SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earlier event reported): May 5, 1999
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NATURAL HEALTH TRENDS CORP.
-------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Florida 0-25238 59-2705336
------------ ---------- --------------
(State of Incorporation (Commission Flle No.) (IRS Identification Number)
or other Jurisdiction)
250 Park Avenue
New York, New York 10117
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(Address of Principal Executive Offices)
(212) 490-6609
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(Registrant's Telephone Number Including Area Code)
<PAGE>
ITEM 7. Financial Statements and Pro Forma Financial Information.
(a) Financial Statements
The required Financial Statements of Kaire will be filed pursuant to
an amendment to this Current Report on Form 8-K no later than sixty
(60) days from the date of this Current Report on Form 8-K.
(b) Pro Forma Financial Information
See attached
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned hereunto duly authorized,
NATURAL HEALTH TRENDS CORP. (Registrant)
By: /s/ Joseph P. Grace
---------------------------------
Joseph P. Grace, Acting President
Dated: February 19, 1999
<PAGE>
KAIRE INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page Number
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3-4
Consolidated Statements of Operations and Comprehensive Loss F-5
Consolidated Statements of Stockholders' Deficit F-6
Consolidated Statements of Cash Flows F-7-8
Summary of Accounting Policies F-9-13
Notes to Consolidated Financial Statements F-14-24
Natural Health Trends Corp. / Kaire International, Inc.
Unaudited Pro Forma Condensed
Consolidated Financial Statements F-25-28
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Kaire International, Inc.
Longmont, Colorado
We have audited the accompanying consolidated balance sheets of Kaire
International, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997 and the related consolidated statements of operations and comprehensive
loss, stockholders' deficit and cash flows for the years then ended. 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 then ended 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
--------------------
BDO Seidman, LLP
March 8, 1999
Denver, Colorado
F-2
<PAGE>
<TABLE>
<CAPTION>
Kaire International, Inc.
Consolidated Balance Sheets
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Kaire International, Inc.
Consolidated Balance Sheets (Continued)
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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-4
<PAGE>
<TABLE>
<CAPTION>
Kaire International, Inc.
Consolidated Statements of Operations
and Comprehensive Loss
Years Ended December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Note 11) $ 26,175,710 $ 35,681,512
Cost of sales (Notes 2 and 10) 6,250,433 8,387,963
- -------------------------------------------------------------------------------------------------------------------
Gross profit 19,925,277 27,293,549
- -------------------------------------------------------------------------------------------------------------------
Operating expenses:
Distributor commissions 13,537,777 19,968,230
Selling general and
administrative expenses 9,291,933 13,008,859
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 22,829,710 32,977,089
- -------------------------------------------------------------------------------------------------------------------
Loss from operations (2,904,433) (5,683,540)
- -------------------------------------------------------------------------------------------------------------------
Other income (expenses):
Other income 56,216 195,899
Interest income 31,446 54,573
Interest expense (971,376) (726,392)
Abandoned offering costs (357,770) -
Loss on foreign exchange (568,424) (29,202)
Other expense (57,253) (56,430)
- -------------------------------------------------------------------------------------------------------------------
Total other income (expenses) (1,867,161) (561,552)
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes and
minority interest (4,771,594) (6,245,092)
Benefit from income taxes (Note 8) - 12,973
Minority interest in loss of subsidiaries 63,973 133,590
- -------------------------------------------------------------------------------------------------------------------
Net loss (4,707,621) (6,098,529)
Other comprehensive income (loss):
Foreign currency translation adjustment 407,827 (430,117)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (4,299,794) $ (6,528,646)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Kaire International, Inc.
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 1997 and 1998
Additional Accumulated Retained Total
Common Stock Paid-in Comprehensive Earnings Comprehensive Stockholders'
------------------------
Shares (Note 7) Amount Capital Income/(Loss) (Deficit) Income/(Loss) Deficit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,470,000 $ 14,700 $ (6,604) $ 11,137 $ 105,258 $ (1,791,649) $ 124,491
===============
Issuance of common stock for services 316,676 3,167 61,769 - - - 64,936
Issuance of common stock for cash net
of offering costs of $78,543 (Note 7) 250,000 2,500 168,957 - - - 171,457
Issuance of common stock in
connection with debt net of offering
costs of $29,580 (Note 5) 172,500 1,725 141,195 - - - 142,920
Conversion of debt to additional
paid-in capital (Note 7) - - 1,000,000 - - - 1,000,000
Comprehensive income/(loss):
Net loss - - - - (6,098,529) (6,098,529) (6,098,529)
Foreign currency translation
adjustment - - - (430,117) - (430,117) (430,117)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,209,176 22,092 1,365,317 (418,980) (5,993,271) $ (6,528,646) (5,024,842)
==============
Issuance of common stock from
exercise of stock options 87,050 870 871 - - - 1,741
Comprehensive income/(loss):
Net loss - - - - (4,707,621) (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 - 407,827 407,827
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,296,226 $ 22,962 $ 1,366,188 $ (11,153) $(10,700,892) $ (4,299,794) $(9,322,895)
=============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Kaire International, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years Ended December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (4,707,621) $ (6,098,529)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 873,003 876,836
Minority interest (63,973) (133,590)
Loss on disposal of fixed assets - 17,217
Common stock issued for services - 17,500
Deferred income taxes - -
Provision for doubtful accounts 148,119 259,369
Write off of inventories 276,871 -
Loss on foreign exchange 562,128 -
Changes in operating assets and liabilities:
Accounts receivable (102,117) (435,517)
Inventories 371,272 293,087
Prepaid expenses and other 386,288 (315,748)
Refundable income taxes - 1,025,000
Accounts payable 412,982 1,218,959
Accounts payable, related party (26,255) 26,254
Accrued liabilities and other 432,693 (184,223)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,436,610) (3,433,385)
- -------------------------------------------------------------------------------------------------------------------
Investing activities:
Restricted cash (125,000) -
Deposits and other 283,094 (289,238)
Purchases of intangibles - (20,106)
Purchases of property and equipment (74,891) (274,679)
Advances - other - 226,855
Proceeds from sale of investment - 250,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 83,203 (107,168)
- -------------------------------------------------------------------------------------------------------------------
F-7
<PAGE>
Kaire International, Inc.
Consolidated Statements of Cash Flows
(Continued)
Increase (Decrease) in Cash and Cash Equivalents
Years Ended December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Financing activities:
Checks written in excess of deposits (287,715) (53,155)
Payments on note payable to bank (60,000) (10,000)
Proceeds from notes payable 150,000 4,217,463
Payments on notes payable - (1,017,463)
Proceeds from notes payable - related party 1,760,470 1,165,531
Payments on notes payable - related party (382,890) (561,192)
Payments on capital lease obligations (103,040) (241,610)
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
- -------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rates changes on cash 186,811 (78,708)
- -------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (88,030) (278,604)
Cash and cash equivalents, beginning of year 460,663 739,267
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 372,633 $ 460,663
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.
F-8
<PAGE>
Kaire International, Inc.
Summary of Accounting Policies
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.
F-9
<PAGE>
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 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.
F-10
<PAGE>
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 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 and $869,305 for the years ended
December 31, 1998 and 1997. The Company monitors its historical sales returns
and will accrue a liability for sales returns when and if sales returns become
significant.
F-11
<PAGE>
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires the
use of the "liability method". Accordingly, deferred tax liabilities and assets
are determined based on the temporary differences between the financial
statement and tax basis of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Accounts Receivable, Accounts Payable and Accrued Liabilities
Fair values of accounts receivables, accounts payable, and accrued liabilities
are assumed to approximate carrying values for these financial instruments since
they are short term in nature and their carrying amounts approximate fair value
or they are receivable or payable on demand.
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.
F-12
<PAGE>
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.
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".
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-13
<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, 1999 (see Note 14), 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 collaterized 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.
F-14
<PAGE>
Kaire Korea, pursuant to a demand promissory note guaranteed by the Company and
personally guaranteed by certain officers of the Company, borrowed $500,000 from
a corporation during May 1997 pursuant to the terms of a note payable at an
annual interest rate of 9.5%. The note was due in principal installments of:
$25,000 due August 31, 1997, $125,000 due September 30, 1997, $175,000 due
October 31, 1997 and $175,000 due November 30, 1997. An option to acquire 15% of
the capital stock of Kaire Korea Ltd. at the par value of Kaire Korea's capital
stock expiring May 2000 was granted to the lender. During 1997, Kaire Korea
defaulted under the note agreement. On November 15, 1997, the Corporation
exercised its option to acquire 15% of Kaire Korea from the Company in
consideration of $143,375 in interest expense due by Kaire Korea under the note
agreement. The Company renegotiated the terms of the original note agreement on
January 1, 1998. The January 1, 1998 agreement modifies the repayment provisions
of principal and interest, stipulating that the Company make monthly interest
only payments until the note is paid in full. The note was due on September 15,
1998. The Company is currently in default on its note payable. The Company has
classified this liability as a current liability. The Company also pledged its
stock in Kaire Korea as collateral on this note. As of 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 14). The note bears interest at 10% per annum, is
collaterized 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:
December 31, 1998
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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-15
<PAGE>
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 14).
5. Notes Payable
Notes payable consists of the following:
December 31, 1998 1997
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
(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 14).
(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 172,500 shares of the Company's common stock. Original
issue discount of $172,500 was recorded a 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 14).
F-16
<PAGE>
(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 14).
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 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.
F-17
<PAGE>
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 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 and 1997. For stock awards issued to
non-employees, the Company estimates the fair value of each stock award at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997. The options and warrants
granted during 1997 to non-employees were considered nominal in value. No stock
awards were issued to non-employees during the year ended 1998.
1997
- --------------------------------------------------------------------------------
Dividend yield 0%
Expected volatility 0%
Risk-free interest rates 5.85% to 6.6%
Expected lives in years 3 to 6 years
- --------------------------------------------------------------------------------
F-18
<PAGE>
A summary of the status of the Company's stock option and warrant plan as of
December 31, 1998 and 1997 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.
Options Warrants
- --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding,
January 1, 1997 - $ - 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, 1997 65,000 $ 0.02 22,050 $ 0.02
- --------------------------------------------------------------------------------
Exercisable,
December 31, 1998 - $ - - $ -
- --------------------------------------------------------------------------------
Options Warrant
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
The following table summarizes information about exercisable stock options and
warrants at December 31, 1998:
Outstanding Exercisable
---------------------------------------- -----------------
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
December 31, 1998 Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
Warrants $ 6.60 712,500 $ 6.60 - $ -
- --------------------------------------------------------------------------------
8. Income Taxes
Income taxes consist of the following:
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------------------
Current benefit:
Federal $ - $ 12,973
Foreign - -
State - -
- --------------------------------------------------------------------------------
- 12,973
- --------------------------------------------------------------------------------
Deferred benefit:
Federal 1,188,000 1,440,000
Foreign 175,000 205,000
State 51,000 62,000
- --------------------------------------------------------------------------------
1,414,000 1,707,000
- --------------------------------------------------------------------------------
1,414,000 1,719,973
Change in valuation allowance (1,414,000) (1,707,000)
- --------------------------------------------------------------------------------
Income tax benefit $ - $ 12,973
- --------------------------------------------------------------------------------
F-19
<PAGE>
At December 31, 1998, the Company had available net operating loss carryforwards
as follows:
Amount Expire
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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:
December 31, 1998 1997
- --------------------------------------------------------------------------------
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 $ - $ -
- --------------------------------------------------------------------------------
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:
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------------------
Federal income tax benefit computed
at the federal statutory rate $ (1,188,000) $ (1,452,973)
State income tax benefit, net of
federal benefit (51,000) (62,000)
Foreign tax benefit at statutory
rates (175,000) (205,000)
Increase in valuation allowance 1,414,000 1,707,000
- --------------------------------------------------------------------------------
Income tax benefit $ - $ (12,973)
- --------------------------------------------------------------------------------
F-20
<PAGE>
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:
Year Ended December 31,
- --------------------------------------------------------------------------------
1999 $ 216,000
2000 110,000
2001 69,000
2002 69,000
2003 50,000
Thereafter 298,000
- --------------------------------------------------------------------------------
Total $ 812,000
- --------------------------------------------------------------------------------
Lease expense for all operating leases was $744,000 and $605,000 for the years
ended December 31, 1998 and 1997.
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 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 and 1997 were
approximately $0 and $53,000. As discussed in Note 14, 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.
F-21
<PAGE>
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 and 1997, the Company purchased amounts
of its products from a limited number of vendors, including significant amounts
from MW International of 44% and 48%. 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.
<TABLE>
<CAPTION>
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:
United New
Year Ended December 31, 1998 States 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
- -------------------------------------------------------------------------------------------------------------------
United New
Year Ended December 31, 1997 States Zealand Korea Other Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------
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>
F-22
<PAGE>
12. Supplemental Data to Statements of Cash Flows
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 169,257 $ 278,139
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
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
- --------------------------------------------------------------------------------
13. Year 2000 Issues (Unaudited)
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the latter two digit year value
to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company's management has assessed the "Year 2000" compliance
expense to be approximately $250,000. The "Year 2000" problem may impact other
entities with which the Company transacts business, and the Company cannot
predict the effect of the "Year 2000" problem on such entities or the resulting
effect on the Company. The Company has not yet established a contingency plan in
the event that it is unable to correct the "Year 2000" problem and has no plans
to do so. There can be no assurance that such problem can be resolved by the
Company in a timely or cost effective fashion, or at all, or that any difficulty
or inability in resolving such problem will not have a material adverse effect
upon the Company.
F-23
<PAGE>
14. 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).
F-24
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed financial statements
have been prepared to show the effects of the February 19, 1999 acquisition of
Kaire International, Inc. ("Kaire") by Natural Health Trends Corp. (the
"Company") for preferred stock with a face amount of $2,800,000 issued to the
sellers, and additional preferred stock with a face amount of $350,000 issued
for settlement with certain creditors. The acquisition is accounted for as a
purchase business combination.
The unaudited pro forma consolidated statements of operations for the
year ended December 31, 1998 reflect the combined results of the Company and
Kaire as if the acquisition had occurred on January 1, 1998. Adjustments include
amortization of goodwill, dividends on the preferred stock issued in the
acquisition and eimination of intercompany transactions.
The accompanying unaudited pro forma balance sheet does not necessarily
reflect the actual financial position of the Company that would have resulted
had the acquisition of Kaire been consummated on December 31, 1998. The
unaudited pro forma consolidated statements of operations do not necessarily
represent actual results that would have been achieved had the companies been
together as of January 1, 1998, nor may they be indicative of future operations.
These unaudited pro forma consolidated financial statements should be read in
conjunction with the Company's historical financial statements and notes
thereto.
F-25
<PAGE>
<TABLE>
<CAPTION>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
Natural Health Kaire
Trends, Corp. International, Inc. Pro Forma
December 31, December 31, Adjustments
1998 1998 DR(CR) Total
--------------- ---------------- ---------------- --------------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 294,220 $ 372,633 $ - $ 666,853
Restricted cash - 125,000 - 125,000
Accounts receivable, net 19,331 262,944 - 282,275
Inventory 314,367 1,061,144 - 1,375,511
Prepaid expenses and other current assets 751,495 61,281 (2) (250,000) 562,776
--------------- ---------------- ---------------- ---------------
TOTAL CURRENT ASSETS 1,379,413 1,883,002 (250,000) 3,012,415
PROPERTY AND EQUIPMENT, net 78,436 538,151 - 616,587
PATENTS AND CUSTOMER LISTS 4,415,049 - (1) 4,002,204 8,417,253
GOODWILL 829,468 - - 829,468
DEPOSITS AND OTHER ASSETS 150,350 139,397 - 289,747
--------------- ---------------- ---------------- ---------------
$ 6,852,716 $ 2,560,550 $ 3,752,204 $ 13,165,470
=============== ================ ================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ - $ 1,035,195 $ - $ 1,035,195
Accounts payable and accrued expenses 1,824,879 5,331,361 (1) 4,093,554 3,062,686
Accrued expenses for discontinued operations 314,593 - - 314,593
Accrued consulting contract 405,385 - - 405,385
Notes payable - 2,255,000 (1) 2,075,000 180,000
Notes payable - related parties - 2,362,247 (1),(2) 2,362,247 -
Current portion of long-term debt, net of discount 314,684 - - 314,684
Other current liabilities 38,481 770,276 (1) 742,524 66,233
--------------- ---------------- ---------------- ---------------
TOTAL CURRENT LIABILITIES 2,898,022 11,754,079 9,273,325 5,378,776
MINORITY INTEREST - 129,366 (1) 129,366 -
COMMON STOCK SUBJECT TO PUT 380,000 - - 380,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,500,000 shares
authorized, 1,650 shares issued and outstanding
(actual) and (pro forma) 1,439,500 - (1) (3,150,000) 4,589,500
Common stock, $.001 par value, 50,000,000 shares
authorized, 6,230,663 shares issued and
outstanding (actual) and (pro forma) 6,231 22,962 (1) 22,962 6,231
Additional paid-in capital 16,878,747 1,366,188 (1) 684,188 17,560,747
Cumulative translation adjustment - (11,153) (1) (11,153) -
Retained earnings (deficit) (14,369,784) (10,700,892) (1) (10,700,892) (14,369,784)
Common stock subject to put (380,000) - - (380,000)
--------------- ---------------- ---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 3,574,694 (9,322,895) (13,154,895) 7,406,694
--------------- ---------------- ---------------- ---------------
$ 6,852,716 $ 2,560,550 $ (3,752,204) $ 13,165,470
=============== ================ ================ ===============
</TABLE>
See notes to proforma financial statements.
F-26
<PAGE>
<TABLE>
<CAPTION>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Natural Health Kaire
Trends, Corp. International, Inc.
Year Ended Year Ended Pro Forma
December 31, December 31, Adjustments
1998 1998 DR (CR) Total
------------------ ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
REVENUES $ 1,191,120 $ 26,175,710 $ 27,366,830
COST OF GOODS SOLD 454,370 6,250,433 6,704,803
------------------ ------------------ ------------------
GROSS PROFIT 736,750 19,925,277 20,662,027
DISTRIBUTOR COMMISSIONS 0 13,537,777 13,537,777
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,277,047 9,291,933 (1) 267,000 12,835,980
------------------ ------------------ ------------------
OPERATING LOSS (2,540,297) (2,904,433) (5,711,730)
INTEREST INCOME (EXPENSE), NET (199,757) (939,930) (1,139,687)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 0 63,973 63,973
OTHER INCOME (EXPENSE), NET 0 (358,807) (358,807)
LOSS ON FOREIGN EXCHANGE 0 (568,424) (568,424)
PROVISION FOR TAXES 0 0 0
------------------ ------------------ -----------------
LOSS FROM CONTINUING OPERATIONS (2,740,054) (4,707,621) (7,714,675)
PREFERRED STOCK DIVIDENDS 0 0 (2) 189,000 (189,000)
------------------ ------------------ -----------------
LOSS TO COMMON SHAREHOLDERS $ (2,740,054) $ (4,707,621) (7,903,675)
================== ================== =================
NET LOSS PER SHARE - BASIC $ (0.80) $ (2.30)
================== =================
WEIGHTED AVERAGE SHARES 3,440,788 3,440,788
================== =================
</TABLE>
F-27
See notes to pro forma financial statements.
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
A. The following unaudited pro-forma adjustments are included in the
accompanying unaudited pro forma consolidated balance sheet at December
31, 1998:
(1) To record the acquisition of certain assets and the assumption of
certain liabilities of Kaire for $2,800,000 face amount of the
Company's Series F convertible preferred stock, with the acquisition
accounted for as a purchase business combination. Additionally, the
Company issued $350,000 face amount of Series G preferred stock for
settlement of certain Kaire liabilities. The preferred stock pays
dividends at the rate of 6% per annum, and is convertible into common
stock at 95% of the common stock's market value. In addition to the
Series F Preferred Stock, the sellers received five year warrants to
purchase 200,000 shares of common stock at an exercise price of 110% of
the closing bid price of the common stock on the date before the
closing. The Company has computed an aggregate $682,000 value on the
warrants under the Black and Scholes Option Pricing Model. No value is
attributed to the 5% discount off market upon the conversion of the
preferred stock into common, since substantially all the common stock
obtainable upon such conversion is subject to a two year lock-up and
the 5% level of discount is considered reasonable in light of this
restriction. Recorded goodwill totals $4,002,204. The computation is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Assets Acquired:
Cash and restricted cash $ 497,633
Accounts receivable 262,944
Inventories 1,061,144
Prepaid expenses and other assets 200,678
Property and equipment 538,151
-----------------
$ 2,560,550
Liabilities Assumed:
Cash overdraft 1,035,195
Accounts payable and accrued expenses 1,237,807
Notes payable and capital lease obligations 457,752
----------------- -----------------
2,730,754
-----------------
Net book value (170,204)
Purchase price (including value of Warrants) 3,832,000
-----------------
Goodwill $ 4,002,204
=================
</TABLE>
(2) To record the elimination of $250,000 intercompany receivable / payable
between the Company and Kaire.
B. The following pro-forma adjustments are included in the accompanying
unaudited pro forma consolidated statements of operations for the year
ended December 31, 1998:
(1) To amortize goodwill over 15 years.
(2) To record preferred stock dividends.
F-28
