finished goods manufacturing services as required based upon price quotations
and other terms obtained from selected manufacturers. Should these relationships
terminate, our supply and ability to meet consumer demands will be adversely
affected. See "Business--Manufacturing."
WE ARE NOT IN COMPLIANCE WITH OUR MANUFACTURING AND DISTRIBUTION AGREEMENT WITH
ONE OF OUR PRIMARY SUPPLIERS.
For the six months ended June 30, 1999 purchases of enzogenol pursuant to
our manufacturing and distribution agreement with ENZO Nutraceuticals, Inc.
accounted for 50.6% of our purchases and 20.6% of our sales. We are not in
compliance with the minimum purchase requirements or payment terms set forth in
the agreement. If the manufacturing and distribution agreement is terminated,
there would be a material adverse effect on our business. See
"Business--Manufacturing."
WE FACE SIGNIFICANT COMPETITION FROM MORE ESTABLISHED COMPANIES.
The sales of vitamin, mineral and other alternative health care related
products are highly competitive, and we expect competitive pressures to
continue. In the vitamin and mineral supplement line, we compete on a regional
basis directly with specialty health retailers and also with mass merchandisers
such as drug stores and supermarkets. Many of our competitors are larger and
have greater resources than us. Our future performance will be subject to a
number of factors beyond our control, including any future economic downturns
and any cyclical variations in the retail market for vitamin, mineral and other
alternative health care related products, as well as the publication of positive
or negative product safety and efficacy studies by the U.S. Department of Health
and Human Services and other health and medical authorities.
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Our competitors include such companies as Genderm, Thompson Medical,
Schering Plough, Pfizer, Chatten and Warner Lambert. Our products include
homeopathic active ingredients in a patented base of natural ingredients. Our
competitors have access to these same homeopathic ingredients and would be
unable to completely duplicate the products' formulae due to its patent
protection that extends to the use of certain inactive ingredients. Nonetheless,
marketplace success will probably be determined more by marketing and
distribution strategies and resources than by product uniqueness and we cannot
guarantee that we will be able to compete effectively in such areas with larger
competing companies.
We also compete 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 us and has significantly
greater financial and personnel resources. See "Business--Competition."
WE DEPEND ON OUR CHAIRMAN, PRESIDENT AND OTHER MANAGEMENT PERSONNEL TO OPERATE
AND GROW.
We believe the efforts of our executive officers and other management
personnel, including Sir Brian Wolfson, our chairman, and Robert L. Richards,
our president and Chief Executive Officer are essential to our operations and
growth. The loss of the services of Sir Brian or Mr. Richards would materially
adversely affect us. We do not carry key-man life insurance on any such
individuals. See "Management."
REGULATORY CHANGES MAY IMPOSE SIGNIFICANT RESTRICTIONS AND ADDITIONAL COSTS OR
OTHER BURDENS ON OUR BUSINESS.
The processing, formulation, packaging, labeling and advertising of our
alternative health care products is subject to regulation by one or more federal
agencies, including the FDA, the Federal Trade Commission (the "FTC"), the
Consumer Product Safety Commission and the United States Department of
Agriculture and the Environmental Protection Agency. These activities are also
regulated by various agencies of the states and localities. The FDA, in
particular, regulates the advertising, labeling and sales of vitamin and mineral
supplements if the FDA believes they are unapproved drugs or food additives
rather than food supplements. Compliance with the rules and regulations of such
agencies is complex and entails continued diligence. In addition, the Compliance
Policy Guide issued by the FDA establishes the manner in which homeopathic drugs
are regulated. The Compliance Policy Guide provides that homeopathic drugs may
only contain ingredients that are generally recognized as homeopathic.
Compliance with the Compliance Policy Guide requires detailed scrutiny and
diligence.
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.
We cannot determine the effect that future governmental regulations or
administrative orders may have on our business. Moreover, governmental
regulations in countries where we plan to commence or expand operations may
prevent, delay or limit market entry of certain products or require the
reformulation of such products. Regulatory action, whether or not it results in
a final determination adverse to us has the potential to create negative
publicity, with detrimental effects on the motivation and recruitment of
associates and, consequently, on our possible future sales and earnings. See
"Business--Government Regulation."
WE MAY SUSTAIN LOSSES IN ENTERING NEW MARKETS.
We intend to expand Kaire Nutraceuticals into the United Kingdom. Completing
the establishment of our 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
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and regulations of the United Kingdom, 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 related to our United Kingdom operations. Until such time as the United
Kingdom operations generate sufficient revenue to cover the foregoing costs and
expenses, of which we cannot assure you, 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 or other
conditions may occur that could cause us to be unsuccessful in such expansion
efforts. See "Business--Marketing and Distributions."
WE ARE SUBJECT TO FEDERAL, STATE AND FOREIGN TAXES.
We are subject to federal and state taxation in the United States. In
addition, each of our subsidiaries are subject to taxation in the country in
which they operate. We 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 our operations in high tax jurisdictions such as
Trinidad and Tobago grow disproportionately to the rest of our operations, we
may be unable to fully utilize our foreign tax credits in the United States,
which could, accordingly, result in us paying a higher overall effective tax
rate on our worldwide operations.
Because we operate outside of the United States, we are subject to the
jurisdiction of the relevant foreign tax authorities. In addition to closely
monitoring our locally based income, these tax authorities regulate and restrict
various corporate transactions, including intercompany transfers. We cannot
assure you that our organizational structures will not be challenged by foreign
tax authorities or that such challenges will not have a material adverse effect
on our business or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
WE MAY BE MATERIALLY AND ADVERSELY AFFECTED BY ECONOMIC, POLITICAL AND SOCIAL
CONDITIONS IN THE COUNTRIES IN WHICH WE OPERATE.
A change in policies by any government in our markets and proposed markets,
could adversely affect our future operations through, among other things,
changes in laws, rules or regulations, 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. We
cannot assure you 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 our operations. In addition, our ability
to expand our current operations into new markets will directly depend on our
ability to secure the requisite government approvals and comply with the local
government regulations. See "Business--Marketing and Distribution."
WE MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN EXCHANGE RATE.
Our foreign-derived sales are converted to U.S. dollars for reporting
purposes. Consequently, our 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, we cannot estimate the effect of these
fluctuations on our future business, product pricing, results of operations or
financial condition. However, because our revenue is realized in local
currencies and the majority of our cost of sales is incurred in U.S. dollars,
our gross profits are positively affected by a weakening in the U.S. dollar and
will be negatively affected by a strengthening in the U.S. dollar. We cannot
assure you that any of the foregoing currency risks will not have a material
adverse effect upon our results from operations or financial condition.
Fluctuations in currency exchange rates, particularly those caused by an
increase in the value of the United States dollar, could have a
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material adverse effect on our financial position, results of operations and
cash flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation."
WE ARE DEPENDENT UPON OUR INDEPENDENT ASSOCIATES.
We distribute a line of our products exclusively through independent
associates. Associate agreements are voluntarily terminable by the associates at
any time. Our 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. There may be
seasonal decreases in associate sponsoring and product sales in some of the
countries in which we operate 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 or the public's perception of our products, product
ingredients, our associates or direct selling businesses in general. We cannot
assure you that the number or productivity of our associates will be sustained
at current levels or increased in the future. See "Business--Marketing and
Distribution."
WE MAY BE AFFECTED BY ADVERSE PUBLICITY.
The size of the distribution force and the results of our operations can be
particularly impacted by adverse publicity regarding us, or our competitors,
including the legality of network marketing, the quality of our products and
product ingredients or those of our competitors, regulatory investigations of us
or our competitors and their products, associate actions and the public's
perception of our associates and direct selling businesses generally. We cannot
assure you that such adverse publicity will not have a material adverse effect
on our ability to attract and retain customers or associates, or on our results
from operations or financial condition generally. See "Business--Marketing and
Distribution."
SEASONALITY HAS AN IMPACT ON OUR BUSINESS.
The natural health care products industry can be highly seasonal. Our sales
of topical analgesic products are strongest during the colder winter months when
arthritis sufferers tend to feel pain and stiffness more acutely. Conversely,
our sales of skin treatment products (e.g., hydrocortisone creams, etc.) are
slightly stronger during the non-winter months. Such seasonality may affect our
sales and cause fluctuations, during certain months of the year, in our
financial performance. See "Business--Seasonality."
WE MAY LOSE OUR PATENT IF WE DO NOT FULFILL OUR AGREEMENT.
Global Health acquired Natural Health Laboratories, Inc., which held certain
rights under the Natural Relief 1222 trademark. Natural Health
Laboratories, Inc. acquired the rights to the patent from Troy
Laboratories, Inc. and H. Edward Troy. In April 1998, we agreed to make certain
payments to and on behalf of Troy Laboratories, Inc. and H. Edward Troy in
relation to the patent in settlement of accrued royalties. We have agreed to pay
royalties in connection with the patent equal to 3% of net sales up to
$2,000,000, 2% of net sales from $2,000,000 to $4,000,000 and 1% of net sales
thereafter. In the event of a default in the payment of royalties or other
payments in connection with the agreement, the patent will revert back to the
original holders. We cannot assure you that we will be able to make our payments
of the royalties. If we do not make such payments, we may lose our patent.
In addition, we may not be able to defend successfully our legal rights in
our trademarks. Our failure to protect our legal rights to our trademarks from
improper appropriations or otherwise may have a material adverse effect on our
business. See "Business--Product Acquisition and Licensing Agreements."
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WE ARE SUBJECT TO OUTSTANDING LITIGATION.
We are a defendant in certain litigation. In the event that the outcome of
any such litigation is adverse to us there would be a material adverse effect on
our financial condition. See "Business--Litigation."
OUR INSURANCE MAY NOT BE SUFFICIENT.
The offering of alternative health care products exposes us to the
possibility of personal injury, product or other liability claims. We carry
general liability insurance in the amount of $5,000,000 per occurrence limit and
$6,000,000 in the aggregate, including product liability insurance. A successful
claim against us which exceeds, or is not covered by, our insurance policies
could have a material adverse effect on us. In addition, we may be required to
expend significant resources and energy in defending against any claims. See
"Business--Insurance."
WE DO NOT INTEND TO PAY DIVIDENDS.
We have not paid any cash dividends on our common stock to date and we do
not anticipate declaring or paying any cash dividends in the foreseeable future.
In addition, future financing arrangements, if any, may preclude or otherwise
restrict the payment of dividends. See "Dividend Policy."
OUR COMMON STOCK MAY BE DELISTED FROM TRADING ON NASDAQ.
The common stock is presently quoted on the Nasdaq SmallCap Market. There
are a number of continuing requirements that must be met in order for the common
stock to remain eligible for quotation on Nasdaq. The failure to meet Nasdaq's
maintenance criteria in the future could result in the delisting of our common
stock from Nasdaq. In such event, trading, if any, in the common stock may then
continue to be conducted in the non-Nasdaq over-the-counter market. As a result,
an investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the common stock. The following table
provides the most recent Nasdaq SmallCap guidelines with respect to initial and
continued listing.
<TABLE>
<CAPTION>
REQUIREMENTS INITIAL LISTING CONTINUED LISTING
- ------------ --------------- -----------------
<S> <C> <C> <C> <C>
Net Tangible Assets(1).................................. $ 4,000,000 $ 2,000,000
or or
Market Capitalization $50,000,000 $35,000,000
or or
Net Income (in latest fiscal year or 2 of last 3 fiscal
years)................................................ $ 750,000 $ 500,000
Public Float (shares)(2)................................ 1,000,000 500,000
Market Value of Public Float............................ $ 5,000,000 $ 1,000,000
Minimum Bid Price....................................... $ 4 $ 1
Market Makers........................................... 3 2
Shareholders (round lot holders)(3)..................... 300 300
Operating History(4).................................... 1 year N/A
or
Market Capitalization................................... $50,000,000
Corporate Governance.................................... Yes Yes
</TABLE>
- ------------------------
1. For initial or continued listing, a company must satisfy one of the
following to be in compliance: the net tangible assets requirement, (net
tangible assets means total assets, excluding goodwill, minus total
liabilities) the market capitalization requirement or the net income
requirement.
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2. Public float is defined as shares that are not held directly or indirectly
by any officer or director of the issuer and by any other person who is the
beneficial owner of more than 10 percent of the total shares outstanding.
3. Round lot holders are considered holders of 100 shares or more.
4. If operating history is less than 1 year, initial listing requires market
capitalization of at least $50 million.
In addition, if the common stock were delisted from trading on Nasdaq and
the trading price of the common stock were less than $5.00 per share, trading in
the common stock would also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
with the penny stock market. These rules impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). For
these types of transactions, the broker-dealer must make a special determination
of the transactions' suitability for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers may discourage broker-dealers from effecting
transactions in penny stocks, which could reduce the liquidity of the shares of
common stock and thereby have a material adverse effect on the trading market
for the securities. See "Market for Common Equity and Related Stockholder
Matters."
THE EXISTENCE OF PREFERRED STOCK MAY PREVENT A CHANGE IN CONTROL OF THE COMPANY.
Our Articles of Incorporation authorize the issuance of 1,500,000 shares of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors are empowered, without shareholder approval, to issue
preferred stock with dividends, liquidation, conversion, voting or other rights
which could decrease the amount of earnings and assets available for
distribution to holders of common stock and adversely affect the relative voting
power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
company. See "Description of Securities--Preferred Stock."
THE CONVERSION OF CONVERTIBLE PREFERRED STOCK MAY EFFECT THE MARKET PRICE.
The exact number of shares of common stock issuable upon conversion of our
convertible preferred stock in the aggregate face amount of $5,590,000 will vary
inversely with the market price of our common stock. The holders of common stock
may be materially diluted by conversion of the shares of convertible preferred
stock depending on the future market price of the common stock. The shares of
convertible preferred stock are generally convertible into common stock based
upon the lower of the (i) closing bid price on Nasdaq of the shares of our
common stock on the date of issuance or (ii) the average of the closing bid
price for a fixed period preceding notice of conversion by the securityholders
at a discount. The issuance of shares of common stock issuable upon the
conversion of the shares of convertible preferred stock could result in
immediate and significant dilution. See "Description of Securities--Preferred
Stock."
SALES, OR THE EXPECTATION OF SALES, OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
AFTER THIS OFFERING COULD DECREASE OUR STOCK PRICE.
After this offering, 8,602,352 shares will become eligible for resale by our
current stockholders. Additional shares of common stock are reserved for
issuance pursuant to our outstanding options, warrants and conversion rights may
also become eligible for resale. See "Shares Eligible for Future Sale."
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THE FAILURE TO BE YEAR 2000 COMPLIANT COULD MATERIALLY ADVERSELY AFFECT US.
We are in the process of becoming compliant with the Year 2000 requirements
and we believe that our management information systems will be compliant on a
timely basis.
We believe it is far more likely that the year 2000 problem may impact other
entities with which we transact business, but we cannot predict the effects of
the year 2000 problem on such entities or the economy in general, or the
resulting effects on us. As a result, if preventative or corrective actions by
us and at those companies with which we do business are not made in a timely
manner, year 2000 non-compliance could have a material adverse effect on our
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance" for additional information concerning the year 2000 problem.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
THE HOLDERS OF THE WARRANTS MAY BE FORCED TO EXERCISE THE WARRANTS.
We may redeem the warrants being offered provided that our common stock
trades at 150% of the public offering price for 20 consecutive trading days
ending three days prior to the notice of redemption and that 30 days written
notice is given. If we decide to redeem the warrants, holders of the warrants
will lose their rights to purchase shares of common stock issuable upon exercise
of such warrants unless the warrants are exercised before they are redeemed.
Upon receipt of a notice of redemption, holders would be required to:
(a) exercise the warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so; (b) sell the warrants at the current market
price, if any, when they might otherwise wish to hold the warrants; or
(c) accept the redemption price, which is likely to be substantially less than
the market value of the warrants at the time of redemption. See "Underwriting."
RESTRICTIONS ON RESALE OF SHARES UNDERLYING WARRANTS.
The warrants are not exercisable unless, at the time of the exercise, we
have a current prospectus covering the shares of common stock issuable upon
exercise of the warrants, and such shares have been registered, qualified or
deemed to be exempt under the securities laws of the state of residence of the
exercising holder of the warrants. Although we have agreed to use our best
efforts to keep a registration statement covering the shares of common stock
issuable upon the exercise of the warrants effective for the term of the
warrants, if we fail to do so for any reason, the warrants may be deprived of
value. See "Underwriting."
OUR SHARE PRICE MAY BE VERY VOLATILE IN THE FUTURE.
You may not be able to resell your shares at or above the price paid for the
shares due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- increased competition;
- the operating and stock price performance of other comparable companies;
and
- general stock market or economic conditions.
In addition, the stock market in general has experienced volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of the common stock regardless of our actual operating performance. See
"Market for Common Equity and Related Stockholder Matters."
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MAY DAVIS GROUP, INC., THE REPRESENTATIVE OF THE UNDERWRITERS, MAY EXERT UNDUE
INFLUENCE OVER ANY
DECISION BY US TO SEEK ADDITIONAL FINANCING.
May Davis Group, Inc. has the following continuing rights:
- to appoint a board member or observer to attend Board meetings following
the offering;
- to receive warrants to purchase up to 100,000 shares of common stock and
warrants; and
- to exercise its demand and piggyback registration rights.
These rights may give May Davis leverage over us and management that could
interfere with or otherwise influence the cost and timing of raising capital we
may need in the future. See "Underwriting" for more information about May Davis'
continuing rights and "Shares Eligible For Future Sale."
PROVISIONS OF LAW MAY PREVENT TAKE-OVERS OF NATURAL HEALTH TRENDS CORP. AND
DEPRESS THE PRICE OF OUR
SHARES.
Certain provisions of Florida law could make it more difficult for a third
party to acquire or discourage a third party from attempting to acquire, control
of Natural Health Trends Corp. Such provisions, which are summarized below under
"Description of Securities" could limit the price that investors might be
willing to pay in the future for the common stock because they believe our
management can defeat a take-over of our company that could be beneficial to
non-management stockholders. See "Description of Securities--Articles and
Bylaws."
INDEMNIFICATION AND LIMITATION OF LIABILITY OF OUR OFFICERS AND DIRECTORS MAY
INSULATE THEM FROM
ACCOUNTABILITY TO STOCKHOLDERS AT SUBSTANTIAL COST TO NATURAL HEALTH TRENDS
CORP.
Our articles of incorporation and by-laws include provisions whereby our
officers and directors are to be indemnified against liabilities to the fullest
extent permissible under Florida law. Our articles of incorporation also limits
a director's liability for monetary damages for breach of fiduciary duty,
including gross negligence. In addition, we have agreed to advance the legal
expenses of our officers and directors who are required to defend against
claims. These provisions and agreements may have the effect of reducing the
likelihood of suits against directors and officers even though such suits, if
successful, might benefit us and our stockholders. Furthermore, a stockholder's
investment in Natural Health Trends Corp. may be adversely affected if we pay
the cost of settlement and damage awards against directors and officers. See
"Description of Securities--Indemnification of Officers and Directors."
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS MAY PROVE TO BE MATERIALLY
INACCURATE.
This prospectus contains forward-looking statements that involve risks and
uncertainties. The words "anticipate," "estimate," "expect," "will," "could,"
"may" and similar words are intended to identify forward-looking statements. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the risks
described above and elsewhere in this prospectus.
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USE OF PROCEEDS
The net proceeds to the company from the sale of the 1,000,000 shares of
common stock and 1,000,000 warrants offered hereby are estimated to be
approximately $2,347,000 ($2,751,550 if the Representative's over-allotment
option is exercised in full), assuming a public offering price of $3.00 per
share (the midpoint of the currently anticipated range of the public offering
price) and a public offering price of $.10 per warrant and after deducting
underwriting discounts and estimated offering expenses. The company expects to
use the net proceeds approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
ANTICIPATED USE OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- ------------------------------- ------------- -------------
<S> <C> <C>
Redemption of Series F Preferred Stock (1)....... $1,177,000 50.2%
Inventory (2).................................... 500,000 21.3%
Repayment of Certain Accounts Payable (3)........ 170,000 7.2%
Repayment of Notes (4)........................... 100,000 4.3%
Working Capital.................................. 400,000 17.0%
---------- -----
Total............................................ $2,347,000 100.0%
========== =====
</TABLE>
- ------------------------
(1) Represents redemption of Series F Preferred Stock.
(2) Represents the purchase inventory.
(3) Represents the repayment of certain accounts payable in connection with
offering expenses of our prior offering.
(4) Represents repayment of notes bearing interest at the rate of 10% which are
payable upon the consummation of this offering. The proceeds of such notes
were primarily utilized for working capital purposes.
If the Underwriters exercise their over-allotment option in full, the
company will realize additional net proceeds of approximately $404,550. Such
proceeds, if received, will be used for working capital and general corporate
purposes. Pending their uses as set forth above, the company intends to invest
the net proceeds of this Offering in short-term, investment grade,
interest-bearing securities.
The company anticipates that the balance of the working capital will be
utilized primarily for payables and accelerating payments of distributor
commissions. The underwriter as a condition of the offering has required the
Company to redeem a portion of the Series F Preferred Stock.
The allocation of the net proceeds set forth above represents the company's
best estimates based on its proposed plans and assumptions relating to its
operations and growth strategy and on current economic and industry conditions.
The amounts actually expended for the above purposes may vary significantly;
furthermore, new purposes may take precedence over these listed above, depending
upon numerous factors, including the sales of the company's products, changes in
economic and/or industry conditions, creditor and supplier relations, government
regulation and expenditures. The company believes that the proceeds of this
Offering, together with anticipated revenues from operations, will be sufficient
to satisfy its contemplated cash requirements for at least six months following
the consummation of this Offering assuming that we are not required to satisfy
certain existing obligations. In the event, however, that the company's plans
change (due to changes in market conditions, competitive factors or new
opportunities that may become available in the future), its assumptions change
or prove to be inaccurate or if the proceeds of this Offering or cash flows
prove to be insufficient to implement its business and expansion plans (due to
unanticipated expenses, difficulties or otherwise), the company could be
required to seek additional financing prior to such time. There can be no
assurance that the proceeds of this Offering will be sufficient to permit the
company to implement its business plans, that any assumptions relating to the
19
<PAGE>
implementation of such plans will prove to be accurate or that any additional
financing would be available to the company on commercially reasonable terms, or
at all.
DILUTION
The difference between the public offering price per share of common stock
and the net tangible book value per share of common stock after the offering
constitutes the dilution to investors in the offering. Net tangible book value
per share on any given date is determined by dividing the net tangible book
value of the company (total tangible assets less total liabilities) on such date
by the number of then outstanding shares of common stock.
At June 30, 1999, the pro forma net tangible book value of the company was
$(3,956,764) or $(0.64) per share. After giving effect to: (i) the sale of
1,000,000 shares of common stock at an assumed public offering of $3.00 per
share (the midpoint of the currently anticipated range of the public offering
price), the sale of 1,000,000 warrants at a purchase price of $.10 per warrant
and the anticipated application of the estimated net proceeds therefrom,
(ii) the conversion of 300,000 warrants into 185,769 shares of common stock,
(iii) the conversion of 610 shares of Series E Preferred Stock into 603,130
shares of common stock and 516 shares of Series I Preferred Stock into 160,104
shares of common stock prior to this offering, (iv) the conversion of shares of
Series E, G and H Preferred Stock into 2,193,503 shares of common stock
subsequent to this offering, (v) the issuance of an aggregate of 280,000 shares
of common stock pursuant to consulting agreements (vi) the issuance of 125,000
shares of common stock pursuant to a settlement agreement (vii) the issuance of
3,018 shares of common stock to a former employee and 25,000 shares of common
stock to a director, and (viii) the conversion of $250,000 of convertible notes
into 263,158 shares of common stock subsequent to this offering, the as adjusted
net tangible book value of the company at June 30, 1999 would have been
$(2,156,764) or $(0.20) per share, representing an immediate increase in net
tangible value of $0.44 per share to existing stockholders and an immediate
dilution of $3.30 (106%) per share to investors in the offering. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Legal Proceedings," "Management--Consulting
Agreements" and "Description of Securities--Preferred Stock."
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C> <C>
Assumed public offering price............................... $ 3.10
Net tangible book value before the offering............... $(0.64)
Decrease attributable to investors in the offering........ $ 0.44
------
Adjusted net tangible book value after the offering......... (0.20)
------
Dilution to investors in the offering....................... $ 3.30 (106%)
====== ======
</TABLE>
The following table sets forth, with respect to existing stockholders and
the investors in the offering, a comparison of the number of shares of common
stock purchased from the company, the percentage ownership of such shares, the
aggregate consideration paid, the percentage of total consideration paid and the
average price paid per share.
<TABLE>
<CAPTION>
SHARES ACQUIRED TOTAL CONSIDERATION
-------------------- ----------------------
<S> <C> <C> <C> <C> <C>
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --- ----------- --- ----
Existing shareholders..................... 7,602,352 88% $19,937,132 87% 2.62
Investors in this offering................ 1,000,000 12% 3,100,000 13% 3.10
--------- --- ----------- ---
8,602,352 100% $23,037,132 100%
========= === =========== ===
</TABLE>
The foregoing tables do not give effect to the (i) proceeds from the sale
and issuance by the company of the shares of common stock subject to the
underwriters over-allotment option, (ii) the shares of common stock issuable
upon the exercise of the 1,000,000 warrants which are included in the offering
or (iii) the exercise of any outstanding options, warrants or conversion rights,
provided however that the dilution per share to investors in this offering gives
effect to the shares of common stock issuable upon the conversion of the
Series E, G and H Preferred Stock.
20
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the company as
of June 30, 1999; and the as adjusted capitalization of the company as of
June 30, 1999 to reflect (i) the sale of 1,000,000 shares of common stock at an
assumed public offering of $3.00 per share (the midpoint of the currently
anticipated range of the public offering price), the sale of 1,000,000 warrants
at a purchase price of $.10 per warrant and the anticipated application of the
estimated net proceeds therefrom, (ii) the conversion of 300,000 warrants into
185,769 shares of common stock, (iii) the conversion of 610 shares of Series E
Preferred Stock into 603,130 shares of common stock and 516 shares of Series I
Preferred Stock into 160,104 shares of common stock prior to this offering,
(iv) the conversion of shares of Series E, G and H Preferred Stock into
2,193,503 shares of common stock subsequent to this offering at prices of
$1.125, $2.85 and $2.85, respectively, (v) the issuance of an aggregate of
280,000 shares of common stock pursuant to consulting agreements (vi) the
issuance of 125,000 shares of common stock pursuant to a settlement agreement
and (vii) the issuance of 3,018 shares of common stock to a former employee and
25,000 shares of common stock to a director and (viii) the conversion of
$250,000 of convertible notes into 263,158 shares of common stock subsequent to
this offering. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Legal Proceedings,"
"Management--Consulting Agreements" and "Description of Securities--Preferred
Stock." The table does not include the proceeds from the sale and issuance by
the company of the shares of common stock subject to the underwriters
over-allotment option or any other shares of common stock issuable upon the
exercise of outstanding options, warrants or conversion rights. The table does
not include the shares of common stock issuable upon the exercise of the
1,000,000 warrants which are included in the offering.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Long term debt--current portion............................. $ 314,684 $ 314,684
------------ ------------
Capital lease obligations, net 122,251 122,251
------------ ------------
Common Stock subject to put................................. 380,000 --
------------ ------------
Stockholders' equity:
Preferred Stock, $.001 par value; 1,500,000 shares
authorized; 6,716 shares issued and outstanding: actual
and 1,623 issued and outstanding (as adjusted)............ 6,716,000 1,623,000
Common Stock, $.001 par value: 50,000,000 shares authorized;
6,220,331 shares issued and outstanding actual 11,059,013
issued and outstanding (as adjusted)...................... 6,221 11,059
Additional paid-in capital.................................. 18,125,536 25,313,073
Accumulated deficit......................................... (16,626,133) (17,305,508)
Common Stock subject to put................................. (380,000) --
------------ ------------
Total stockholders' equity.................................. 7,841,624 9,641,624
------------ ------------
Total capitalization........................................ $ 8,658,559 $ 10,078,559
============ ============
</TABLE>
21
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The common stock is quoted on the Nasdaq SmallCap Market under the symbol
"NHTC." The following table sets forth the range of high and low closing sale
prices as reported by The Nasdaq SmallCap Market for the common stock for the
quarters indicated.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1997
First Quarter............................................... $100.00 $40.00
Second Quarter.............................................. 90.00 35.00
Third Quarter............................................... 40.00 8.75
Fourth Quarter.............................................. 10.00 1.25
1998
First Quarter............................................... 5.00 1.88
Second Quarter.............................................. 3.75 .56
Third Quarter............................................... 2.13 .78
Fourth Quarter.............................................. 4.00 1.91
1999
First Quarter............................................... 5.63 3.56
Second Quarter.............................................. 4.34 3.31
Third Quarter............................................... 4.25 2.47
</TABLE>
HOLDERS
As of January 22, 1999, the company had approximately 192 record holders of
its common stock, and as of January 22, 1999, 1,669 beneficial holders of its
common stock.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated statements of operations data for the
years ended December 31, 1998, 1997, 1996 and 1995 and the selected consolidated
balance sheet data at December 31, 1998, 1997, 1996, and 1995, are derived from
the financial statements of the company included elsewhere herein, which
statements have been audited by Feldman Sherb Horowitz & Co., P.C., independent
auditors, whose report thereon is included elsewhere in this prospectus. The
operations for the year ended December 31, 1994 have been discontinued and
therefore are not presented herein. The selected consolidated statements of
operations data presented for the six month periods ended June 30, 1999 and
1998, and the selected consolidated balance sheet data at June 30, 1999, are
unaudited and were prepared by management of the company on the same basis as
the audited consolidated financial statements of the company included elsewhere
herein and, in the opinion of management, include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The selected consolidated financial data for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the company, including the related
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------------
1999 1998
1998 1997 1996 1995 (UNAUDITED) (UNAUDITED)
----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues....................................... $ 1,191,120 $ 1,133,726 $ -- $ -- $7,625,391 $ 832,831
Cost of sales.................................. 454,370 375,034 -- -- 1,536,686 223,354
----------- ----------- --------- ----------- ----------- -----------
Gross profit................................... 736,750 758,692 -- -- 6,088,705 609,477
Distributor commissions........................ -- -- -- -- 3,605,488 --
Selling, general and administrative expenses... 3,277,047 4,194,044 232,371 149,675 3,673,137 1,697,450
----------- ----------- --------- ----------- ----------- -----------
Operating loss................................. (2,540,297) (3,435,352) (232,371) (149,675) (1,189,920) (1,087,973)
Minority interest in loss of subsidiaries...... -- -- -- -- 10,616 --
Gain on foreign exchange....................... -- -- -- -- 2,582 --
Interest expense (net)......................... (199,757) (868,721) (32,209) -- (38,059) (269,053)
----------- ----------- --------- ----------- ----------- -----------
Loss from continuing operations................ (2,740,054) (4,304,073) (264,580) (149,675) (1,214,781) (1,357,026)
----------- ----------- --------- ----------- ----------- -----------
Loss from discontinued operations.............. (86,234) (2,919,208) (707,408) (1,789,194) -- (83,471)
Gain (loss) on disposal........................ 722,640 (501,839) 82,450 -- -- 19,028
----------- ----------- --------- ----------- ----------- -----------
Gain (loss) from discontinued operations....... 636,406 (3,421,047) (624,958) (1,789,194) -- (64,443)
----------- ----------- --------- ----------- ----------- -----------
Loss before extraordinary gain................. (2,103,648) (7,725,120) (889,538) (1,938,869) (1,214,781) (1,421,469)
Extraordinary gain-forgiveness of debt......... 815,636 -- -- -- 1,471 1,508,092
----------- ----------- --------- ----------- ----------- -----------
Net income (loss).............................. (1,288,012) (7,725,120) (889,538) (1,938,869) (1,213,310) 86,623
Preferred stock dividends...................... 2,011,905 733,333 -- -- 1,043,039 --
----------- ----------- --------- ----------- ----------- -----------
Net income (loss) to common stockholders....... $(3,299,917) $(8,458,453) $(889,538) $(1,938,869) $(2,256,349) $ 86,623
=========== =========== ========= =========== =========== ===========
Basic and diluted income (loss) per common
share:
Continuing operations.......................... $ (1.24) $ (9.91) $ (0.94) $ (0.65) $ (0.20) $ (1.40)
Discontinued operations........................ 0.29 (7.88) (2.23) (7.78) -- (0.07)
Extraordinary gain............................. 0.37 -- -- -- -- 1.55
Preferred stock dividends...................... (0.91) (1.69) -- -- (0.17) --
----------- ----------- --------- ----------- ----------- -----------
Net income (loss).............................. $ (1.49) $ (19.48) $ (3.17) $ (8.43) $ (0.37) $ 0.08
=========== =========== ========= =========== =========== ===========
Basic and diluted weighted average common
shares outstanding........................... 2,210,458 434,265 280,350 230,120 6,220,331 969,886
=========== =========== ========= =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------
1998 1997 1996 1995 1999
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)........................... $(2,016,734) $(4,647,844) $ 517,323 $1,087,726 $(4,828,142)
Inventories......................................... $ 314,367 $ 719,726 $ -- $ 124,887 $ 1,111,995
Total assets........................................ $ 6,852,716 $ 8,865,335 $ 417,323 $1,957,573 $15,779,931
Current liabilities................................. $ 2,898,022 $ 5,607,038 $ -- $ 869,847 $ 7,436,056
Long-term debt...................................... $ -- $ 171,875 $ -- $ 27,303 $ --
Common stock subject to put......................... $ 380,000 $ 380,000 $ 380,000 $ -- $ 380,000
Stockholders' equity................................ $ 3,574,694 $ 2,395,515 $6,205,927 $2,151,214 $ 7,841,624
</TABLE>
23
<PAGE>
PRO FORMA FINANCIAL DATA
Set forth below is certain selected unaudited summary pro forma combined
financial data for the company for the periods and as of the dates, indicated.
The summary pro forma combined selected financial data for the company for the
year ended December 31, 1998 and the six months ended June 30, 1999 is based on
the historical financial statements of the company and has been prepared to
illustrate the effects on such historical financial data of the Kaire
Acquisition as if this transaction had occurred as of January 1, 1998 with
respect to the statement of operations. The Kaire Acquisition is reflected using
the purchase method of accounting for business combinations. The historical pro
forma combined selected financial data for the year ended December 31, 1998 has
been derived from our audited consolidated financial statements included
elsewhere in this prospectus and in the opinion of management include all the
necessary adjustments for fair presentation of such data. The pro forma combined
selected financial data is provided for comparative purposes only and does not
purport to be indicative of the results that actually would have been obtained
if this transaction had been effected on the dates indicated. The information
presented below is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Financial Data" and the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
24
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------
PRO FORMA
NATURAL HEALTH KAIRE ------------------------------
TRENDS CORP. INTERNATIONAL, INC. ADJUSTMENTS COMBINED
-------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................ $ 1,191,120 $26,175,710 $ -- $ 27,366,830
Cost of sales....................... 454,370 6,250,433 -- 6,704,803
----------- ----------- ----------- ------------
Gross profit........................ 736,750 19,925,277 -- 20,662,027
Distributor commissions............. -- 13,537,777 -- 13,537,777
Selling, general and administrative
expenses.......................... 3,277,047 10,155,191 575,495 (1) 14,007,733
Interest expense, (net)............. 199,757 939,930 -- 1,139,687
----------- ----------- ----------- ------------
Loss from continuing operations..... (2,740,054) (4,707,621) (575,495) (8,023,170)
Preferred stock dividends........... 2,011,905 -- 396,069 (2) 2,407,974
----------- ----------- ----------- ------------
Loss to common stockholders......... $(4,751,959) $(4,707,621) $ (971,564) $(10,431,144)
=========== =========== =========== ============
Basic and diluted loss per common
share............................. $ (2.15) $ (4.72)
=========== ============
Basic and diluted weighted average
common shares outstanding......... 2,210,458 2,210,458
=========== ============
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------------------------------
PRO FORMA
NATURAL HEALTH KAIRE ------------------------------
TRENDS CORP. INTERNATIONAL, INC.(3) ADJUSTMENTS COMBINED
-------------- ---------------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 7,625,391 $ 2,303,006 $ -- $ 9,928,397
Cost of sales..................... 1,536,686 426,219 -- 1,962,905
----------- ----------- ----------- ------------
Gross profit...................... 6,088,705 1,876,787 -- 7,965,492
Distributor commissions........... 3,605,488 1,145,149 -- 4,750,637
Selling, general and
administrative expenses......... 3,659,939 866,724 82,088 (1) 4,608,751
Interest expense, (net)........... 38,059 -- -- 38,059
----------- ----------- ----------- ------------
Loss from continuing operations... (1,214,781) (135,086) $ (82,088) (1,431,955)
Preferred stock dividends......... 1,043,039 -- 1,556 (2) 1,044,595
----------- ----------- ----------- ------------
Loss to common stockholders....... (2,257,820) $ (135,086) $ (83,644) (2,476,550)
=========== =========== =========== ============
Basic and diluted loss per common
share........................... $ (0.36) $ (0.40)
=========== ============
Basic and diluted weighted average
common shares outstanding....... 6,220,331 6,220,331
=========== ============
</TABLE>
- ------------------------
(1) To reflect the amortization of goodwill and customer list incurred through
the Kaire Acquisition over a period of 15 and 10 years, respectively.
(2) To reflect imputed and accrued dividends on preferred stock issued in the
Kaire Acquisition.
(3) To reflect the operations of Kaire International, Inc. from January 1, 1999
to February 19, 1999.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Prior to August 1997, the company's operations consisted of the operation of
natural health care centers and vocational schools. Upon the acquisition of
Global Health on July 23, 1997, the company commenced marketing and distributing
a line of natural, over-the-counter homeopathic pharmaceutical products. In
February 1999, the company acquired substantially all of the assets of Kaire
International, Inc. and commenced marketing and distributing a line of natural,
herbal based dietary supplements and personal care products through an
established network marketing system. The company discontinued the operations of
the natural health care centers during the third quarter of 1997 and sold the
vocational schools in August 1998. During most of the year ended December 31,
1997, the company's ongoing lines of business were not in operation, not having
been acquired until July 1997 and February 1999.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues for the six months ended June 30, 1999 were approximately
$7,625,000 as compared to revenues for the six months ended June 30, 1998 of
approximately $833,000, an increase of $6,792,000 or 915.4%. Sales for the six
months ended June 30, 1998 were primarily from Global Health. The increase in
sales is primarily attributable to Kaire Nutraceuticals' sales of approximately
$7,054,000 which commenced on February 19, 1999. Global Health's revenues
declined 31.4% during the six months ended June 30, 1999 as compared to the six
months ended June 30, 1998 due to a change in the marketing approach used by the
company to a less capital intensive method.
COST OF SALES
Cost of sales for the six months ended June 30, 1999 was approximately
$1,537,000 or 20.2% of revenues. Cost of sales for the six months ended
June 30, 1998 was $223,000 or 26.8% of revenues. The total cost of sales
increased by approximately $1,314,000 or 589.2% of which approximately
$1,250,000 was attributable to Kaire Nutraceuticals and its related operations.
The decrease in the cost of sales as a percentage of revenues is also the
attributable to effect of Kaire Nutraceuticals' sales due to the different
pricing structure associated with Kaire Nutraceuticals' sales distribution
channel.
GROSS PROFIT
Gross profit increased from approximately $609,000 in the six months ended
June 30, 1998 to approximately $6,089,000 in the six months ended June 30, 1999.
The increase was $5,480,000 or 1,000.0%. The increase was attributable to Kaire
Nutraceuticals' gross profit.
COMMISSIONS
Distributor commissions were $3,605,000 or 47.3% of revenues in the six
months ended June 30, 1999 attributable to Kaire Nutraceuticals' marketing
system.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative costs increased from approximately
$1,697,000 or 203.0% of revenues in the six months ended June 30, 1998 to
approximately $3,673,000 or 48.2% of revenues in the six months ended June 30,
1999, an increase of $1,976,000 or 216.0% which is attributable to Kaire
Nutraceuticals' operations.
26
<PAGE>
LOSS FROM OPERATIONS
Operating losses increased from $1,088,000 in the six months ended June 30,
1998 to approximately $1,190,000 in the six months ended June 30, 1999
representing a 9.4% increase in the loss or approximately $102,000 between
comparable periods. This increase is due primarily to larger losses being
incurred by Global Health due to reduced revenues without a corresponding
reduction in operating expenses.
MINORITY INTEREST
The income offset of $11,000 in the six months ended June 30, 1999 for
minority interest was a reflection of the profitability of the Australia and New
Zealand subsidiaries. Kaire Nutraceuticals owns 51% of such subsidiaries.
GAIN ON FOREIGN EXCHANGE
As a part of the acquisition of Kaire, the company acquired interests in
Kaire's subsidiaries in Australia, New Zealand, Trinidad and Tobago and the
United Kingdom. During the six months ended June 30, 1999, the net gain on
foreign exchange adjustments was approximately $2,600.
INTEREST EXPENSE
Interest expense of $269,000 or 32.2% of revenues in the six months ended
June 30, 1998 declined to approximately $38,000 or 0.5% of revenues in the six
months ended June 30, 1999, a change of approximately $231,000. This decrease is
due primarily to a workout of various debt and payables of Global Health during
the six months ended June 30, 1998 resulting in an overall reduction in interest
bearing liabilities.
INCOME TAXES
Income tax benefits were not reflected in either period. The anticipated
benefits of utilizing net operating losses against future profits was not
recognized in the six months ended June 30, 1999 or the six months ended
June 30, 1998 under the provisions of Financial Standards Board Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes), utilizing
its loss carry forwards as a component of income tax expense. A valuation
allowance equal to the net deferred tax asset has been recorded, as management
of the company has not been able to determine that it is more likely than not
that the deferred tax assets will be realized.
NET LOSS FROM CONTINUING OPERATIONS
Net loss from continuing operations was approximately $1,215,000 in the six
months ended June 30, 1999 or 15.9% of revenues as compared to approximately
$1,357,000 or 163.0% of revenues in the six months ended June 30, 1998. Of the
net loss from continuing operations, approximately $121,000 was attributable to
Kaire Nutraceuticals' operations.
DISCONTINUED OPERATIONS
In February, 1998, the company closed the natural health care center in
Pompano Beach, Florida. The anticipated gain on this discontinued operation was
reflected in the six months ended June 30, 1998.
GAIN ON FORGIVENESS OF DEBT
During the six months ended June 30, 1998, the company realized a $1,508,092
gain on the work-out of various debt and payables of Global Health.
27
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues for continuing operations for the year ended December 31,
1998 were $1,191,120, as compared to revenues of $1,133,726 for the year ended
December 31, 1997, an increase of 5.1%. Although revenues increased during the
year ended December 31, 1998, the revenues for the year ended December 31, 1998
reflect operations for a full year. However, the revenues for the year ended
December 31, 1997, reflect operations for five months. On an annualized basis
revenues decreased by 57%. The company believes that the decrease in revenues is
primarily attributable to a decrease in the sale of Natural Relief 1222 to mass
market retailers and major drug chains. The company believes that such decrease
is due to a decrease in spending on marketing and advertising as a result of the
company's decision to pursue less capital intensive channels of distribution.
COST OF SALES
Cost of sales for the year ended December 31, 1998 were $454,370 (38.1% of
revenues), as compared to $375,034 (33.1% of revenues) for the year ended
December 31, 1997. Gross profit for the year ended December 31, 1998 was
$736,750 (61.9% as a percentage of revenues) as compared to $758,692 (66.9% as a
percentage of revenues) for the year ended December 31, 1997. The company
believes that the decrease in gross profit as a percentage of revenues is
primarily attributable to a write-down of $75,000 for obsolete inventory for the
year ended December 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended
December 31, 1998 were $3,277,047, as compared to $4,194,044 for the year ended
December 31, 1997, a decrease of 21.9%. The company believes that the decrease
in selling, general and administrative expenses is primarily attributable to
reduced spending on advertising and promotion. Advertising and promotion
expenses were $1,771,095 for the year ended December 31, 1997 as compared to
$692,344 for the year ended December 31, 1998.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1998 was $199,757 as
compared to $868,721 for the year ended December 31, 1997. Excluding the
amortization of notes payable discount (related to the company's convertible
debentures) which amounted to $433,333 for the year ended December 31, 1997,
interest expense decreased by 54.1%. The company believes that the decrease in
interest expense is primarily attributable to the conversion of convertible
debentures during the fourth quarter of the year ended December 31, 1998 and the
first quarter of the year ended December 31, 1997.
DISCONTINUED OPERATIONS
In October 1997, the company closed its natural health care center in Boca
Raton, Florida. In February 1998, the company sold its remaining natural health
care center in Pompano Beach, Florida. The anticipated losses on these
discontinued operations were reflected in the year ended December 31, 1997. In
August 1998, the company sold its three vocational schools and certain related
businesses, recognizing a gain of $1,424,379 from the sale. In November 1998,
the company sold an office building which previously accommodated its corporate
headquarters and one of its vocational schools, realizing an estimated loss of
$829,000 which was reflected in the quarter ended September 30, 1998.
GAIN ON FORGIVENESS OF DEBT
During the year ended December 1998, the company realized a gain of $815,636
on the work-out of various debt and trade payables.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES AND COST OF SALES
There were no revenues or cost of sales for the year ended December 31, 1996
as such operations were shown as discontinued.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The company incurred selling, general and administrative expenses of
$4,194,044 for the year ended December 31, 1997 as compared to selling, general
and administrative expenses of $232,371 for the year ended December 31, 1996, an
increase of $3,961,673. The company believes that the increase is attributable
to the increase in selling, general and administrative expenses attributable to
Global Health's operations commencing in July 1997 which selling, general and
administrative expense for the year ended December 31, 1996 are attributable to
professional fees as the company's ongoing lines of business were not in
operation.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1997 was $868,721 as
compared to $32,209 for year ended December 31, 1996. Excluding the amortization
of notes payable discount (related to the company's convertible debentures)
which amounted to $433,333 for the year ended December 31, 1997, the company
believes the increase is associated with additional financing related to the
operations of Global Health.
DISCONTINUED OPERATIONS
The company had a loss from discontinued operations of $3,421,047 for the
year ended December 31, 1997 as compared to a loss from discontinued operations
of $624,958 for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The company has funded its working capital and capital expenditure
requirements primarily from cash provided through borrowings from institutions
and individuals, and from the sale of its securities in private placements. The
company's other ongoing source of cash receipts has been from the sale of Global
Health's and Kaire Nutraceuticals' products.
In February 1998, the company issued $300,000 face amount of Series B
Preferred Stock, net of expenses of $38,500. The Series B Preferred Stock has
been converted into 541,330 shares of common stock.
In April 1998, the company issued $4,000,000 face amount of Series C
Preferred Stock, net of expenses of $492,500 from the proceeds raised, the
company paid $2,500,000 to retire $1,568,407 face value of Series A Preferred
Stock outstanding. The Series C Preferred Stock has been converted into
3,608,296 shares of common stock.
In July 1998, the company issued $75,000 face amount of Series D Preferred
Stock, which was redeemed in August 1998 for $91,291.
In August 1998, the company issued $1,650,000 face amount of Series E
Preferred Stock, net of expenses of $210,500. The Series E Preferred Stock pays
dividends of 10% per annum and is convertible into shares of common stock at the
lower of the closing bid price on the date of issue or 75% of the market value
of the common stock. In September 1999, $610,000 of face amount of Series E
Preferred Stock was converted into 603,130 shares of common stock.
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In August 1998, the company sold its three vocational schools and certain
related businesses for $1,778,333 and other consideration. From the proceeds
from the sale of the schools, the company paid $1,030,309 to retire the
remaining $631,593 face value of Series A Preferred Stock then outstanding, and
$91,291 to redeem all of the Series D Preferred Stock outstanding. The remaining
proceeds were used to pay down payables.
In March and April 1999, the company issued $1,400,000 of Series H Preferred
Stock. The Series H Preferred Stock pays dividends of 10% per annum and is
convertible into shares of common stock at the lower of the closing bid price on
the date of issue or 75% of the market value of the common stock. The Series H
Preferred Stock has not been converted.
In July 1999, the company borrowed $50,000 from H. Newcomb Eldredge and
issued a nine month secured promissory note bearing interest at the rate of 14%
per annum, but in no event shall the interest payable be less than $5,000.
In July 1999, the company borrowed $50,000 from Capital Development S.A. and
issued a nine month secured promissory note bearing interest at the rate of 14%
per annum, but in no event shall the interest payable be less than $5,000.
In July and August 1999 the company borrowed $150,000 from Filin
Corporation, and issued a secured promissory note due on the earlier of 60 days
from the date of issuance or upon the sale of its securities resulting in gross
proceeds of at least $5,000,000 and bearing interest at the rate of 10% per
annum, but in no event less than $12,000. In October 1999 the company amended
the promissory note to provide that the note is payable upon demand and is
convertible into shares of common stock at a discount equal to 40% of the
average closing bid price of the common stock on the three days preceding notice
of conversion.
In June 1999, the company borrowed $100,000 from Domain Investments, Inc.
The loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 40% of the
average closing bid price of the common stock on the three days preceding notice
of conversion.
In October 1999, the company borrowed $100,000 from Domain
Investments, Inc. The loan bears interest at 10% per annum and is payable on
demand. The note is convertible into shares of common stock at a discount equal
to 40% of the average closing bid price of the common stock on the three days
preceding notice of conversion. The company intends to repay this loan from the
net proceeds of this offering.
At June 30, 1999, the company's ratio of current assets to current
liabilities was .35 to 1.0 and the Company had a working capital deficit of
approximately $4,828,000.
Cash used in operations for the period ended June 30, 1999 was approximately
$316,000 attributable primarily to the net loss of approximately $1,213,000,
decreases in accounts payable of approximately $1,075,000 offset by increases in
accrued expenses of approximately $1,458,000. Cash used in investing activities
during the period was approximately $996,000, which was primarily related to the
Kaire Acquisition. Cash provided by financing activities during the period was
approximately $1,581,000, primarily from the issuance of preferred stock of
approximately $1,201,000 and an increase in the revolving credit line of
approximately $130,000. Total cash increased by approximately $269,000 during
the period.
Our independent auditors' report on our consolidated financial statements
stated as of December 31, 1998 due to net losses and a working capital deficit,
there is substantial doubt about the company's ability to continue as a going
concern. The company anticipates that together with the proceeds of this
offering it has sufficient additional resources for the company's continuing
operations during the next six months, assuming that the company is not required
to satisfy certain existing obligations and thereafter the
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Company will require additional financing principally to fund Kaire
Nutraceuticals' operations. Management has revised its business plan of
marketing development and support for Global Health's products, decreasing its
emphasis on mass market advertising. Instead, the company plans to use its
resources for the development of other less capital-intensive distribution
channels. Management believes that the Company will require approximately
$500,000, primarily to finance Kaire Nutraceuticals' operations in addition to
the anticipated net proceeds from this offering and that Global Health will not
require any additional financing provided that Global Health is successful in
reaching satisfactory settlements with its creditors. The Company intends to
raise such additional financing through additional debt and equity financings,
of which there can be no assurance and for which there are no commitments or
definitive agreements. As of June 30, 1999, Global Health owed approximately
$1,660,000 to creditors and had a working capital deficit of approximately
$1,694,000. In the event that the company cannot reach satisfactory settlements
with Global Health's creditors, the company may discontinue the operations of
Global Health and file for protection from creditors under the bankruptcy laws.
There can be no assurance that the company will be able to achieve satisfactory
settlements with its creditors or secure such additional financing. The failure
of the company to achieve satisfactory settlements with its creditors or secure
additional financing would have a material adverse effect on the company's
business, prospects, financial conditions and results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries to represent years in the date code field.
Computer systems and products that do not accept four-digit year entries will
need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years. Management is in the process of
becoming compliant with the Year 2000 requirements and believes that its
management information system will be compliant on a timely basis at an
approximate cost of $50,000. The company currently does not anticipate that it
will experience any material disruption to its operations as a result of the
failure of its management information system to be Year 2000 compliant. There
can be no assurance, however, that computer systems operated by third parties,
including customers, vendors, credit card transaction processors, and financial
institutions, with which the company's management information system interface
will continue to properly interface with the company's system and will otherwise
be compliant on a timely basis with Year 2000 requirements. The company
currently is developing a plan to evaluate the Year 2000 compliance status of
third parties with which its system interfaces. Any failure of the company's
management information system or the systems of third parties to timely achieve
Year 2000 compliance could have a material adverse effect on the company's
business, financial condition, and operating results. The company 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 prospectus, has no plans to do so.
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BUSINESS
Natural Health Trends Corp. is a corporation which develops and operates
businesses, in one business segment, to promote human wellness. Through Global
Health, the company's wholly-owned subsidiary, the company markets a line of
natural, over-the-counter homeopathic pharmaceutical products. Through Kaire
Nutraceuticals, the company's wholly-owned subsidiary, the company utilizes a
network of independent associates to offer a line of approximately 50 products.
ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF KAIRE INTERNATIONAL, INC.
In February 1999, the company's newly formed, wholly-owned subsidiary, Kaire
Nutraceuticals, acquired substantially all of the assets (the "Kaire Assets") of
Kaire International, Inc. including, but not limited to, the names "Kaire,"
"Kaire International, Inc." and all variations and any other product name and
all other registered or unregistered trademarks, tradenames, service marks,
patents, logos, and copyrights of Kaire International, Inc. all accounts
receivable, contractual rights and product formulations to any and all products
of Kaire International, Inc., product inventory, "800" and other "toll-free"
telephone numbers, product supply contracts (including, but not limited to, its
Enzogenol-TM- product), independent associate lists, and shares of capital stock
owned by Kaire International, Inc. in each of its wholly-owned and/or partially
owned subsidiaries including, but not limited to, Kaire New Zealand Ltd., Kaire
Australia Pty Ltd., Kaire Trinidad, Ltd. and Kaire Europe Ltd. (but excluding
Kaire Korea Ltd.).
In exchange for the Kaire Assets, the company issued (i) to Kaire
International, Inc., $2,800,000 aggregate stated value of Series F Preferred
Stock; (ii) to two creditors of Kaire International, Inc., $350,000 aggregate
stated value of Series G Preferred Stock; and (iii) to Kaire
International, Inc., five-year warrants to purchase 200,000 shares of the
company's common stock exercisable at $4.06 per share. In addition, Kaire
Nutraceuticals has agreed to make certain payments to Kaire International, Inc.
each year for a period of five years (the "Kaire Nutraceuticals Net Income
Payments") commencing with the year ending December 31, 1999, to be determined
as follows:
(i) 25% of the net income of Kaire Nutraceuticals if the net sales of Kaire
Nutraceuticals in any such year are between $1 and $10,000,000;
(ii) 33% of Kaire Nutraceuticals' net income if its net sales are between
$10,000,000 and $15,000,000;
(iii) 40% of Kaire Nutraceuticals' net income if its net sales are between
$15,000,000 and $40,000,000; and
(iv) 50% of Kaire Nutraceuticals' net income if its net sales are in excess
of $40,000,000.
The Kaire Nutraceuticals Net Income Payments shall be reduced on a
dollar-for-dollar basis to the extent of (A) all indebtedness of Kaire
International, Inc. assumed by Kaire Nutraceuticals; (B) all other direct and/or
indirect costs or expenses assumed and/or otherwise incurred by the company of,
or resulting from, Kaire International, Inc. including, but not limited to,
litigation costs, payments of sales or other taxes, expenses of officers of
Kaire International, Inc., and other payments or expenses resulting directly
and/or indirectly from the acquisition of the Kaire Assets; and (C) any
reasonable inter-company obligations of the company resulting from third party
payments made by the company on behalf of (or allocable proportionately to)
Kaire Nutraceuticals by the company that resulted from the acquisition of the
Kaire Assets. In addition, all amounts set-off against Kaire Nutraceuticals Net
Income Payments are cumulative and, if not set-off in the year they are paid (or
incurred) because Kaire Nutraceuticals did not have a sufficient amount of Net
Income (or for any reason), such set-off amounts shall accrue and be used as a
set-off in the earliest possible year or years.
In connection with the Kaire Acquisition, Kaire Nutraceuticals assumed
certain specified liabilities of Kaire International, Inc. including:
(i) approximately $475,000 owed to MW International Inc.; (ii) approximately
$50,000 owed to Manhattan Drug Company; (iii) approximately $120,000 in the
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aggregate owed to Robert L. Richards and Mark Woodburn (both officers and
directors of Kaire International, Inc.); (iv) up to approximately $120,000 in
unpaid payroll taxes of Kaire International, Inc.; and (v) up to $180,000 owed
to STAR Financial Bank.
In connection with the Kaire Acquisition, the company has appointed to its
Board of Directors one nominee of Kaire International, Inc., Robert L. Richards.
In addition, Kaire Nutraceuticals has agreed to indemnify certain officers of
Kaire International, Inc. against all amounts paid following the acquisition of
the Kaire Assets by such persons resulting from unpaid sales taxes accrued by
Kaire International, Inc. prior to the closing date of the Kaire Acquisition.
In connection with the Kaire Acquisition, the company retained BLH, Inc. as
a consultant. In accordance with the terms of the consulting agreement,
BLH, Inc. was to identify companies which the company could effect a business
combination. BLH, Inc. introduced Kaire International, Inc. to the company.
Pursuant to the terms of the consulting agreement, BLH, Inc. earned a fee of
approximately $430,000 in connection with the Kaire Acquisition which was paid
in February, 1999 by issuing 516 shares of Series I Preferred Stock. The Series
I Preferred Stock was converted into 160,104 shares of common stock during
July 1999.
INDUSTRY OVERVIEW
NATURAL HEALTH PRODUCTS
The company believes that the market for natural products and supplements is
being driven by information in the mass media which continues to highlight
problems with the American diet; the fact that American consumers are becoming
increasingly disenchanted with and skeptical about many conventional medical
approaches to disease treatment; growing consumer interest in and acceptance of
natural and alternative therapies and products; and, finally, recent
clarifications and changes of food and drug laws that have eased significantly
the regulatory burdens associated with the introduction and sale of dietary
supplements.
The company believes that public awareness of the positive effects of
nutritional supplements and natural remedies on health has been heightened by
widely publicized reports and medical research findings indicating a correlation
between the consumption and use of a wide variety of nutrients and natural
remedies and the reduced incidence of certain diseases.
The company believes, although there can be no assurance, that the aging of
the United States population, together with an increased focus on preventative
and alternative health care measures, will continue to fuel increased demand for
certain nutritional supplement products and natural remedies. Management also
believes that the continuing shift to managed healthcare delivery systems will
place greater emphasis on disease prevention and health maintenance, areas with
which natural health products are most identified.
With respect to the distribution of natural health products, while
distribution through small to large sized natural and health food stores remains
significant, the bulk of the growth is found in the mass merchandisers and
health food chains such as General Nutrition Centers which now represent the
majority of sales, and represent the fastest growing channels of distribution.
DIRECT SELLING
According to The Direct Selling Association, network marketing is one of the
fastest growing segments for the distribution of products. The Direct Selling
Association reports that worldwide, over 17.5 million individuals are now
involved in direct selling (of which network marketing is a major segment) and
that those involved in direct selling generate $80 billion in annual sales
around the world. Network marketing sales in the United States are estimated to
be approximately $22 billion annually.
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Currently, the company has associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and Tobago
and the United Kingdom. Management believes that significant market potential
exists for its products in international markets, and it is the company's
intention to explore expansion into Japan, Europe, Hong Kong, Taiwan, India and
the Philippines. Statistics from the World Federation of Direct Selling
Associations as reported in May 1998 indicate that the direct sales market in
the foregoing countries amounted to over $37 billion with 6.4 million
individuals being involved in some form of direct marketing. This compares to
$28.6 billion in sales and 7.2 million individuals involved in the markets
currently serviced by the company.
PRODUCT ACQUISITION AND LICENSING AGREEMENTS
Global Health has obtained its current product portfolio by acquiring
product lines and companies and entering into licensing agreements relating to
the marketing and manufacture of its products. Global Health has not developed
any of its products, and does not maintain a research and development staff or
research facilities.
In October 1996 Global Health acquired two natural product lines: Ellon
flower essence products and Fruitseng-Registered Trademark- new age beverages.
The Ellon products comprise 38 traditional English homeopathic flower remedies
and one combination flower remedy. These products are sold principally through
natural and health food stores. The Fruitseng line of ginseng-supplemented fruit
juice drinks and iced tea drinks was distributed prior to the acquisition
through specialty food distributors and mass market beverage distributors.
Following the acquisition of the Fruitseng line, Global Health elected to
develop, less capital-intensive products, and Fruitseng is not currently in
distribution nor does the company have any intention of allocating resources to
reintroduce the brand.
In November 1996 Global Health entered into an option agreement to acquire
all of the capital stock of Natural Health Laboratories, Inc., which held
marketing and distribution rights to a line of natural, homeopathic topical
medical products utilizing a patented base and marketed under the Natural Relief
1222 trademark. In connection with the acquisition, Natural Health
Laboratories, Inc. acquired the rights to the patent from Troy
Laboratories, Inc. and H. Edward Troy. Prior to the acquisition, Global Health
funded the operations of Natural Health Laboratories, Inc. pursuant to the
option agreement.
In April 1998, the company restructured its agreement with the previous
holder of the patented base for Natural Relief 1222. The company agreed to make
certain payments to and on behalf of the previous holders of the patent in
settlement of accrued royalties and for the modification of the scheduled
royalties. Under the agreement, the company will pay royalties in connection
with the patent equal to 3% of net sales up to $2,000,000, 2% of net sales from
$2,000,000 to $4,000,0000 and 1% of net sales thereafter. In the event of a
default in the payment of royalties or other payments in connection with the
agreement, the patent will revert back to the original holders. The company has
received a notice of default pursuant to the license agreement. In the event
that the company does not cure the default the company could lose the patent.
PRODUCTS
NATURAL RELIEF 1222
The company's initial mass market-oriented product, Natural Relief 1222
Arthritis Relief ("Arthritis Relief") is a topical, natural, homeopathic
medicine. The active ingredients are Bryonia 6X and Rhus Toxicodendron 6X, in a
patented base of natural ingredients. This product is intended to be utilized
for the temporary relief of minor pains and stiffness of muscles and joints
associated with arthritis. Arthritis Relief was introduced in July 1997 through
a nationwide television direct response advertising campaign. The company also
introduced Arthritis Relief to the mass consumer distribution channels through a
broker network. The company obtained distribution of Arthritis Relief in several
drug chains. However, due to the capital intensive nature of mass market
distribution the company has revised its business plan of marketing
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and support for Global Health's products, decreasing its emphasis on mass market
advertising. Instead, the company plans to use its resources for the development
of other less capital-intensive distribution channels (e.g., network marketing
which will be facilitated through Kaire Nutraceuticals and institutional
marketing), possibly via acquisition. The company also markets Arthritis Relief
through catalog and electronic media marketing companies. As a result of a
working capital deficit of $1,694,000 as of June 30, 1999, we are considering
discontinuing the operations and filing a petition for Global Health
Alternatives, Inc. for protection from creditors under the bankruptcy laws.
However, we are presently attempting to achieve settlements with our creditors.
In the event that we are unable to achieve satisfactory settlements with our
creditors and we file a petition for protection from creditors under the
bankruptcy laws, there could be a material adverse effect on our financial
condition.
The market for topical analgesics consists of two general types of
products--counter-irritants, such as BenGay, which mask pain by irritating the
skin in the area of application, and capsaicin products, such as Zostrix, which
utilize the pain-reducing properties of a component of hot chili peppers. It is
estimated that approximately 50 million Americans have some form of arthritis.
In December 1997 Global Health introduced three extensions to the Natural
Relief 1222 product line--Sports Rub, Wart Remover and Dermatitis & Eczema
Relief. These products have been introduced to existing mass market and
natural/health food distribution channels through the company's broker networks
and direct selling efforts.
Natural Relief 1222 Sports Rub, like Arthritis Relief, is a topical
analgesic comprised of a homeopathic active ingredient, Thuja occidentalis 2C,
in a patented base of natural ingredients. This product is intended to be
utilized for prompt, temporary relief of minor pain, strains, sprains,
stiffness, bruising, inflammation and weakness in muscles and joints due to
overexertion and athletic activity. The company intends Sports Rub to be a
companion product to Arthritis Relief within the topical analgesics category.
Natural Relief 1222 Wart Remover is a natural alternative to traditional
salicylic acid-based products, and is comprised of a homeopathic active
ingredient, Thuja occidentalis 2C, in a patented base of natural ingredients.
This product is intended to be utilized for the removal of common warts.
Natural Relief 1222 Dermatitis & Eczema Relief is a natural alternative to
traditional hydrocortisone-based products, and is comprised of a homeopathic
active ingredient, Lycopodium 2C, in a patented base of natural ingredients.
This product is intended to be utilized for temporary relief of scalp or skin
itching, irritation, redness, flaking and scaling associated with seborrheic
dermatitis or eczema.
Management anticipates introducing additional products under the Natural
Relief 1222 product line. The company currently has developed formulations for
acne relief and for first aid use for minor abrasions and contusions. Other
Natural Relief 1222 products in development include a natural anti-fungal
topical pharmaceutical and a natural burn and wound topical pharmaceutical.
ELLON
The company markets a line of homeopathic flower remedies under the Ellon
trade name, which consists of 38 individual flower remedies and one combination
flower remedy, sold as Calming Essence-Registered Trademark-. These products are
regulated over-the-counter pharmaceuticals which are intended to be utilized for
the relief of a range of emotional and psychological stresses. Calming Essence
is sold principally to natural and health food retailers and distributors, and
to alternative health care practitioners. The company utilizes a combination of
brokers and in-house telemarketers to sell the Ellon products. The company
competes in this category with several other established lines of homeopathic
flower remedies, including the Bach and Flower Essence Services product lines.
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KAIRE NUTRACEUTICALS
Kaire Nutraceuticals develops and distributes, through a network of
independent associates, products that are intended to appeal to health-conscious
consumers. Current products include health care supplements and personal care
products. Kaire Nutraceuticals 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.
ANTIOXIDANT PROTECTION
This line is primarily nutritional supplements based on antioxidants
including Maritime Prime and EnzoKaire Complete. Most of the products are based
on exclusive formulations in several combinations containing natural products
including Pycnogenol-Registered Trademark-, Enzogenol and Arctic
Root-Registered Trademark-. Products containing Pycnogenol have not been
approved for direct importation into Australia. Kaire Nutraceuticals 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.
Pycnogenol, in Kaire Nutraceuticals' formulation, is believed to be highly
bioavailable and retained in the body for several days. Antioxidants have been
shown to be effective in fighting the effects of oxidation on the body.
Oxidation is the same process that causes metals to rust and apples to turn
brown. Free radicals, which are molecules damaged by oxidation, are being
studied as the causes of various infirmities in humans. A free radical is an
unstable oxygen molecule seeking, at the molecular level, to pair up with an
electron. Free radicals can be created in the atmosphere by the exposure of
oxygen to sunlight and pollution. Free radicals can also be created by natural
metabolic processes. Antioxidants are molecules which can combine with and, as a
result, neutralize free radicals.
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 Nutraceuticals 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 Nutraceuticals believes
aids the human immune system. This product is imported exclusively by Kaire
Nutraceuticals.
Noni is 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. Fruit-N-Aloe is a more palatable form of the Aloe juice as it is mixed
with fruit juices to get the Aloe benefits without the strong taste of AloElite,
a more concentrated form of the Aloe juice.
Two other products currently round out this line, a colon-cleansing product,
Colon Complex, for periodic use in cleaning the lower digestive system and
Synerzyme, a combination of naturally occurring
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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
Night-time is, a "clustered" water product whose purpose is to increase the
metabolic efficiency of the body. Inner Chi combines 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 Nutraceuticals also markets St. John's Wort.
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
Kaire Nutraceuticals has developed a weight management program that is
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 Nutraceuticals
products, walking or other sensible exercise available to virtually all
individuals and sensible permanent eating habits. Kaire Nutraceuticals
anticipates, although there can be no assurance, that the Weight Management
Program being designed will promote long-term, sustained weight loss.
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.
ARTHROKAIRE AND OSTEO FORMULA
Osteo Formula is a comprehensive bone supplement that provides 18 nutrients
including four different types of calcium for maximum absorption and
assimilation. ArthroKaire 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.
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PERSONAL KAIRE
This includes JoBelle Gold (a skin softener containing gold flakes),
Dermakaire (Kaire Nutraceuticals' 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
Nutraceuticals is attempting to develop an upscale image for this product line
with an appeal to a younger market than Kaire Nutraceuticals' current United
States associate base.
NEW PRODUCT DEVELOPMENT
Additional products being considered in these areas are additional
antioxidants, anti-aging, weight management, and energy products. In addition to
the introduction of single products, Kaire Nutraceuticals is also focusing on
promoting groups of products to be taken in conjunction with each other to
address specific needs (such as weight loss, stress, daily wellness, etc.) that
an individual may have.
Kaire Nutraceuticals intends to seek to identify, develop and introduce
innovative, effective and safe products. Management believes that its ability to
introduce new products increases its associates' visibility and competitiveness
in the marketplace.
Kaire Nutraceuticals maintains its own product review and evaluation staff
but relies upon independent research, vendor research departments, research
consultants and others for product research, development and formulation
services.
PRODUCT WARRANTIES AND RETURNS
Kaire Nutraceuticals' product warranties and policy regarding returns of
products are similar to those of other companies in its industry. If a consumer
who enrolled with Kaire subsequent to July 1, 1999, for any of Kaire
Nutraceuticals' products is not satisfied with the product, she/he may return it
to the associate from whom the purchase was made, within 90 days of enrollment.
The associate is required to refund the purchase price to the consumer. The
associate may then return the unused portion of the product to Kaire
Nutraceuticals for an exchange of equal value. If an associate requests a refund
in lieu of an exchange, a check or credit is issued. All associates enrolled
with Kaire prior to July 1, 1999 may return products for exchange or refund
within 30 days from the date of purchase. All products are warranted against
defect by the manufacturer of those products. Most products returned to Kaire
Nutraceuticals, however, are not found to be defective in manufacture.
MANUFACTURING
The company does not intend to develop its own manufacturing capabilities
since management believes that the availability of manufacturing services from
third parties on a contract basis is adequate to meet the company's needs. The
company has utilized a number of manufacturers who have sufficient manufacturing
capacity to meet the company's anticipated production needs.
Kaire Nutraceuticals currently purchases all of its vitamins, nutritional
supplements and all other products and ingredients from parties that manufacture
such products to Kaire Nutraceuticals' specifications and standards. All
nutritional supplements, raw materials and finished products are subject to
sample testing, weight testing and purity testing by independent laboratories.
The company has used the services of a number of companies to manufacture
its Natural Relief 1222 and the Ellon product lines. Natural Relief 1222
products generally require the mixing and processing of the active and inactive
ingredients, which are then filled in tubes and packaged for retail sale. Ellon
products involve the preparation of homeopathic medicines according to the
Homeopathic Pharmacopoeia of the United States, and are generally sold in the
form of tinctures packaged in small dropper bottles labeled for retail sale. The
products are shipped from the company's Portland, Maine facility or independent
distribution centers located in Maine and New Jersey. The company's products are
manufactured to the company's specifications in facilities in compliance with
Federal Good Manufacturing Practice regulations.
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Natural Relief 1222 Arthritis Relief, Sports Rub and Wart Remover are
manufactured in the United States. Natural Relief 1222 Dermatitis & Eczema
Relief utilizes certain components manufactured in the Peoples' Republic of
China, and packaged in the United States. Ellon products utilize certain
components manufactured in the United Kingdom and are further manufactured and
packaged in the United States. The company anticipates that it will, for the
foreseeable future, continue to rely on foreign sources for certain key
components for certain of its products.
Except for an agreement with Enzo Nutraceuticals, Inc., the company has no
existing contractual commitments or other arrangements for the future
manufacture of its products. Rather, it places orders for component or finished
goods manufacturing services as required based upon price quotations and other
terms obtained from selected manufacturers. During the years ended December 31,
1998 and 1997, Kaire International purchased amounts of its products from a
limited number of vendors, including 44% and 48% respectively, from MW
International, Inc. The Company currently buys all of its Pycnogenol, an
important component of its products, from one supplier.
MARKETING AND DISTRIBUTION
GLOBAL HEALTH
Natural Relief 1222 Arthritis Relief was introduced in July 1997. Commercial
shipments of the product were initiated in the same month. Extensions of the
Natural Relief 1222 product line (Sports Rub, Wart Remover and Dermatitis &
Eczema Relief) were introduced in December 1997.
The company has pursued a "multi-channel" distribution strategy in marketing
its line of Natural Relief 1222 products, and intends to follow a similar
strategy with future products. The Natural Relief 1222 line of products has been
sold in several drug chains. However, due to the capital intensive nature of
mass market distribution the company has revised its business plan of marketing
and support for Global Health's products, decreasing its emphasis on mass market
advertising. Instead, the company plans to use its resources for the development
of other less capital-intensive distribution channels (e.g., network marketing
which will be facilitated through Kaire Nutraceuticals and institutional
marketing). The company also distributes its products to the health and natural
food market through distributors and independent health and natural food
retailers. In addition, the company sells through other specialty channels,
including catalogs such as Publishers Clearinghouse. The nature of the product
and its target market dictate the channels of distribution in which a particular
product is launched, and the level of effort directed to each channel of
distribution.
The company utilizes a number of independent brokers to assist in the sale
of its products in the mass market and natural and health food distribution
channels. Brokers receive a commission on sales, and in certain cases a fixed
monthly payment, under agreements that are terminable at will by either party on
short notice. In most cases, the company sells and ships its products directly
to the warehouses and distribution centers of major retail chains. To reach
smaller chains and independent retailers, the company distributes products
through drug wholesalers such as McKesson and Bergen Brunswig, and natural foods
distributors such as Cornucopia (United Natural Foods).
To support its marketing efforts, the company attends trade shows and
exhibitions, sponsors promotional programs and events and in-store promotions,
and engages in a public relations effort that has resulted in articles in
health, mature audience, trade and natural products publications, which the
company uses to promote its products.
In the twelve-month periods ended December 31, 1997 and December 31, 1998,
Global Health's expenditures for product advertising and promotion were
approximately $1,771,095 and $692,344, respectively.
KAIRE NUTRACEUTICALS
Kaire Nutraceuticals' products are distributed through its network marketing
system of associates. Associates are independent contractors who purchase
products directly from Kaire Nutraceuticals for
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resale to retail consumers. Associates may elect to work on a full-time or a
part-time basis. Management believes that its network marketing system is well
suited to marketing its nutritional supplements and other products because sales
of such products are strengthened by ongoing personal contact between retail
consumers and associates, many of whom use Kaire Nutraceuticals' products.
The company's goal is to offer distributors a business opportunity that
allows the part-time and full-time network marketers to achieve income levels
relative to their business practices and sales levels. Distributors have the
opportunity to earn immediate, residual, and retirement incomes. Bonuses are
paid to qualified distributors based on sales for each month. Rank titles for
the distributors are Associate, Broker, Director, Executive, Managing Executive,
Senior Executive, and Master Executive. Each increased rank has additional
standards to achieve and maintain rank, as well as providing the ability to earn
additional bonuses.
To become an associate, a person must simply sign an agreement to comply
with the policies and procedures of Kaire Nutraceuticals. No investment is
necessary to become an associate. Kaire Nutraceuticals considers approximately
40,000 of its associates to be "active," that is, an individual associate who
has ordered at least $50 of Kaire International, Inc.'s products during the
preceding 12 month period.
Kaire Nutraceuticals 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
Nutraceuticals' product line and selling techniques. Associates give
presentations relating to their experiences with Kaire Nutraceuticals' products
and the methods by which they have developed their own organization of
associates. Specific selling techniques are explained, and emphasis is placed on
the need for consistency in using such techniques. Participants are encouraged
to ask questions regarding selling techniques and product developments, to share
information with other associates and to develop confidence in selling and
goal-setting techniques. Motivation is offered to participants in the form of
recognition, gifts, excursions and tours, which are intended to foster an
atmosphere of excitement throughout the associate organization. Prospective
associates are educated about the structure, dynamics and benefits of Kaire
Nutraceuticals' network marketing system.
Kaire Nutraceuticals continues to develop marketing strategies and programs
to motivate associates. These programs are designed to increase associates'
monthly product sales and the recruiting of new associates. An example of these
programs is the Kaire Select Program.
Under the Kaire Select Program, an associate may enroll in a minimum
ordering program to maintain eligibility for performance bonuses. Minimum orders
ranging from $50 to $550 per month are automatically placed by credit card or
autodraft. The associate also gets preferred pricing, no minimum purchase
requirement (once they have a qualifying select order set up), exclusive access
to some product introductions, and discounts on Kaire Nutraceuticals' sponsored
events.
As part of Kaire Nutraceuticals' maintenance of constant communication with
its associate network, Kaire Nutraceuticals offers the following support
programs to its associates:
TOUCHTALK AND FAXBACK
An automated telephone system that associates can call 24 hours a day to
place orders, receive reports on the sales activity of their organization and
listen to selected messages on special offers, marketing program updates,
product information, and similar information. Certain information is also
available via facsimile to the associate.
24 HOUR TELECONFERENCE
A weekly teleconference on various subjects such as technical product
discussions, associate organization building and management techniques. An
associate can listen to any of the last four weekly teleconferences.
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INTERNET
Kaire Nutraceuticals maintains a web-site at http:\www.kaireint.com. There,
the user can read news letters, learn more about products, place an order or
sign up to be an associate. In addition, associates can send messages and orders
to Kaire Nutraceuticals e-mail address of kaireint.com. This allows associates
to potentially be able to sponsor associates and order products 24 hours a day.
PRODUCT LITERATURE
Kaire Nutraceuticals produces for its associates color catalogs and
brochures displaying and describing Kaire Nutraceuticals' products.
TOLL FREE ACCESS
A toll free number is available to place orders, sponsor new associates, and
for consumer support.
BROADCAST FAX/BROADCAST E-MAIL
Kaire Nutraceuticals' announcements and product specials are automatically
sent via facsimile and/or e-mail to associates who have requested this service.
MARKETS
Kaire Nutraceuticals has operations in the United States, Canada, Australia
and New Zealand, Trinidad and Tobago and the United Kingdom.
Upon deciding to enter a new market, Kaire Nutraceuticals hires local
counsel to assist ensuring that Kaire Nutraceuticals' network marketing system
and products comply with all applicable regulations and that Kaire
Nutraceuticals' profits may be expatriated. In addition, local counsel assists
in establishing favorable relations in the new market area by acting as liaison
between Kaire Nutraceuticals and local regulatory authorities, public officials
and business people. Local counsel also is responsible for explaining Kaire
Nutraceuticals' products and product ingredients to appropriate regulators and,
when necessary, will arrange for local technicians to conduct any required
ingredient analysis tests of Kaire Nutraceuticals' products.
If regulatory approval is required in a foreign market, Kaire
Nutraceuticals' local counsel interfaces with local regulatory agencies to
confirm that all of the ingredients of Kaire Nutraceuticals' products are
permissible within the new market. During the regulatory compliance process,
Kaire Nutraceuticals may alter the formulation, packaging or labeling of its
products to conform to applicable regulations as well as local variations in
customs and consumer habits, and Kaire Nutraceuticals may modify certain aspects
of its network marketing system as necessary to comply with applicable
regulations.
Following completion of the regulatory compliance phase, Kaire
Nutraceuticals undertakes the steps necessary to meet the operational
requirements of the new market. Kaire Nutraceuticals then initiates plans to
satisfy inventory, distribution, personnel and transportation requirements of
the new market, and modifies its associate training materials as may be
necessary to be suitable for the new market.
COMPETITION
GLOBAL HEALTH
Over the counter medicine products are distributed primarily through the
mass market channels of distribution, including chain drug stores, independent
drug stores, supermarkets and mass merchandisers. The company's competitors
include such companies as Genderm, Thompson Medical, Schering Plough, Pfizer,
Chattem and Warner Lambert.
The company's products include FDA recognized homeopathic active ingredients
in a patented base of natural ingredients. The company's competitors have access
to these same homeopathic ingredients and would be able to develop and market
similar products. However, competitors would be unable to
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completely duplicate the products' formulae due to the patent protection that
extends to the use of certain inactive ingredients. Nonetheless, marketplace
success will probably be determined more by marketing and distribution
strategies and resources than by product uniqueness.
KAIRE NUTRACEUTICALS
Kaire Nutraceuticals 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 Nutraceuticals
competes for associates. Some of the largest of these are Nutrition for Life
International, Inc., Nature's Sunshine, Inc., Herbalife International, Inc.,
Amway and Rexall Sundown, Inc. Each of these companies is substantially larger
than Kaire Nutraceuticals and has significantly greater financial and personnel
resources than Kaire Nutraceuticals. Kaire Nutraceuticals competes for
associates by means of its marketing program that includes its commission
structure, training and support services, and other benefits.
Not all competitors market all types of products marketed by Kaire
Nutraceuticals, and some competitors market products and services in addition to
those marketed by Kaire Nutraceuticals. For example, some competitors are known
for and are identified with sales of herbal formulations, some are known for and
are identified with sales of household cleaning and personal care products, and
others are known for and are identified with sales of nutritional and dietary
supplements. Kaire Nutraceuticals' principal methods of competition for the sale
of products are its responsiveness to changes in consumer preferences and its
commitment to quality, purity, and safety.
GOVERNMENT REGULATION
The company believes that all of its existing products are homeopathic
medicines which do not require governmental approvals prior to marketing in the
United States. The processing, formulation, packaging, labeling and advertising
of such products, however, are subject to regulation by one or more federal
agencies including the FDA, the Federal Trade Commission, the Consumer Products
Safety Commission, the Department of Agriculture, the Department of Alcohol,
Tobacco and Firearms and the Environmental Protection Agency. The company's
activities are also subject to regulation by various agencies of the states and
localities in which its products are sold. In addition, the sale of the
company's products by distributors in foreign markets are subject to regulation
and oversight by various federal, state and local agencies in those markets.
The FDA traditionally has been the main agency regulating the types of
products sold by homeopathic and natural over-the-counter pharmaceutical firms.
Official legal recognition of homeopathic drugs in the United States dates to
the Federal Food, Drug and Cosmetic Act of 1938. The Food Drug and Cosmetic Act
provides that the term "drug" includes articles recognized in the official
Homeopathic Pharmacopoeia of the United States. The Food Drug and Cosmetic Act
further recognizes the separate nature of homeopathic drugs from traditional,
allopathic drugs by providing that whenever a drug is recognized in both the
U.S. Pharmacopoeia and the Homeopathic Pharmacopoeia, it shall be subject to the
requirements of the U.S. Pharmacopoeia unless it is labeled and offered for sale
as a homeopathic drug, in which case it shall be subject to the provisions of
the Homeopathic Pharmacopoeia and not to those of the U.S. Pharmacopoeia.
In 1988, the FDA issued a Compliance Policy Guide that formally established
the manner in which homeopathic drugs are regulated. The Compliance Policy Guide
provides that homeopathic drugs may only contain ingredients that are generally
recognized as homeopathic. Such recognition is most often obtained via the
publication of a monograph in the Homeopathic Pharmacopoeia. The FDA has also
noted that a product's compliance with a Homeopathic Pharmacopoeia monograph
system does not necessarily mean that it has been shown to be safe and
effective. According to the Compliance Policy Guide, and consistent with
established FDA principles regarding allopathic drugs, a homeopathic drug may
only be
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marketed without a prescription if it is intended solely for self-limiting
disease conditions amenable to self-diagnosis and treatment. Other homeopathic
drugs must be marketed as prescription products. In addition, if a Homeopathic
Pharmacopoeia monograph states that a drug should only be available on a
prescription basis, this criteria will apply even if the drug is intended for a
self limiting condition. The Compliance Policy Guide provides that the FDA's
general allopathic drug labeling requirements are also applicable to homeopathic
drugs. All firms that manufacture, prepare, compound, or otherwise process
homeopathic drugs must register their drug establishments with the FDA and must
also "list" their drugs with the agency. Homeopathic drugs must also be
manufactured in conformance with "current good manufacturing practices." In
addition, homeopathic drugs are exempt from FDA's requirements for expiration
date labeling.
The Homeopathic Pharmacopoeia is updated regularly. The Homeopathic
Pharmacopoeia was initially published by the Committee on Pharmacy of the
American Institute of Homeopathy and is currently published by the Homeopathic
Pharmacopoeia Convention of the United States, a private, non-profit entity
organized exclusively for charitable, educational, and scientific activities.
The Homeopathic Pharmacopoeia is an official publication that is cited in the
Federal Food and Drug Laws and Compliance Policy Guide. The Homeopathic
Pharmacopoeia contains hundreds of monographs for homeopathic ingredients that
have been found by the Homeopathic Pharmacopoeia Convention to be both safe and
effective. The Homeopathic Pharmacopoeia also contains general standards for the
preparation of homeopathic drugs.
In 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.
Through the date of this Prospectus, no new regulations which affect Kaire
Nutraceuticals' labeling practices have been promulgated. 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 Nutraceuticals
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 Nutraceuticals 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
Nutraceuticals cannot predict whether new legislation regulating its activities
will be enacted, which new legislation could have a material adverse effect on
Kaire Nutraceuticals.
Kaire Nutraceuticals has an ongoing compliance program with assistance from
FDA counsel regarding the nature and scope of food and drug legal matters
affecting Kaire Nutraceuticals' business and products. Kaire Nutraceuticals is
unaware of any legal actions pending or threatened by the FDA or any other
governmental authority against Kaire Nutraceuticals.
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
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"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 Nutraceuticals' history of
operations in such markets to date, Kaire Nutraceuticals believes that its
method of distribution is in compliance in all material respects with the laws
and regulations relating to direct selling activities of the countries in which
Kaire Nutraceuticals currently operates. Even though management believes that
laws governing direct selling are generally becoming more permissive, many
countries currently have laws in place that would prohibit Kaire Nutraceuticals
from conducting business in such markets. There can be no assurance that Kaire
Nutraceuticals will be allowed to continue to conduct business in each of its
existing markets that it currently services or any new market it may enter in
the future.
The company believes that it is in material compliance with all regulations
applicable to it. Despite this belief, the company may be found not to be in
material compliance with existing regulations as a result of, among other
things, the considerable interpretative and enforcement discretion given to
regulators or misconduct by associates. There can be no assurances that the
company will not be subject to inquiries and regulatory investigations or
disputes and the effects of any adverse publicity resulting therefrom. Any
assertion or determination that the company or any of its associates are not in
compliance with existing laws or regulations could have a material adverse
effect on the company' business and results of operations. In addition, in any
country or jurisdiction, the adoption of new laws or regulations or changes in
the interpretation of existing laws or regulations could generate negative
publicity and/or have a material adverse effect on the company' business and
results of operations. The company cannot determine the effect, if any, that
future governmental regulations or administrative orders may have on the
company' business and results of operations. Moreover, governmental regulations
in countries where the company may commence or expand its operations may
prevent, delay or limit market entry of certain products or require the
reformulation of such products. Regulatory action, whether or not it results in
a final determination adverse to the company, has the potential to create
negative publicity, with detrimental effects on the motivation and recruitment
of associates and consequently, on the company' sales and earnings.
EMPLOYEES
As of June 30, 1999, the company had 85 full time employees and 3 part time
employees of which 13 were involved in sales and marketing, 15 in administration
and finance and 60 in operations. None of the company's employees are
represented by a union, and the company believes that its employee relations are
good.
INSURANCE
The company carries general liability insurance in the amount of $5,000,000
per occurrence and $6,000,000 in the aggregate including product liability
insurance. There can be no assurance, however, that the company's insurance will
be sufficient to cover potential claims or that an adequate level of coverage
will be available in the future at a reasonable cost, if at all. A successful
claim could have a material adverse effect on the company.
PATENTS AND TRADEMARKS
Global Health, through Natural Health Laboratories, Inc., has a United
States Patent covering the use of certain inactive botanical ingredients as a
base for several of its Natural Relief 1222 products. The company also has
obtained marketing and manufacturing rights to a family of Chinese-origin,
patented, natural topical medical products. Global Health has federal trademark
registrations for Natural Relief 1222, Ellon, Calming Essence and Mesozoic
Minerals. The company also has trademark registrations for Nature's Relief and
Nature's Relief 1222 in Canada. Most Kaire Nutraceuticals' products are packaged
under Kaire Nutraceuticals' "private label." Kaire Nutraceuticals has registered
trademarks with the
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United States Patent and Trademark Office for its name, logo and various
products names. It has applied for trademark registration in several countries
outside of those it is currently operating in for its name, logo and various
product names.
Additional trademark registration applications which may be filed by the
company with the United States Patent and Trademark Office and in other
countries may or may not be granted and the breadth or degree of protection of
the company's existing or future trademarks may not be adequate. Moreover, the
company may not be able to defend successfully any of its legal rights with
respect to its present or future trademarks. The failure of the company to
protect its legal rights to its trademarks from improper appropriation or
otherwise may have a material adverse effect on the company.
SEASONALITY
Sales of topical analgesic products are strongest during the colder winter
months when arthritis sufferers tend to feel pain and stiffness more acutely.
Conversely, sales of skin treatment products (e.g., hydrocortisone creams, etc.)
are slightly stronger during the non-winter months. The company does not believe
that the sales of wart removal products are seasonal.
LEASED PROPERTIES
Kaire Nutraceuticals leases an aggregate of approximately 45,000 square feet
of office and warehouse space in two buildings in Longmont, Colorado. The lease
terms expire over a span of one month to 11 months, and the current rate is
approximately $150,000 per year. The Australian and New Zealand subsidiaries
also lease their office and warehouse facilities of approximately 8,000 square
feet for a period of approximately five years at an annual rental of $30,000 and
$24,000, respectively. Kaire Nutraceuticals has entered into a lease as of
June 1, 1997 through the Trinidad and Tobago subsidiary. 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
Nutraceuticals entered into, through its United Kingdom subsidiary, a lease of
approximately 4,800 square feet for 11 years in Solihull, England, with an
option to renew the lease after five years, and terminate with notice.
The company leases approximately 2,200 square feet of office and warehouse
space in Portland, Maine at a monthly rental of $2,200 plus utilities. This
lease expires on November 30, 2001, although the company may elect to terminate
the lease commencing December 1, 1998 with six months notice. The company leases
approximately 1,500 square feet of office space for its corporate headquarters
at 250 Park Avenue, New York, New York. The current annual rent is $65,400 and
the lease expires on October 31, 1999. The company believes that such properties
are suitable and adequate for current operating needs.
LEGAL PROCEEDINGS
On August 4, 1997 Samantha Haimes brought an action in the Fifteenth
Judicial Circuit of Palm Beach County, Florida, against the company and National
Health Care Centers of America, Inc., 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 natural health care center which was located in
Boca Raton, Florida. The company is vigorously defending the action. The
plaintiff is seeking damages in the amount of approximately $535,000. The
company has agreed to settle such action for shares of common stock with a fair
market value of $325,000, but not less than 125,000 shares of common stock. The
company is registering the shares of common stock for resale in the concurrent
offering.
On September 10, 1997 Rejuvenation Unlimited, Inc. and Sam Lilly, Inc.
brought an action in the Fifteenth Judicial Circuit of Palm Beach County,
Florida, arising out of the company's alleged breach of contract in connection
with the acquisition of the company's natural health care center which was
located in Boca Raton, Florida from the plaintiff. The plaintiff is seeking
damages in excess of $15,000.
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In an action brought by Erie Laboratories, Inc. ("Erie") and H. Edward Troy
("Troy") v. Patricia J. Fisher, Richard Aji and Edward G. Coyne in the Supreme
Court of the State of New York, Onondaga County, the plaintiffs are seeking to
have a purported assignment of patent utilized for Natural Relief 1222 to the
defendants declared null and void and to have Erie declared the lawful owner of
such patent. The plaintiffs have prevailed at the trial level, however, the
defendants have filed a notice of appeal. In the event that the defendants
prevail, then the defendants would have equal rights to the patent.
In Global Health and Ellon, Inc. v. Leslie Kaslof, Ralph Kaslof, and Ellon
USA, Inc., pending in the United States District Court for the District of Maine
(the "Maine Kaslof Case") claims have been made arising out of the sale of Ellon
USA's ("Old Ellon") assets to Global Health's wholly-owned subsidiary,
Ellon, Inc. ("New Ellon"). In connection with that sale, Leslie Kaslof and Ralph
Kaslof, former shareholders and officers of Old Ellon, entered into employment
and consulting agreements with Global Health. Global Health's potential
obligation to the Kaslofs under the employment and consulting agreements was
approximately $525,000. The complaint in the Maine Kaslof Case seeks a
determination that the Kaslofs materially breached their respective obligations
under the agreements and that Global Health and New Ellon are excused from
further performance thereunder. The complaint includes a breach of fiduciary
claim against Ralph Kaslof, as well as a claim to recover approximately
$142,000. In a related civil action brought by the Kaslofs and Old Ellon in the
United States District Court for the Eastern District of New York (the "New York
Kaslof Action"). The Kaslofs have alleged breaches of the purchase and sale
agreement, the employment and consulting agreements, and other agreements
executed in connection with the sale of Old Ellon's assets. The complaint seeks
to recover damages in an unspecified amount, but not less than $1,300,000, costs
of court, reasonable attorney fees, and interest. Global Health intends to
vigorously defend any and all claims asserted by the Kaslofs and their
corporation.
Inter/Media Time Buying Corp. ("Inter/Media") v. Global Health, et al.,
which is pending in the United States District Court for the Central District of
California (the "Inter/Media Action"), is based on Inter/Media's provision of
marketing, media purchasing, and related advertising services to Global Health
in connection with Natural Relief 1222. The complaint seeks compensatory damages
of $144,500, unstated special damages, attorney fees and costs of court. Global
Health answered the complaint, denying all material allegations therein, and
asserting a counterclaim arising out of Inter/Media's creation of a defective
national direct response campaign which prevented a successful nationwide retail
launch for a clinically-proven product. By its counterclaim, which includes
claims for breach of contract, negligence, intentional interference with a
prospective economic advantage, fraud and intentional misrepresentation, and
negligent misrepresentation, Global Health seeks to recover general damages of
not less than $6,500,000, special damages, costs of suit, and reasonable
attorney fees. Inter/Media has sought an attachment against Global Health's
assets for the full amount of its claims.
In PIC-TV v. Global Health, et al., PIC-TV seeks to recover compensatory
damages of not less than $319,656, together with interest and costs of suit,
based on the sale of advertising time and sponsorships to Global Health. Global
Health has answered the complaint, and is also continuing its settlement
discussions with PIC-TV.
On April 26, 1999, Gusrae Kaplan & Bruno commenced an action against the
Company in the Supreme Court of the State of New York for unpaid legal fees of
approximately $60,000. The company settled this action in August 1999, however
the company is in default under the terms of the settlement agreement.
Kaire International, Inc. 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 International, Inc. 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 International, Inc. has
completed all obligations and requests pertaining to this matter.
46
<PAGE>
In September 1999 Command Financial Press Corp. commenced an action in the
Supreme Court of the State of New York in New York City against the company for
unpaid invoices for printing services in the amount of approximately $65,000.
The company is defending the action.
Kaire International, Inc. has also received a voluntary request for
information from the FTC regarding a separate investigation into dietary
supplement interactions with certain disorders. Kaire International, Inc.
voluntarily produced information to the FTC with regards to the initial request,
and has received a subsequent request for additional information. Kaire
International, Inc. is currently responding with clarifications to previous
inquiries. The FTC has proposed a Complaint and Agreement Containing Consent
order for execution by Kaire International, a former officer and a current
officer of Kaire International, Inc.
MANAGEMENT INFORMATION SYSTEMS
Kaire Nutraceuticals maintains a computerized system for processing
associate orders and calculating associate commission and bonus payments
enabling it to promptly remit payments to associates. Kaire Nutraceuticals
believes that prompt remittance of commissions and bonuses is vital to
maintaining a motivated network of associates and that associate loyalty has
been enhanced by Kaire Nutraceuticals making commission and bonus payments as
scheduled.
Kaire Nutraceuticals' computer system provides each associate a detailed
monthly accounting of all sales and recruiting activity in his or her
organization. These convenient statements eliminate the need for substantial
record keeping on behalf of the associate. As a precaution, duplicate copies of
Kaire Nutraceuticals' computer records are transferred daily to an off-site
location for safekeeping. Kaire Nutraceuticals 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 September 30, 1999 allowing adequate time for testing.
Management has assessed Kaire Nutraceuticals' Year 2000 compliance expense to be
$50,000. Kaire Nutraceuticals 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
hereof has no plans to do so.
47
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the directors
and executive officers of the company.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Sir Brian Wolfson......................... 64 Chairman of the Board and Director
Robert L. Richards........................ President, Chief Executive Officer and
53 Director
Mark D. Woodburn.......................... Chief Financial Officer, Secretary and
28 Treasurer
Martin C. Licht........................... 57 Director
Dirk D. Goldwasser........................ 38 Director
</TABLE>
The following is a brief summary of the background of each executive officer
and director of the Company:
SIR BRIAN WOLFSON has served as chairman and a director of the company since
July 1997. Prior to co-founding GHA in October 1995, Mr. Wolfson served as
chairman of Wembley, PLC from 1986 to 1995. Mr. Wolfson is currently a director
of Fruit of the Loom, Inc., Kepner-Tregoe, Inc., Playboy Enterprises, Inc., and
Autotote Corporation, Inc.
ROBERT L. RICHARDS is the Chief Executive Officer of Kaire Nutraceuticals
and became a director of the company in April 1999 and president of the Company
in September 1999. He was a co-founder and has been an executive officer and
director of Kaire International, Inc. since its inception in 1992.
MARK D. WOODBURN has been secretary and a director of Kaire
International, Inc. from 1992 to the present. He became the chief financial
officer of the company in April, 1999 and secretary in October 1999.
MARTIN C. LICHT has been a practicing attorney since 1967. Mr. Licht became
a director of the company in July 1995.
DIRK D. GOLDWASSER has been a consultant/trader with Filin Corp. from
August 1996 to the present. From June 1994 to July 1996 he was a vice president
with Bankers Trust Securities Company. From December 1993 to June 1994 he was an
associate with Oppenheimer and Co. From 1988 to December 1993, he was director
of sales for Galbreath Asset Advisors/Loews Organization. Mr. Goldwasser became
a director in September 1998.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of (i) Forms 3 and 4 and amendments thereto
furnished to the company pursuant to Rule 16a-3(e), promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), during the company's
fiscal year ended December 31, 1998, and (ii) Forms 5 and amendments thereto
and/or written representations furnished to the company by any director, officer
or ten percent security holder of the company (collectively "Reporting Persons")
stating that he or she was not required to file a Form 5 during the company's
fiscal year ended December 31, 1998, it has been determined that no Reporting
Person is delinquent with respect to his or her reporting obligations set forth
in Section 16(a) of the Exchange Act, except that the company did not receive
any Form 5's from its officers and directors or Form 3's from Messrs. Grace or
Goldwasser.
48
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides a summary of cash and non-cash compensation for
each of the last three fiscal years ended December 31, 1996, 1997, and 1998 with
respect to the following officers of the company:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------- ------------------------------------------
AWARDS PAYOUTS
------------------ --------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND COMPENSATION AWARD(S) OPTIONS PAYOUTS COMPENSA-
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) $ SARS(#) ($) TION($)
- -------------------------- -------- --------- -------- ------------ ------------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert L. Richards,(2) ... -- -- -- -- -- -- -- --
President
Joseph P. Grace,(3) ...... 1998 $162,500 -- -- -- -- -- --
Former President
Sir Brian Wolfson, ....... 1998 50,000 -- -- -- -- -- --
Chairman of the Board 1997 -- -- -- -- -- -- --
(4)
Neal R. Heller,(5) ....... 1998 155,365 -- -- -- -- -- --
President and Chief 1997 201,500 -- -- -- -- -- --
Executive Officer 1996 162,500 -- -- -- -- -- --
Elizabeth S. Heller(6) ... 1998 50,885 -- -- -- -- -- --
Secretary 1997 141,100 -- -- -- -- -- --
1996 150,000 -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Mr. Richards became the company's president in September 1999.
(3) Mr. Grace resigned in September 1999 and will receive consulting fees of
$8,333 per month for a period of nine months commencing October 1, 1999.
(4) Sir Brian Wolfson waived $50,000 of his 1997 salary.
(5) Mr. Heller is no longer an officer or employee of the company.
(6) Mrs. Heller is no longer an officer or employee of the company.
49
<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR. The following table sets forth certain
information with respect to option grants during the fiscal year ended
December 31, 1998 to the named executive officers.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE OR BASE PRICE
NAME GRANTED YEAR ($.SH) EXPIRATION DATE
- ---- -------------------- ------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Joseph P. Grace........... 50,000 41.6% $1.00 August 2003
</TABLE>
Year-end Option Table. During the fiscal year ended December 31, 1998, none
of the named executive officers exercised any options issued by the company. The
following table sets forth information regarding the stock options held as of
December 31, 1998 by the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR-END
------------------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------------- --------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Joseph P. Grace........... 0 50,000 $0 $143,750
</TABLE>
DIRECTORS' COMPENSATION
Directors of the company do not receive any fixed compensation for their
services as directors. The company grants each non-employee director options to
purchase 1,000 shares of common stock, at an exercise price equal to the fair
market value of the common stock on the date of grant, and pays non-employee
directors $500 for each meeting of the board of directors they attend. Directors
are reimbursed for their reasonable out-of-pocket expenses incurred in
connection with performance of their duties to the company. The company did not
pay its directors any cash or other form of compensation for acting in such
capacity, although directors who were also executive officers of the company
received cash compensation for acting in the capacity of executive officers.
Mr. Goldwasser received options to purchase 50,000 shares of common stock and
consulting fees of $2,500 per month, and Mr. Ellison, a former director,
received options to purchase 20,000 shares of common stock during the year ended
December 31, 1998 and 20,000 shares of common stock for the year ending
December 31, 1999 at an exercise price of $1.00 per share. See "--Executive
Compensation." No director received any other form of compensation for the
fiscal year ended December 31, 1998.
CONSULTING AGREEMENTS
In October 1999, the Company entered into a two year consulting agreement
with Domain Investments, Inc. pursuant to which Domain Investments Inc. will
provide the Company with financial advisory services relating to mergers and
acquisitions and strategic alliances in consideration for the issuance of 95,000
shares of common stock.
In October 1999, the Company entered into a consulting agreement with
Meridian Equities Hong Kong, Ltd. pursuant to which Meridian Equities Hong Kong,
Ltd. will negotiate settlements with the company's creditors in consideration
for the issuance of 185,000 shares of common stock.
STOCK OPTIONS
The 1998 Stock Option Plan (the "1998 Plan") provides for the granting of
options to key employees, including officers, non-employee directors and
consultants of the company and its subsidiaries to purchase up to 200,000 shares
of common stock which are intended to qualify either as Incentive Stock Options
within the meaning of the Code or as options which are Nonstatutory Stock
Options.
50
<PAGE>
The 1997 Stock Option Plan (the "1997 Plan") provides for the granting of
options to key employees, including officers, non-employee directors and
consultants of the company and its subsidiaries to purchase up to 75,000 shares
of common stock which are intended to qualify either as incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (the "Code"), or as options which are not
intended to meet the requirements of such section ("Nonstatutory Stock
Options").
The company has adopted the 1994 Stock Option Plan (the "1994 Plan") under
which up to 16,667 options to purchase shares of common stock may be granted to
key employees, officers, consultants and members of the Board of Directors of
the company. Options granted under the 1994 Plan may be either Incentive Stock
Options or Nonstatutory Options.
The plans are administered by the Board of Directors. Under the plans, the
Board of Directors has the authority to determine the persons to whom options
will be granted, the number of shares to be covered by each option, whether the
options granted are intended to be incentive stock options, the manner of
exercise, and the time, manner and form of payment upon exercise of an option.
Incentive stock options granted under the Plans may not be granted at a
price less than the fair market value of the common stock on the date of grant
(or less than 110% of fair market value in the case of employees holding 10% or
more of the voting stock of the company). Non-qualified stock options may be
granted at an exercise price established by the Stock Option Committee selected
by the Board of Directors, but may not be less than 85% of fair market value of
the shares on the date of grant. Incentive stock options granted under the plans
must expire not more than ten years from the date of grant, and not more than
five years from the date of grant in the case of incentive stock options granted
to an employee holding 10% or more of the voting stock of the company.
In April 1999, the company granted options to purchase shares of common
stock to the following individuals at an exercise price of $3.50 per share as a
bonus for the year ended December 31, 1998:
<TABLE>
<CAPTION>
PERSON NUMBER OF OPTIONS
- ------ -----------------
<S> <C>
Joseph P. Grace............................................. 150,000
Dirk Goldwasser............................................. 50,000
Sir Brian Wolfson........................................... 50,000
Martin C. Licht............................................. 25,000
Kevin Underwood............................................. 20,000
</TABLE>
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as to the common stock
ownership of each of the company's directors, executive officers, all executive
officers and directors as a group, and all persons known by the company to be
the beneficial owners of more than five percent of the company's common stock.
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.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES BEFORE AFTER
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING(2) OFFERING
---------------------- ------------------ ----------- --------
<S> <C> <C> <C>
Martin C. Licht........................................ 35,300(3) * *
Sir Brian Wolfson...................................... 9,850(4) * *
Dirk D. Goldwasser..................................... 66,125(5) * *
Robert L. Richards..................................... -- * *
Mark D. Woodburn....................................... -- * *
------- --- ---
All Executive Officers and Directors (5 persons)....... 101,275 * *
</TABLE>
- ------------------------
*Owns less than one (1%) percent.
(1) The address of each executive officer and director is c/o the company, 250
Park Avenue, New York, New York 10177.
(2) Does not include shares of common stock issuable upon the conversion of the
company's Series E, F, G, and H Preferred Stock. Pursuant to the terms of
the Series E, F, G, and H 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 Series E, F, G, and H Preferred Stock, a
change in control of the company may occur, based upon the number of shares
of common stock issuable.
(3) Includes options to purchase 9,000 shares of Common Stock which are
exercisable within 60 days, but does not include options to purchase 16,000
shares of Common Stock which are not exercisable within 60 days.
(4) Includes options to purchase 9,000 shares of Common Stock, but does not
include options to purchase 41,000 shares of Common Stock which are not
exercisable within 60 days.
(5) Includes options to purchase 65,000 shares of Common Stock, but does not
include options to purchase 35,000 shares of Common Stock which are not
exercisable within 60 days.
52
<PAGE>
CERTAIN TRANSACTIONS
In August 1998, the Company sold its three vocational schools that it
operated as a junior college in Orlando, Pompano Beach and Miami, Florida (the
"Schools") that offer training and preparation for licensing in therapeutic
massage and skin care to Florida College of Natural Health, Inc. ("FCNH"). Neal
R. Heller, the company's former President, Chief Executive Officer, a principal
stockholder and a former director, Elizabeth S. Heller, his wife, the company's
former secretary, a principal stockholder and a former director, and Mr. Arthur
Kaiser, a former director of the company, are principal shareholders of FCNH.
The purchase price for the Schools was $1,778,333 in cash. In addition, FCNH
assumed all of the liabilities in connection with the operations of the Schools
together with additional liabilities in the aggregate amount of approximately
$2,559,249. The company was not released from such liabilities despite such
assumption by FCNH.
In connection with the sale of the Schools, Mr. and Mrs. Heller's employment
agreements were canceled, and they each resigned as directors and officers of
the company. Mr. and Mrs. Heller also transferred to the company 79,175 shares
of common stock which were canceled and options to purchase 20,000 shares of
common stock.
In connection with the refinancing of the company's property in Pompano
Beach, Florida (the "Pompano Property") in October, 1997, the company paid a
mortgage loan in the amount of $443,727 (the "Prior Mortgage Loan") which
encumbered both the Pompano Property and an adjacent parcel of land (the
"Adjacent Parcel") which was owned by Justin Real Estate Corp. ("Justin"). The
capital stock of Justin was owned by Neal R. Heller and Elizabeth S. Heller.
Mr. and Mrs. Heller also had guaranteed the Prior Mortgage Loan.
As of October 1997, the company had advanced to Mr. and Mrs. Heller
$142,442. In October 1997, Mr. and Mrs. Heller advanced the sum of $240,295 on
behalf of the company and the company advanced $24,412 to Justin. In November,
1997, the company advanced $53,523 on behalf of Justin. In December 1997,
Mr. and Mrs. Heller waived the repayment of the sum of $19,918 from the company.
As of December 31, 1997, there were no amounts due to the company from Mr. and
Mrs. Heller or Justin and no amounts were due to the company from Mr. and
Mrs. Heller or Justin.
Martin C. Licht, a director of the company, was a member of law firms which
received $153,351 attributable to 1997 and $263,221 attributable to 1998.
As of June 30, 1999, the company owed $50,000 to each of Mark Woodburn, the
company's chief financial officer, and Robert L. Richards, the president and a
director of the company, in connection with liabilities assumed in connection
with the Kaire Acquisition. Mr. Woodburn and Mr. Richards have guaranteed a loan
to the company in the amount of $175,000 from STAR Financial Bank.
The company believes that the transactions between the company and any of
its officers, directors and/or 5% stockholders have been on terms no less
favorable to the company than could have been obtained from independent third
parties. Future transactions, if any, between the company and any of its
officers, directors and/or 5% stockholders will be on terms no less favorable to
the company than could be obtained from independent third parties and will be
approved by a majority of the independent, disinterested directors of the
Company. In addition, any forgiveness of indebtedness of officers, directors or
5% stockholders will be approved by a majority of disinterested directors who do
not have an interest in the transactions and who have access, at the company's
expense, to counsel.
53
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The total authorized capital stock of the company is 50,000,000 shares of
common stock, $.001 par value per share, and 1,500,000 shares of Preferred
Stock, $.001 par value per share. As of the date of this Prospectus the company
had 7,602,352 shares of common stock issued and outstanding, which are held by
approximately 1,669 shareholders, excluding shares of common stock issuable upon
exercise of outstanding options, warrants and conversion rights.
COMMON STOCK
Each share of common stock entitles the holder thereof to one vote on all
matters submitted to a vote of the shareholders. Since the holders of common
stock do not have cumulative voting rights, holders of more than 50% of the
outstanding shares can elect all of the directors of the company then being
elected and holders of the remaining shares by themselves cannot elect any
directors. The holders of common stock do not have preemptive rights or rights
to convert their common stock into other securities. Holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the company, holders of the common
stock have the right to a ratable portion of the assets remaining after payment
of liabilities subject to any superior claims of any shares of Preferred Stock
hereafter issued. See "--Preferred Stock." All shares of common stock
outstanding and to be outstanding upon completion of the Offering are and will
be fully paid and nonassessable.
PREFERRED STOCK
The company is authorized by its Articles of Incorporation to issue a
maximum of 1,500,000 shares of Preferred Stock, in one or more Series and
containing such rights, privileges and limitations, including voting rights,
dividend rates, conversion privileges, redemption rights and terms, redemption
prices and liquidation preferences, as the Board of Directors of the company
may, from time to time, determine.
The issuance of shares of Preferred Stock pursuant to the Board's authority
could decrease the amount of earnings and assets available for distribution to
holders of common stock, and otherwise adversely affect the rights and powers,
including voting rights, of such holders and may have the effect of delaying,
deferring or preventing a change in control of the company. The company is not
required by current Florida Law to seek shareholder approval prior to any
issuance of authorized but unissued stock and the Board of Directors does not
currently intend to seek shareholder approval prior to any issuance of
authorized but unissued shares of Preferred Stock or common stock, unless
otherwise required by law.
SERIES E PREFERRED STOCK
The Series E Preferred Stock in the face amount of $1,650,000 was issued in
a private placement in August 1998 and pays a dividend (provided the company has
either sufficient surplus or net profits), at a rate of ten percent of the
stated value per annum, payable upon conversion of the shares of Series E
Preferred Stock, in cash or in shares of common stock. The shares of Series E
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 the lower of the closing bid price on the date of issuance or
75% of the average closing bid price of the common stock for the five trading
days immediately preceding the date on which the company receives notice of
conversion from a holder. As of the date of this prospectus, shares of Series E
Preferred Stock in the face amount of $610,000 have been converted into 603,130
shares of common stock.
54
<PAGE>
Except in the case of the automatic conversion 24 months from the date of
issuance, the holder of shares of Series E Preferred Stock can convert any
portion of such holder's shares of Series E Preferred Stock if such conversion
would not increase such holder's beneficial ownership of common stock (other
than shares of common stock owned through ownership of the Series E Preferred
Stock) to in excess of 4.9%.
The holder of each share of Series E Preferred Stock is entitled to a
payment of 2% of the face amount of the Series E Preferred Stock for each
30 day period after 120 days after the issuance of the Series E Preferred Stock
that the registration statement is not effective, payable in cash or shares of
common stock at the option of the holder. Shares of Series E Preferred Stock are
converted automatically into shares of common stock 24 months from their date of
issuance. As of the date of this Prospectus the outstanding shares of Series E
Preferred Stock including the accrued interest and penalty charges are
convertible into approximately 1,377,422 shares of common stock. The shares of
common stock underlying the Series E Preferred Stock are being registered for
resale by this registration statement.
In connection with the offering of the Series E Preferred Stock, the company
issued warrants to purchase 300,000 shares of common stock to BLH, Inc. The
warrants were exchanged for 185,769 shares in July 1999.
SERIES F PREFERRED STOCK
The Series F Preferred Stock in the face amount of $2,800,000 issued to
Kaire International, Inc. pays a dividend (provided the company has either
sufficient surplus or net profits), at the rate of six percent of the stated
value per annum, payable upon conversion of the shares of Series F Preferred
Stock, in cash or 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 95% of the average closing bid price of the common stock for the
three trading days immediately preceding the date on which the company receives
notice of conversion from a holder. The terms of the Series F Preferred Stock
permit the company at any time, on five days prior written notice, to redeem the
outstanding Series F Preferred Stock at a 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 Stock are subject to a lock-up
preventing the sale, pledge, hypothecation or other transfer of such shares, for
a period of one year from the closing date of the Kaire Acquisition in the case
of $1,000,000 aggregate stated value of Series F Preferred Stock, and a lock-up
of two years from the closing date of the Kaire Acquisition with respect to the
remaining $1,800,000 aggregate stated value of Series F Preferred Stock. The
company intends to redeem $1,177,000 of Series F Preferred Stock from the net
proceeds of this offering.
SERIES G PREFERRED STOCK
The Series G Preferred Stock in the face amount of $350,000 pays a dividend
(provided the company has either sufficient surplus or net profits), at the rate
of 6% of the stated value per annum, payable upon conversion of the shares of
Series G Preferred Stock, in cash or 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 95% of the average closing bid price of the common
stock for three 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 days prior written notice, to
redeem the outstanding Series G Preferred Stock at a redemption price equal to
the stated value and the accrued dividends thereon. The company has agreed to
register for sale under the Securities Act all shares of common stock issuable
upon conversion of the Series G Preferred Stock on any registration statement
(other than on Form S-4, Form F-8 or any similar or successor form) filed by the
company or upon demand of all of the holders of the Series G Preferred Stock
commencing
55
<PAGE>
eight months following the closing date of the Kaire 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 Kaire Acquisition.
The shares of common stock underlying the Series G Preferred Stock are being
registered for resale by this registration statement. As of the date of this
prospectus, the shares of Series G Preferred Stock are convertible into
approximately 206,316 shares of common stock, based upon a market price of the
common stock of $2.00 per share.
SERIES H PREFERRED STOCK
The Series H Preferred Stock in the face amount of $1,400,000 was issued in
a private placement in March and April 1999 and pays a dividend (provided the
company has either sufficient surplus or net profits), at a rate of 8% of the
stated value per annum, payable upon conversion of the shares of Series H
Preferred Stock, in cash or in shares of common stock. The shares of Series H
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
lower of the closing bid price on the date of issuance or the stated value by
75% of the average closing bid price of the common stock for the three trading
days immediately preceding the date on which the company receives notice of
conversion from a holder.
Except in the case of the automatic conversion 24 months from the date of
issuance, the shares of Series H Preferred Stock, the holder can convert any
portion of such holder's shares of Series H Preferred Stock if such conversion
would not increase such holder's beneficial ownership of common stock (other
than shares of common stock owned through ownership of the Series H Preferred
Stock) to in excess of 4.9%.
The holder of each share of Series H Preferred Stock is entitled to a
payment of 2% of the face amount of the Series H Preferred Stock for each
30 day period after 90 days after the issuance of the Series H Preferred Stock
that this registration statement is not declared effective, payable in cash or
shares of common stock at the option of the holder. Shares of Series H Preferred
Stock are converted automatically into shares of common stock 24 months from
their date of issuance. As of the date of this prospectus the shares of
Series H Preferred Stock are convertible into approximately 1,133,333 shares of
common stock.
THE KAIRE ACQUISITION WARRANTS
The warrants issued to Kaire International, Inc. are exercisable for a
period of five years from the closing date of the Kaire Acquisition into an
aggregate of 200,000 shares of common stock at an exercise price of $4.06 per
share. 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 warrants are being
exercised, and the exercise price, by delivering to the company for cancellation
the warrants owned by such holders. The shares of common stock issuable upon
exercise of the warrants contain certain "piggyback" registration rights and
anti-dilution protection.
TRANSFER AGENT AND REGISTRAR
The Company has appointed Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004, as transfer agent and registrar for the
common stock and the warrants.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Articles of Incorporation of the company provides that the company shall
indemnify to the fullest extent permitted by Florida law any person whom it may
indemnify thereunder, including directors, officers, employees and agents of the
company. Such indemnification (other than as ordered by a court)
56
<PAGE>
shall be made by the company only upon a determination that indemnification is
proper in the circumstances because the individual met the applicable standard
of conduct. Advances for such indemnification may be made pending such
determination. In addition, the Articles, of Incorporation provides for the
elimination, to the extent permitted by Florida law, of personal liability of
directors to the company and its stockholders for monetary damages for breach of
fiduciary duty as directors. The company carries directors' and officers'
liability insurance coverage in the amount of $3 million.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the company
pursuant to the foregoing provisions, or otherwise, the company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the company of expenses incurred or paid by a director, officer
or controlling person of the company in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the company, will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ARTICLES OF INCORPORATION AND BYLAWS
Pursuant to Florida law, the power to adopt, amend and repeal bylaws is
conferred solely upon the shareholders and the board of directors unless the
corporation's articles of incorporation reserves the power to amend the bylaws
or any part thereof solely to the shareholders. Under the Company's Articles of
Incorporation, the Board of Directors retains the power to amend the Bylaws of
the Company. Such Bylaws provide that each director has one vote on each matter
for which directors are entitled to vote. The Articles of Incorporation and/or
the Bylaws also provide that (i) from time to time, by resolution, the Board has
the power to decrease the number of directors to one and increase the number of
directors to up to ten members, provided that no decrease will have the effect
of shortening the term of any incumbent director, (ii) the directors will hold
office until the next annual meeting of shareholders and until their respective
successors are elected and qualified, and (iii) special meetings of shareholders
may only be called by the Board of Directors or officers of the Company. These
provisions, in addition to the existence of authorized but unissued capital
stock, may have the effect, either alone or in combination with each other, of
making more difficult or discouraging an acquisition of the Company deemed
undesirable by the Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, 8,602,352 shares of Common Stock
will be issued and outstanding. In addition to other shares of common stock not
held by affiliates, the shares offered hereby will be freely tradeable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of the Company (as defined in Rule 144
promulgated under the Securities Act) will be subject to the resale limitations
of Rule 144, as described below.
The shares of Common Stock outstanding held by affiliates are deemed
"restricted securities," as that term is defined under Rule 144, and may only be
sold pursuant to an effective registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Such restricted shares of Common Stock will
become eligible for sale, under Rule 144, subject to certain volume and manner
of sale limitations prescribed by Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including a person who may be
deemed an "affiliate" of the Company, who has beneficially owned restricted
securities for at least one year may sell, within any three-month period, a
number of
57
<PAGE>
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of Common Stock or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the date on which notice of such sale
was filed under Rule 144. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and availability of current public
information about the Company. A person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale by such
person, and who has beneficially owned the restricted shares for at least two
years, is entitled to sell such shares under Rule 144(k) without regard to any
of the restrictions described above.
CONCURRENT OFFERING
Pursuant to a separate prospectus included in the registration statement of
which this prospectus is a part selling securityholders are offering an
aggregate of 795,613 shares of common stock underlying such securities. Such
securityholders do not presently own any of such shares of common stock, but
will acquire the shares of common stock upon the conversion or exercise of such
securities. The company will not receive the proceeds from the sale of any such
securities.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom May Davis Group, Inc. is acting as representative (the "Representative"),
has agreed to purchase, the number of shares of common stock and warrants set
forth opposite its name below. Under certain circumstances, the commitments of
nondefaulting Underwriters may be increased as set forth in the Agreement Among
Underwriters.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES NUMBER OF WARRANTS
- ----------- ---------------- ------------------
<S> <C> <C>
May Davis Group, Inc..............
Total.........................
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the Underwriters' obligations are such
that they are committed to purchase and pay for all of the above securities if
any are purchased. The Underwriters propose to offer the securities directly to
the public at the public offering prices set forth on the cover page of this
Prospectus.
The company has granted the Underwriters a 45-day over-allotment option to
purchase up to 150,000 additional shares of common stock and warrants at the
public offering price less the underwriting discount. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of the securities offered hereby.
The company has also agreed to sell to the Underwriters, for nominal
consideration, warrants to purchase the number of shares of common stock and
warrants equal to 10% of the total number of securities sold in this offering at
a price per share equal to 120% of the public offering price. The Underwriters'
Warrants will be exercisable for a period of four years commencing one year from
the effective date of this offering and will contain certain demand and
"piggyback" registration rights with respect to the securities issuable upon the
exercise of the Underwriters' Warrants. The Underwriters' Warrants are not
transferable (except to members of the syndicate and their affiliates). The
exercise price and the number of securities issuable upon exercise may, under
certain circumstances, be subject to adjustment pursuant to antidilution
provisions.
The company has agreed to allow the Underwriters a commission of ten percent
(10%) of the public offering price of the securities being offered hereby.
Additionally, the company will be paying the
58
<PAGE>
Underwriters, following the closing of this Offering, a nonaccountable expense
allowance equal to three percent (3%) of the aggregate public offering price of
the securities, of which $25,000 has been paid.
The company has agreed to engage the Representative as a financial advisor
for a period of five years commencing upon the closing of the offering at a fee
equal to $1,500 per month, which is payable in full upon the closing of the
offering.
Upon the exercise of the warrants at any time commencing on ,
2001 or earlier with the consent of the Representative, the company will pay the
Representative a commission of 5% of the aggregate exercise price if (i) the
market price of the company's shares of common stock on the date the warrant is
exercised is greater than the then exercise price of the warrants; (ii) the
exercise of the warrant was solicited by a member of the National Association of
Securities Dealers, Inc.; (iii) the warrant is not held in a discretionary
account; (iv) disclosure of compensation arrangements was made both at the time
of the offering and at the time of exercise of the warrant; (v) the holder of
the warrant has stated in writing that the exercise was solicited and designated
in writing by the soliciting broker-dealer; and (vi) the solicitation of
exercise of the warrant was not in violation of Regulation M, promulgated under
the Exchange Act. No fee will be paid to the Representative on warrants
exercised prior to 2001 or on warrants voluntarily exercised at any time without
solicitation by the Representative.
The Underwriting Agreement provides that, during the three years after the
date of this prospectus, the Representative has the right to designate a person
to observe meetings of the company's board of directors or, during the three
years after the date of this prospectus, require the company to use its best
efforts to elect the Representative's nominee to the company's board of
directors. Such observer or nominee shall be entitled to receive compensation
and reimbursement of expenses as provided to other board members.
The company has further agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof. The company also has agreed to reimburse the Underwriters
for certain out-of-pocket expenses incurred in connection with the offering.
The Underwriters have advised the company that they do not intend to make
sales to discretionary accounts.
In connection with this offering certain underwriters may engage in passive
market making transactions in the shares in accordance with Rule 103 of
Regulation M. Further, the Underwriters' selling group members and their
respective affiliates may engage in transactions that stabilize, maintain or
otherwise affect the market price of the shares of common stock. These
transactions may include stabilization transactions permitted by Rule 104 of
Regulation M, under which persons may bid for or purchase shares to stabilize
the market price. The Underwriters may also create a "short position" for their
own account by selling more shares in the offering than they are committed to
purchase, and in that case they may purchase shares in the open market after
this offering is completed to cover all or a part of their short position. The
Representative may also cover all or a portion of their short position, up to
150,000 shares, by exercising their over-allotment option described above and on
the cover of this Prospectus.
The public offering price of the common stock, the warrants and the terms of
the Underwriters' Warrants (including the exercise price) have been determined
by negotiation between the company and the Representative. Among the factors
considered in such negotiations were the history of, and the prospect for, the
company's business, and assessment of the company's management, its past and
present operations, the company's development and the general condition of the
securities market at the time of the Offering. The public offering price does
not necessarily bear any relationship to the company's assets, book value,
earnings or other established criteria of value. Such price is subject to change
as a result of market conditions and other factors, and no assurance can be
given that a public market for the common stock will
59
<PAGE>
be sustained after the closing of the offering or that the common stock or
warrants can be resold at any time at the offering or any other price.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the securities offered
hereby will be passed upon for the company by Silverman Collura & Chernis, P.C.,
New York, New York. Martin C. Licht, Esq., a member of such firm, owns 26,300
shares of common stock and options to purchase 9,000 shares of common stock and
is a member of the Board of Directors of the company. Certain legal matters will
be passed upon to the underwriters by Gersten Savage & Kaplowitz LLP, New York,
New York.
EXPERTS
The consolidated financial statements of the company at December 31, 1998
and for the three years then ended, have been included herein and in the
Registration Statement in reliance upon the report of Feldman Sherb Horowitz &
Co., P.C., independent certified public accountants, appearing elsewhere herein,
and upon the authority of such firm as experts in accounting and auditing. Their
report contains an explanatory paragraph regarding the company's ability to
continue as a going concern.
The consolidated financial statements of Kaire International, Inc. as of
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996 have been included herein and in the Registration Statement in reliance
upon the report of BDO Seidman, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing. Their report contains an explanatory paragraph
regarding the company's ability to continue as a going concern.
ADDITIONAL INFORMATION
We have filed our Form S-1 registration statement with the SEC. This
prospectus does not contain all the information set forth in the registration
statement. You'll find additional information about us and our common stock in
the registration statement. For example, in this prospectus we have summarized
or referred to some contracts, agreements, and other documents that have been
filed as exhibits to the registration statement. The registration statement,
including its exhibits and schedules, may be inspected without charge at the
SEC's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies may be obtained from that office, upon payment of the applicable fees.
The registration statement, including its exhibits and schedules, are also
available on the SEC's website at www.sec.gov.
We are subject to the information requirements of the Securities Exchange
Act of 1934, and accordingly will file reports, proxy statements, and other
information with the SEC. These materials can be inspected and copies at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of these materials can be obtain from the SEC's
Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Some information about us is also available on the SEC's
website at www.sec.gov.
60
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NUMBER
------------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of Natural
Health Trends Corp. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998, 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, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998, 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 three fiscal years and as more fully described in Note 2, the
Company anticipates that additional funding will be necessary to sustain the
Company's operations through the fiscal year ending December 31, 1999. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
February 26, 1999, except for Note 17
as to which the date is October 13, 1999
F-2
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1998 1997 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 294,220 $ 67,023 $ 563,477
Restricted cash........................................... -- -- 231,431
Accounts receivable....................................... 19,331 161,105 653,632
Inventories............................................... 314,367 719,726 1,111,995
Due from affiliate........................................ 250,000 -- --
Prepaid expenses.......................................... 3,370 11,340 47,379
----------- ----------- -----------
TOTAL CURRENT ASSETS.................................... 881,288 959,194 2,607,914
Property and equipment...................................... 78,436 82,706 769,015
Prepaid royalties........................................... 498,125 -- 553,805
Patents and customer lists.................................. 4,415,049 5,063,091 9,725,592
Goodwill.................................................... 829,468 890,716 2,072,796
Net asset held for disposition.............................. -- 1,676,764 --
Deposits and other assets................................... 150,350 192,864 50,809
----------- ----------- -----------
$ 6,852,716 $ 8,865,335 $15,779,931
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft............................................ $ -- $ -- $ 489,857
Accounts payable.......................................... 1,685,313 2,345,986 3,406,798
Accrued expenses.......................................... 139,566 838,370 1,858,489
Accrued expenses for discontinued operations.............. 314,593 338,446 304,593
Notes payable............................................. -- -- 360,268
Current portion of long-term debt......................... 314,684 1,677,809 314,684
Accrued consulting contract............................... 405,385 246,607 405,385
Other current liabilities................................. 38,481 159,820 295,982
----------- ----------- -----------
TOTAL CURRENT LIABILITIES............................... 2,898,022 5,607,038 7,436,056
Long term debt.............................................. -- 171,875 --
Debentures payable.......................................... -- 179,767 --
Accrued consulting contract................................. -- 113,524 --
Accrued expenses for discontinued operations................ -- 17,616 --
Capital lease obligations, net of current portion........... -- -- 122,251
Common stock subject to put................................. 380,000 380,000 380,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value; 1,500,000 shares
authorized; 1,650, 2,200 and 6,716 shares issued and
outstanding............................................. 1,439,500 1,900,702 6,716,000
Common Stock, $.001 par value; 50,000,000 shares
authorized; 6,220,331, 758,136 and 6,220,331 shares
issued and outstanding.................................. 6,221 758 6,221
Additional Paid-in Capital................................ 16,878,757 11,941,381 18,125,536
Accumulated Deficit....................................... (14,369,784) (11,053,576) (16,626,133)
Common Stock Subject to Put............................... (380,000) (380,000) (380,000)
Deferred stock compensation............................... -- (13,750) --
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY.............................. 3,574,694 2,395,515 7,841,624
----------- ----------- -----------
$ 6,852,716 $ 8,865,335 $15,779,931
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -------------------------
1998 1997 1996 1999 1998
----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 1,191,120 $ 1,133,726 $ -- $ 7,625,391 $ 832,831
Cost of sales........................ 454,370 375,034 -- 1,536,686 223,354
----------- ----------- --------- ----------- -----------
Gross profit......................... 736,750 758,692 -- 6,088,705 609,477
Distributor commissions.............. -- -- -- 3,605,488 --
Selling, general and administrative
expenses........................... 3,277,047 4,194,044 232,371 3,673,137 1,697,450
----------- ----------- --------- ----------- -----------
Operating loss....................... (2,540,297) (3,435,352) (232,371) (1,189,920) (1,087,973)
Minority interest in loss of
subsidiaries....................... -- -- -- 10,616 --
Gain on foreign exchange............. -- -- -- 2,582 --
Interest expense (net)............... (199,757) (868,721) (32,209) (38,059) (269,053)
----------- ----------- --------- ----------- -----------
Loss from continuing operations...... (2,740,054) (4,304,073) (264,580) (1,214,781) (1,357,026)
----------- ----------- --------- ----------- -----------
Discontinued operations:
Loss from discontinued
operations....................... (86,234) (2,919,208) (707,408) -- (83,471)
Gain (loss) on disposal............ 722,640 (501,839) 82,450 -- 19,028
----------- ----------- --------- ----------- -----------
Gain (loss) from discontinued
operations......................... 636,406 (3,421,047) (624,958) -- (64,443)
----------- ----------- --------- ----------- -----------
Loss before extraordinary gain....... (2,103,648) (7,725,120) (889,538) (1,214,781) (1,421,469)
Extraordinary gain--forgiveness of
debt............................... 815,636 -- -- 1,471 1,508,092
----------- ----------- --------- ----------- -----------
Net income (loss).................... (1,288,012) (7,725,120) (889,538) (1,213,310) 86,623
Preferred stock dividends............ 2,011,905 733,333 -- 1,043,039 --
----------- ----------- --------- ----------- -----------
Net income (loss) to common
stockholders....................... $(3,299,917) $(8,458,453) $(889,538) $(2,256,349) $ 86,623
=========== =========== ========= =========== ===========
Basic and diluted income (loss) per
common share:
Continuing operations............ $ (1.24) $ (9.91) $ (0.94) $ (0.20) $ (1.40)
Discontinued operations.......... 0.29 (7.88) (2.23) -- (0.07)
Extraordinary gain............... 0.37 -- -- 0.00 1.55
Preferred stock dividends........ (0.91) (1.69) -- (0.17) --
----------- ----------- --------- ----------- -----------
Net income (loss) to common
stockholders................... $ (1.49) $ (19.48) $ (3.17) $ (0.37) $ 0.08
=========== =========== ========= =========== ===========
Basic and diluted weighted common
shares used........................ 2,210,458 434,265 280,350 6,220,331 969,886
=========== =========== ========= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
-------------------- ---------------------- PAID-IN ACCUMULATED SUBJECT
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TO PUT
--------- -------- -------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31, 1995......... 267,728 $ 268 -- $ -- $ 3,877,730 $(1,705,584) $ --
Shares issued for aquisistion.... 9,500 9 -- -- 1,367,991 -- --
Shares issued for consulting
agreement...................... 2,500 2 -- -- 164,998 -- --
Amortization of prepaid
consulting..................... -- -- -- -- -- -- --
Shares issued to employees....... 400 1 -- -- 21,999 -- --
Convertible debentures treated as
converted...................... 28,522 29 -- -- 809,971 -- --
Common Stock subject to put...... -- -- -- -- -- -- (380,000)
Net loss......................... -- -- -- -- -- (889,539) --
--------- ------ ------ ----------- ----------- ------------ ---------
BALANCE--DECEMBER 31, 1996......... 308,650 309 -- -- 6,242,689 (2,595,123) (380,000)
Sale of Convertible Series A
preferred stock................ -- -- 2,200 1,900,702 -- -- --
Preferred stock dividends
imputed........................ -- -- -- -- 733,333 (733,333) --
Conversion of debentures......... 303,986 303 -- -- 1,207,172 -- --
Stock issued for acquisition..... 145,000 145 -- -- 2,899,855 -- --
Other issuances.................. 500 1 -- -- 24,999 -- --
Issuance of stock options........ -- -- -- -- 400,000 -- --
Amortization of deferred stock
compensation................... -- -- -- -- -- -- --
Discount on debentures........... -- -- -- -- 433,333 -- --
Net loss......................... -- -- -- -- -- (7,725,120) --
--------- ------ ------ ----------- ----------- ------------ ---------
BALANCE--DECEMBER 31, 1997......... 758,136 758 2,200 1,900,702 11,941,381 (11,053,576) (380,000)
Sale of Convertible Series B
preferred stock................ -- -- 300 261,500 -- -- --
Sale of Convertible Series C
preferred stock................ -- -- 4,000 3,507,500 -- -- --
Sale of Convertible Series D
preferred stock................ -- -- 75 75,000 -- -- --
Sale of Convertible Series E
preferred stock................ -- -- 1,650 1,650,000 (210,500) -- --
Preferred stock dividends
imputed........................ -- -- -- -- 2,011,905 (2,011,905) --
Redemption of Convertible Series
A preferred stock.............. -- -- (2,200) (1,900,702) (1,629,607) -- --
Redemption of Convertible Series
D preferred stock.............. -- -- (75) (75,000) -- (16,291) --
Conversion of debentures......... 206,603 207 -- -- 188,418 -- --
Conversion of Convertible Series
B preferred stock.............. 541,330 541 (300) (261,500) 260,959 -- --
Conversion of Convertible Series
C preferred stock.............. 3,608,296 3,608 (4,000) (3,507,500) 3,503,892 -- --
Conversion of notes payable...... 1,195,473 1,196 -- -- 697,917 -- --
Redemption of shares re: school
sale........................... (79,175) (79) -- -- (96,118) -- --
Shares cancelled in reverse stock
split.......................... (10,332) (10) -- -- 10 -- --
Amortization of deferred stock
compensation................... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (1,288,012) --
--------- ------ ------ ----------- ----------- ------------ ---------
BALANCE--DECEMBER 31, 1998......... 6,220,331 6,221 1,650 1,650,000 16,660,259 (14,369,784) (380,000)
Issuance of Convertible Series F
preferred stock -
(unaudited).................... -- -- 2,800 2,800,000 -- -- --
Issuance of Convertible Series G
preferred stock -
(unaudited).................... -- -- 350 350,000 -- -- --
Sale of Convertible Series H
preferred stock -
(unaudited).................... -- -- 1,400 1,400,000 (198,985) -- --
Issuance of Convertible Series I
preferred stock -
(unaudited).................... -- -- 516 516,000 -- -- --
Issuance of common stock warrants
- (unaudited).................. -- -- -- -- 682,000 -- --
Preferred stock dividends imputed
- (unaudited).................. -- -- -- -- 632,455 (632,455) --
Accrued preferred stock dividends
- (unaudited).................. -- -- -- -- 341,809 (410,584) --
Net loss - (unaudited)........... -- -- -- -- -- (1,213,310) --
--------- ------ ------ ----------- ----------- ------------ ---------
BALANCE--June 30, 1999 -
(unaudited)...................... 6,220,331 $6,221 6,716 $ 6,716,000 $18,125,536 $(16,626,133) $(380,000)
========= ====== ====== =========== =========== ============ =========
<CAPTION>
DEFERRED
STOCK
COMPENSATION TOTAL
------------- ----------
<S> <C> <C>
BALANCE--DECEMBER 31, 1995......... $ -- $2,172,414
Shares issued for aquisistion.... 1,368,000
Shares issued for consulting
agreement...................... (165,000) --
Amortization of prepaid
consulting..................... 68,750 68,750
Shares issued to employees....... -- 22,000
Convertible debentures treated as
converted...................... -- 810,000
Common Stock subject to put...... -- (380,000)
Net loss......................... -- (889,539)
--------- ----------
BALANCE--DECEMBER 31, 1996......... (96,250) 3,171,625
Sale of Convertible Series A
preferred stock................ -- 1,900,702
Preferred stock dividends
imputed........................ -- --
Conversion of debentures......... -- 1,207,475
Stock issued for acquisition..... -- 2,900,000
Other issuances.................. -- 25,000
Issuance of stock options........ -- 400,000
Amortization of deferred stock
compensation................... 82,500 82,500
Discount on debentures........... -- 433,333
Net loss......................... -- (7,725,120)
--------- ----------
BALANCE--DECEMBER 31, 1997......... (13,750) 2,395,515
Sale of Convertible Series B
preferred stock................ -- 261,500
Sale of Convertible Series C
preferred stock................ -- 3,507,500
Sale of Convertible Series D
preferred stock................ -- 75,000
Sale of Convertible Series E
preferred stock................ -- 1,439,500
Preferred stock dividends
imputed........................ -- --
Redemption of Convertible Series
A preferred stock.............. -- (3,530,309)
Redemption of Convertible Series
D preferred stock.............. -- (91,291)
Conversion of debentures......... -- 188,625
Conversion of Convertible Series
B preferred stock.............. -- --
Conversion of Convertible Series
C preferred stock.............. -- --
Conversion of notes payable...... -- 699,113
Redemption of shares re: school
sale........................... -- (96,197)
Shares cancelled in reverse stock
split.......................... -- --
Amortization of deferred stock
compensation................... 13,750 13,750
Net loss......................... -- (1,288,012)
--------- ----------
BALANCE--DECEMBER 31, 1998......... -- 3,574,694
Issuance of Convertible Series F
preferred stock -
(unaudited).................... -- 2,800,000
Issuance of Convertible Series G
preferred stock -
(unaudited).................... -- 350,000
Sale of Convertible Series H
preferred stock -
(unaudited).................... -- 1,201,015
Issuance of Convertible Series I
preferred stock -
(unaudited).................... -- 516,000
Issuance of common stock warrants
- (unaudited).................. -- 682,000
Preferred stock dividends imputed
- (unaudited).................. -- --
Accrued preferred stock dividends
- (unaudited).................. -- (68,775)
Net loss - (unaudited)........... -- (1,213,310)
--------- ----------
BALANCE--June 30, 1999 -
(unaudited)...................... $ -- $7,841,624
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1998 1997 1996 1999 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,288,012) $(7,725,120) $ (889,538) $(1,213,310) $ 86,623
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss from discontinued operations................... 86,234 2,919,208 707,408 -- --
(Gain) loss on disposal of discontinued
operations........................................ (722,640) 501,839 (82,450) -- --
Depreciation and amortization....................... 549,668 255,345 -- 386,775 272,999
Loss on disposal of fixed asset..................... -- -- -- -- 8,858
Interest settled by issuance of stock............... 112,971 116,065 -- -- --
Write-down of patent................................ 200,000 -- -- -- --
Amortization of note payable discount............... -- 433,333 -- -- --
(Gain) on forgiveness of debt....................... (815,636) -- -- (1,471) (1,508,092)
Changes in assets and liabilities, net of business
combination:
Decrease (increase) in accounts receivable.......... 141,774 (62,446) -- (472,488) 35,688
Decrease (increase) in inventories.................. 405,359 (219,144) -- 288,476 266,533
Decrease (increase) in prepaid expenses............. 7,970 102,353 -- (35,011) (428,083)
Increase in prepaid royalties....................... (491,825) -- -- -- 32,237
Decrease in deposits and other assets............... 42,514 66,775 -- 99,541 191,864
(Decrease) increase in accounts payable............. 154,963 1,380,509 -- (1,073,935) 167,303
(Decrease) increase in accrued expenses............. (698,805) 506,021 -- 1,458,038 (464,192)
(Decrease) increase in accrued expenses for
discontinued operations........................... (41,469) 356,062 -- (10,000) --
Increase in accrued interest........................ -- -- -- -- --
Increase in accrued consulting contract............. 45,254 360,131 -- -- 113,524
(Decrease) increase in other current liabilities.... (121,339) 33,397 -- 257,501 (62,467)
----------- ----------- ----------- ----------- -----------
Net cash used in continuing operations................ (2,433,019) (975,672) (264,580) (315,884) (1,287,205)
Net cash used in discontinued operations.............. (2,057,177) (3,455,155) (942,715) -- (447,624)
----------- ----------- ----------- ----------- -----------
NET USED IN OPERATING ACTIVITIES............................ (4,490,196) (4,430,827) (1,207,295) (315,884) (1,734,829)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (7,510) (32,658) -- (21,701) --
Business acquisitions..................................... -- -- -- (417,541) --
Proceeds (loss) from disposition of discontinued
operations.............................................. 4,349,700 -- -- -- 500,560
Increase in restricted cash............................... (60,746) --
Decrease in cash overdraft................................ (556,154) --
Proceeds from related party............................... 69,268 --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 4,342,190 (32,658) -- (995,874) 500,560
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due to affiliate................... (250,000) -- -- 250,000 --
Proceeds from preferred stock............................. 5,283,000 2,200,000 -- 1,201,015 3,768,500
Proceeds from sale of debentures.......................... -- 1,626,826 810,000 -- --
Increase in revolving credit line......................... -- -- -- -- --
Payments of debentures.................................... -- (355,650) -- -- --
Loan origination costs--preferred stock................... -- (299,299) -- -- --
Proceeds from note payable and long-term debt............. -- 850,000 -- 130,000 196,517
Payments of notes payable and long-term debt.............. (940,000) (8,692) -- -- (279,926)
Redemption of common stock................................ (96,197) -- -- -- --
Redemption of preferred stock............................. (3,621,600) -- -- -- (2,500,000)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 375,203 4,013,185 810,000 1,581,015 1,185,091
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................. 227,197 (450,300) (397,295) 269,257 (49,178)
CASH, BEGINNING OF PERIOD................................... 67,023 517,323 914,618 294,220 67,023
----------- ----------- ----------- ----------- -----------
CASH, END OF PERIOD......................................... $ 294,220 $ 67,023 $ 517,323 $ 563,477 $ 17,845
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 151,580 $ 450,470 $ 236,671 $ -- $ --
=========== =========== =========== =========== ===========
DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
(1) Conversion of preferred stock to common stock......... $ 3,769,000 $ -- $ -- $ -- $ --
(2) Conversion of debentures, notes payable and related
accrued interest to common stock........................ $ 887,738 $ 1,207,475 $ -- $ -- $ --
(3) Stock and warrants issued for acquisition............. $ -- $ 2,900,000 $ 1,368,000 $4,348,000 $ --
(4) Preferred stock dividends............................. $ 2,011,905 $ 733,333 $ -- $1,043,039 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The consolidated balance sheet at June 30, 1999 and the consolidated
statements of operations and cash flows for the six months ended June 30, 1999
and 1998 and the consolidated statement of stockholders' equity at June 30, 1999
are unaudited but include all adjustments which in the opinion of management,
are necessary to the fair presentation of the financial position and results of
operations for the periods then ended. All such adjustments are of normal
recurring nature. The results of the operations for any interim period are not
necessarily indicative of results for a full fiscal year.
1. ORGANIZATION
Natural Health Trends Corp. (formerly known as Florida Institute of Massage
Therapy, Inc.) (the "Company") was incorporated under the laws of the State of
Florida in December 1988.
In 1996, the Company opened two natural health care centers which provided
multi-disciplinary complementary health care in the areas of alternative and
nutritional medicine.
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: Ellon, Inc. ("Ellon"), Maine
Naturals, Inc. ("MNI") and Natural Health Laboratories, Inc.
In 1998, the Company sold its schools and related facilities, that offered
curricula in therapeutic massage training and skin care therapy. These
operations are being accounted for as discontinued operations.
These facilities were closed during 1997 and accordingly are being accounted
for as discontinued operations.
In February 1999, the Company's newly formed, wholly-owned subsidiary, Kaire
Nutraceuticals, Inc., ("Kaire Nutraceuticals") acquired substantially all the
assets of Kaire International Inc., ("Kaire"). Kaire Nutraceuticals is engaged
in the distribution of health and personal care products through network
marketers throughout the United States, Canada, New Zealand, Australia, Trinidad
and Tobago and the United Kingdom. Included in the purchase was shares of common
stock owned by Kaire in each of its wholly-owned and /or majority owned
subsidiaries including, but not limited to Kaire New Zealand Ltd., Kaire
Australia Pty. Ltd., Kaire Trinidad, Ltd., and Kaire Europe Ltd..
Kaire Nutraceuticals acquired 100% of the common stock of Kaire
Europe, Ltd. and Kaire Trinidad, Ltd., and it acquired 51% of the common stock
of Kaire New Zealand Ltd. and Kaire Australia Pty. Ltd..
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Natural Health Trends Corp. and its
subsidiaries. All material inter-company transactions have been eliminated in
consolidation.
B. ACCOUNTS RECEIVABLE--Accounts receivable are stated net of allowance for
doubtful accounts of approximately $2,000 for 1998 and $82,000 for 1997.
C. INVENTORIES--Inventories consisting primarily of natural remedies are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
F-7
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. PROPERTY AND EQUIPMENT--Property and equipment is carried at cost.
Depreciation is computed using the straight-line method over the useful lives of
the various assets.
E. CASH EQUIVALENTS--Cash equivalents consist of money market accounts and
commercial paper with an initial term of fewer than three months. For purposes
of the statement of cash flows, the Company considers highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
F. EARNINGS (LOSS) PER SHARE--In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS 128") "Earnings Per Share", which became effective for both interim and
annual financial statements for periods ending after December 15, 1997.
SFAS 128 requires a presentation of "Basic" and (where applicable) "Diluted"
earnings per share. Generally, Basic earnings per share is computed on only the
weighted average number of common shares actually outstanding during the period,
and the Diluted computation considers potential shares issuable upon exercise or
conversion of other outstanding instruments where dilution would result.
Furthermore, SFAS 128 requires the restatement of prior period reported earnings
per share to conform to the new standard. The per share presentations in the
accompanying financial statements reflect the provisions of SFAS 128. Diluted
earnings per share is not being shown due to the fact that the years ended
December 31, 1998, 1997 and 1996 show a net loss and the conversion of the
preferred stock and common stock outstanding during those years would be
anti-dilutive.
G. ACCOUNTING ESTIMATES--The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
H. INCOME TAXES--Pursuant to Statement of Financial Accounting Standards
No. 109 ("SFAS 109") "Accounting for Income Taxes", the Company accounts for
income taxes under the liability method. Under the liability method, a deferred
tax asset or liability is determined based upon the tax effect of the
differences between the financial statement and tax basis of assets and
liabilities as measured by the enacted rates which will be in effect when these
differences reverse.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts reported in the
balance sheet for cash, receivables, accrued expenses, and long-term debt
approximate fair value based on the short-term maturity of these instruments.
J. STOCK BASED COMPENSATION--The Company accounts for stock transactions in
accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees."
In accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting For Stock-Based Compensation," the Company adopted the
pro forma disclosure requirements of SFAS 123.
K. IMPAIRMENT OF LONG--LIVED ASSETS--The Company reviews long-lived assets,
certain identifiable assets and goodwill related to those assets on a quarterly
basis for impairment whenever circumstances and situations change such that
there is an indication that the carrying amounts may not be recovered. At
December 31, 1998, the Company recorded a charge against a patent upon such a
review (Note 4).
L. BASIS OF PRESENTATION--The Company had a working capital deficiency of
approximately $2,017,000 and $4,648,000 for the years ended December 31, 1998
and 1997, and they recorded net losses of
F-8
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately $1,288,000 and $7,725,000 respectively, that raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
continued existence is dependent on its ability to obtain additional debt or
equity financing and to generate profits from operations.
Management has utilized an acquisition strategy for its revenue growth and
is addressing virtually every aspect of its operations. The Company is
continuing to pursue additional equity and debt financing including a secondary
public offering of its securities.
There are no assurances that the Company will receive the additional equity
and debt financing. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
M. ROYALTY EXPENSE--Royalties that are incurred on a per unit sold basis are
included in Cost of Sales. Additional royalty amounts incurred to meet
contractual minimum levels are classified as Selling, General and Administrative
Expenses.
N. RECLASSIFICATIONS--The Company has reclassified certain expenses in its
consolidated statements of operations for the years ended December 31, 1997 and
1996 and certain assets and liabilities in its consolidated balance sheet as of
December 31, 1997, as a result of the sale of its schools and related
facilities. These changes had no significant impact on previously reported
results of operations or stockholders' equity.
O. FOREIGN CURRENCY TRANSLATIONS--Assets and liabilities of subsidiaries are
translated at the rate of exchange in effect on the balance sheet date; income
and expenses of subsidiaries are translated at the average rates of exchange
prevailing during the year or period then ended. The related transaction
adjustments are reflected as a cumulative translation adjustment in consolidated
stockholders' equity. Foreign currency gains and losses resulting from
transactions are included in results of operations in the period in which the
transaction occurred.
P. REVENUE RECOGNITION (UNAUDITED)--Kaire Nutraceuticals sells its product
directly to independent distributors. Sales are recorded when products are
shipped. Kaire Nutraceuticals has a program that provides a 100% refund (less
shipping and handling) to all end users, for any unopened product that is
returned within 30 days from the date of purchase in resalable condition. Kaire
Nutraceuticals provides a 100% product exchange for any product that does not
meet customer satisfaction if returned within 30 days under this program. An
associate is allowed 90 days from order date for exchange or refund only if
product bottles (empty, partial or full) are returned. SFAS No. 48 "Revenue
Recognition When Right of Return Exists" requires that Kaire Nutraceuticals
accrue losses that may be expected from sales returns. Kaire Nutraceuticals
monitors its historical sales returns and accrues a liability for sales returns
when and if sales returns become significant.
Q. COMPREHENSIVE INCOME (UNAUDITED)--Subsequent to the acquisition of Kaire,
the Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130") "Reporting Comprehensive Income". Comprehensive income is comprised
of net loss and all changes to the consolidated statements of stockholders'
equity, except those due to investments by stockholders, changes in paid in
capital and distribution to stockholders. For the six months ended June 30,
1999, the Company has deemed comprehensive income to be negligible, due to the
purchase of Kaire in February, and has reported comprehensive income as such.
F-9
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
R. CONCENTRATION OF RISK (UNAUDITED)--The Company maintains its cash
accounts in several bank accounts. Accounts in the United States are insured by
the Federal Deposit Insurance Corporation (FDIC) up to $100,000. The Company's
cash balance in some of its bank accounts generally exceeds the insured limits.
Kaire Nutraceuticals sells its products through network marketers throughout
the United States, Canada, New Zealand, Australia, 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 risk, in the normal
course of business.
S. RESTRICTED CASH (UNAUDITED)--Kaire Nutraceuticals 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 Kaire Nutraceuticals' credit card customers. The credit card
processing company may periodically increase the restricted cash account.
However, Kaire Nutraceuticals' restricted cash account will not go below
$125,000.
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -----------
LIFE RANGE 1998 1997 1999
---------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Equipment, furniture and fixtures.................. 5 to 7 $ 91,795 $ 85,955 $825,348
Leasehold improvements............................. 3 to 5 4,190 7,115 15,719
-------- -------- --------
95,985 93,070 841,067
Less: Accumulated depreciation..................... (17,549) (10,364) (72,052)
-------- -------- --------
$ 78,436 $ 82,706 $769,015
======== ======== ========
</TABLE>
F-10
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. PATENTS, CUSTOMER LISTS AND GOODWILL
Patents and customer lists consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- -----------
1998 1997 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Patents, net of accumulated amortization of $873,540,
$211,684 and $1,100,734 for 1998, 1997 and 1999
respectively........................................... $4,374,674 $5,011,316 $4,370,270
Customer lists, net of accumulated amortization of
$16,625, $5,225 and $160,284 for 1998, 1997 and 1999
respectively........................................... 40,375 51,775 5,355,322
---------- ---------- ----------
$4,415,049 $5,063,091 $9,725,592
========== ========== ==========
Goodwill, net of accumulated amortization of $89,319,
$28,071 and $113,973 for 1998, 1997 and 1999
respectively........................................... $ 829,468 $ 890,716 $2,072,796
========== ========== ==========
</TABLE>
F-11
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The goodwill, the patents, and the customer lists arose in connection with
the acquisitions of businesses made by the Company in 1997 and 1999. The
goodwill, the patents, and the customer lists are being amortized over their
estimated useful lives which are 5 to 10 years for the customer lists, 15 years
for goodwill and 11 and 17 years for patents. In 1998, the Company under
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed"
evaluated the recoverability of one of its patents, by comparing its carrying
amount to income generated. As a result of such evaluation the Company recorded
a charge of $200,000 against this patent in 1998.
In connection with the acquisition of Kaire in February 1999, the Company
has recognized $6,113,529 in goodwill and customer list (Note 17).
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Goodwill.................................................... $1,075,753
Customer List............................................... 5,037,776
----------
$6,113,529
==========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- -----------
1998 1997 1999
-------- --------- -----------
(UNAUDITED)
<C> <S> <C> <C> <C>
(i) $375,000 face amount note payable, non interest
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 $ 239,865 $239,865
(i) $75,000 face amount note payable, non interest bearing,
due September 15, 1998 (less unamortized discount
based on imputed interest rate of 12% per
annum--$1,349)....................................... 47,819 47,819 47,819
(i) $69,000 face amount note payable, non interest bearing,
due October 15, 1997................................. 27,000 27,000 27,000
(ii) Various bridge notes totaling $685,000 bearing interest
at 12.5%. Principal and interest payments due in
September 15, 1997................................... -- 685,000 --
(iii) Bridge notes issued in October and November 1997,
bearing interest at 14.5% per annum, due in February
1998................................................. -- 850,000 --
-------- --------- --------
314,684 1,849,684 314,684
Less current portion................................... 314,684 1,677,809 314,684
-------- --------- --------
$ -- $ 171,875 $ --
======== ========= ========
</TABLE>
(i) The above notes were issued upon the purchase of Ellon, Inc. in 1996.
Scheduled payments have not been made since 1997, due to disputes with
the note holders, and accordingly all unpaid balances are included in
current portion of long-term debt.
F-12
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. LONG-TERM DEBT (CONTINUED)
(ii) Of these bridge notes a total of $595,000 plus accrued interest of
$104,113 were converted in May 1998 to 1,195,473 shares of common stock.
The remaining principal of $90,000 plus accrued interest of $13,518 was
repaid.
(iii) These bridge notes totaling $850,000 plus accrued interest of $104,430
were repaid in 1998.
6. NOTE PAYABLE--(UNAUDITED)
In accordance with the asset purchase agreement of Kaire (Note 17), the
Company assumed a note payable to a bank that bears interest at 10.5% per annum
and is collateralized by inventories, accounts receivable, certain assets, and
the personal guarantees of certain officers and directors of Kaire. The term
loan is payable in monthly principal installment of $5,000 plus accrued interest
and is due in January 2000.
7. STOCKHOLDERS' EQUITY
A. COMMON STOCK--The Company is authorized to issue 50,000,000 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, redemption rights and terms, redemption
prices and liquidation preferences, as the Company's board of directors may,
from time to time, determine.
SERIES A PREFERRED STOCK--In June 1997, the Company sold 2,200 shares of its
convertible Series A Preferred Stock for $1,000 a share realizing net proceeds
of $1,900,702. The preferred stock pays dividends at the rate of 8% per annum
payable in cash or shares of the Company's common stock valued at 75% of the
closing bid price. The preferred stock has a liquidation preference of $1,000
per share. The preferred stock is convertible commencing 60 days after issuance,
provided that a registration statement covering the resale of the shares of
common stock is effective, at the rate of 75% of the average closing bid price
of the common stock over the five days preceding the notice of redemption. The
Company has the right to redeem the preferred stock for 240 days after the date
of issuance at the rate of 125% of the stated value. If a registration statement
is not deemed effective within 60 days of the date of issuance, then the Company
is obligated to pay a penalty at the rate of 2.5% per month.
In 1998 all 2,200 shares of Series A preferred stock were redeemed for
$3,530,309, inclusive of face amount, redemption value, penalties and dividends.
SERIES B PREFERRED STOCK--In February 1998, the Company issued 300 shares of
Series B Preferred Stock with a stated value of $1,000 per share realizing net
proceeds of $261,500. The preferred stock and the accrued dividends thereon are
convertible into shares of the Company's common stock at a price equal to the
lower of 70% of the average closing bid price of the common stock for the three
trading days immediately preceding the notice of conversion or $0.625 per share.
Due to the beneficial conversion features in the issuance of this series of
preferred stock, an imputed dividend of $128,572 has been recorded.
In 1998 all 300 shares of Series B Preferred Stock converted to a total of
541,330 shares of the Company's common stock.
F-13
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
SERIES C PREFERRED STOCK--In April 1998, the Company issued 4,000 shares of
Series C Preferred Stock with a stated value of $1,000 per share realizing net
proceeds of $3,507,500. The preferred stock and the accrued dividends thereon
are convertible into shares of the Company's common stock at a conversion price
equal to 75% of the average closing bid prices of the common stock for the five
day trading period ending on the day before conversion date, or 100% of the
closing bid price on the day of funding. Due to the beneficial conversion
features in the issuance of this series of preferred stock, an imputed dividend
of $1,333,333 has been recorded.
In 1998 all 4,000 shares of Series C Preferred Stock converted to a total of
3,608,296 shares of the Company's common stock.
SERIES D PREFERRED STOCK--In July 1998, the Company issued 75 shares of
Series D Preferred Stock with a stated value of $1,000 per share. The stated
value and the accrued dividends thereon are convertible into shares of the
Company's common stock at a conversion price equal to 70% of the average closing
bid prices of the common stock for the five day trading period ending on the day
before conversion date.
In August 1998 all 75 shares of Series D Preferred Stock were redeemed for a
total of $91,291.
SERIES E PREFERRED STOCK--In August 1998, the Company issued 1,650 shares of
Series E Preferred Stock with a stated value of $1,000 per share realizing net
proceeds of $1,439,500. The preferred stock and the accrued dividends thereon
are convertible into shares of the Company's common stock at a conversion price
equal to the lower of 75% of the average closing bid price of the common stock
for the five trading days immediately preceding the conversion date or 100% of
the closing bid price on the day of funding. This series of stock is convertible
commencing 60 days after issuance. Due to the beneficial conversion features in
the issuance of this series of preferred stock, an imputed dividend of $550,000
has been recorded.
SERIES E PREFERRED STOCK (UNAUDITED)--If the Company does not have an
effective common stock registration 120 days subsequent to the issuance of
Series E Preferred Stock, a 2% penalty on the face amount of $1,650,000 accrues
for every 30 days without an effective registration statement. As of the six
months ended June 30, 1999 the Company has recorded a charge of $214,500 due to
non compliance with this clause.
In the six months ended June 30, 1999, $82,500 in accrued dividends was
recorded for the period such stock was outstanding.
SERIES F PREFERRED STOCK (UNAUDITED)--In February 1999, the Company issued
2,800 shares of Series F Preferred Stock with a stated value of $1,000 per share
realizing a net value of $2,800,000. This issuance is in accordance with the
asset purchase agreement of Kaire (Note 17). The preferred stock pays a dividend
at 6% per annum and is payable upon conversion into either cash or common stock.
The preferred stock and the accrued dividends thereon are convertible into
shares of the Company's common stock at a conversion price equal to 95% of the
average closing bid price of the Common stock for the three trading days
immediately preceding the date on which the Company receives notice of
conversion from a holder. The Company is permitted at any time, on five days
prior to written notice, to redeem the outstanding preferred stock at a
redemption price equal to the stated value and the accrued dividends thereon.
F-14
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
In the six months ended June 30, 1999, the Company recorded an imputed
dividend of $147,368 due to the beneficial conversion features in the Series F
Preferred Stock. An additional $61,133 in accrued dividends was recorded for the
period such stock was outstanding.
SERIES G PREFERRED STOCK (UNAUDITED)--In February 1999, the Company issued
350 shares of Series G Preferred Stock with a stated value of $1,000 per share
realizing a net value of $350,000. The preferred stock pays a dividend at the
rate of 6% per annum. The preferred stock and the accrued dividends thereon are
convertible into shares of the Company's common stock at a conversion price
equal to 95% of the average closing bid price of the common stock for the three
trading days immediately preceding the date on which the Company receives notice
of conversion. The Company is permitted at any time, on five days prior written
notice, to redeem the outstanding preferred stock at a redemption price equal to
the stated value and the accrued dividends thereon.
In the six months ended June 30, 1999, the Company recorded an imputed
dividend of $18,421 due to the beneficial conversion features in the Series G
Preferred Stock. An additional $7,462 in accrued dividends was recorded for the
period such stock was outstanding.
SERIES H PREFERRED STOCK (UNAUDITED)--In March and April 1999, the Company
sold 1,400 shares of Series H Preferred Stock with a stated value of $1,000 per
share realizing net proceeds of $1,201,015. The preferred stock pays a dividend
at the rate of 8% per annum. The preferred stock and the accrued dividends
thereon are convertible into shares of the Company's common stock at a
conversion price equal to the lower of the closing bid price on the date of
issuance or 75% of the average closing bid price of the common stock for the
three trading days immediately preceding the date on which the Company receives
notice of conversion from a holder.
In the six months ended June 30, 1999, the Company recorded an imputed
dividend of $333,333 due to the beneficial conversion features in the Series H
Preferred Stock. An additional $29,788 in accrued dividends was recorded for the
period such stock was outstanding.
SERIES I PREFERRED STOCK (UNAUDITED)--In February 1999, the Company
authorized the issuance of 516 shares of Series I Preferred Stock with a stated
value of $1,000 per share realizing a net value of $516,000. These shares were
issued in connection to services rendered in connection with the Kaire
acquisition. The preferred stock pays a dividend at the rate of 8% per annum.
The preferred stock and the accrued dividends thereon are convertible into
shares of the Company's common stock at a conversion price equal to the average
closing bid price of the Common stock for the five trading days immediately
preceding the date of conversion. The financial statements for June 30, 1999
give effect to the issuance of the Series I Preferred Stock.
In the six months ended June 30, 1999, $15,021 in accrued dividends was
recorded for the period such stock was outstanding.
C. CONVERTIBLE DEBENTURES--In April 1997, the Company issued $1,300,000 of
6% convertible debentures (the "Debentures"). Principal on the Debentures is due
in March 2000. The principal and accrued interest on the Debentures are
convertible into shares of common stock of the Company. The Debentures are
convertible into shares of common stock at a conversion price equal to the
lesser of $1.4375 or 75% of the average closing bid price of the common stock
for the five trading days immediately preceding the
F-15
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
notice of conversion. In June 1997, the Company repaid $300,000 of the
Debentures. As of December 1997, $820,233 of such debentures were converted into
303,986 shares of common stock. As of December 1998, the remaining $179,767 were
converted into 206,603 shares of common stock.
In conjunction with the issuance of the Debentures, the Company issued
warrants to purchase an aggregate of 5,000 shares of Common Stock. The warrants
are exercisable until April 3, 2002. Warrants to purchase 2,500 shares of Common
Stock are exercisable at $97.50 per share, and the balance are exercisable at
$130.00 per share.
D. OPTIONS--During the quarter ended September 30, 1997, the Company's
president and secretary were issued an aggregate of 20,000, 10 year options,
exercisable at $.001 per share. The Company has recorded a non-cash expense of
$400,000 representing the difference between the exercise price and the fair
value of the common stock.
In connection with the sale of the schools, to the Company's former
president and secretary, the above options were canceled.
E. 1 FOR 40 REVERSE STOCK SPLIT--On April 6, 1998, the Company effected a 1
for 40 reverse split of its common stock, amending its certificate of
incorporation to provide for the authority to issue 50,000,000 shares of $.001
par value common stock. All per share data in these financial statements is
retroactively restated to reflect this reverse split.
F. CONVERSION OF NOTES PAYABLE--In May 1998 the Company converted $595,000
of its 12.5% promissory notes, plus accrued interest of $104,113 into 1,195,473
shares of common stock.
G. REDEMPTION OF SHARES--In connection with the sale of the schools, the
Company redeemed 79,175 shares of common stock from its former president and
secretary.
8. DISCONTINUED OPERATIONS
During the third quarter of 1998, the Company sold its three vocational
schools and certain related businesses. Net assets of the schools were
approximately $2,875,285 consisting primarily of furniture and equipment,
accounts receivable and goodwill. Liabilities were approximately $2,559,249.
Accordingly, the results of the vocational school operations are shown
separately as "discontinued operations."
Revenues of the discontinued vocational school business were $3,351,959 in
1998, $5,858,790 for the full year 1997, and $2,469,903 for the full year 1996.
In November 1998, the Company sold an office building located in Pompano
Beach, Florida that previously accommodated the Company's corporate headquarters
and one of its vocational schools. Gross proceeds were approximately $2,900,000,
less net book value of $3,238,000 plus closing and financing costs of $498,000.
During the third quarter of 1997, the Company reached a decision to
discontinue the medical clinic line of business. Net assets of the medical
clinics were approximately $1,509,405 consisting primarily of furniture and
equipment, accounts receivable and goodwill. Liabilities were approximately
$213,987. The Company has accrued an estimated loss on disposal of approximately
$716,193 representing primarily an accrued employment contract and lease
terminations. Accordingly, the results of the clinic operations are shown
separately as "discontinued operations." As of December 31, 1998 accrued
expenses on this discontinued operation totaled $314,593.
Revenues of the discontinued clinic line of business were $1,754,066 for
1997 and $2,374,469 for 1996.
F-16
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS 109. SFAS
No. 109 requires the recognition of deferred tax assets and liabilities for both
the expected impact of differences between the financial statement and tax basis
of assets and liabilities, and for the expected future tax benefit to be derived
from tax loss and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. At December 31, 1998 and 1997, the Company had net
deferred tax assets of approximately $4,464,000 and $4,077,000, respectively.
The Company has established a valuation allowance for the full amount of such
deferred tax assets at December 31, 1998 and 1997, as management of the Company
has not been able to determine that it is more likely than not that the deferred
tax assets will be realized.
The net deferred asset at June 30, 1999 has been increased to reflect the
loss for the six months then ended.
The following table reflects the Company's deferred tax assets and
(liabilities) at December 31, 1998 and 1997 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1997 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss deduction........................... $ 4,464,000 $ 3,760,000 $ 4,989,000
Deferred revenue....................................... -- 436,000 --
Section 481 adjustment................................. -- (124,000) --
Other.................................................. -- 5,000 --
Valuation allowance.................................... (4,464,000) (4,077,000) (4,989,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
1998 1997 1996 1999 1998
--------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income tax (benefit) computed at
statutory rate.................... $(451,000) $(2,704,000) $(670,000) $(460,000) $(498,000)
Effect of temporary differences..... -- 152,000 146,000 -- --
Effect of permanent differences..... -- 13,000 19,000 -- --
Tax benefit not recognized.......... 451,000 2,539,000 505,000 460,000 498,000
--------- ----------- --------- --------- ---------
Provision for income taxes
(benefit)......................... $ -- $ -- $ -- $ -- $ --
========= =========== ========= ========= =========
</TABLE>
The net operating loss carryforward at December 31, 1998 was approximately
$11,160,000 and expires in the years 2012 to 2013.
10. COMMITMENTS AND CONTINGENCIES
A. Leases--The Company leases its Portland, Maine office under two leases
expiring in 2001. Rent expense for the years ended December 31, 1998 and 1997
was $24,000 and $11,480, respectively. In 1998
F-17
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Corporate headquarters rented facilities in New York City. Minimum rental
commitments for the Portland and New York City facilities over the next five
years are as follows:
<TABLE>
<S> <C>
1999........................................................ $92,073
2000........................................................ 93,713
2001........................................................ 81,457
2002........................................................ --
2003........................................................ --
</TABLE>
B. Employment Agreement--During the quarter ended March 31, 1997, the
Company renegotiated with a former stockholder of Sam Lilly, Inc. with whom it
was obligated under an employment agreement, to cancel the employment agreement
and replace it with a consulting agreement. The consulting agreement required
the individual to provide services to the Company for one day per week through
December 1998 at the rate of $5,862 per week. The Company determined that the
future services, if any, that it will require will be of little or no value and
accounted for this obligation as a cost of severing the employment contract.
Accordingly all future payments have been accrued in full at September 1997. The
expense associated with this accrual is recorded as part of the loss from
discontinued operations in 1997.
C. Renegotiation of Patent Agreement--In April 1998, the Company
renegotiated the terms of its acquisition of the Troy Patent, due to the
agreement being in breach because of unpaid minimum royalties. Under the new
agreement, royalties are payable at the rate of 3% of the first $2,000,000 of
related product sales; 2% of the next $2,000,000 in sales and 1% of sales in
excess of $4,000,000.
D. Litigation--On August 4, 1997, a civil suit was brought in the Fifteenth
Judicial Circuit of Palm Beach County, Florida, against the Company and Health
Wellness Nationwide Corp., the Company's former wholly-owned subsidiary. The
Company has asserted counterclaims against the individuals who initiated the
suit. 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.
Global is a plaintiff in a litigation against Ellon USA, Inc. and its
previous owners. The litigation involves claims arising out of the sale of
defendants Ellon USA, Inc. ("Ellon USA") to Global. The actions seeks a
determination that Ellon USA and their principals materially breached their
respective obligations under the purchase agreement, and that Global is excused
from further performance under the agreement. A counter claim by Ellon USA and
their owners seek to recover damages in an unspecified amount, but not less than
$1,300,000 in legal, court and interest fees. No discovery has taken place in
either case. Management believes it has a strong legal position in both cases;
however, given the complexity of the issues involved, it is unable to evaluate
the likelihood of a favorable or unfavorable outcome at this time. As of
December 31, 1998, Global has recorded in excess of $420,000 in current
liabilities owed to Ellon USA and their owners.
F-18
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1998, Global is seeking to restructure its trade debt in
out of court proceedings. The Company has offered, on certain terms and
conditions, to settle each creditor's claim by payment of 40% of the claim,
payable in either cash (or cash equivalent) or its publicly traded stock,
depending on the size of the claim.
As of December 31, 1998, Global is a defendant in a legal action brought by
a creditor to whom the Company offered a settlement as mentioned above. The
complaint seeks approximately $144,000 plus unstated special damages, attorney
fees and court cost, based on them having provided marketing, media purchasing
and related advertising services to Global. The complaint was answered by Global
with a counterclaim arising out of the complainants creation of a defective
advertising campaign. Global seeks not less than $6,500,000 plus unstated
special damages, attorney fees and court cost. No discovery has taken place,
Global is unable to evaluate the likelihood of a favorable or unfavorable
outcome at this time. As of December 31, 1998, Global has recorded approximately
$144,000 of the complainants original fees.
As of December 31, 1998, Global is a defendant in a legal action brought by
a creditor to whom the Company offered a settlement as mentioned above. The
complaint seeks approximately $320,000 plus interest and legal fees, based on
them having provided advertising time and sponsorship. Global has responded to
the complaint, with continuing settlement discussion as mentioned above. Global
disputes the liability on this claim, and contends that the complainants in the
$144,000 action are responsible for any claim should the court find in favor of
this lawsuit. No discovery has taken place, Global is unable to evaluate the
likelihood of a favorable or unfavorable outcome at this time. As of
December 31, 1998, Global has recorded approximately $320,000 of the
complainants original fees.
E. Major Supplier--
- Kaire Nutraceuticals currently buys all of its Pycnogenol, an important
component of its products, from one supplier.
- For a period of five years, Kaire Nutraceuticals must purchase no less
than $73,750 per month of a different product from another supplier.
Although there are a limited number of manufacturers of this component,
management believes that other suppliers could provide similar components
on comparable terms. Kaire Nutraceuticals does not maintain any other
contractual commitments or similar arrangements with other suppliers.
- Kaire Nutraceuticals purchases its products from manufacturers and
suppliers on an as needed basis. Should these relationships terminate,
Kaire Nutraceuticals' supply and ability to meet consumer demands would be
adversely affected.
11. COMMON STOCK SUBJECT TO PUT
In connection with the January 1996 acquisition of the net assets of Sam
Lilly, Inc., the 9,500 shares issued in connection with the acquisition are
subject to the seller's ability to require the Company to repurchase such shares
for a three year period for $380,000, in the event that the aggregate market
value of the shares falls below $380,000. Such shares are excluded from
permanent equity on the accompanying balance sheet. As of March 1998, the seller
had exercised the put and this matter is now subject to litigation.
F-19
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. STOCK OPTION PLANS AND WARRANTS
Under the Company's 1994 Stock Option Plan, up to 16,667 shares of common
stock are reserved for issuance. The exercise price of the options will be
determined by the Stock Option Committee selected by the board of directors, but
the exercise price will not be less than 85% of the fair market value on the
date of grant. Towards the end of 1995, 50 options were issued to each of two
directors at an exercise price equal to the market price at the time. During
1996 the Company issued 250 options to a director at a price equal to the fair
market value on the date of grant.
In August 1997, the Company adopted a stock option plan covering officers,
directors, employees and consultants. In August the Company issued 43,750 ten
year options under the 1997 Plan, exercisable at fair market value (which was
$22.40 per share) to certain of its officers who were former principals of
Global. Options to purchase 21,875 shares became exercisable in August 1998, and
the remaining 21,875 will be exercisable in August 1999.
In 1998 the Company issued 100,000 warrants to two directors at an exercise
price of $1.00, which was equal to the fair market value at the date of grant.
The following table summarizes the changes in options and warrants
outstanding, and the related exercise price for shares of the Company's common
stock:
<TABLE>
<CAPTION>
STOCK OPTIONS WARRANTS
--------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE EXERCISABLE SHARES PRICE EXERCISABLE
-------- -------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1996.... 100 $101.20 100 2,110,757 $ 8.35 2,110,757
Granted....................... 250 58.92 250 -- -- --
------- ------- ------ --------- ------- ---------
Outstanding at December 31,
1996............................ 350 50.13 350 2,110,757 8.35 2,110,757
Granted....................... 63,750 5.77 20,000 5,000 113.75 5,000
------- ------- ------ --------- ------- ---------
Outstanding at December 31,
1997............................ 64,100 71.00 20,350 2,115,757 8.60 2,115,757
Granted (Canceled)............ (20,000) 0.00 1,875 447,500 1.16 447,500
------- ------- ------ --------- ------- ---------
Outstanding at December 31,
1998............................ 44,100 15.68 22,225 2,523,257 7.41 2,523,257
Granted (Unaudited)........... 295,000 -- -- 200,000 4.06 200,000
------- ------- ------ --------- ------- ---------
Outstanding at June 30, 1999
(Unaudited)..................... 339,100 6.01 22,225 2,723,257 7.07 2,723,257
======= ======= ====== ========= ======= =========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WARRANTS
-------- --------
<S> <C> <C>
Weighted Average fair value of options and warrants granted
during 1996............................................... $40.42 None
Weighted Average fair value of options and warrants granted
during 1997............................................... $10.55 $78.03
Weighted Average fair value of options and warrants granted
during 1998............................................... None $0.84
(Unaudited)
Weighted Average fair value of options and warrants granted
during quarter ended June 30, 1999........................ 3.50 $2.79
</TABLE>
F-20
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. STOCK OPTION PLANS AND WARRANTS (CONTINUED)
The following table summarizes information about exercisable stock options
and warrants at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------------------ ----------------------
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------- ----------- ----------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options:................... $ 22.40-101.20 44,100 2-8 years $22.79 22,225 $ 23.16
Warrants:.................. $ 1.00-130.00 2,523,257 1-5 years $ 7.41 2,523,257 $ 7.41
</TABLE>
(UNAUDITED)
The following table summarizes information about exercisable stock options
and warrants at June 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------------------ ----------------------
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------- ----------- ----------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options:................... $ 22.40-101.20 339,100 2-8 years $ 6.01 22,225 $ 23.16
Warrants:.................. $ 1.00-130.00 2,723,257 1-5 years $ 7.07 2,723,257 $ 7.07
</TABLE>
In fiscal 1997, the Company adopted the disclosure provisions of SFAS 123.
For disclosure purposes, the fair value of options is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for stock options granted during the years ended
December 31, 1998 and 1997 respectively: annual dividends of $0; expected
volatility of 50%; risk free interest rate of 7% and expected life of 10 years.
The weighted average fair value of stock options granted during the years ended
December 31, 1998 and 1997 was $0 and $21.60, respectively. If the Company had
F-21
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. STOCK OPTION PLANS AND WARRANTS (CONTINUED)
recognized compensation cost of stock options in accordance with SFAS 123, the
Company's proforma loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss to common stockholders
As reported.......................... $(3,299,917) $(8,458,453) $ (889,538)
Pro forma............................ $(3,299,917) $(9,214,453) $ (983,538)
Net loss from continuing operations:
As reported.......................... $(2,740,054) $(4,304,073) $ (264,580)
Pro forma............................ $(2,740,054) $(5,060,073) $ (358,580)
Net loss per share to common
stockholders
Basic
As reported........................ $ (1.49) $ (19.48) $ (3.17)
Pro forma.......................... $ (1.49) $ (21.22) $ (3.51)
Net loss per share to common
stockholders--continuing operations:
Basic
As reported........................ $ (1.24) $ (9.91) $ (0.94)
Pro forma.......................... $ (1.24) $ (11.65) $ (1.28)
</TABLE>
13. FORGIVENESS OF DEBT
- During the six months ended June 30, 1998 (unaudited) the Company realized
a gain of approximately $1,508,092 due to its ongoing efforts to
restructure Global and its various wholly owned subsidiaries.
- The Company for the year ended December 31, 1998, reviewed the fair value
of its accounts payable, accrued expenses and other liabilities, and
adjusted their gain on forgiveness of debt to approximately $816,000,
resulting in an approximate decrease of $692,000 in gain that had been
realized in the six months ended June 30, 1998.
14. RELATED PARTY TRANSACTION
The Company sold its three vocational schools (Note 8) in 1998 to a company
controlled by the Company's former President and Chief Executive Officer, the
Company's former Secretary, and a former director.
The Company has paid legal fees to a law firm, whose member is a director of
the Company. Fees of approximately $263,000 and $153,000 were paid in the year's
ended December 31, 1998 and 1997, respectively.
(UNAUDITED)
The Company as of June 30, 1999 owed $50,000 to its chief financial officer
and $50,000 to a director of the Company, both in connection with liabilities
assumed in connection with the Kaire acquisition.
F-22
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. FOREIGN SALES--(UNAUDITED)
Since the acquisition of Kaire and its foreign subsidiaries in
February 1999, the Company has substantially increased its international
presence both in sales and long-lived assets. The Company's sales and long-lived
assets by country as of June 30, 1999 is as follows:
<TABLE>
<CAPTION>
UNITED AUSTRALIA AND OTHER
STATES NEW ZEALAND SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
----------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.......... $ 5,786,042 $1,479,391 $359,958 $ -- $ 7,625,391
Transfers between
geographic areas... 342,935 -- -- (342,935) --
----------- ---------- -------- --------- -----------
Net sales............ 6,128,977 1,479,391 359,958 (342,935) 7,625,391
=========== ========== ======== ========= ===========
Long-lived assets at
June 30, 1999...... $12,460,489 $ 35,382 $ 71,532 $ -- $12,567,403
=========== ========== ======== ========= ===========
</TABLE>
16. ACQUISITIONS
On July 23, 1997, the Company closed on the acquisition of the capital stock
of Global. The purchase price for the acquisition of Global was settled with the
issuance of 145,000 shares of the Company's common stock. The Company has agreed
to issue to former Global shareholders additional shares of common stock as
follows: i) up to 20,000 shares if Global's pre-tax operating earnings equal or
exceed $1,200,000 for the period from July 1, 1997 through June 30, 1998, which
did not occur and ii) shares equal in market value to the lesser of $45 million
or eight times Global pre-tax operating earnings for the period from July 1,
1999 through June 30, 2000 minus the fair market value on the date of issuance
of the 145,000 share initial consideration.
The acquisition was recorded using the purchase method of accounting by
which the assets are valued at fair market value at the date of acquisition. The
following table summarizes the acquisition.
<TABLE>
<S> <C>
Purchase price.................................. $ 2,900,000
Liabilities assumed............................. 4,530,741
Fair value of assets acquired................... (6,511,954)
-----------
Goodwill........................................ $ 918,787
===========
</TABLE>
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") was valued at $404,000. In December 1998 management
evaluated the recoverability of the Xu patent, by comparing its carrying amount
to income generated. As a result of such evaluation the Company recorded a
charge of $200,000 against this patent. The "Xu Patent" is being amortized over
its remaining life of 17 years, from the date of purchase, with adjustments for
future amortization in regards to the charge against it. Additionally, the
Company acquired a customer list valued at $57,000, which is being amortized
over 5 years.
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
F-23
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
16. ACQUISITIONS (CONTINUED)
indicative of the results that would have been achieved had the acquisition not
occurred or the results that would have been obtained had the acquisition
actually occurred on January 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
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)
============ ===========
Basic and diluted loss per share from continuing
operations................................................ $ (15.21) $ (6.90)
============ ===========
Basic and diluted net loss per share........................ $ (20.20) $ (7.14)
============ ===========
Shares used in computation.................................. 506,765 425,350
============ ===========
</TABLE>
17. SUBSEQUENT EVENTS
A. The Company in February 1999, pursuant to an asset purchase agreement
acquired substantially all the assets of Kaire in exchange for the (i) issuance
to Kaire, of $2,800,000 aggregate stated value of the Company's Series F
Preferred Stock, par value of $.001, (ii) issuance to creditors of Kaire of
$350,000 aggregate stated value of the Company's Series G Preferred Stock, par
value of $.001, (iii) issuance to Kaire of five year warrants to purchase
200,000 shares of the Company's common stock, par value of $.001, and
acquisition costs of $622,587 of which $516,000 will be paid with the issuance
of $516,000 aggregate stated value of the Company's Series I Preferred Stock,
par value $.001 and $106,587 was paid in cash. The Company has computed an
aggregate $682,000 value on the warrants for acquisition purposes. The value was
derived by using the Black-Scholes Option Pricing model, (iv) the assumption of
certain indebtedness of Kaire, as defined in the agreement and as agreed to
outside of the asset purchase agreement. (v) indemnification to certain officers
of Kaire against certain liabilities accrued prior to the closing date of the
asset purchase, and (vi) certain annual payments to Kaire for a period of five
years commencing December 31, 1999 based upon revenues and net income.
The acquisition was recorded using the purchase method of accounting, by
which assets are valued at fair value on the date of acquisition. The following
table summarized the acquisition:
<TABLE>
<S> <C>
Purchase price.................................. $ 4,454,587
Liabilities assumed............................. 4,205,012
Fair value of assets acquired................... (2,546,070)
-----------
Goodwill and customer list...................... $ 6,113,529
===========
</TABLE>
The Goodwill acquired is approximately $1,076,000 and is being amortize over
its remaining useful life of 15 years. The customer list acquired is
approximately $5,038,000 and is being amortized over its remaining useful life
of 10 years.
The following schedule combines the unaudited pro-forma results of
operations of the Company and Kaire, as if the acquisition occurred on
January 1, 1996 and includes such adjustments which are directly
F-24
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
17. SUBSEQUENT EVENTS (CONTINUED)
attributable to the acquisition, including the amortization of goodwill. It
should not be considered indicative of the results that would have been achieved
had the acquisition actually occurred on January 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ----------------------------
1998 1997 1996 1999 1998
------------ ------------ ----------- ----------- -----------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 27,366,830 $ 36,815,238 $51,498,562 $ 9,928,397 $15,718,186
============ ============ =========== =========== ===========
Loss from continuing operations...... $ (8,023,170) $(10,978,096) $(2,642,860) $(1,431,955) $(2,903,571)
============ ============ =========== =========== ===========
Net income (loss) to common
stockholder........................ $(10,431,144) $(15,362,756) $(3,496,098) $(2,476,551) $(1,593,513)
============ ============ =========== =========== ===========
Basic and diluted loss per common
share from continuing operations... $ (3.63) $ (25.28) $ (9.43) $ (0.23) $ (2.99)
============ ============ =========== =========== ===========
Basic and diluted net income (loss)
to common stockholder per share.... $ (4.72) $ (35.38) $ (12.47) $ (0.40) $ (1.64)
============ ============ =========== =========== ===========
Shares used in computation........... 2,210,458 434,265 280,350 6,220,331 969,886
============ ============ =========== =========== ===========
</TABLE>
B. In July 1999, the company borrowed $50,000 each from two lenders and
issued each lender a nine month secured promissory note and warrants to purchase
10,000 shares of common stock. The notes bear interest at 14% per annum, but in
no event shall the interest payable be less than $5,000.
In July and August 1999, the company borrowed $150,000 from a private lender
and issued a secured promissory note and issued warrants to purchase 30,000
shares of common stock. The note is due on the earlier of 60 days from the date
of issuance or upon the sale of its securities resulting in gross proceeds of at
least $5,000,000 and bearing interest at the rate of 10% per annum, but in no
event less than $12,000. In October 1999 the company amended the promissory note
to provide that the note is payable upon demand and is convertible into shares
of common stock at a discount equal to 40% of the average closing bid price of
the common stock on the three days preceeding notice of conversion.
In June 1999, the company borrowed $100,000 from a lender. The loan bears
interest at 10% per annum and is payable on demand. The note is convertible into
shares of common stock at a discount equal to 40% of the average closing bid
price of the common stock on the three days preceding notice of conversion.
In October 1999, the company borrowed $100,000 from a lender. The loan bears
interest at 10% per annum and is payable on demand. The note is convertible into
shares of common stock at a discount equal to 40% of the average closing bid
price of the common stock on the three days preceding notice of conversion.
In October 1999, the Company entered into a two year consulting agreement
with a consultant pursuant to which the consultant will provide the Company with
advisory services relating to mergers and acquisitions and strategic alliances
in consideration for the issuance of 95,000 shares of common stock.
In October 1999, the Company entered into a consulting agreement with a
consultant pursuant to which the consultant will negotiate settlements with the
Company's creditors in consideration for the issuance of 185,000 shares of
common stock.
F-25
<PAGE>
KAIRE INTERNATIONAL, INC.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-27
Financial Statements:
Consolidated Balance Sheets............................... F-28
Consolidated Statements of Operations and Comprehensive
Loss.................................................... F-29
Consolidated Statements of Stockholders' Deficit.......... F-30
Consolidated Statements of Cash Flows..................... F-31
Summary of Accounting Policies............................ F-32 - F-35
Notes to Consolidated Financial Statements................ F-36 - F-46
</TABLE>
F-26
<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, 1998 and
1997 and the related consolidated statements of operations and comprehensive
loss, stockholders' deficit and cash flows for the years ended December 31,
1998, 1997 and 1996. 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, 1998 and 1997 and the
results of their operations and their cash flows for the years ended
December 31, 1998, 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. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit of $9,862,931 and a capital deficit of $9,322,895
at December 31, 1998. 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.
/s/BDO Seidman LLP
March 8, 1999
Denver, Colorado
F-27
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS (Notes 1, 4 and 5)
CURRENT:
Cash and cash equivalents................................. $ 372,633 $ 460,663
Restricted cash........................................... 125,000 --
Accounts receivable, less allowance of $0 and $168,805 for
possible losses (Notes 4 and 5)......................... 262,944 301,135
Inventories (Note 4)...................................... 1,061,144 1,612,960
Prepaid expenses and other................................ 61,281 267,123
------------ -----------
Total current assets........................................ 1,883,002 2,641,881
------------ -----------
PROPERTY AND EQUIPMENT (Note 3):
Computer equipment........................................ 901,491 914,451
Computer software......................................... 579,955 579,955
Office equipment.......................................... 424,310 424,714
Furniture and fixtures.................................... 152,544 322,171
Leasehold improvements and other.......................... 135,029 174,985
------------ -----------
2,193,329 2,416,276
Accumulated depreciation and amortization................. (1,655,178) (1,344,463)
------------ -----------
Net property and equipment.................................. 538,151 1,071,813
------------ -----------
OTHER ASSETS:
Deposits and other........................................ 139,397 405,638
Debt issuance costs, net of accumulated amortization of
$347,230 and $143,886 (Note 5).......................... -- 204,344
------------ -----------
Total other assets.......................................... 139,397 609,982
------------ -----------
$ 2,560,550 $ 4,323,676
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable (Note 5).................................... $ 2,075,000 $ 1,787,166
Note payable to bank (Note 4)............................. 180,000 240,000
Notes payable--related parties (Note 2)................... 2,362,247 984,667
Current portion of capital lease obligations (Note 3)..... 19,606 116,079
Checks written in excess of deposits...................... 1,035,195 1,322,910
Accounts payable.......................................... 3,500,778 2,495,829
Accounts payable, related party (Note 2).................. -- 26,255
Accrued commissions payable............................... 815,513 1,369,305
Accrued payroll taxes payable and other (Note 6).......... 411,075 281,841
Sales taxes payable (Note 6).............................. 603,995 268,299
Other accrued liabilities................................. 742,524 241,818
------------ -----------
Total current liabilities................................... 11,745,933 9,134,169
CAPITAL LEASE OBLIGATION, LESS CURRENT MATURITIES
(Note 3).................................................... 8,146 14,713
------------ -----------
Total liabilities........................................... 11,754,079 9,148,882
------------ -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.............. 129,366 199,636
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 9)............ -- --
STOCKHOLDERS' DEFICIT (Note 7):
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; 2,296,226 and 2,209,176 shares issued and
outstanding............................................. 22,962 22,092
Additional paid-in capital................................ 1,366,188 1,365,317
Other accumulated comprehensive loss...................... (11,153) (418,980)
Retained deficit.......................................... (10,700,892) (5,993,271)
------------ -----------
Total stockholders' deficit................................. (9,322,895) (5,024,842)
------------ -----------
$ 2,560,550 $ 4,323,676
============ ===========
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-28
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES (Note 11)................................... $26,175,710 $35,681,512 $51,498,562
COST OF SALES (Notes 2 and 10)........................ 6,250,433 8,387,963 13,321,062
----------- ----------- -----------
GROSS PROFIT.......................................... 19,925,277 27,293,549 38,177,500
----------- ----------- -----------
OPERATING EXPENSES:
Distributor commissions............................. 13,537,777 19,968,230 27,965,416
Selling general and administrative expenses......... 9,291,933 13,008,859 12,975,915
----------- ----------- -----------
Total operating expenses.............................. 22,829,710 32,977,089 40,941,331
----------- ----------- -----------
Loss from operations.................................. (2,904,433) (5,683,540) (2,763,831)
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Other income........................................ 56,216 195,899 40,432
Interest income..................................... 31,446 54,573 79,029
Interest expense.................................... (971,376) (726,392) (126,663)
Abandoned offering costs............................ (357,770) -- --
Loss on foreign exchange............................ (568,424) (29,202) (17,335)
Other expense....................................... (57,253) (56,430) (2,775)
----------- ----------- -----------
Total other income (expenses)......................... (1,867,161) (561,552) (27,312)
----------- ----------- -----------
Loss before income taxes and minority interest........ (4,771,594) (6,245,092) (2,791,143)
Benefit from income taxes (Note 8).................... -- 12,973 1,103,000
Minority interest in (income) loss of subsidiaries.... 63,973 133,590 (114,643)
----------- ----------- -----------
NET LOSS.............................................. (4,707,621) (6,098,529) (1,802,786)
Other comprehensive income (loss):
Foreign currency translation adjustment........... 407,827 (430,117) 11,137
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS)........................... $(4,299,794) $(6,528,646) $(1,791,649)
=========== =========== ===========
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-29
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED RETAINED
-------------------------- PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE
SHARES (NOTE 7) AMOUNT CAPITAL INCOME/(LOSS) (DEFICIT) INCOME/(LOSS)
--------------- -------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996.... 1,470,000 $14,700 $ (6,604) $ -- $ 1,908,044 [$ 1,186,351]
============
Comprehensive income/(loss):
Net loss.................. -- -- -- -- (1,802,786) [$(1,802,786)]
Foreign currency
translation
adjustment.............. -- -- -- 11,137 -- [11,137]
--------- ------- ---------- --------- ------------ ------------
Balance, December 31,
1996...................... 1,470,000 14,700 (6,604) 11,137 105,258 [$(1,791,649)]
============
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 7)....... 250,000 2,500 168,957 -- -- --
Issuance of common stock in
connection with debt net
of offering costs of
$29,580 (Note 5).......... 172,500 1,725 141,195 -- -- --
Conversion of debt to
additional paid-in capital
(Note 7).................. -- -- 1,000,000 -- -- --
Comprehensive income/(loss):
Net loss.................. -- -- -- -- (6,098,529) [$(6,098,529)]
Foreign currency
translation
adjustment.............. -- -- -- (430,117) -- [(430,117)]
--------- ------- ---------- --------- ------------ ------------
Balance, December 31,
1997...................... 2,209,176 22,092 1,365,317 (418,980) (5,993,271) [$(6,528,646)]
============
Issuance of common stock
from exercise of stock
options................... 87,050 870 871 -- -- --
Comprehensive income/(loss):
Net loss.................. -- -- -- -- (4,707,621) [$(4,707,621)]
Foreign currency
translation adjustment,
includes $381,429
transfer of loss on
foreign exchange from
writedown of investment
in foreign subsidiary... -- -- -- 407,827 -- [407,827]
--------- ------- ---------- --------- ------------ ------------
Balance, December 31,
1998...................... 2,296,226 $22,962 $1,366,188 $ (11,153) $(10,700,892) [$(4,299,794)]
========= ======= ========== ========= ============ ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balance, January 1, 1996.... $ 1,916,140
Comprehensive income/(loss):
Net loss.................. (1,802,786)
Foreign currency
translation
adjustment.............. 11,137
-----------
Balance, December 31,
1996...................... 124,491
Issuance of common stock for
services.................. 64,936
Issuance of common stock for
cash net of offering costs
of $78,543 (Note 7)....... 171,457
Issuance of common stock in
connection with debt net
of offering costs of
$29,580 (Note 5).......... 142,920
Conversion of debt to
additional paid-in capital
(Note 7).................. 1,000,000
Comprehensive income/(loss):
Net loss.................. (6,098,529)
Foreign currency
translation
adjustment.............. (430,117)
-----------
Balance, December 31,
1997...................... (5,024,842)
Issuance of common stock
from exercise of stock
options................... 1,741
Comprehensive income/(loss):
Net loss.................. (4,707,621)
Foreign currency
translation adjustment,
includes $381,429
transfer of loss on
foreign exchange from
writedown of investment
in foreign subsidiary... 407,827
-----------
Balance, December 31,
1998...................... $(9,322,895)
===========
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-30
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(4,707,621) $(6,098,529) $(1,802,786)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 873,003 876,836 440,873
Minority interest......................................... (63,973) (133,590) 114,643
Loss on disposal of fixed assets.......................... -- 17,217 --
Common stock issued for services.......................... -- 17,500 --
Deferred income taxes..................................... -- -- (84,000)
Provision for doubtful accounts........................... 148,119 259,369 41,210
Write off of inventories.................................. 276,871 -- --
Loss on foreign exchange.................................. 562,128 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................... (102,117) (435,517) 317,451
Related party receivable.................................. -- -- 238,638
Inventories............................................... 371,272 293,087 123,341
Prepaid expenses and other................................ 386,288 (315,748) (55,909)
Refundable income taxes................................... -- 1,025,000 (725,000)
Accounts payable.......................................... 412,982 1,218,959 157,490
Accounts payable, related party........................... (26,255) 26,254 --
Accrued liabilities and other............................. 432,693 (184,223) (322,349)
Income taxes payable...................................... -- -- (65,755)
----------- ----------- -----------
Net cash used in operating activities....................... (1,436,610) (3,433,385) (1,622,153)
----------- ----------- -----------
INVESTING ACTIVITIES:
Restricted cash........................................... (125,000) -- --
Deposits and other........................................ 283,094 (289,238) --
Purchases of intangibles.................................. -- (20,106) (172,488)
Purchases of property and equipment....................... (74,891) (274,679) (243,415)
Advances--other........................................... -- 226,855 (224,804)
Proceeds from sale of investment.......................... -- 250,000 --
Purchase of investment.................................... -- -- (250,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities......... 83,203 (107,168) (890,707)
----------- ----------- -----------
FINANCING ACTIVITIES:
Checks written in excess of deposits...................... (287,715) (53,155) 1,376,065
Proceeds from note payable to bank........................ -- -- 250,000
Payments on note payable to bank.......................... (60,000) (10,000) --
Proceeds from notes payable............................... 150,000 4,217,463 200,000
Payments on notes payable................................. -- (1,017,463) --
Proceeds from notes payable--related party................ 1,760,470 1,165,531 75,000
Payments on notes payable--related party.................. (382,890) (561,192) (228,738)
Payments on capital lease obligations..................... (103,040) (241,610) (223,902)
Issuance of common stock.................................. 1,741 171,457 --
Offering costs paid....................................... -- (29,580) --
Payments for debt issue costs............................. -- (300,794) --
----------- ----------- -----------
Net cash provided by financing activities................... 1,078,566 3,340,657 1,448,425
----------- ----------- -----------
Effect of foreign exchange rates changes on cash............ 186,811 (78,708) 33,570
----------- ----------- -----------
Net decrease in cash and cash equivalents................... (88,030) (278,604) (1,030,865)
Cash and cash equivalents, beginning of year................ 460,663 739,267 1,770,132
----------- ----------- -----------
Cash and cash equivalents, end of year...................... $ 372,633 $ 460,663 $ 739,267
=========== =========== ===========
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-31
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
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, Trinidad and Tobago, and the United Kingdom.
On March 18, 1997, the Company 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. During October 1998,
the Company began trying to sell its South Korean subsidiary, and as of December
31, 1998, the Company wrote off all of its assets in its South Korean subsidiary
as the Company does not anticipate recovering its investment. The Company
recorded a $884,600 writedown of its assets in its South Korean subsidiary,
which included a writedown of $132,863 in property and equipment and $210,736 in
inventories. 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.
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, 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
F-32
<PAGE>
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 company's financial statements. The
cash held in the Company's subsidiary accounts is not available to cover the
Company's bank overdrafts.
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.
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. The credit card processing company may periodically increase the
restricted cash account. However, the Company's restricted cash account will not
go below $125,000. Subsequent to December 31, 1998, the credit card processing
company increased the restricted cash account to $200,000.
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.
DEBT ISSUE COSTS
Debt issue costs are being amortized using the straight-line method over the
term of the notes payable.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors. Sales
are recorded when products are shipped.
Under the Kaire Direct program the Company provides a 100% refund (less
shipping and handling), to all end users, for any unopened product that is
returned within 30 days from the date of purchase in resalable condition. The
Company provides a 100% product exchange for any product that does not meet
F-33
<PAGE>
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.
The Company recorded sales returns of $458,337, $869,305 and $861,213 for the
years ended December 31, 1998, 1997 and 1996. 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 receivable, 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.
NOTES PAYABLE TO RELATED PARTIES
Due to its related party nature and terms of the notes payables to related
parties, the Company cannot estimate the fair market value of such financial
instruments.
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 December 31, 1998
and 1997.
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.
F-34
<PAGE>
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 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 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' deficit. Comprehensive income is comprised of net loss and all
changes to the consolidated statements of stockholders' deficit, except those
due to investments by stockholders, changes in paid in capital and distributions
to stockholders.
SEGMENT REPORTING
During 1998, the Company implemented Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This standard establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements. The adoption of SFAS No. 131 did not have a
material impact on the Company's consolidated financial statements.
F-35
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GOING CONCERN
The Company incurred significant losses during the years ended December 31,
1998 and 1997 and, at December 31, 1998, has a negative working capital of
$9,862,931 and a capital deficit of $9,322,895. 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.
Subsequent to December 31, 1998 (see Note 13), the Company sold
substantially all of its assets and certain liabilities to Natural Health Trends
Corporation ("NHTC") and NHTC Acquisition Corp. As part of the purchase price,
commencing December 31, 1999 and each year for a period of five years
thereafter, NHTC will pay certain amounts to the Company based upon NHTC
Acquisition Corp.'s net income and sales levels. The Company believes that this
amount will be sufficient to pay its existing, outstanding indebtedness. There
are no assurances that the Company will receive the payments from NHTC or that
the payments will be sufficient to pay its existing indebtedness. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
2. RELATED PARTY TRANSACTIONS
ACCOUNTS PAYABLE, OFFICERS AND DIRECTORS
As of December 31, 1997, the Company owed $26,255 in accounts payable to
officers and directors. The amounts were paid during 1998.
NOTES PAYABLE, RELATED PARTIES
During 1997, 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
December 31, 1998 and 1997, the Company owed $258,337 and $262,037 to the
officers.
During 1997 and 1998, two individual directors advanced funds to the Company
for working capital requirements. The advances are evidenced by note agreements.
The notes bear interest at 10%, are uncollateralized, and due upon demand. As of
December 31, 1998 and 1997, the Company owed $242,410 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.
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.
During 1998, the Company borrowed $443,000 from directors of the Company for
notes payable. The notes bear interest at 10%. The notes are collateralized by
all the assets of the Company and are due on demand. As of December 31, 1998,
the Company owed $136,500 under these notes to the directors.
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,
F-36
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RELATED PARTY TRANSACTIONS (CONTINUED)
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 December 31, 1998 and
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 7).
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.
During December 1998, the Company borrowed $250,000 from Natural Health
Trends Corporation ("NHTC") (see Note 13). The note bears interest at 10% per
annum, is collateralized by the Company's supplier agreement (see Note 9) and is
payable on demand. The note is personally guaranteed by certain officers of the
Company.
3. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations which are collateralized
by equipment. Interest rates under the agreements range from 7.1% to 31.9%, with
monthly principal and interest payments ranging from $51 to $11,349.
Future minimum lease payments and the present value of the minimum lease
payments under the noncancelable capital lease obligations as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- ------------ --------
<S> <C>
1999........................................................ $15,694
2000........................................................ 15,347
-------
Total future minimum lease payments......................... 31,041
Less amounts representing interest.......................... 3,289
-------
Present value of minimum lease payments..................... 27,752
Less current maturities..................................... 19,606
-------
Total long-term obligations................................. $ 8,146
=======
</TABLE>
At December 31, 1998 and 1997, property and equipment includes equipment
under capital lease obligations with a total cost of $757,689 and accumulated
amortization of $560,794 and $489,056.
F-37
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTE PAYABLE TO BANK
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 December 31, 1998 and 1997, the balance was $180,000 and
$240,000. As of December 31, 1998 and 1997, the term loan is classified as a
current liability. In accordance with the Asset Purchase Agreement, NHTC assumed
the term loan subsequent to year end (see Note 13).
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Note payable to a corporation (1)........................... $ 200,000 $ 200,000
Notes payable to individuals (2)............................ 1,725,000 1,587,166
Note payable to a corporation (3)........................... 150,000 --
---------- ----------
Total notes payable......................................... $2,075,000 $1,787,166
========== ==========
</TABLE>
- ------------------------
(1) 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 December 31,
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 7). Subsequent to December 31, 1998, the note was paid in full (see
Note 13).
(2) 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
F-38
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
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 December 31, 1998 and
1997, the notes payable are disclosed net of unamortized original issue
discount of $0 and $137,834. Subsequent to December 31, 1998, the notes were
paid in full (see Note 13).
(3) During January 1998, the Company borrowed $150,000 from a corporation for a
note payable at an annual interest rate of 24%. Interest and principal are
due on demand. The note is uncollateralized and is personally guaranteed by
certain officers and directors of the Company. Subsequent to December 31,
1998, the note was paid in full (see Note 13).
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.
6. 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 and is
currently negotiating a payment plan with the IRS. As of December 31, 1998 and
1997, the Company owes approximately $312,800 and $51,096 of delinquent payroll
tax liabilities including interest and penalties. The Company's failure to pay
its delinquent payroll tax liabilities could result in tax liens being filed by
various taxing authorities.
During 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 December 31, 1998 and 1997, the Company owed
approximately $603,995 and $268,299 in current and delinquent sales taxes. The
Company's failure to pay its delinquent sales taxes could result in tax liens
being filed by various taxing authorities.
7. STOCKHOLDERS' 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
F-39
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
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 December 31, 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 of $.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. As discussed
in Note 14, the Company finalized the Asset Purchase Agreement with NHTC during
February 1999. These warrants remained with the Company.
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 the 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 December 31, 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 years ended 1998, 1997 and 1996. 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-
F-40
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Scholes option-pricing model with the following weighted-average assumptions
used for grants in 1997 and 1996. 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 year ended 1998.
<TABLE>
<CAPTION>
1997 1996
------------ --------
<S> <C> <C>
Dividend yield.............................................. 0% 0%
Expected volatility......................................... 0% 0%
5.85% to
Risk-free interest rates.................................... 6.6% 6%
Expected lives in years..................................... 3 to 6 years 3 years
</TABLE>
A summary of the status of the Company's stock option and warrant plan as of
December 31, 1998, 1997 and 1996 is presented below. As discussed in Note 14,
the Company finalized the Asset Purchase Agreement with NHTC during February
1999. The Company's stock options and warrants remained with the Company.
<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............................................ (65,000) 0.02 (22,050) 0.02
------- ----- ------- -----
Outstanding, December 31, 1998........................... -- -- 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, December 31, 1998........................... -- $ -- -- $ --
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WARRANTS
-------- --------
<S> <C> <C>
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
Weighted average fair value of options and warrants granted
during 1998............................................... None None
</TABLE>
The following table summarizes information about exercisable stock options
and warrants at December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
----------------------------------------------- ----------------------
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Warrants.......................... $6.60 712,500 $6.60 -- $ --
</TABLE>
F-41
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
INCOME TAXES CONSIST OF THE FOLLOWING:
Current benefit:
Federal............................................... $ -- $ 12,973 $1,017,000
Foreign............................................... -- -- --
State................................................. -- -- 2,000
----------- ----------- ----------
-- 12,973 1,019,000
Deferred benefit:
Federal............................................... 1,188,000 1,440,000 68,000
Foreign............................................... 175,000 205,000 --
State................................................. 51,000 62,000 100,000
----------- ----------- ----------
1,414,000 1,707,000 168,000
----------- ----------- ----------
1,414,000 1,719,973 1,187,000
Change in valuation allowance........................... (1,414,000) (1,707,000) (84,000)
----------- ----------- ----------
Income tax benefit...................................... $ -- $ 12,973 $1,103,000
=========== =========== ==========
</TABLE>
At December 31, 1998, the Company had available net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRE
---------- ------------
<S> <C> <C>
Federal net operating loss carryforwards.................... $8,004,000 2018
State net operating loss carryforwards...................... 8,984,000 2010 to 2018
Foreign net operating loss carryforwards.................... 242,000 2003 to 2005
Foreign net operating loss carryforwards.................... 243,000 Indefinite
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net operating loss carryforwards............................ $3,036,000 $1,436,000
Foreign operating loss carryforwards........................ 127,000 205,000
Property and equipment...................................... (64,000) (90,000)
Inventories................................................. 93,000 216,000
Accounts receivable allowance............................... -- 11,000
Contribution carryforwards.................................. 13,000 13,000
---------- ----------
Net deferred tax assets..................................... 3,205,000 1,791,000
Less valuation allowance.................................... (3,205,000) (1,791,000)
---------- ----------
Net deferred taxes.......................................... $ -- $ --
========== ==========
</TABLE>
F-42
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A valuation allowance equal to the net deferred tax assets has been
recorded, as management of the Company has not been able to determine that it is
more likely than not that the net deferred tax assets will be realized. A
reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax benefit computed at the federal
statutory rate....................................... $(1,188,000) $(1,452,973) $(1,085,000)
State income tax benefit, net of federal benefit....... (51,000) (62,000) (102,000)
Foreign tax benefit at statutory rates................. (175,000) (205,000) --
Increase in valuation allowance........................ 1,414,000 1,707,000 84,000
----------- ----------- -----------
Income tax benefit..................................... $ -- $ (12,973) $(1,103,000)
=========== =========== ===========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under operating leases for office space, office
equipment and vehicles. Seven leases are on a month-to-month basis and seven
require future minimum lease payments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1999........................................................ $216,000
2000........................................................ 110,000
2001........................................................ 69,000
2002........................................................ 69,000
2003........................................................ 50,000
Thereafter.................................................. 298,000
--------
Total....................................................... $812,000
========
</TABLE>
Lease expense for all operating leases was $744,000, $605,000 and $291,000
for the years ended December 31, 1998, 1997 and 1996.
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.
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
F-43
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 December
31, 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 7). During
October 1998, Consultant exercised its $.02 per share option to purchase 50,000
shares of common stock of the Company.
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 years ended December 31, 1998, 1997
and 1996 were approximately $0, $53,000 and $67,000. As discussed in Note 13,
the Company finalized the Asset Purchase Agreement with NHTC during February
1999. The Company anticipates that the plan will be transferred into NHTC's
401(k) profit sharing retirement plan.
LEGAL PROCEEDINGS
As part of its ordinary course of business, the Company is involved in
certain litigious activities from time to time. No litigation exists at December
31, 1998 or to the date of this report that management or legal counsel believe
will have a material impact on the financial position or operations of the
Company.
The Company is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. The Company was initially contacted in January 1997 and was advised,
in writing, that it is not a "target" of the Department's investigation, but
that it is a "subject" (meaning that its conduct is deemed to be within the
scope of the investigation) thereof. The Company has completed all obligations
and requests pertaining to this matter.
The Company has also received a voluntary request for information from the
FTC regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. The Company is currently responding with clarifications
to previous inquiries.
10. MAJOR SUPPLIERS
During the years ended December 31, 1998, 1997 and 1996, the Company
purchased amounts of its products from a limited number of vendors, including
significant amounts from MW International of 44%, 48% and 57%. During 1996, the
Company also purchased 22% of its products from Manhattan Drug. 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-44
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FOREIGN SALES
The Company sells its product in the United States and internationally. Net
sales and long-lived assets by country are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 UNITED STATES NEW ZEALAND KOREA OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------- ------------- ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers...................... $19,605,047 $3,586,561 $1,825,382 $1,158,720 $ -- $26,175,710
Transfers between geographic
areas.......................... 1,660,926 -- -- -- (1,660,926) --
----------- ---------- ---------- ---------- ----------- -----------
Net sales........................ $21,265,973 $3,586,561 $1,825,382 $1,158,720 $(1,660,926) $26,175,710
=========== ========== ========== ========== =========== ===========
Long-lived assets at December 31,
1998........................... $ 546,122 $ 18,122 $ -- $ 83,100 $ -- $ 647,344
=========== ========== ========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 UNITED STATES NEW ZEALAND KOREA OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------- ------------- ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers...................... $29,278,545 $4,527,170 $ 808,117 $1,067,680 $ -- $35,681,512
Transfers between geographic
areas.......................... 2,211,101 -- -- -- (2,211,101) --
----------- ---------- ---------- ---------- ----------- -----------
Net sales........................ $31,489,646 $4,527,170 $ 808,117 $1,067,680 $(2,211,101) $35,681,512
=========== ========== ========== ========== =========== ===========
Long-lived assets at December 31,
1997........................... $ 852,593 $ 32,889 $ 233,468 $ 85,118 $ -- $ 1,204,068
=========== ========== ========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 UNITED STATES NEW ZEALAND KOREA OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------- ------------- ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers...................... $44,122,950 $6,183,359 $ -- $1,192,253 $ -- $51,498,562
Transfers between geographic
areas.......................... 1,784,815 -- -- -- (1,784,815) --
----------- ---------- ---------- ---------- ----------- -----------
Net sales........................ $45,907,765 $6,183,359 $ -- $1,192,253 $(1,784,815) $51,498,562
=========== ========== ========== ========== =========== ===========
Long-lived assets at December 31,
1996 $ 1,344,889 $ 39,049 $ -- $ 66,710 $ -- $ 1,450,648
=========== ========== ========== ========== =========== ===========
</TABLE>
12. SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
-------- ---------- --------
Cash paid during the period for:
Interest.................................................. $169,257 $ 278,139 $120,839
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 $ --
Equipment acquired under capital lease obligations........ $ -- $ -- $ 79,374
Issuance of common stock in connection with long-term
debt.................................................... $ -- $ 172,500 $ --
Increase in minority interest from sale of 15% interest in
subsidiary.............................................. $ -- $ 143,375 $ --
Common stock issued for debt issue costs.................. $ -- $ 47,436 $ --
Common stock issued for services.......................... $ -- $ 17,500 $ --
</TABLE>
F-45
<PAGE>
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS
ASSET PURCHASE AGREEMENT WITH NATURAL HEALTH TRENDS CORPORATION AND NHTC
ACQUISITION CORP.
On November 24, 1998, the Company entered into an Asset Purchase Agreement
with Natural Health Trends Corporation ("NHTC"), a publicly traded company, and
NHTC Acquisition Corporation, where NHTC, in exchange for the Company assets and
assumption of certain liabilities, issued to the Company $2,800,000 of its
Series F Preferred stock, to two creditors of the Company $350,000 of its Series
G Preferred stock and to the Company warrants to purchase 200,000 shares of
common stock. Furthermore, based upon NHTC Acquisition Corporation'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 was approved by the stockholders of NHTC and closed on
February 19, 1999.
In connection with the Asset Purchase Agreement, the Company transferred
$2,000,000 of its Series F Preferred stock in NHTC in payment in full on its
$1,725,000 notes payable due to individuals including accrued interest (see Note
5). In addition, the Company's corporate noteholders received $350,000 of NHTC's
Series G Preferred stock in payment on their $350,000 notes payable (see Note
5).
14. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1998...................... $168,805 $148,119 $316,924 $ --
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
</TABLE>
F-46
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF THE COMMON STOCK.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 19
Dilution.............................. 20
Capitalization........................ 21
Market for Common Equity and Related
Stockholders Matters................ 22
Selected Financial Data............... 23
Pro Forma Financial Data.............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 32
Management............................ 48
Principal Stockholders................ 52
Certain Transactions.................. 53
Description of Securities............. 54
Shares Eligible for Future Sale....... 57
Concurrent Offering................... 58
Underwriting.......................... 58
Legal Matters......................... 60
Experts............................... 60
Additional Information................ 60
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,000,000 SHARES OF
COMMON STOCK
NATURAL HEALTH TRENDS CORP.
---------------------
PROSPECTUS
---------------------
MAY DAVIS GROUP, INC.
, 1999
<PAGE>
- -------------------------------------------
- -------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 1, 1999
PROSPECTUS
795,613 Shares of Common stock*
NATURAL HEALTH TRENDS CORP.
Selling securityholders are offering up to 795,613 shares of common stock of
Natural Health Trends Corp.
The selling securityholders may sell the shares of common stock from time to
time. They have no underwriting arrangements. The selling securityholders and
intermediaries through whom such securities may be sold may be "underwriters"
under the Securities Act, and any profits or commissions may be underwriting
compensation. Natural Health Trends Corp. has agreed to indemnify the selling
securityholders against certain liabilities, including liabilities under the
Securities Act.
THESE ARE SPECULATIVE SECURITIES AND THIS INVESTMENT INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" ON PAGE .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of the prospectus. Any representation to the contrary is a criminal
offense.
*The shares of common stock being sold by the selling securityholders
include the resale of (i) aggregate of 120,000 shares of common stock issuable
upon the exercise of options and warrants (ii) 160,104 shares of Common Stock
issued upon the conversion of 516 shares of Series I Preferred Stock issued in
July 1999, (iii) 185,769 shares of Common Stock issued upon the exercise of a
warrant in July, 1999 and (iv) 603,130 shares of Common Stock issued upon the
conversion of 610 shares of Series E Preferred Stock having a face amount of
$610,000 issued in a private placement in August 1998. The shares of Common
Stock being sold by the selling securityholders also include such presently
indeterminate number of additional shares of Common Stock up to 2,717,071 shares
issuable upon (i) conversion of convertible notes in the aggregate amount of
$350,000. The number of shares of common stock indicated to be issuable in
connection with such transactions and offered for resale hereby is an estimate
determined in accordance with a formula based on the market price of the common
stock, as described in this prospectus, and is subject to adjustment and could
be materially less or more than such estimated amount depending upon factors
which cannot be predicted by the company at this time. If, however, all the
notes were converted, the company would be obligated to issue a total of 245,613
shares of common stock based upon our assumed market price of $2.00 per share.
This presentation is not intended to constitute a prediction as to the future
market price of the common stock or as to the number of shares of common stock
into which such notes will be converted.
The date of this Prospectus , 1999
<PAGE>
USE OF PROCEEDS
Since this Prospectus relates to the offering of shares by the selling
securityholders, the company will not receive any proceeds from the sale of the
shares of common stock offered hereby. See "Selling Securityholders."
SELLING SECURITYHOLDERS
The following table sets forth the name and the number of shares of common
stock beneficially owned by each selling securityholder as of October 25, 1999,
the number of shares of common stock to be offered by each selling
securityholder pursuant to this prospectus and the number of shares to be
beneficially owned by each selling securityholder after the offering if all of
the shares of common stock offered hereby by such selling securityholder are
sold as described herein. Except as noted below, the selling securityholders
have not held any position or office with, been employed by, or otherwise had a
material relationship with, the company, other than as securityholders of the
company subsequent to their respective acquisition of shares of common stock.
The shares of common stock are being registered to permit public secondary
trading of the shares of common stock, and the securityholders may offer the
shares of common stock for resale from time to time. See "Plan of Distribution."
The shares of common stock being sold by the selling securityholders include
the resale of (i) 430,000 shares of common stock, (ii) an aggregate of 120,000
shares of common stock issuable upon the exercise of certain options and
warrants and of such presently indeterminate number of shares of common stock as
shall be issued in respect of all shares of common stock issuable upon
(i) conversion of convertible notes in the aggregate amount of $350,000. The
number of shares of common stock indicated to be issuable in connection with
such transactions and offered for resale hereby is an estimate determined in
accordance with a formula based on the market prices of the common stock, as
described in this prospectus, and is subject to adjustment and could be
materially less or more than such estimated amount depending upon factors which
cannot be predicted by the company at this time. If, however, all shares of
Series E, G, H and I Preferred Stock and the dividends thereon and the
applicable penalty were converted, the company would be obligated to issue a
total of approximately 245,613 shares of common stock. This presentation is not
intended to constitute a prediction as to the future market price of the common
stock or as to the number of shares of common stock into which such notes will
be converted.
In recognition of the fact that selling securityholders may wish to be
legally permitted to sell their shares of common stock when they deem
appropriate, the company has filed with the Commission, under the Securities
Act, a Registration Statement, of which this prospectus forms a part, with
respect to the resale of the shares from time to time on the Nasdaq SmallCap
Market or in privately-negotiated transactions and has agreed to prepare and
file such amendments and supplements to the Registration Statement as may be
necessary to keep the Registration Statement effective until the shares of
common stock are no longer required to be registered for the sale thereof by the
selling securityholders.
The company has agreed to pay for all costs and expenses incident to the
issuance, offer, sale and delivery of the shares of common stock, including, but
not limited to, all expenses and fees of preparing, filing and printing the
Registration Statement and prospectus and related exhibits, amendments and
supplements thereto and mailing of such items. The company will not pay selling
commissions and expenses associated with any such sales by the selling
securityholders. The company has agreed to indemnify the selling securityholders
against civil liabilities including liabilities under the Securities Act.
Except as otherwise indicated, to the knowledge of the company, all persons
listed below have sole voting and investment power with respect to their
securities. The information in the table concerning the selling securityholders
who may offer shares of common stock hereunder from time to time is based on
information provided to the company by such security holders, except for the
assumed conversion price of the securities, which is based solely on the
assumptions discussed or referenced in the footnotes to the table. Information
concerning such selling securityholders may change from time to time and any
changes
<PAGE>
of which the company is advised will be set forth in a prospectus supplement to
the extent required. See "Plan of Distribution."
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NUMBER OF SHARES OF COMMON STOCK NUMBER OF SHARES
COMMON STOCK OFFERED BENEFICIALLY OWNED AFTER
NAME OF SELLING SECURITYHOLDER BENEFICIALLY OWED HEREBY OFFERING
<S> <C> <C> <C>
Meridian Equities Hong Kong
Ltd(1)............................ 185,000 185,000 --
Domain Investments, Inc.(2)......... 235,350 235,350 --
Samantha Haimes..................... 125,000 125,000 --
Martin C. Licht(3).................. 25,000 25,000 --
Filin Corporation(4)................ 135,263 135,263 --
Dirk Goldwasser(5).................. 50,000 50,000 --
Ralph Ellison(6).................... 40,000 40,000 --
</TABLE>
(1) Meridian Equities Hong Kong, Ltd. is a consultant for the Company.
(2) Domain Investments, Inc. is a consultant for the Company. Includes 95,000
shares of common stock and convertible notes in the aggregate amount of
$200,000 convertible at a 40% discount of the market price of common stock.
(3) Mr. Licht is a director of the Company and a member of Silverman, Collura
and Chernis, P.C., counsel to the Company.
(4) Includes warrants to purchase 30,000 shares of common stock and convertible
notes in the aggregate amount of 150,000 convertible at a 40% discount of
the market price of common stock.
(5) Mr. Goldwasser is a director of the Company. Includes options to purchase
50,000 shares of common stock.
(6) Mr. Ellison is a former director of the Company.
The selling securityholders are offering the shares of common stock for
their own account, and not for the account of the company. The company will not
receive any proceeds from the sale of the shares of common stock by the selling
securityholders.
PLAN OF DISTRIBUTION
The shares of common stock may be sold from time to time by the selling
securityholders. Such sales may be made through ordinary brokerage transactions,
the over-the-counter market, or otherwise at prices and at terms then
prevailing, at prices related to the then current market price or at negotiated
prices. The shares of common stock may be sold by any one or more of the
following methods: (a) a block trade in which the broker or dealer so engaged
will attempt to sell the securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker as principal and resale by such broker or dealer for its account,
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and (d) privately negotiated transactions. In addition, any
shares of common stock that qualify for sale pursuant to Rule 144 may be sold
under Rule 144 rather than pursuant to this prospectus.
The selling securityholders and any broker-dealers, agents or underwriters
that participate with the selling securityholders in the distribution of the
shares may be deemed to be "underwriters" within the meaning of the Securities
Act and any commissions received by such broker-dealer, agent or underwriter and
any profit on the resale of the shares of common stock purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
Under the Exchange Act and the regulations thereunder, any person engaged in
a distribution of the shares offered by this prospectus may simultaneously
engage in market making activities with respect to
<PAGE>
the common stock during any applicable "Cooling off" periods prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the selling securityholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder.
The company has agreed to indemnify the selling securityholders against
liabilities incurred by the selling securityholders by reason of misstatements
or omissions to state material facts in connection with the statements made in
this prospectus and the Registration Statement of which it forms a part. The
selling securityholders, in turn, have agreed to indemnify the company against
liabilities incurred by the company by reason of misstatements or omissions to
state material facts in connection with statements made in the Registration
Statement and prospectus based on information furnished in writing by the
selling securityholders. To the extent that such section of the Registration
Rights Agreement may purport to provide exculpation from possible liabilities
arising under the Federal securities laws, it is the opinion of the Commission
that such indemnification is contrary to public policy and unenforceable.
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all estimated costs and expenses in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts. All such expenses will be paid by
the company; none will be paid by the company's stockholders.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 2,475
NASD filing fee............................................. 1,402
Blue sky fee and expenses (including legal fees)............ 25,000
*Printing and engraving expenses............................ 75,000
*Legal fees and expenses.................................... 35,000
*Accounting fees and expenses............................... 75,000
Consulting fee.............................................. 90,000
Transfer agent fees......................................... 5,000
*Miscellaneous.............................................. 66,123
--------
*TOTAL.................................................. $350,000
========
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 607.0850 of the Florida Business Corporation Act (the "FBCA")
permits, in general, a Florida corporation to indemnify any person who was or is
a party to an action or proceeding by reason of the fact that he or she was a
director or officer of the corporation, or served another entity in any capacity
at the request of the corporation, against liability incurred in connection with
such proceeding including the estimated expenses of litigating the proceeding to
conclusion and the expenses, actually and reasonably incurred in connection with
the defense or settlement of such proceeding, including any appeal thereof, if
such person acted in good faith, for a purpose he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation and, in criminal
actions or proceedings, in addition had no reasonable cause to believe that his
or her conduct was unlawful. Section 607.0850(6) of the FBCA permits the
corporation to pay in advance of a final disposition of such action or
proceeding the expenses incurred in defending such action or proceeding upon
receipt of an undertaking by or on behalf of the director or officer to repay
such amount as, and to the extent, required by statute. Section 607.0850 of the
FBCA provides that the indemnification and advancement of expense provisions
contained in the FBCA shall not be deemed exclusive of any rights to which a
director or officer seeking indemnification or advancement of expenses may be
entitled.
The company's Certificate of Incorporation provides, in general, that the
company shall indemnify, to the fullest extent permitted by Section 607.0850 of
the FBCA, any and all persons whom it shall have power to indemnify under said
section from and against any and all of the expenses, liabilities or other
matters referred to in, or covered by, said section. The Certificate of
Incorporation also provides that the indemnification provided for therein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to actions taken in his or her official capacity
and as to acts in another capacity while holding such office.
In accordance with that provision of the Certificate of Incorporation, the
company shall indemnify any officer or director (including officers and
directors serving another corporation, partnership, joint venture, trust, or
other enterprise in any capacity at the company's request) made, or threatened
to be made, a party to an action or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that he or she was
serving in any of those capacities against judgments, fines, amounts paid in
II-1
<PAGE>
settlement and reasonable expenses (including attorney's fees) incurred as a
result of such action or proceeding. Indemnification would not be available if a
judgment or other final adjudication adverse to such director or officer
establishes that (i) his or her acts were committed in bad faith or were the
result of active and deliberate dishonesty or (ii) he or she personally gained
in fact a financial profit or other advantage to which he or she was not legally
entitled.
The registration rights agreements contain, among other things, provisions
whereby the selling securityholders agree to indemnify the company, each officer
and director of the company who has signed the Registration Statement, and each
person who controls the company within the meaning of Section 15 of the
Securities Act, against any losses, liabilities, claims or damages arising out
of alleged untrue statements or alleged omissions of material facts with respect
to information furnished to the company by the selling securityholders for use
in the Registration Statement or Prospectus. See Item 17, "Undertakings."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Unless otherwise noted, the sale of the securities were exempt from
registration under the Securities Act under Section 4(2) and/or Regulation D
promulgated thereunder. All such sales being made to sophisticated investors
and/or accredited investors who had access to information about the Company and
were able to bear the risk of loss of their investment.
1. In January 1996, the Company issued 9,500 shares of Common Stock to Sam
Lily, Inc. in connection with the acquisition of a natural health center in Boca
Raton, Florida.
2. In February 1996, the Company issued 2,500 shares of Common Stock to
Richard Schuman pursuant to a consulting agreement.
3. In February 1996, the Company issued an aggregate of 150 shares of Common
Stock to 26 employees.
4. In December 1996, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued $900,000 of the Company's 10% convertible debentures to
Kingsbridge Capital Ltd. ($300,000), Dominion Capital Fund, Ltd. ($300,000) and
Canadian Advantage, L.P. ($300,000). The placement agent for the private
placement was Meridian Equities, Inc. and a placement agent fee of $90,000 was
paid. Upon the conversion of the debentures, the Company issued 28,522 shares of
Common Stock.
5. In December 1996, the Company issued 250 shares of Common Stock to
Russell Newman, an employee.
6. In January 1997, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued $100,000 of convertible debentures to FT Trading Company. The
placement agent for the private placement was Meridian Equities, Inc. and a
placement agent fee of $10,000 was paid. Upon the conversion of the debentures,
the Company issued 2,866 shares of Common Stock.
7. In February 1997, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued $300,000 of convertible debentures to Canadian Advantage L.P.
($150,000) and Dominion Capital Fund Ltd. ($150,000) In connection with the
issuance of the debentures, the Company paid a placement agent fee of $30,000 to
Meridian Equities, Inc. The debentures were subsequently converted into 8,265
shares of Common Stock.
8. On March 18, 1997, the Company issued 500 shares of common stock to
Samantha Haimes in connection with the acquisition of the natural health care
center in Boca Raton, Florida.
II-2
<PAGE>
9. In April 1997, the Company sold $1,300,000 of its convertible debentures
to the Endeavour Capital Fund, S.A. ($1,000,000) and The Gross Foundation, Inc.
($300,000). In connection with the issuance of the debentures, the Company paid
a placement agent fee of $97,500 to J.W. Charles Securities, Inc. In connection
with the issuance of the debentures the Company issued warrants to purchase
2,500 shares of Common Stock to each of Windward, Island, Ltd. and J.W. Charles
Securities, Inc. Of such debentures $300,000 was repaid and the balance were
converted into 499,458 shares of Common Stock.
10. In June 1997, the Company sold 2,200 shares of its convertible Series A
preferred stock to Sovereign Partners, L.P. (950 shares), FT Trading Company
(250 shares), Canadian Advantage, L.P. (500 shares) and Dominion Capital Fund
(500 shares). In connection with the issuance of the Series A preferred stock,
the Company paid a placement agent fee of $264,000 to Meridian Equities Inc..
The shares of Series A preferred stock were subsequently redeemed.
11. In July 1997, the Company's President, Neal R. Heller and the Company's
secretary, Elizabeth S. Heller were issued an aggregate of 20,000, options,
which were cancelled in August 1998.
II-3
<PAGE>
12. In July 1997, in connection with the acquisition of all of the capital
stock of Global Health Alternatives, Inc., the Company issued an aggregate of
145,000 shares of Common Stock to the following individuals:
<TABLE>
<S> <C>
Azure Limited Partnership I................................. 41,569
Capital Development S.A..................................... 20,516
Cosmo Finance & Investments, S.A............................ 162
William Nelson.............................................. 1,501
Carl F. Berner.............................................. 1,051
Tom Farmer.................................................. 4,082
Alfred S. Ross.............................................. 2,689
Golden Union International.................................. 3,067
N. K. Verwaltungs, Inc...................................... 3,434
N. Foss & Co. A/S........................................... 1,080
Benjamin B. Tregoe Ttee u/a 07/20/79........................ 540
Benjamin B. Tregoe.......................................... 108
Didgemere Consultants Limited............................... 540
Z & M Capital Corporation................................... 540
Robert A. Seibel............................................ 210
International Marketing Group Ltd........................... 210
Robert E. Cleaves IV........................................ 7,256
Stephen W. Batzell.......................................... 2,841
Thomas P. Pinansky.......................................... 3,843
John M. Eldredge............................................ 2,030
H. Newcomb Eldredge......................................... 216
Robert C. Bruce............................................. 1,929
Virginia M. King............................................ 243
Clarissa Rowe............................................... 121
Arthur B. Page.............................................. 121
Douglas M. Costle........................................... 121
Kimball C. Chen............................................. 97
Westminster Associates...................................... 540
Peter Thompson.............................................. 648
Stuart Ungar................................................ 150
Bradford S. Weeks........................................... 901
Complimentary Medical Associates Inc........................ 300
Patrick Killorin............................................ 11,475
Kevin Underwood............................................. 11,475
Joe Grace................................................... 11,475
David Cohen................................................. 162
H. Edward Troy.............................................. 1,221
Mark Colosi................................................. 732
William Deehan.............................................. 488
Alexandra W. Hopkins........................................ 108
Carol B. A. Lee............................................. 43
Promenade Investments Limited............................... 1,080
Leslie J. Kaslof............................................ 2,792
Ralph Kaslof................................................ 991
Dennis Bookshester.......................................... 300
</TABLE>
II-4
<PAGE>
13. In February 1998, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued 300 shares of Series B preferred stock to Investquest, Inc. In
connection with the issuance of the Series B Preferred stock, the Company paid a
placement agent fee of $30,000 to Domain Investments, Inc. and issued warrants
to purchase 7,500 shares of common stock to Domain Investments, Inc. The shares
of Series B Preferred Stock have been converted into 541,330 shares of Common
Stock.
14. In April 1998, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued 4,000 shares of Series C preferred stock to Canadian Advantage
Limited Partnership (1,250 shares) and Dominion Capital Fund, Ltd. (2,750
shares). In connection with the issuance of the Series A preferred stock, the
Company paid a placement agent fee in the aggregate amount of $480,000 to
Meridian Equities, Inc. and BLH, Inc. The shares of Series C Preferred Stock
have been converted into a total of 3,608,296 shares of Common Stock.
15. In July 1998, the Company issued 75 shares of Series D preferred stock
at a purchase price of $1,000 per share to H. Newcombe Eldredge (50 shares) and
Carol Lee (25 shares). The shares of Series D preferred stock were redeemed in
August 1998.
16. In August 1998, the Company issued 1,650 shares of Series E Preferred
Stock to Dominion Capital Fund, Ltd. (850 shares) and Sovereign Partners, LP.
(800 shares) of which 610 shares have been converted into 603,130 shares of
common stock. In connection with the issuance of the Series E Preferred Stock,
the Company paid a placement agent fee of $198,000 to BLH, Inc., and issued
BLH, Inc. warrants to purchase 300,000 shares of common stock, which have been
exercised for 185,769 shares of common stock.
17. In August 1998, the Company converted $595,000 of its 12.5% promissory
notes into 1,195,473 shares of common stock as follows: N.K. Verwaltungs, Inc.
(404,140 shares), Golden Union International, S.A. (451,986 shares), Alfred Ross
(101,926 shares), Sir Peter Thompson (99,580 shares), Benjamin B. Tregoe (98,022
shares), and Carol Lee (39,818 shares).
18. In connection with the acquisition of substantially all of the assets of
Kaire International, Inc., the Company issued to Kaire International, Inc.
(i) 2,800 shares of Series F Preferred Stock, (ii) 350 shares of Series G
Preferred Stock and (iii) warrants to purchase 200,000 shares of Common Stock.
19. In March and April 1999, the Company issued 1,400 shares of Series H
preferred stock with a face amount of $1,000 per share to Endeavour Capital
Fund, S.A. (1,000 shares) and Dominion Capital Fund, Ltd. (400 shares). In
connection with the issuance of the Series H preferred stock the Company paid a
placement fee of $168,000 to BLH, Inc.
20. In June 1999, the Company issued a convertible note in the amount of
$100,000 to Domain Investments, Inc.
21. In July 1999, the Company issued a promissory note in the amount of
$50,000 and warrants to purchase 10,000 shares of common stock to each of
Capital Development, S.A. and H. Newcombe Eldredge.
22. In July and August 1999 the Company issued a promissory note in the
amount of $150,000 and warrants to purchase 30,000 shares of common stock to
Filin Corporation.
23. In October 1999, the Company issued a convertible note in the amount of
$100,000 to Domain Investments, Inc.
24. In October 1999, the Company issued 125,000 shares of Common Stock to
Samantha Haimes in a litigation settlement.
25. In October 1999, the Company issued 3,018 shares of Common Stock to an
employee and 25,000 shares to a director.
26. In October 1999, the Company issued 95,000 shares of Common Stock to
Domain Investments, Inc. and 185,000 shares of Common Stock to Meridian Equities
Hong Kong, Ltd. for consulting services.
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.(10)
2.1 Asset Purchase Agreement dated April 29, 1998 by and among
Natural Health Trends Corp., Neal Heller & Elizabeth S.
Heller and Florida College of Natural Health, Inc. (2)
2.2 Acquisition Agreement among the Company, NHTC Acquisition
Corp. and Kaire International, Inc. (the "Acquisition
Agreement").(3)
3.1 Amended and Restated Certificate of Incorporation of the
Company.(4)
3.2 Amended and Restated By-Laws of the Company.(4)
4.1 Specimen Certificate of the Company's Common Stock.(4)
4.2 Form of Class A Warrant.(4)
4.3 Form of Class B Warrant.(4)
4.4 Form of Class C Warrant.(10)
4.5 Form of Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company for Class A and B
Warrants.(4)
4.6 Form of Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company for the Class C
Warrants.(10)
4.7 Form of Representative's Warrant Agreement, including Form
of Representative's Warrant.
4.8 1994 Stock Option Plan.(4)
4.9 1997 Stock Option Plan.(11)
4.10 1998 Stock Option Plan.(11)
4.11 Articles of Amendment of Articles of Incorporation of the
Company.(6)
4.12 Articles of Amendment of Articles of Incorporation- Series C
Preferred Stock.(7)
4.13 Articles of Amendment of Articles of Incorporation- Series E
Preferred Stock.(3)
4.14 Articles of Amendment of Articles of Incorporation- Series F
Preferred Stock.(3)
4.15 Articles of Amendment of Articles of Incorporation- Series G
Preferred Stock.(3)
4.16 Articles of Amendment of Articles of Incorporation- Series H
Preferred Stock.(3)
4.17 Form of Warrant in connection with the Acquisition
Agreement.(3)
5.1 Opinion of Silverman Collura & Chernis, P.C., counsel to the
Company.(10)
10.1 Agreement among Natural Health Trends Corp. Health Wellness
Nationwide Corp., Samantha Haimes and Leonard Haimes.(8)
10.2 Leases (Two) for Registrant's Denver, Colorado
facilities.(11)
10.3 Manufacturing and Distribution Agreement between Kaire
International Inc. and ENZO Nutraceuticals, Ltd.(11)
10.4 Assignment of Patents Agreement dated May 23, 1997 between
MikeCo., Inc. and Troy Laboratories, Inc. and H. Edward
Troy.(11)
10.5 Agreement dated April 8, 1998 among Global Health
Alternatives, Inc. and MikeCo., Inc., Troy Laboratories,
Inc., H. Edward Troy, Kevin Underwood and Patrick
Killorin.(11)
10.6 Assumption Agreement and Amendment of Commercial Security
Agreement dated February 19, 1999 by and between STAR
Financial Bank, Kaire International, Inc. and NHTC
Acquisition Corp.(11)
10.7 Agreement dated September 17, 1999 between the Company and
Joseph P. Grace.(11)
10.8 Promissory Note in the amount of $150,000 from the Company
to Filin Corporation.(11)
10.9 Promissory Note in the amount of $50,000 from the Company to
H. Newcomb Eldredge.(11)
10.10 Promissory Note in the amount of $50,000 from the Company to
Capital Development S.A.(11)
10.11 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <S>
10.12 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
10.13 Consulting Agreement between the Company and Meridian
Equities Hong Kong, Ltd.(10)
10.14 Consulting Agreement between the Company and Domain
Investments, Inc.(10)
21.1 List of Subsidiaries.(9)
23.1 Consent of Feldman Sherb Horowitz & Co P.C.(1)
23.2 Consent of Silverman Collura & Chernis, P.C., Esq.,
(included in Exhibit 5.1)(11)
23.3 Consent of BDO Seidman, LLP(1)
27.1 Financial Data Schedule.(12)
</TABLE>
- ------------------------
(1) Filed upon the initial filing of this Registration Statement.
(2) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
May 14, 1998.
(3) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
January 25, 1999.
(4) Previously filed with Registration Statement No. 33-91184.
(5) Previously filed with the Company's Form 8-K dated August 7, 1997.
(6) Previously filed with the Company's Form 10-QSB dated June 30, 1997.
(7) Previously filed with the Company's Form 10-QSB dated September 30, 1998.
(8) Previously filed with the Company's Form 10-KSB for the year ended December
31, 1996.
(9) Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1998.
(10) To be filed by Amendment.
(11) Previously filed with the Company's Registration Statement, File
No. 333-80465.
(12) Filed herewith.
II-7
<PAGE>
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
1. The Registrant will:
(a) for determining any liability under the Securities Act of 1933, as
amended (the "Securities Act"), treat the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part
of this registration statement as of the time the Commission declared it
effective;
(b) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
3. If the company relies on Rule 430A under the Securities Act, the company
will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the company under rule 424(b)(1), or (4), or 497(h)
under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective; and
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration
Statement and treat the offering of such securities at that time as the
initial bona fide offering of those securities.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Amendment No. 1 to Form S-1 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
County of New York, State of New York, on the 19th day of October 1999.
<TABLE>
<S> <C> <C>
NATURAL HEALTH TRENDS CORP.
BY: /S/ ROBERT L. RICHARDS
-----------------------------------------
Robert L. Richards, President,
Chief Executive Officer and Director
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert L. Richards his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or either of them or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman of the Board and
- ------------------------------------------- Director November 1, 1999
Sir Brian Wolfson
/s/ MARTIN C. LICHT Director
- ------------------------------------------- November 1, 1999
Martin C. Licht
/s/ DIRK D. GOLDWASSER Director
- ------------------------------------------- November 1, 1999
Dirk D. Goldwasser
/s/ MARK D. WOODBURN Chief Financial Officer and
- ------------------------------------------- Treasurer (principal November 1, 1999
Mark D. Woodburn accounting officer)
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- ------- -------------
<C> <S>
1.1 Form of Underwriting Agreement.(10)
2.1 Asset Purchase Agreement dated April 29, 1998 by and among
Natural Health Trends Corp., Neal Heller & Elizabeth S.
Heller and Florida College of Natural Health, Inc. (2)
2.2 Acquisition Agreement among the Company, NHTC Acquisition
Corp. and Kaire International, Inc. (the "Acquisition
Agreement").(3)
3.1 Amended and Restated Certificate of Incorporation of the
Company.(4)
3.2 Amended and Restated By-Laws of the Company.(4)
4.1 Specimen Certificate of the Company's Common Stock.(4)
4.2 Form of Class A Warrant.(4)
4.3 Form of Class B Warrant.(4)
4.4 Form of Class C Warrant.(10)
4.5 Form of Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company for Class A and B
Warrants.(4)
4.6 Form of Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company for the Class C
Warrants.(10)
4.7 Form of Representative's Warrant Agreement, including Form
of Representative's Warrant.(10)
4.8 1994 Stock Option Plan.(4)
4.9 1997 Stock Option Plan.(11)
4.10 1998 Stock Option Plan.(11)
4.11 Articles of Amendment of Articles of Incorporation of the
Company.(6)
4.12 Articles of Amendment of Articles of Incorporation- Series C
Preferred Stock.(7)
4.13 Articles of Amendment of Articles of Incorporation- Series E
Preferred Stock.(3)
4.14 Articles of Amendment of Articles of Incorporation- Series F
Preferred Stock.(3)
4.15 Articles of Amendment of Articles of Incorporation- Series G
Preferred Stock.(3)
4.16 Articles of Amendment of Articles of Incorporation- Series H
Preferred Stock.(3)
4.17 Form of Warrant in connection with the Acquisition
Agreement.(3)
5.1 Opinion of Silverman Collura & Chernis, P.C., counsel to the
Company.(10)
10.1 Agreement among Natural Health Trends Corp. Health Wellness
Nationwide Corp., Samantha Haimes and Leonard Haimes.(8)
10.2 Leases (Two) for Registrant's Denver, Colorado
facilities.(11)
10.3 Manufacturing and Distribution Agreement between Kaire
International Inc. and ENZO Nutraceuticals, Ltd.(11)
10.4 Assignment of Patents Agreement dated May 23, 1997 between
MikeCo., Inc. and Troy Laboratories, Inc. and H. Edward
Troy.(11)
10.5 Agreement dated April 8, 1998 among Global Health
Alternatives, Inc. and MikeCo., Inc., Troy Laboratories,
Inc., H. Edward Troy, Kevin Underwood and Patrick
Killorin.(11)
10.6 Assumption Agreement and Amendment of Commercial Security
Agreement dated February 19, 1999 by and between STAR
Financial Bank, Kaire International, Inc. and NHTC
Acquisition Corp.(11)
10.7 Agreement dated September 17, 1999 between the Company and
Joseph P. Grace.(11)
10.8 Promissory Note in the amount of $150,000 from the Company
to Filin Corporation.(11)
10.9 Promissory Note in the amount of $50,000 from the Company to
H. Newcomb Eldredge.(11)
10.10 Promissory Note in the amount of $50,000 from the Company to
Capital Development S.A.(11)
10.11 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
10.12 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
10.13 Consulting Agreement between the Company and Meridian
Equities Hong Kong, Ltd.(10)
10.14 Consulting Agreement between the Company and Domain
Investments, Inc.(10)
21.1 List of Subsidiaries.(9)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- ------- -------------
<C> <S>
23.1 Consent of Feldman Sherb Horowitz & Co P.C.(1)
23.2 Consent of Silverman Collura & Chernis, P.C., Esq.,
(included in Exhibit 5.1)(11)
23.3 Consent of BDO Seidman, LLP(1)
27.1 Financial Data Schedule.(12)
</TABLE>
- ------------------------
(1) Filed upon the initial filing of this Registration Statement.
(2) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
May 14, 1998.
(3) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
January 25, 1999.
(4) Previously filed with Registration Statement No. 33-91184.
(5) Previously filed with the Company's Form 8-K dated August 7, 1997.
(6) Previously filed with the Company's Form 10-QSB dated June 30, 1997.
(7) Previously filed with the Company's Form 10-QSB dated September 30, 1998.
(8) Previously filed with the Company's Form 10-KSB for the year ended December
31, 1996.
(9) Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1998.
(10) To be filed by Amendment.
(11) Previously filed with the Company's Registration Statement, File
No. 333-80465.
(12) Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 563,477
<SECURITIES> 0
<RECEIVABLES> 233,418
<ALLOWANCES> 1,987
<INVENTORY> 1,111,995
<CURRENT-ASSETS> 2,607,914
<PP&E> 975,950
<DEPRECIATION> 206,935
<TOTAL-ASSETS> 15,779,931
<CURRENT-LIABILITIES> 7,436,056
<BONDS> 0
0
6,716,000
<COMMON> 6,221
<OTHER-SE> 1,119,403
<TOTAL-LIABILITY-AND-EQUITY> 15,779,931
<SALES> 7,625,391
<TOTAL-REVENUES> 0
<CGS> 1,536,686
<TOTAL-COSTS> 1,536,686
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,059
<INCOME-PRETAX> (1,214,781)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,214,781)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,213,310)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
