SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10- KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission File Number 0-25238
NATURAL HEALTH TRENDS CORP.
(Name of small business issuer in its charter)
Florida 59-2705336
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
250 Park Avenue, New York, New York 10177
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 490-6609
Securities registered pursuant to Section 12(b) of the
Exchange Act:
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Class A Warrants
(Title of Class)
Class B Warrants
(Title of Class)
Units
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $1,191,120
The number of shares of Common Stock held by nonaffiliates of the registrant (as
determined for the purpose of this Form 10-KSB only) as of March 31, 1999 was
6,190,909 with an approximate aggregate market value of $26,698,00 (based upon
the average of the bid and asked prices of such shares as of such date). The
number of shares of the Common Stock of the issuer outstanding as of March 31,
1999 was 6,190,909.
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TABLE OF CONTENTS
Page
Numbertem Number and Caption
PART I ...................................................................-4-
Item 1. Description of Business..........................................-4-
Item 2. Description of Properties........................................-14-
Item 3. Legal Proceedings................................................-14-
Item 4. Submission of Matters to a Vote of Security Holders..............-15-
PART II ...................................................................-16-
Item 5. Market for Common Equity and Related Stockholder Matters.........-16-
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.........................................-17-
Item 7. Financial Statements.............................................-21-
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................-21-
PART III ...................................................................-22-
Item 9. Directors, Executive Officers, Promoters and Control
Persons..........................................................-22-
Item 10. Executive Compensation...........................................-23-
Item 11. Security Ownership of Certain Beneficial Owners and
Management.......................................................-25-
Item 12. Certain Relationships and Related Transactions...................-26-
Item 13. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.........................................................-27-
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PART I
Item 1. Description of Business.
Natural Health Trends Corp. (the "Company") is a corporation
which develops and operates businesses to promote human wellness. Through
Global Health Alternatives, Inc. ("GHA"), the Company's wholly-owned subsidiary,
the Company markets a line of natural, over-the-counter ("OTC") homeopathic
pharmaceutical products. Unless the context otherwise requires, the Company
and its subsidiaries, including GHA, are sometimes referred to collectively as
the "Company."
In June 1997, GHA commenced marketing Natural Relief 1222(R),
a line of topical homeopathic medicines in a patented base of natural
ingredients, acquired in May 1997 from Troy Laboratories, Inc. In July 1997 the
Company acquired all of the capital stock of GHA. From GHA's inception on August
3, 1993 through June 1997, GHA was primarily engaged in organizational and
financing activities, including business and product line acquisitions, and
preliminary marketing and distribution activities. GHA's primary focus has been
to develop a distribution network for its line of Natural Relief 1222 products.
GHA has obtained initial distribution of Natural Relief 1222 in mass channels
primarily chain drug stores and health food stores. Other GHA products include
the Ellon flower remedies which utilize homeopathic active ingredients in a
tincture appropriate for oral consumption or in a topical form.
The Company's strategy has been to focus on developing GHA's
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.
In addition, the Company intends to acquire, although there can be no assurance
thereof, existing products and companies which are complementary to the
Company's existing products.
As part of the Company's shift in emphasis to the sale and
marketing of natural health products, the Company closed the Company's natural
health care center in Boca Raton, Florida in October, 1997 and the Company's
natural health care center in Pompano Beach, Florida in January 1998. The
natural health care centers provided multidisciplinary complementary health care
in the areas of alternative and nutritional medicine. In March 1998, the Company
sold the assets of The Corporate Body, Inc., which offered on-site massages to
businesses and in August 1998, sold the Company's three vocational schools.
In February 1999, the Company acquired substantially all of
the assets of Kaire International, Inc.("Kaire"), which is further described
below. Kaire develops and distributes, through a network of independent
associates, products that are intended to appeal to health conscious consumers.
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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.
Acquisition of Substantially all of the Assets of Kaire
In February 1999, the Company's newly formed, wholly-owned
subsidiary, NHTC Acquisition Corp. ("NHTC"), acquired substantially all of the
tangible and intangible assets (the "Kaire Assets") of Kaire including, but not
limited to, the names "Kaire," "Kaire International, Inc." and all variations
thereof and any other product name and all other registered or unregistered
trademarks, tradenames, service marks, patents, logos, and copyrights of Kaire,
all accounts receivable, contractual rights and product formulations to any and
all products of Kaire, product inventory, "800" and other "toll-free" telephone
numbers, product supply contracts (including, but not limited to, its
EnzogenolTM product), independent associate lists, and shares of capital stock
owned by Kaire in each of its wholly-owned and/or partially owned subsidiaries
including, but not limited to, Kaire New Zealand Ltd., Kaire Australia Pty Ltd.,
Kaire Trinidad, Ltd. and Kaire Europe Ltd. (but excluding Kaire Korea Ltd.).
In exchange for the Kaire Assets, the Company issued (i) to Kaire,
$2,800,000 aggregate stated value of Series F Preferred Stock; (ii) to two
creditors of Kaire, $350,000 aggregate stated value of Series G Preferred Stock;
and (iii) to Kaire, five-year warrants to purchase 200,000 shares of the
company's common stock. In addition, NHTC has agreed to make certain payments to
Kaire each year for a period of five years (the "NHTC Net Income Payments")
commencing with the year ending December 31, 1999, to be determined as follows:
(i)25% of the net income of NHTC if the net sales of NHTC in any such year are
between $1.00 and $10,000,000; (ii) 33% of NHTC's net income if its net sales
are between $10,000,000 and $15,000,000;(iii) 40% of NHTC's net income if its
net sales are between $15,000,000 and $40,000,000; and (iv) 50% of NHTC's net
income if its net sales are in excess of $40,000,000.
The NHTC Net Income Payments shall be reduced on a
dollar-for-dollar basis to the extent of (A) all indebtedness of Kaire assumed
by NHTC; (B) all other direct and/or indirect costs or expenses assumed and/or
otherwise incurred by the Company of, or resulting from, Kaire including, but
not limited to, litigation costs, including, but not limited to, reasonable
attorneys' fees, payments of sales or other taxes, expenses of officers of
Kaire, and other payments or expenses resulting directly and/or indirectly from
the 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) NHTC by the Company that
resulted from the acquisition of the Kaire Assets. In addition, all amounts
set-off against NHTC Net Income Payments are cumulative and, if not set-off in
the year they are paid (or incurred) because NHTC did not have a sufficient
amount of net income (or for any reason), such set-off amounts shall accrue and
be used as a set-off in the earliest possible year or years.
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In connection with the acquisition of the Kaire Assets, NHTC
assumed certain specified liabilities of Kaire including: (i) approximately
$475,000 owed to MW International Inc.; (ii) approximately $50,000 owed to
Manhattan Drug Company; (iii) approximately $120,000 in the aggregate owed to
Robert Richards and Mark Woodburn (both officers and directors of Kaire); (iv)
up to approximately $120,000 in unpaid payroll taxes of Kaire; and (v) up to
$180,000 owed to STAR Financial Bank.
In connection with the acquisition of the Kaire Assets, the
Company has agreed to appoint to its Board of Directors one nominee of Kaire,
Robert L. Richards. In addition, NHTC has agreed to indemnify certain officers
of Kaire against all amounts paid following the acquisition of the Kaire Assets
by such persons resulting from unpaid sales taxes accrued by Kaire prior to the
closing date.
In connection with the acquisition of the Kaire Assets, the
Company had retained BLH, Inc. as consultant and advisor to the Company (the
"Consultant") pursuant to a written agreement dated September 2, 1998 (the
"Consulting Agreement"). In accordance with the terms of the Consulting
Agreement, the Consultant was to identify companies which the Company could
acquire and/or merge with. BLH introduced Kaire to the Company. Pursuant to the
terms of the Consulting Agreement during its term the Company shall pay a cash
fee (the "Cash Fee") to the Consultant equal to ten (10%) percent of the
aggregate consideration ("Consideration"), paid by the Company in a Transaction.
The Cash Fee shall be payable at each closing of a Transaction. At the option of
the Company, however, the Company may pay to the Consultant in lieu of paying
the Cash Fee, a fee in shares of preferred stock of the Company with an
aggregate stated value of the preferred stock equal to 120% of the Cash Fee (the
"Fee Preferred Stock"). The Fee Preferred Stock shall be issued to the
Consultant at any closing, pay quarterly dividends at a rate of 8% annually in
cash (or at the option of the holder in shares of Common Stock of the Company
valued at the Conversion Price, as defined below), and shall be convertible into
shares of Common Stock of the Company at a conversion price equal to the lower
of (i) 110% the average closing bid price of the Common Stock of the Company for
the five days immediately preceding the date of the Consulting Agreement, and
(ii) 95% of the average closing bid price of the Common Stock of the Company for
the three (3) trading days prior to the date of any conversion. The Fee
Preferred Stock shall be redeemable at the option of the Company at a price per
share equal to 108% of the stated value plus all unpaid and accrued dividends
and shall contain piggyback and demand registration rights, the demand
registration rights commencing eight (8) months following the closing of the
Transaction.
Description of Kaire International, Inc.
Kaire develops and distributes, through a network of independent
associates, products that are intended to appeal to health-conscious consumers.
Current Kaire products include health care supplements and personal care
products. Kaire offers a line of approximately 50 products which it divides into
nine categories, including Antioxidant Protection (Bodily) Defense, Digestion,
Energy and Alertness, Stress, Vital Nutrients, Weight Management, Anti-Aging and
Personal Care.
Kaire develops products that it believes will have market appeal
to its associates and their customers, and assists its associates in
establishing their own businesses. Kaire associates can start a home based
business without significant start-up costs and other difficulties usually
associated with new ventures. Kaire produces product development, marketing
aids, customer service, and essential record-keeping functions to its associates
without charge. Kaire also provides other support programs to its associates
including a 24-hour touch talk system, international teleconferencing calls,
seminars and business training systems with audio and video tapes.
It is Kaire's strategy and expectation that associates actively
recruit interested people to become new associates. These recruits are placed
beneath the recruiting associate in the "network" and are referred to by Kaire
as that associate's "organization." Associates earn commissions on purchases by
associates in their organization as well as retail profits on the sales they
make themselves. Kaire's marketing program is designed to provide incentives for
associates to build an organization of recruited associates to maximize their
earning potential. Approximately 60,000 of Kaire's associates have had product
purchases in excess of $50 during 1997 and are considered to be "active" as
opposed to approximately 108,000 and 156,000 in 1996 and 1995, respectively.
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Kaire purchases most of its products directly from manufacturers
and markets them to its independent associates located in all fifty states, the
District of Columbia, Puerto Rico, Guam, and Canada. In 1995, Kaire expanded the
number of its associates located in other parts of the world, particularly
Australia and New Zealand. Kaire expanded its operations into South Korea,
Tobago and the United Kingdom during 1997. Kaire has since discontinued its
operations in South Korea in October 1998.
Unless the context otherwise requires, the balance of the
discussion in this Form 10-KSB excludes the acquisition of the Kaire Assets
which were not acquired until February 1999.
Product Acquisition and Licensing Agreements
GHA 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. GHA has not developed any of its
products, and does not maintain a research and development staff or research
facilities.
In October 1996 GHA acquired two natural product lines: Ellon
flower essence products and Fruitseng(R) 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, GHA 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 GHA 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, GHA 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.
Overview of the Natural Health Product Market
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
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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.
Products
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 has 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 and support for GHA'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., multi-level
marketing which will be facilitated through the acquisition of the Kaire Assets
and institutional marketing), possibly via acquisition. The Company also markets
Arthritis Relief through catalogue and electronic media marketing companies.
The total market for topical analgesics in mass market
channels in 1997 exceeded $230 million. The category 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
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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 GHA 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 based 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.
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(R). These products are
regulated OTC 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
direct mail 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.
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.
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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.
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.
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.
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.
Marketing and Distribution
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 is 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 GHA'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., multi-level
marketing which will be facilitated through the acquisition of the Kaire
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Assets 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 catalogues 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.
For the years ended December 31, 1997 and December 31, 1998,
GHA's expenditures for product advertising and promotion were approximately
$1,771,095 and $692,344, espectively.
Competition - Products
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 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.
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.
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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 OTC pharmaceutical firms.
Official legal recognition of homeopathic drugs in the United States dates to
the federal Food, Drug and Cosmetic Act of 1938 ("FDCA"). The FDCA provides that
the term "drug" includes articles recognized in the official Homeopathic
Pharmacopoeia of the United States ("HPUS"). The FDCA further recognizes the
separate nature of homeopathic drugs from traditional, allopathic drugs by
providing that whenever a drug is recognized in both the United States
Pharmacopoeia ("USP") and the HPUS it shall be subject to the requirements of
the USP unless it is labeled and offered for sale as a homeopathic drug, in
which case it shall be subject to the provisions of the HPUS and not to those of
the USP.
In 1988, the FDA issued a Compliance Policy Guide ("CPG") that
formally established the manner in which homeopathic drugs are regulated. The
CPG 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 HPUS. The FDA has also noted that a
product's compliance with a HPUS monograph system does not necessarily mean that
it has been shown to be safe and effective. According to the CPG, and consistent
with established FDA principals regarding allopathic drugs, a homeopathic drug
may only be 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 an
HPUS 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 CPG 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" ("GMP"). In addition, homeopathic drugs
are exempt from FDA's requirements for expiration date labeling.
The HPUS is updated regularly. The HPUS 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 ("HPCUS"), a private, non-profit entity organized exclusively for
charitable, educational, and scientific activities. The HPUS is an official
publication that is cited in the Federal Food and Drug Laws and CPU. The HPUS
contains hundreds of monographs for homeopathic ingredients that have been found
by the HPCUS to be both safe and effective. The HPUS also contains general
standards for the preparation of homeopathic drugs.
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Employees
As of December 31, 1998 the Company had 13 full time employees
including 6 full time administration employees, 6 in marketing and sales and one
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 products
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
GHA, 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 and for content mints, a
natural stress relief tablet. The Company also has obtained marketing and
manufacturing rights to a family of Chinese-origin, patented, natural topical
medical products.
GHA 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. The
Company's general policy is to pursue registrations of trademarks associated
with its key products and to protect its legal and commercial rights with
respect to the use of those trademarks. The Company relies on common law
trademark rights to protect its unregistered trademarks.
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.
-13-
<PAGE>
Item 2. Description of Properties
Leased Properties
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.
These leases 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, 2001.
Item 3. 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.
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.
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 GHA 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 GHA'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 GHA. GHA's potential obligation to the Kaslofs under
the employment and consulting
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<PAGE>
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 GHA 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. GHA intends to vigorously
defend any and all claims asserted by the Kaslofs and their corporation.
Inter/Media Time Buying Corp. ("Inter/Media") v. GHA, 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 GHA in
connection with Natural Relief 1222. The complaint seeks compensatory damages of
$144,463.77, unstated special damages, attorney fees and costs of court. GHA
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, GHA 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 GHA's assets for the full amount of
its claims.
In PIC-TV v. GHA, et al. (the "PIC-TV Action"), 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 GHA. GHA has answered the complaint, and is also continuing its
settlement discussions with PIC-TV.
On July 13, 1998, Preferred Real Estate Investments, Ltd.
commenced an action in the Circuit Court of Florida, in and for Palm Beach
County, for unpaid rent against the Company and its wholly-owned subsidiary. The
Company claims that there was a settlement and that there are no additional
amounts due to the landlord.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the fourth quarter of 1998.
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<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
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 bid
quotations as reported by The NASDAQ SmallCap Market for the Common Stock for
the quarters indicated. The quotations reflect inter-dealer prices without
retail mark-up, mark-down or commissions, and may not represent actual
transactions. The table below reflects the Company's one for 40 reverse stock
split which occurred in April 1998.
Common Stock
High Low
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............................ 4.0 1.91
1999
First Quarter............................. 5.63 3.56
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.
Dividends
The Company has not paid any dividends since its inception.
The Company has no intention of paying any cash dividends on its Common Stock in
the foreseeable future, as it intends to use any earnings to generate increased
growth. The payment by the Company of cash dividends, if any, in the future
rests within the discretion of its Board of Directors and, among other things,
will
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<PAGE>
depend upon the Company's earnings, capital requirements and financial
condition, as well as other relevant factors.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
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 GHA on July 23, 1997, the Company commenced marketing and
distributing a line of natural, over-the-counter homeopathic pharmaceutical
products. The Company subsequently 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 1997, the
Company's current ongoing line of business (GHA natural products) was not in
operation, not having been acquired until July 1997.
Revenues
Total revenues for continued 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.
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<PAGE>
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 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 year ended December 31, 1997,
interest expense decreased by 54.2%. 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 vocation 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 $816,000 on the work-out of various debt and trade payables.
Liquidity and Capital Resources
The Company has funded its working capital and capital
expenditure requirements primarily from cash provided through borrowing from
institutions and individuals, and from the sale of the Company's securities in
private placements. The Company's other ongoing source of cash receipts has been
from the sale of GHA's products.
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<PAGE>
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 $493,000. The Series C Preferred
Stock pays a dividend of 10% per annum and is convertible into Common Stock at
75% of the market value of the Common Stock, commencing 41 days after issuance.
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 $211,000. 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 of the date of issuance or 75% of
the market value of the Common Stock.
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 issuance or 75% of the market value of the common
stock.
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 outstanding, and
$91,291 to redeem all of the Series D Preferred Stock outstanding. The remaining
proceeds were used to pay down notes payable.
At December 31, 1998 the ratio of current assets to current
liabilities was .30 to 1.0 and there was a working capital deficit of
$2,016,734.
Cash used in operations for the period ended December 31, 1998
was $4,777,957, attributable primarily to the net loss of $1,288,012 and net
cash used in discontinued operations of $2,645,638. Other uses of cash in
continuing operations were decreases in accounts payable and accrued expenses of
$660,673 and $698,805, respectively. Cash provided by investing activities
during 1998 was approximately $4,342,000, mainly from proceeds from the
disposition of discontinued operations. Cash provided by financing activities
during fiscal 1998 was approximately $625,000, mainly from the issuance of
preferred stock of $5,283,000 offset by payments of notes payable $940,000 and
redemptions of preferred stock $3,621,600.
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<PAGE>
The Company intends to offer to sell its securities to raise
gross proceeds of $3,500,000 to $5,500,000 during the second quarter of 1999.
However, there can be no assurance that the Company will do so. The Company
intends to use the gross proceeds of the offering to retire the Series F
Preferred Stock and the Series G Preferred Stock and to provide working capital.
The Company anticipates that further additional financing will be
required to finance the Company's continued operations during the next twelve
months, principally to fund Kaire's operations. Management has revised its
business plan of marketing development and support for GHA'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 Kaire will require approximately
$1,200,000 over the next 12 months and that GHA will not require any additional
financing provided that GHA is successful in reaching satisfactory settlements
with its creditors. As of December 31, 1998, GHA owed approximately $1,600,000
to creditors and had a working capital deficit of approximately $1,300,000. In
the event that the Company cannot reach satisfactory settlements with GHA's
creditors, the Company may discontinue the operation of GHA. 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 Issue
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 a minimal
cost. 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.
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<PAGE>
Item 7. Financial Statements.
See Item 13 of this form 10-KSB "Exhibits and Reports on Form 8K"
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
The following table sets forth certain information concerning
the directors and executive officers of the Company.
Directors and Executive Officers
Name Age Position
Sir Brian Wolfson 64 Chairman of the Board and Director
Joseph P. Grace 48 President and Director
Martin C. Licht 56 Director
Dirk Goldwasser 38 Director
Ralph Ellison 37 Director
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.
Joseph P. Grace has been the President and a Director of the
Company since October, 1998 and Co-Chief Operating Officer of GHA since October
1996. From 1995 to 1996, Mr. Grace was a principal of Natural Health
Laboratories, Inc. From 1994 to 1996, Mr. Grace was Chairman of Ovation, Inc., a
health and fitness equipment supplier. From 1989 to 1994, Mr. Grace was Vice
Chairman of Ovation, Inc., a health and fitness equipment supplier. Mr. Grace
has an M.B.A. from Cornell University and a B.S. in Electrical Engineering,
also from Cornell University.
Martin C. Licht has been a practicing attorney since 1967 and has
been a partner of the law firm of McLaughlin & Stern, LLP since January 1998.
Mr. Licht became a director of the Company in July 1995.
Dirk 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 1994, he was director of sales
for Galbreath Asset Advisors/Loews Organization.
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<PAGE>
Ralph Ellison has been the president of PolarRx Biopharmaceuticals,
a biotechnology company, since 1997. From 1995 to 1997, he was a principal of
Parna LLC, a real estate consulting firm. From 1990 to 1995 he was the director
of clinical research at Research Testing Laboratories.
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,
Goldwasser or Ellison.
Item 10. 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
Securities
Other Restricted Underlying LTIP All Other
Name and Annual Stock Award(s) Options Payouts Compensa-
Principal Position Year Salary($) Bonus($) Compensation ($)(1) $ SARs(#) ($) tion($)
------------------ ---- --------- -------- ------------------- ------------------------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph P. Grace, President 1998 $162,500 ---- ---- ---- ---- ---- ----
and Chief Executive Officer
Sir Brian Wolfson, Chairman of 1998 50,000 ---- ---- ---- ---- ---- ----
the Board (2) 1997 50,000
Neal R. Heller, 1998 155,365 ---- ---- ---- ---- ---- ----
President and 1997 201,500 ---- ---- ---- ---- ---- ----
Chief Executive Officer 1996 162,500 ---- ---- ---- ---- ---- ----
Elizabeth S. Heller 1998 50,885 ---- ---- ---- ---- ---- ----
Secretary 1997 141,100 ---- ---- ---- ---- ---- ----
1996 150,000 ---- ---- ---- ---- ---- ----
</TABLE>
- --------------------------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Sir Brian Wolfson waived his 1997 salary.
Options Grants in Last Fiscal Year. The following table sets forth
certain information with respect to option grants during the fiscal year ended
December 31, 1998 to the named executive officers.
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base Price
Name Granted Year ($.SH) Expiration Date
- -------- ----------------------- ------------------- ---------------------- ---------------
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>
<S> <C> <C>
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
- --------- ---------------- ----------------- --------------- ----------------
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,
except for Mr. Goldwasser who received options to purchase 50,000 shares of
Common Stock and consulting fees of $ 5,000 per month, and Mr. Ellison who
received options to purchase 20,000 shares of Common Stock. See "-- Executive
Compensation." No director received any other form of compensation for the
fiscal year ended December 31, 1998.
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 optins which are Nonstatutory Stock
Options.
The 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
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<PAGE>
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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
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.
Name and Address Number of Shares
of Beneficial Owner(1)(2) Beneficially Owned Percent of Class
- ---------------------- ------------------ ----------------
Joseph P. Grace(3) 11,479 *
Martin C. Licht(4)
1,300 *
Sir Brian Wolfson(5) 850 *
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<PAGE>
Dirk D. Goldwasser(6) 1,125 *
Ralph Ellison(7) 15,000 *
All Executive Officers and 39,754 *
Directors (5 persons)
*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 issued and outstanding
Series C Preferred Stock and Series E Preferred Stock. Pursuant to the terms of
the Series C Preferred Stock, the holders thereof generally are not entitled to
convert such instruments to the extent that such conversion would increase the
holders' beneficial ownership of Common Stock to in excess of 4.9%, except in
the event of a mandatory conversion. On the date of a mandatory conversion of
the Preferred Stock with respect to the Series C Preferred Stock and the Series
E Preferred Stock, a change in control of the Company may occur, based upon the
number of shares of Common Stock issuable. As of the date of this Proxy
Statement, 1,650 shares of Series E Preferred Stock are issued and outstanding.
(3) Mr. Grace is the President and a Director of the Company. (4) Mr. Licht is a
Director of the Company. (5) Sir Brian is Chairman of the Board and a Director
of the Company. (6) Mr. Goldwasser is a Director of the Company. (7) Mr. Ellison
is a Director of the Company. Includes warrants to purchase 20,000 shares of
Common Stock at an exercise price of $1.00 per share, of which 5,000 warrants
have vested and 5,000 additional warrants will vest on each of March 1, June 1
and September 1, 1999.
Item 12. Certain Relationships and Related Transactions.
In August 1998, the Company sold its three vocational schools
that it operates 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 $2,559,244. The Company was not released from such
liabilities despite such assumption by FCNH.
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<PAGE>
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 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.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Financial Statements
1. Financial Statements Page
Index to Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheet - December 31, 1998 F-3
Consolidated Statements of Operations - Years Ended December
31, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity - For
the period from December 31, 1996 through December 31, 1998 F-5
Consolidated Statements of Cash Flow - Years Ended December 31,
1998 and 1997 F-6-7
Notes to Consolidated Financial Statements F-8-20
-27-
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6-7
Notes to Consolidated Financial Statements F-8-20
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 sheet of Natural
Health Trends Corp. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997. 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 the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred losses in
each of the last two fiscal years and as more fully described in Note 2, the
Company anticipates that additional funding will be necessary to sustain the
Company's operations through the fiscal year ending December 31, 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 Ehrlich & Co., P.C.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
February 26, 1999, except for Note 13
as to which the date is April 14, 1999
F-2
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 294,220
Accounts receivable 19,331
Inventories 314,367
Due from affiliate 250,000
Prepaid expenses 3,370
------------------------
TOTAL CURRENT ASSETS 881,288
PROPERTY AND EQUIPMENT 78,436
PREPAID ROYALTIES 498,125
PATENTS AND CUSTOMER LISTS 4,415,049
GOODWILL 829,468
DEPOSITS AND OTHER ASSETS 150,350
------------------------
$ 6,852,716
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,685,313
Accrued expenses 139,566
Accrued expenses for discontinued operations 314,593
Current portion of long-term debt 314,684
Accrued consulting contract 405,385
Other current liabilities 38,481
------------------------
TOTAL CURRENT LIABILITIES 2,898,022
COMMON STOCK SUBJECT TO PUT 380,000
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value; 1,500,000 shares authorized;
1,650 shares issued and outstanding 1,439,500
Common Stock, $.001 par value; 50,000,000 shares authorized;
6,230,663 shares issued and outstanding 6,231
Additional Paid-in Capital 16,878,747
Retained Earnings (Accumulated Deficit) (14,369,784)
Common Stock Subject to Put (380,000)
------------------------
TOTAL STOCKHOLDERS' EQUITY 3,574,694
------------------------
$ 6,852,716
========================
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997
----------------------- -----------------------
<S> <C> <C>
REVENUES $ 1,191,120 $ 1,133,726
COST OF SALES 454,370 375,034
----------------------- -----------------------
GROSS PROFIT 736,750 758,692
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,277,047 4,194,044
----------------------- -----------------------
OPERATING LOSS (2,540,297) (3,435,352)
Interest (net) (199,757) (868,721)
----------------------- -----------------------
LOSS FROM CONTINUING OPERATIONS (2,740,054) (4,304,073)
DISCONTINUED OPERATIONS:
Loss From Discontinued Operations (86,234) (2,919,208)
Gain (Loss) on Disposal 722,640 (501,839)
----------------------- -----------------------
GAIN (LOSS) FROM DISCONTINUED OPERATIONS 636,406 (3,421,047)
----------------------- -----------------------
LOSS BEFORE EXTRAORDINARY GAIN (2,103,648) (7,725,120)
EXTRAORDINARY GAIN - FORGIVENESS OF DEBT 815,636 0
----------------------- -----------------------
NET LOSS $ (1,288,012) $ (7,725,120)
======================= =======================
INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ (0.09) $ (9.91)
Discontinued Operations 0.18 (7.88)
Extraordinary Gain 0.24 0.00
----------------------- -----------------------
Net Loss $ (0.07) $ (17.79)
======================= =======================
WEIGHTED AVERAGE COMMON SHARES USED 3,440,788 434,265
======================= =======================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common
Additional Retained Stock Deferred
Common Stock Preferred Stock Paid-in Earnings Subject Stock
--------------------- -----------------
----
Shares Amount Shares Amount Capital (Deficit) to Put Compensation Total
------------- ------ ------ ---------- ----------- ----------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 308,650 $ 309 0 $ 0 $ 6,242,689 $(2,595,123) $(380,000)$(96,250) $ 3,171,625
Sale of Convertible Series A
preferred stock 0 0 2,200 1,900,702 0 0 0 0 1,900,702
Preferred stock dividends imputed 0 0 0 0 733,333 (733,333) 0 0 0
Conversion of debentures 303,986 303 0 0 1,207,172 0 0 0 1,207,475
Stock issued for acquisition 145,000 145 0 0 2,899,855 0 0 0 2,900,000
Other issuances 500 1 0 0 24,999 0 0 0 25,000
Issuance of stock options for
compenstion 0 0 0 0 400,000 0 0 0 400,000
Amortization of deferred stock
compensation 0 0 0 0 0 0 0 82,500 82,500
Discount on debentures 0 0 0 0 433,333 0 0 0 433,333
Net Loss 0 0 0 0 0 (7,725,120) 0 0 (7,725,120)
------------- ------ ------ ---------- ----------- ----------- --------- ------- -----------
BALANCE - DECEMBER 31, 1997 758,136 758 2,200 1,900,702 11,941,381 (11,053,576) (380,000) (13,750) 2,395,515
Sale of Convertible Series
B preferred stock 0 0 300 261,500 0 0 0 0 261,500
Sale of Convertible Series
C preferred stock 0 0 4,000 3,507,500 0 0 0 0 3,507,500
Sale of Convertible Series
D preferred stock 0 0 75 75,000 0 0 0 0 75,000
Sale of Convertible Series
E preferred stock 0 0 1,650 1,439,500 0 0 0 0 1,439,500
Preferred stock dividends imputed 0 0 0 0 2,011,905 (2,011,905) 0 0 0
Redemption of Series A
preferred stock 0 0 (2,200) (1,900,702) (1,629,607) 0 0 0 (3,530,309)
Redemption of Series D
preferred stock 0 0 (75) (75,000) 0 (16,291) 0 0 (91,291)
Conversion of debentures 206,603 207 0 0 188,418 0 0 0 188,625
Conversion of Series B
preferred stock 541,330 541 (300) (261,500) 260,959 0 0 0 0
Conversion of Series C
preferred stock 3,608,296 3,608 (4,000) (3,507,500) 3,503,892 0 0 0 0
Conversion of notes payable 1,195,473 1,196 0 0 697,917 0 0 0 699,113
Redemption of shares re:
school sale (79,175) (79) 0 0 (96,118) 0 0 0 (96,197)
Shares cancelled in reverse
stock split (10,332) (10) 0 0 10 0 0 0 0
Amortization of deferred stock
compensation 0 0 0 0 0 0 0 13,750 13,750
Net Loss 0 0 0 0 0 (1,288,012) 0 0 (1,288,012)
------------- ------ ------ ---------- ---------- ----------- --------- ------- ------------
BALANCE - DECEMBER 31, 1998 6,220,331 $6,221 1,650 $1,439,500 $16,878,757 $(14,369,784)$(380,000) $ 0 $ 3,574,694
============= ====== ====== ========== ========== =========== ========== ======= ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997
----------------------- -------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,288,012)$ (7,725,120)
----------------------- -------------------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 86,234 2,919,208
(Gain) loss on disposal of discontinued operations (722,640) 501,839
Depreciation and amortization 549,668 255,345
Interest settled by issuance of stock 112,971 116,065
Write-down of patent 200,000 0
Amortization of note payable discount 0 433,333
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 141,774 (62,446)
Decrease (increase) in inventories 405,359 (219,144)
Decrease in prepaid expenses 7,970 102,353
(Increase) decrease in prepaid royalties (491,825) 0
Decrease in deposits and other assets 343,214 66,775
(Decrease) increase in accounts payable (660,673) 1,380,509
(Decrease) increase in accrued expenses (698,805) 506,021
(Decrease) increase in accrued expenses for discontinued operations (41,469) 356,062
Increase in accrued consulting contract 45,254 360,131
(Decrease) increase in other current liabilities (121,339) 33,397
----------------------- -------------------------
Net cash used in continuing operations (2,132,319) (975,672)
Net cash used in discontinued operations (2,645,638) (3,417,394)
----------------------- -------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,777,957) (4,393,066)
----------------------- -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,510) (32,658)
Proceeds from disposition of discontinued operations 4,349,700 0
----------------------- -------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,342,190 (32,658)
----------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock 5,283,000 2,200,000
Proceeds from sale of debentures 0 1,626,826
Payments of debentures 0 (355,650)
Loan origination costs - preferred stock 0 (299,299)
Proceeds from note payable and long-term debt 0 850,000
Payments of notes payable and long-term debt (940,000) (8,692)
Redemption of common stock (96,197) 0
Redemptions of preferred stock (3,621,600) 0
----------------------- -------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 625,203 4,013,185
----------------------- -------------------------
NET INCREASE (DECREASE) IN CASH 189,436 (412,539)
CASH, BEGINNING OF PERIOD 104,784 517,323
----------------------- -------------------------
CASH, END OF PERIOD $ 294,220 $ 104,784
======================= =========================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997
----------------------- -------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 151,580 $ 450,470
======================= =========================
DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
(1) Conversion of preferred stock to common stock $ 5,744,702 $ 0
(2) Conversion of debentures and accrued interest to common stock $ 887,738 $ 1,207,475
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. ORGANIZATION
Natural Health Trends Corp. (formerly known as Florida Institute of
Massage Therapy, Inc.) (the "Company") was incorporated under the laws
of the State of Florida in December 1988.
In July 1997, the Company acquired Global Health Alternatives, Inc.,
("Global") a company incorporated in Delaware and headquartered in
Portland, Maine, which is in the business of marketing and distribution
of over-the-counter homeopathic pharmaceutical health products.
Global operates its business through its wholly owned subsidiaries: GHA
(UK), Ltd., Ellon, Inc. ("Ellon"), Maine Naturals, Inc. ("MNI") and
Natural Health Laboratories, Inc.
In 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.
In 1996, the Company opened two natural health care centers which
provided multi- disciplinary complementary health care in the areas of
alternative and nutritional medicine. These facilities were closed
during 1997 and accordingly are being accounted for as discontinued
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of Natural Health
Trends Corp. and its subsidiaries. All material inter-company
transactions have been eliminated in consolidation.
B. Accounts Receivable - Accounts receivable are stated net of
allowance for doubtful accounts of $2,000.
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.
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.
F-8
<PAGE>
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, "Earnings Per Share" ("SFAS No.
128"), which became effective for both interim and annual
financial statements for periods ending after December 15,
1997. SFAS No. 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 No. 128 requires the restatement of prior
period reported earnings per share to conform to the new
standard. The per share presentations in the accompanying
financial statements reflect the provisions of SFAS No. 128.
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 SFAS 109, the Company accounts for
income taxes under the liability method. Under the liability
method, a deferred tax asset or liability is determined based
upon the tax effect of the differences between the financial
statement and tax basis of assets and liabilities as measured
by the enacted rates which will be in effect when these
differences reverse.
I. Fair Value of Financial Instruments - The carrying amounts
reported in the balance sheet for cash, receivables, and
accrued expenses approximate fair value based on the
short-term maturity of these instruments.
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,
"Accounting For Stock-Based Compensation," the Company adopted
the pro forma disclosure requirements of Statement No. 123.
K. Impairment of Long - Lived Assets - The Company reviews
long-lived assets, certain identifiable assets and goodwill
related to those assets for impairment whenever circumstances
and situations change such that there is an indication that
the carrying amounts may not be recovered. At December 31,
1998, the Company recorded a charge against a patent upon such
a review (Note 4).
F-9
<PAGE>
L. Basis of Presentation - At December 31, 1998, the Company has
a working capital deficiency of approximately $2,017,000 and
has recorded a net loss of approximately $1,288,000 for the
year then ended. The Company's continued existence is
dependent on its ability to obtain additional debt or equity
financing and to generate profits from operations.
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.
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1998:
Life Range Amount
------------------ ----------------
Equipment, furniture and fixtures 5 to 7 $ 91,795
Leasehold improvements 3 to 5 4,190
----------------
95,985
Less: Accumulated depreciation (17,549)
$ 78,436
================
4. PATENTS, CUSTOMER LIST AND GOODWILL
Patents and customer list consisted of the following at December 31,
1998:
Patents, net of accumulated amortization of $873,540 $ 4,374,674
Customer list, net of accumulated amortization of $16,625 40,375
---------------
$ 4,415,049
===============
Goodwill, net of accumulated amortization of $89,319 $ 829,468
===============
The goodwill, the patents, and the customer list arose in connection
with the acquisitions of businesses made by the Company in 1997. The
goodwill, the patents, and the customer list are being amortized over
their estimated useful lives which are 5 years for the customer list,
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
F-10
<PAGE>
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.
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998:
$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
$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
$69,000 face amount note payable, non interest
bearing, due October 15, 1997. 27,000
------------
$ 314,684
============
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.
6. 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 Sock - 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
F-11
<PAGE>
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 $3,503,309, 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 $ .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.
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.
F-12
<PAGE>
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. 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. 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.
C. Convertible Debentures - In April 1997, the Company issued
$1,300,000 of 6% convertible debentures (the "Debentures").
Principal on the Debentures is due in March 2000. The
principal and accrued interest on the Debentures are
convertible into shares of common stock of the Company. The
Debentures are convertible into shares of common stock at a
conversion price equal to the lesser of $1.4375 or 75% of the
average closing bid price of the Common Stock for the five
trading days immediately preceding the notice of conversion.
In June 1997, the Company repaid $300,000 of the Debentures.
As of December 1997, $820,233 of such debentures were
converted into 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 $2.4375 per share, and the balance
are exercisable at $3.25 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 August 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.
F-13
<PAGE>
G. Redemption of Shares - In connection with the sale of the
schools, the Company redeemed 79,715 shares of common stock
from its former president and secretary.
7. DISCONTINUED OPERATIONS
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.
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 and $5,858,790 for the full year 1997.
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.
8. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). SFAS No. 109 requires the recognition of
deferred tax assets and liabilities for both the expected impact of
differences between the financial statement and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from
tax loss and tax credit carryforwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. At December 31, 1998,
the Company had net deferred tax assets of approximately $4,464,000.
The Company has established a valuation allowance for the full amount
of such deferred tax assets. The following table gives the Company's
deferred tax assets and (liabilities) at December 31, 1998:
F-14
<PAGE>
Net operating loss deduction $ 4,464,000
Valuation allowance (4,464,000)
--------------------
$ -
====================
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,
------------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Income tax (benefit) computed at statutory rate $ (451,000) (2,704,000)
Effect of temporary differences - 152,000
Effect of permanent differences - 13,000
Tax benefit not recognized 451,000 2,539,000
------------------ -----------------
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.
9. COMMITMENTS AND CONTINGENCIES
A. Leases - The Company leases its Portland Maine office under
two lease expiring in 2001. Rent expense for the year ended
December 31, 1998 was $24,000. In 1998 Corporate headquarters
rented facilities in New York City. Minimum rental commitments
over the next five years are as follows:
1999 $ 92,073
2000 93,713
2001 81,457
2002 -
2003 -
B. Employment Agreement - During the quarter ended March 31,
1997, the Company renegotiated with a former stockholder of
Sam Lily, Inc. with whom it was obligated under an employment
agreement, to cancel the employment agreement and replace it
with a consulting agreement. The consulting agreement required
the individual to
F-15
<PAGE>
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 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 accrued in excess of $420,000 in
current liabilities with Ellon USA and their owners.
As of December 31, 1998 the Company 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.
F-16
<PAGE>
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 accrued 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 accrued approximately $320,000 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 $9,700 plus interest and legal fees, based on
them having provided Global with radio air time. Global does
not dispute the amount of the claim, but contends that the
complainants in the $144,000 action are responsible for any
claim should the Court find in favor of this lawsuit. Global
believes that the plaintiff in this case is likely to obtain a
judgement if a settlement is not reached, and Global's ability
to charge the complainants in the $144,000 action is subject
to the outcome of Global's counterclaim in that legal action.
As of December 31, 1998, Global has accrued approximately
$9,000 of the complainants original fees.
As of December 31, 1998, Global is a defendant in a legal
action brought by a creditor who seeks approximately $8,600
plus interest and legal fees, based on them having sold raw
materials to Global. It is Global's position that the products
sold did not meet specifications contained in the purchase
order and were defective. Global has answered the claim, and
filed a counterclaim seeking damages of approximately $6,100
paid by Global, to their customers, due to the poor quality of
the materials purchased. An additional $25,000 is sought by
Global due to loss of goodwill and deterioration of customer
relations due to the poor quality of the raw materials
purchased. 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 not accrued
for any possible outcome.
F-17
<PAGE>
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 $7,000 based on them having provided radio air
time. Global does not dispute the amount of the claim. As of
December 31, 1998, Global has accrued approximately $7,000 of
the complainants original fees.
10. 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.
11. STOCK OPTION PLAN 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 August 1998 the Company adopted a stock option plan covering
officers, directors, employees and consultants to purchase up to
200,000 shares of common stock.
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.
In fiscal 1997, the Company adopted the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". For disclosure
purposes, the fair value of options is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for stock options granted during the
years ended December 31, 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
F-18
<PAGE>
and $21.60, respectively. If the Company had recognized compensation
cost of stock options in accordance with SFAS No. 123, the Company's
proforma loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C>
Net loss: As reported $ (1,288,012) $ (7,725,120)
Pro forma $ - $ (8,481,120)
Net loss from continuing operations: As reported $ (2,740,054) $ (4,304,073)
Pro forma $ - $ (5,060,073)
Net loss per share:
Basic As reported $ (0.37) $ (17.79)
Pro forma $ - $ (19.53)
Net loss per share - continuing operations:
Basic As reported $ (0.79) $ (9.91)
Pro forma $ - $ (11.65)
</TABLE>
12. 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 following
table summarizes the acquisition.
F-19
<PAGE>
Purchase price $ 2,900,000
Liabilities assumed 4,530,741
Fair value of assets acquired (6,511,954)
------------------
Goodwill $ 918,787
==================
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.
13. SUBSEQUENT EVENTS
The Company in February 1999, pursuant to an asset purchase agreement acquired
substantially all the assets of Kaire International, Inc., ("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, (iv) the assumption of certain indebtedness of Kaire, (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.
Kaire is in the business of marketing and distributing over-the-counter
pharmaceutical health products.
In March and April 1999 the Company issued $1,400,000 of Series H Preferred
Stock. The Series H Preferred Stock pay 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.
F-20
<PAGE>
2. Exhibits Included Herein
See Exhibit Index on page 28 hereof for the exhibits filed as
part of this Form 10-KSB.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on December 4,
1998.
(c) Exhibit Index
<TABLE>
<CAPTION>
Number Description of Exhibit
<S> <C>
2.1 Assets Purchase Agreement dated April 29, 1998 by and among Natural Health Trends
Corp., Neal R. Heller & Elizabeth S. Heller and Florida College of Natural Health, Inc. #
2.2 Acquisition Agreement among the Company, NHTC Acquistion Corp., Kaire International,
Inc. and the Company (the "Acquisition Agreement"). ##
3.1 Amended and Restated Certificate of Incorporation of the Company.*
3.2 Amended and Restated By-Laws of the Company.*
4.1 Specimen Certificate of the Company's Common Stock.*
4.2 Form of Class A Warrant.*
4.3 Form of Class B Warrant.*
4.4 Form of Warrant Agreement between the Company and Continental Stock Transfer and Trust
Company.*
4.5 Form of Underwriter's Warrants.*
4.6 1994 Stock Option Plan.*
4.7 Form of Debenture.**
4.8 Registration Rights Agreement dated July 23, 1997 by and among the Company, Global and
the Global Stockholders.+
4.9 Agreement as to Transfers dated July 23, 1997 by and between Capital Development, S.A.
and the Company.+
4.10 Articles of Amendment of Articles of Incorporation of the Company.***
4.11 Articles of Amendment of Articles of Incorporation - Series C Preferred Stock.****
4.12 Articles of Amendment of Articles of Incorporation - Series E Preferred Stock.****
4.13 Articles of Amendment of Articles of Incorporation - Series F Preferred Stock.##
4.14 Articles of Amendment of Articles of Incorporation - Series G Preferred Stock.##
4.15 Articles of Amendment of Articles of Incorporation - Series H Preferred Stock.##
4.16 Form of Warrant in connection with the Acquisition Agreement.##
10.1 Agreement among Natural Health Trends Corp. Health Wellness Nationwide Corp.,
Samantha Haimes and Leonard Haimes.++
21.1 List of Subsidiaries.
27.1 Financial Data Schedule.
* Previously filed with the Company's Registration Statement No. 33-991184.
** Previously filed with the Company's Form 10-QSB for the quarter ended March 31, 1997.
*** Previously filed with the Company's Form 10-QSB dated June 30, 1997.
**** Previously filed with the Company's Form 10-QSB dated September 30, 1998.
+ Previously filed with the Company's Form 8-K dated August 7, 1997.
++ Previously filed with the Company's Form 10-KSB for the year ended December 31, 1996.
+++ Previously filed with the Company's Registration Statement No. 333-35935.
# Previously filed with the Company's Proxy Statement on Schedule 14A, dated May 14, 1998.
## Previously filed with the Company's Proxy Statement on Schedule 14A, dated January 25,
1999.
</TABLE>
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 1999 NATURAL HEALTH TRENDS CORP.
By: /s/ Joseph P. Grace
Joseph P. Grace, President, and Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Name Title Date
/s/ Sir Brian Wolfson Chairman of the Board April 14, 1999
- --------------------------------
Sir Brian Wolfson
/s/ Joseph P. Grace President, Chief Executive April 14, 1999
- -------------------------------- Officer and Director
Joseph P. Grace
/s/ Martin C. Licht Director April 14, 1999
- --------------------------------
Martin C. Licht
/s/ Dirk Goldwasser Director April 14, 1999
- --------------------------------
Dirk Goldwasser
/s/ Ralph Ellison Director April 14, 1999
- --------------------------------
Ralph Ellison
29
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Name State of Incorporation
GHA Natural Products, Inc. Delaware
GHA Specialty Retailing, Inc. Delaware
Global Health Alternatives, Inc. Florida
Maine Naturals, Inc. Delaware
NHTC Real Estate, Inc. Florida
Natural Health Laboratories, Inc. New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000912061
<NAME> NATURAL HEALTH TRENDS CORP.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 294,220
<SECURITIES> 0
<RECEIVABLES> 21,331
<ALLOWANCES> 2,000
<INVENTORY> 314,367
<CURRENT-ASSETS> 881,288
<PP&E> 95,985
<DEPRECIATION> 17,549
<TOTAL-ASSETS> 6,852,716
<CURRENT-LIABILITIES> 2,898,022
<BONDS> 0
0
1,439,500
<COMMON> 6,231
<OTHER-SE> 2,508,963
<TOTAL-LIABILITY-AND-EQUITY> 6,852,716
<SALES> 1,191,120
<TOTAL-REVENUES> 1,191,120
<CGS> 454,370
<TOTAL-COSTS> 454,370
<OTHER-EXPENSES> 3,277,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,757
<INCOME-PRETAX> (2,740,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,740,054)
<DISCONTINUED> 636,406
<EXTRAORDINARY> 815,636
<CHANGES> 0
<NET-INCOME> (1,288,012)
<EPS-PRIMARY> (.037)
<EPS-DILUTED> (.037)
</TABLE>
